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We are glad to present to you the 211th edition of ‘Taxsutra Database Bulletin’, where we keep you updated with current trends in the tax arena!
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Expert Column
With a view to curb tax avoidance across various developed and developing countries, OECD Action Plan 15 provided for development of a Multilateral Instrument (‘MLI’) to counter abuse of Tax treaties or Tax treaty network for gaining tax advantages. Under the MLI provisions, Article 7 (which deals with prevention of treaty abuse and is applicable as a minimum standard) prescribes Principal Purpose Test (‘PPT’) as one of the measures to prevent treaty abuse. While India has opted for the PPT rule under MLI, it has also implemented General Anti-Avoidance Rules (‘GAAR’) under its domestic law for countering tax abuse, which also provided for Principal Purpose Test (‘PPT’).
In this regard, Kinjesh Thakkar (Head – Corporate Tax & Transfer Pricing at Linde Engineering India) provides a lucid analysis of Interplay between PPT under MLI and GAAR. The author highlights that the approaches in application of Principal Purpose Test under MLI and GAAR are divergent and states that while GAAR adopts the narrow approach (i.e., main/principal purpose is to obtain tax benefit), MLI adopts the intermediate approach (i.e., one of the main/principal purposes is to obtain tax benefit), thus, creating confusion. The author explains that domestic law is the prime source of charge on tax as well as characterization of transaction or arrangement, “Thus, it is reasonable to conclude that PPT under MLI shall not displace GAAR”. Similarly, the author explains that based on commentary in OECD and Vienna convention, PPT is also not displaceable and therefore, both should co-exist. Highlighting that even OECD commentary on Model Tax Convention provides that in case there is conflict in result of GAAR and MLI, the provisions of tax treaties are intended to prevail, the author opines that “...broader definition under PPT rule of MLI shall achieve more desirable result which is in line with purposive interpretation when applied to GAAR provision.”
1) SC: Remands matter to HC for deciding issue of royalty on merits - SC sets aside HC order, holds HC has not answered the question of payment of royalty on merits; On perusal of HC order, SC observes that HC answered the question formulated against the assessee relying on the decision of co-ordinate bench in case of Samsung Electronics [TS-5782-HC-2009(Karnataka)-O] and it is not in dispute that the said decision has been considered in the subsequent decision of SC in GE India [TS-201-SC-2010-O]wherein, the SC remanded the matter to HC for adjudication on merits; Accordingly, SC .................. Click here to read and download SC order
2) HC: No addition on basis of confessional statement of partner recorded u/s 108 of the Customs Act – HC dismisses Revenue’s appeal, uploads ITAT order that in the absence of any documentary evidence, no addition can be made on the action of third party i.e. the Directorate of Revenue Intelligence (DRI); HC observes that there was no material to corroborate the statement made by the assessee in the form of confession; HC relies on co-ordinate bench decision reported in [TS-5928-HC-2008(Gujarat)-O] wherein it was held that merely on the basis of admission, the assessee cannot be subjected to additions and unless and until some corroborative evidence is found in support of such admission, the department would not be justified in making additions..................Click here to read and download HC Order
3) Mere adoption of 'business principles' does not transform a charitable institution into a business entity – ITAT held Assessee (Karnataka Industrial Areas Development Board, a statutory body, constituted u/s 5 of KIADA) as eligible to claim exemption u/s 11, confirming that proviso to section 2(15) is not applicable; ITAT noted that the issue had arisen in earlier AY 2013-14, 2014-15 in assessee own case reported in [TS-7562-ITAT-2019(BANGALORE)-O] wherein Tribunal observed that the main aim and object for which the Assessee was established is to (a) Promote rapid and orderly development of industries in the state (b) Assist in implementation of policies of Government within the purview of MAD Act (c) Facilitate in establishing infrastructure projects (d) Function on "No Profit - No Loss" basis; Co-ordinate bench in aforesaid ruling had observed that “In the present case, the assessee has carried on its activities on business principles and sound principles of management....................Click here to read and download ITAT order
4) Rejects AO’s change of method for share valuation, remits issue for fresh consideration - ITAT follows co-ordinate bench ruling reported in [TS-281-ITAT-2020(Bang)]wherein following Bombay HC ruling in Vodafone M-Pesa, ITAT had discarded AO’s change of method of shares valuation from DCF and followed NAV method; Bombay HC had held that “AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee."; Accordingly, restores the matter back to the file of AO for a fresh decision with the same directions as were given by the coordinate bench..................Click here to read and download ITAT order
5) Education Cess is not disallowable as a deduction u/s 40(a)(ii); Deletes disallowance following Sesa Goa HC-ruling – ITAT admits additional ground of appeal raised by the assessee, whether or not the amount paid towards “Education Cess” or any “other cess” viz. the Secondary and Higher Education Cess is disallowable as an expenditure u/s 40(a)(ii), notes that the assessee has raised a purely legal issue which would not require any verification of facts; Assessee claimed that unlike “rates” and “taxes”, the amount paid towards “Education Cess” or any “other cess” viz. the Secondary and Higher Education Cess is not a disallowable expenditure u/s 40(a)(ii)......................Click here to read and download ITAT order
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In this regard, Kinjesh Thakkar (Head – Corporate Tax & Transfer Pricing at Linde Engineering India) provides a lucid analysis of Interplay between PPT under MLI and GAAR. The author highlights that the approaches in application of Principal Purpose Test under MLI and GAAR are divergent and states that while GAAR adopts the narrow approach (i.e., main/principal purpose is to obtain tax benefit), MLI adopts the intermediate approach (i.e., one of the main/principal purposes is to obtain tax benefit), thus, creating confusion. The author explains that domestic law is the prime source of charge on tax as well as characterization of transaction or arrangement, “Thus, it is reasonable to conclude that PPT under MLI shall not displace GAAR”. Similarly, the author explains that based on commentary in OECD and Vienna convention, PPT is also not displaceable and therefore, both should co-exist. Highlighting that even OECD commentary on Model Tax Convention provides that in case there is conflict in result of GAAR and MLI, the provisions of tax treaties are intended to prevail, the author opines that “...broader definition under PPT rule of MLI shall achieve more desirable result which is in line with purposive interpretation when applied to GAAR provision.”
