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We are glad to present to you the 216th edition of ‘Taxsutra Database Bulletin’, where we keep you updated with current trends in the tax arena!
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Expert Column
The Finance Act 2015 amended the test of residence for foreign companies to provide that a company would be treated as resident in India if its “place of effective management” (POEM) in the previous year is in India. The intention of the provision is to target shell companies and companies which are created for retaining income outside India although real Control and management of affairs is located in India. A set of guiding principles to determine POEM has been issued by CBDT vide Circular No. 06 of 2017 dated 24.01.2017. Further, Circular No 8 of 2017 clarifies that section 6(3)(ii) shall not apply to companies having turnover or gross receipts of Rs.50 Crore or less in a financial year.
In this regard, Rishabh Jain (Chartered Accountant) discusses the nuances of the provision as to determination of POEM, Meaning of ‘Active business outside India (ABOI) etc. Speaking of the some instances where the facts will not be conclusive of a POEM, the author highlights a foreign company which is completely owned by an Indian company, foreign entity having a PE in India, etc. The author signs off with an opinion that the provisions and the Circulars related to POEM “lead to several tax disputes and the existence of POEM in India would be a subject matter of litigation in various cases”
Click here to read an article titled, “Decoding POEM - Test of Residency”
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Key Takeaways from Handpicked Rulings
1) Onus of establishing genuineness of a cash credit to AO’s satisfaction, always on the assessee – ITAT notes that AO made addition u/s 68 as assessee failed to establish the identity and credit worthiness of two persons from whom loan was obtained; On appeal before CIT(A) assessee had filed contemporaneous documents to prove the identity and credit worthiness of the loan creditors and genuineness of the transaction, however the addition was sustained by CIT(A); ITAT in the interest of justice restores the issue to AO with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction regarding the identity and credit worthiness of the loan creditors and the genuineness of the transaction and directs assessee to produce the creditors ................Click here to read and download ITAT Order
2) ITAT: Creditworthiness does not necessarily mean that company should have given the money out of profits only; Nil return by lender, not a deterrent to loan’s genuineness – ITAT sets aside addition u/s 68 with respect to unsecured loan; Referring to how the money passed amongst various entities, notes that “there is a complete trace of the transaction of the above loan received”; Further, noting that the creditworthiness of the amount given to the assessee by the lender is a source of fund from another group company, holds ....................Click here to read and download ITAT Order
3) Income from leasing of workstation, taxable under the head of “other source”, not income from house property – ITAT rules in favour of Revenue, notes that in the instant lease, the prime objective is exploitation of asset in the form of workstations installed by the assessee and not the building or any part thereof; Accordingly, infers that “The use of easement and common areas by the second party is incidental to the lease of exploitation of workstation.” and concludes that “The workstation in the form of plant and machinery are inseparable from the building and for exploitation or use of the workstation, the use of the building is incidental..................Click here to read and download ITAT Order
4) Any adverse materials collected / recorded from a third party when not allowed for cross-examination by assessee cannot be considered against the assessee and cannot be read in evidence against the assessee - ITAT holds that the assessee has the right to confront the evidence relied on by Revenue by asking for cross-examination; Notes that adverse material collected at the back of the assessee when not confronted and that if any statement is recorded by the AO / Revenue Department at the back of the assessee and such statement is not allowed for cross-examination on behalf of the assessee, such material cannot be considered against the assessee in the Income Tax proceedings and such material/statement cannot be read in evidence against the assessee; Observes that the entire case is set-up on the basis of the statement of third party recorded during the course of search u/s 132(4) in which, he has admitted to have received donation/capitation fees in cash ................Click here to read and download ITAT Order
5) Interest can be capitalized only in respect of capital assets purchased out of borrowed funds, rejects Revenue’s attempt to capitalise interest expenditure on inventories – ITAT dismisses Revenue’s appeal in respect of disallowance of interest expenditure made by the AO in A.Y 2008-09; holds that inventories held by the assessee are current assets and hence the requirement of capitalising the interest does not arise; Notes that proviso to section 36(1)(iii) mandates capitalization of interest only in respect of capital assets.................Click here to read and download ITAT Order
6) Allows Sec.54 benefit against LTCG arising on sale of more than one residential flats – ITAT held that capital gains arising from sale of more than one residential flats will be eligible for exemption u/s 54 if gains are invested in a residential house within the permitted time period from the sale of the residential flats; Notes that assessee had purchased two residential flats and modified both the flats and converted two units as one residential unit; Later assessee has sold both the flats through two separate sale deeds and purchased a residential flat at Noida within the permitted time period from the sale of the residential flats; Noting that there is no restriction placed in section 54 that exemption is allowable only in respect of sale of one residential house, ITAT holds that ................Click here to read and download ITAT Order
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CBDT Corner
CBDT issues guidelines on applicability of TDS on E-commerce operators u/s. 194-O & TCS on sale of goods u/s. 206C(1H) – Circular No. 17/2020
CBDT amends Rule 29B, allows foreign 'insurers' to apply for 'tax non-deduction' certificate u/s. 195(3) - NOTIFICATION NO. 76/2020
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In this regard, Rishabh Jain (Chartered Accountant) discusses the nuances of the provision as to determination of POEM, Meaning of ‘Active business outside India (ABOI) etc. Speaking of the some instances where the facts will not be conclusive of a POEM, the author highlights a foreign company which is completely owned by an Indian company, foreign entity having a PE in India, etc. The author signs off with an opinion that the provisions and the Circulars related to POEM “lead to several tax disputes and the existence of POEM in India would be a subject matter of litigation in various cases” 
