Domestic and Direct Tax Updates

Notification and Circulars

1. Further guidelines issued by CBDT for withholding tax obligations on e-commerce operators and purchase/sale of goods

Withholding tax obligations on e-commerce operators and buyers/sellers of goods were introduced by the Indian government in recent past, vide insertion 194-O (TDS by e commerce operators), section 206C(1H) (TCS on sale of goods) and section 194Q (TDS on purchase of goods) in the Income tax Act,1961 (‘ITA’). Central Board of Direct Taxes (‘CBDT’) has issued further guidelines vide Circular no. 20 of 2021 dated 25 November 2021, to remove difficulties in interpretation and implementation of provisions. Following additional issues addressed by CBDT would of relevance in the latest guidelines:

Adjustment of various state levies and taxes other than Goods & Service Tax (“GST”)

In the earlier notification in this regard, it was clarified that TDS will not be applicable on GST component (if separately indicated in invoice). Similar clarification has been provided for other Non-GST levies such as VAT, Excise duty, Sales tax, etc. As a result TDS would not be applicable on state levies such as VAT/Sales tax/Excise duty/CST in respect of purchase of goods wherein the invoice indicates such levies separately. However, in case of advance payment, the tax is to be deducted on the whole amount, as it will not be possible to identify the VAT/Sales tax/Excise duty/CST component to be invoiced in the future.

Cross application of section 194Q and section 206C(1A) of ITA

Provisions of section 194Q of ITA does not apply in respect to those transactions where tax is collectible under section 206C [except (1H)] of ITA. Since by virtue section 206C(1A) of ITA, the tax is not required to be collected for goods covered under section 206C (1), it is clarified that in such cases, the buyer shall be liable to deduct tax under 194Q if the conditions specified therein are fulfilled.

2. New Faceless Appeals Scheme 2021 and guidelines for early disposal of appeal

CBDT has notified the Faceless Appeals Scheme, 2021 (‘New FAS’) on 28 December 2021 in supersession of earlier the Faceless Appeals Scheme, 2020 (‘Old FAS’). CBDT has addressed some of taxpayers' concerns.

The New FAS aims to establish assessee’s right for personal hearing and streamlining other procedures as compared to old FAS wherein request for a personal hearing was at the behest of specified tax authorities.

CBDT has also issued guidelines on 29 December 2021 for out of turn disposal of appeals by Appeal Units or Commissioner (Appeals). It provides for certain instances which can be considered for priority hearing on the recommendation of specified revenue authorities. Relevant considerations in this regard are:

Cases with demand of more than Rs. 1 Crore
Cases with original refund claim in excess of Rs. 1 Lac
Cases where direction for out of turn or priority hearing is passed by the Courts
Any other genuine hardship

Domestic Tax Rulings

1. Hon’ble High Courts (‘HC’) quashes assessment orders passed under Faceless Assessment regime for various reasons

Faceless Assessment Scheme (‘FAS’) was introduced with objective of bringing in transparency and efficiency in tax assessments. Taxpayers faced several issues in the first round of orders passed under the FAS, resulting in unwarranted tax demands. Number of such assessment orders passed under the FAS have been quashed by various HCs for flaunting the mandatory procedure prescribed under the applicable statutory provisions (section 144B). Some of such instances have been summarised below:

Show-cause notice in the form of a draft assessment order was not served before issuance of the assessment order, due to which assessment order was quashed.
Taxpayer had requested for the personal hearing, which was not granted without providing any reasons for not granting such personal hearing. The HC held that such an action of the AO was violative of the FAS.
Assessment order passed prior to expiry of time period allowed to the taxpayer to file its reply to show cause notice was held to be resulting in violation of principles of natural justice and hence, assessment order was quashed.
The assessment order passed without affording reasonable time to file response to draft assessment order as well as non-consideration of earlier submissions filed, was held to be resulting in violation of principle of natural justice and said assessment order was quashed. Hon’ble HC also imposed personal cost of INR 25,000 on the officer to bring deterrence and scrupulous adherence to the Scheme.

Thus, courts have upheld rights of the taxpayers to get a reasonable opportunity represent their case. This opportunity should be judiciously used and any lapse in affording adequate opportunity to the taxpayer should be challenged.

2. Hon’ble Bombay HC held expenditure in respect of preserving and maintenance of existing capital asset as revenue expenditure

Bombay HC in case of Jetha Properties Private Limited [TS-1128-HC-2021(BOM)] has held that expenditure incurred on raising floor height of the warehouse to secure goods from rainwater would be a revenue expenditure. It observed that, since the warehouse was already in existence and the amount spent was only to preserve and maintain an existing asset it would be revenue expenditure.

In this regard, HC observed that:

Expenditure was incurred to ensure continuity of business with its customer offering attractive returns
Expenditure was so related to the carrying on or conduct of the business that it would be regarded as an integral part of the profit earning process

3. Karnataka HC held that there is no liability to deduct TDS on ad-hoc year end provisions

The issue of applicability of TDS provision on the year-end provisions has been a subject matter of litigation. In the recent decision of Volvo India Private Limited (TS-1076-HC-2021 KAR) Karnataka HC held that no TDS liability should arise in respect of ad-hoc year end provisions wherein :

The provision made by the taxpayer is not identifiable with respect to any payee
The exact amount of liability at the time of creating the year end provision could not be computed
Tax payer has not claimed deduction of provisional expenditure.

It also noted that in the instance case TDS was deducted and paid as and when the bill was raised by the parties, during the subsequent assessment year. Accordingly, Karnataka HC concluded that where no income was attributable to the payee, there shall be no liability to deduct TDS in the hands of the tax deductor.

4. Pune Income Tax Appellate Tribunal (‘ITAT’) held that Fees paid for accessing SAP platform, hardware and software akin to consideration for ‘using’ IT Infrastructure taxable as Royalty

In the case of Bekaert Industries Private Limited [TS-1135-ITAT-2021(PUN)], ITAT held that payment made by the Taxpayer to its Associated Enterprise (‘AE’) in Belgium for using IT Infrastructure facility set up by the AE falls within the ambit of royalty under Sect. 9(1)(vi) of ITA and also under Article 12 of DTAA India-Belgium.

Basis Intercompany agreement, ITAT observed that Belgian entity created a full-fledged IT Infrastructure facility in the nature of an equipment with the help of ERP system (SAP), SAP platforms, hardware, software, servers, network, domain structures and security. Hence, ITAT opined that payment in this regard is not for services but for access to complete IT Infrastructure facility akin to payment of industrial royalty.

ITAT distinguished Supreme Court (SC) ruling in the case of Engineering Analysis Centre of Excellence (P.) Ltd on the ground that it applies only on copyright royalty cases and not on industrial royalty cases.
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