Domestic and Direct Tax Updates

published on 31 January 2024 I reading time approx. 7 minutes

Notifications and Circulars

1. Central Board of Direct Taxes (‘CBDT’) issues tax deducted at source (‘TDS’) guidelines for e-commerce operators; clarifies 5 major issues

TDS provisions under section 194-O of the Income Tax Act, 1961 (‘ITA’) were introduced for e-commerce operator (‘ECO’) vide Finance Act 2020. As per section 194-O of the ITA, an ECO is required to deduct TDS at the rate of one per cent of gross amount of sale of goods or provision of services which are facilitated through electronic platforms. Considering the practical issues involved, CBDT has issued clarifications with respect to section 194-O from time to time.

Further guidelines have been issued by the CBDT in this regard, vide Circular No. 20 of 2023 dated 28 December 2023 [F. No. 370142/43/2023-TPL]. Broadly, the guidelines address following issues:
  • Where multiple ECOs are involved in a single transaction of sale of goods or provision of services through ECO platform or network and where the seller-side ECO is not the actual seller of the goods or services, the compliance under section 194-O is to be done by the seller-side ECO who finally makes the payment or the deemed payment to the seller for goods sold or services provided. Where multiple ECOs are involved in a single transaction of sale of goods or provision of services through ECO platform or network and where the seller-side ECO is the actual seller of the goods or services, the compliance under section 194-O is to be done by the ECO which finally makes the payment or the deemed payment to the seller for goods or services sold.
  • Would convenience fees, commission charged, logistics and delivery fees for the transaction form a part of “gross amount” for the purposes of TDS under section 194-O.
  • How will Goods and Services Tax (‘GST’), various state levies and taxes other than GST such as VAT/Sales Tax/Excise duty/CST be treated when calculating gross amount of sales of goods or provision of services as per provisions of section 194-O of the Act.
  • How will adjustment for purchase-returns take place.
  • How will the discounts given by seller as an ECO participant or by any of the multiple ECOs be treated while calculating “gross amount”.

2. CBDT condones Form 10-IC delay for Assessment Year (‘AY’) 2021-22 for tax-compliant Assessees, with January 2024 deadline

Finance Act, 2020 introduced section 115BAA of the ITA to provide the option of concessional tax rate of 22 per cent (plus applicable surcharge and cess) to domestic companies, subject to fulfilment of certain conditions. To avail the benefit of concessional tax rate, the domestic company is required to exercise the option by filing Form 10-IC on or before the due date of furnishing return of income.

In a relief to the domestic companies who have missed filing of Form 10-IC for AY 2021-22 as above, the CBDT vide Circular no. 19/2023 dated 23 October 2023 has condoned the delay in filing Form 10-IC to avoid genuine hardship caused to the domestic companies seeking section 115BAA concession. As per the Circular, the delay is condoned in cases where the following 3 conditions are satisfied:
  • Return of income is filed on or before the due date of furnishing the return under section 139(1) of ITA.
  • Domestic company had opted for item (e) of “Filing Status” in “Part A – GEN” of the Return of Income form.
  • Form 10-IC is filed electronically on or before 31 January 2024.

Domestic Tax Rulings 

1. Supreme Court holds variable licences fees paid for establishing, maintaining and operating cellular mobile service is capital expenditure

This case involved issue of allowability as revenue expenditure of Variable Licence Fee (‘VLF’) paid by telecom operator to the Government. The VLF was computed as a certain percentage of its net profits from the operations.  Supreme Court has analysed plethora of judgments dealing with various tests laid down by Courts including the English Courts in determining whether the expenditure is on revenue account or capital account. 

Supreme Court based on the facts has held that the VLF paid by the taxpayer was to acquire the right to carry on the business of telecommunication services which is a capital asset and hence, the said expenditure is capital expenditure. It also held that merely because VLF was paid in annual instalments based on the annual gross revenue, the payment cannot be construed as revenue in nature. Supreme Court also held that the license obtained by telecom operator was a composite right, not comprising of divisible rights and the same cannot be split in an artificial manner. Therefore, Supreme Court discarded High Court’s approach of apportionment of VLF payment partially into revenue and capital expenditure. It further held that if the expenditure inherently is capital in nature, neither the fact that the same was paid in instalments nor that it was dependent on revenue or profit of the assessee would warrant a change in classification of the transaction.

The judgement has far reaching effects as the principles discussed and the reasoning considered in this judgement may also be relevant where rights are granted in relation to other similar business or commercial arrangements, for an upfront fee together with variable fees charged on revenue sharing basis or on the basis of output. In all such cases, a thorough analysis of the facts and relevant contracts/documents may be needed to ascertain whether the licence fees payable on a revenue sharing basis can be linked to acquisition of a right being a capital asset. 

2. Waiver of working capital loan is a capital receipt not taxable as business income 

In the case of I.G. Petrochemicals Ltd, the Karnataka High Court (‘HC’) has held that the waiver of working capital loan is not a “benefit” or “perquisite” covered under the charging section of business income and is a capital receipt which is not subject to tax.

The taxpayer offered waiver of interest by the bank to tax and claimed waiver of principal amount of term loan and working capital loan as capital receipt not chargeable to tax. However, the tax authorities denied the claim of the taxpayer and considered waiver of principal amount for both loans as “benefit” or “perquisite” chargeable to tax. The Income Tax Appellate Tribunal (‘ITAT’) granted partial relief to the taxpayer by treating waiver of term loan as capital receipt not taxable and considered waiver of working capital loan as revenue receipt as subject to tax. On this issue, Karnataka HC relied on the decision of the Supreme Court (‘SC’) in the case of Mahindra & Mahindra and held that “benefit” or “perquisite” should be “other than in the shape of money”, thus waiver of any loan being in the shape of money would fall outside the scope of the charging provisions. Accordingly, waiver of loan will not be subject to tax as business income.

This issue has now been settled by the Finance Act, 2023 which has widened the provisions  and included “benefit” in the form of cash as well, which would now cover waiver of any loan as “benefit” which is subject to tax.

3. Madras HC holds delayed filing of Form 67 but before the processing of the Return of Income is a sufficient compliance for claiming of Foreign tax credit (‘FTC’)

In the instant case of Duraiswamy Kumaraswamy, assessee was employed in Kenya and had filed his Return of Income for AY 2019-20 including his income received in Kenya and claimed the benefit of FTC under Section 90/91 read with Article 24 of the India-Kenya DTAA. Form 67 prescribed under Rule 128 of the Income Tax Rules 1962, which is required to claim FTC, was inadvertently not uploaded while filing the Return of Income. However, assessee later uploaded Form 67 before the completion of assessment proceedings. Revenue authorities rejected the FTC claim and hence assessee had filed a Writ Petition before the Madras HC.

The Madras High Court held that the filing of FTC in terms of the rule 128 is only directory in nature and it is not mandatory. The rule is only for the implementation of the provisions of the ITA, and it will always be directory in nature. Further, Madras HC relied on the decision of the Supreme Court in case of G.M.Knitting Industries (P.) Limited, in which the Supreme Court had held that when the returns were filed without furnishing Form 3AA and the same were filed during assessment proceedings but before the final order of assessment is made, it would amount to sufficient compliance. In view of the above, Madras High Court set aside the impugned order and Revenue was directed to give due FTC and pass the final assessment order.

Rejection of valid claims of the taxpayers by the Revenue Authorities on account of non-furnishing of corresponding Forms prescribed under the ITA and Rules, is an often litigated matter. This decision comes as a welcome relief for the taxpayers in such instances.

4. HC holds system default as tax department’s ‘standard excuse’ for delays in issuance of income tax refund; seeks governmental intervention

Delays in issuance of income tax refunds by the relevant tax authorities is a routine issue which the taxpayers in India have to deal with. Many a times the reasons for such delay is cited by the tax department as system related technical glitches at the level of the Centralised Processing Centre of Income tax department (‘CPC’).

In the instant case of Matrix Publicities and Media India Pvt Ltd, taxpayer company sought for income tax refund of approx. INR 190 Million for a particular year. Due to a delay in receipt of such substantial amount of refund on account of technical default in the system of the CPC, taxpayer preferred a Writ Petition in the Bombay HC. The Court, observing that although no substantial legal issues were involved in the current case, still the same violated the fundamental right of the taxpayer to receive undisputed tax refunds. Bombay HC directed the income tax department by itself or through CPC, to ensure that the taxpayers’ refund was processed immediately along with interest up to the date of payment of such refund.

The Court strikingly observed “We would only hope that the Finance Ministry looks into it with seriousness and tries to put an end to the problem faced by all assessees and the Income Tax Officer ... Interest is payable in law until the date of refund and the Department does not realize that it is public money that is used to pay interest. That is a waste and burden on the exchequer.” Considering the seriousness of the issue and the often “standard excuse” provided by the income tax department in such matters, the Court also ordered a copy of the judgement to be sent to the Prime Ministers’ Office (‘PMO’), Finance Ministers’ office, Law Ministers’ office, Central Board of Direct Taxes (‘CBDT’) and to the Attorney General of India for information and necessary action.

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