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Delhi High court Dismissed the appeal against the order of the Income Tax Appellate Tribunal

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Title: THE COMMISSIONER OF INCOME TAX – INTERNATIONAL TAXATION -3 vs SPRINGER NATURE CUSTOMER SERVICES CENTRE GMBH (EARLIER KNOWN AS SPRINGER CUSTOMERS CENTRE GMBH)

Judgment Reserved on: 25.05.2023  

Judgment Pronounced on: 12.07.2023

+ ITA 306/2023

CORAM: HON’BLE MR JUSTICE RAJIV SHAKDHER

   HON’BLE MR JUSTICE GIRISH KATHPALIA

Introduction

Delhi High court Dismissed the appeal against the order of the Income Tax Appellate Tribunal concerning Assessment Year (AY) 2013-14. Via the impugned order, the Tribunal has partly allowed the appeal preferred by the respondent/assessee.

Facts of the case

On March 31, 2015, the respondent/assessee submitted its return of income (ROI) for the pertinent AY, which was 2013–2014. The respondent/assessee originally processed its declaration of “nil” income under Section 143(1) of the Income Tax Act of 1961 through the aforementioned ROI. However, the ROI was chosen for examination, and as a result, the respondent/assessee was served with a notice dated 20.08.2015 issued under Section 143(2) of the Act. Three increases to the respondent’s income were made by the Assessing Officer (AO) through order dated 04.05.2016, which was issued in accordance with Section 143(3) read with Section 144C(3)(a) of the Act.

The first addition dealt with a sum equal to Rs. 24,84,114 being paid to the respondent/assessee by Springer India Pvt. Ltd. (also known as “SIPL”) in India in accordance with a Commissionaire Agreement. This addition was made up of two parts. The second increase, which the AO made, was for Rs. 16,67,83,110. This sum reflected the subscription costs the respondent/assessee had paid to two Indian companies, Informatics Publishing Private Ltd. and ZS Associates, for e-journals. The third increment amounts to Rs. 2,62,85,504 in total. On behalf of SIPL, the respondent/assessee collected this sum from Indian-based third parties whose consumers were purchasing online journals and/or books. The aforementioned sum is listed as “gross proceeds from sale by AE (Associate Enterprise) of Indian journal in printed form” in SIPL’s Form 3CEB report.

The AO saw the aforementioned three additions as royalties, and to that end, it made use of Section 9(1)(vi) of the Act and Article 12 of the Double Taxation Avoidance Agreement between Germany and India (often known as the “DTAA”). The respondent/assessee opted to file an appeal with the Commissioner of Income Tax (Appeals) (abbreviated “CIT(A)”) because it was unhappy with the changes that had been made. In a ruling dated 22.01.2019, the CIT(A) partially upheld the appeal. The second part of the initial addition, which was equal to Rs. 1,94,279 and had been labelled as “service charges” for the sale of “Indian journals in printed form,” was eliminated by the CIT(A). Insofar as the second and third additions were concerned, the CIT(A) confirmed the same, i.e., both with regard to the amount, as well as the treatment accorded to them by the AO. In other words, these amounts were treated as royalty, by the CIT(A) as well.

It is this decision which led to the respondent/assessee preferring an appeal with the Tribunal. As mentioned above, the CIT(A) affirmed the deletion of the first component of the first addition by the Tribunal in the assailed order dated 14.10.2022. The Tribunal cited a ruling issued by its coordination bench in the case of Springer Verlag GmbH v. DCIT in ITA Nos. 434 and 3826/DEL/2019, which was rendered on August 23,2022. The AYs 2014–15 and 2015–16 were covered by the Tribunal’s ruling.

Regarding the second addition, the Tribunal overruled the respondent/assessee’s argument, which claimed that the subscription fee could not be considered a kind of royalty. Regarding this matter, the Tribunal adhered to the ruling made by the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, [2021] 432 ITR 471 (SC).

Analysis of the court

In this case, the Tribunal disagreed with the CIT(A)’s conclusion. There was Rs. 22,89,835 at stake. The services provided by the respondent/assessee must unquestionably come within one or more of the following categories, namely managerial, technical, or consulting services, in order for this addition to be upheld as FTS. This is clear from a straightforward reading of Section 9(1)(vii)(b) of the Act, read with Explanation 2, and Article 12(4) of the DTAA.

Section 9 establishes a deeming fiction for income accruing or generating in India, which includes, among other things, FTS paid by a resident. Explanation 2 to the aforementioned provision defines FTS as any payment (including lump sum payments) for the provision of managerial, technical, or consulting services. Payments for the recipient’s own construction, assembly, mining, or similar projects are not considered to be FTS, nor are payments that would otherwise be considered compensation subject to taxation under the “salaries” heading.

As a result, the services provided by the respondent/assessee under the Commissionaire Agreement must fall under one or more of the aforementioned categories, namely management, technical, or consultant services, in order for the consideration received to be considered FTS. The respondent/assessee received a commission for providing the services at a rate of 9.9% on the net revenue total of “any and all” sales commissioned through the respondent/assessee’s intermediary. The assessor/respondent was authorised to keep the commission while transferring the revenue to SIPL or by any other commission payment arranged between SIPL and itself.

Nothing in the Commissionaire Agreement suggests that the respondent/assessee was required to identify, create, define, or evaluate the goals that SIPL needed to achieve, or even to frame the policies that led to these goals, supervise, carry out, or modify already-adopted policies. In a sense, the respondent/assessee was not carrying out executive or supervisory duties. The respondent/assessee was only required to provide assistance with company operations.

We do not feel motivated to challenge the Tribunal’s judgement on the removal of the added item in the sum of Rs. 22,89,835, on account of commission that the respondent/assessee got. We believe that the CIT(A) erred in concluding that the respondent/assessee’s receipt of the aforementioned sum possessed FTS characteristics.

The coordination bench judgement of this Court in DIT v. Panalfa Autoelektrik Ltd. addressed the characteristics of what constituted FTS in great detail. The coordination bench has addressed the order issued by the Authority for Advance Ruling (AAR) in Wallace Pharmaceuticals (P.) Ltd. in this ruling. Mr. Bhatia’s attempt to separate the ruling in DIT v. Panalfa Autoelektrik Ltd. must fail because it misinterprets the judgment’s real ratio.

The second addition is therefore brought into focus. We must note that Mr. Bhatia stated during the argument that the additional Rs. 16,67,83,110/- that the respondent/assessee received from its affiliates as a subscription fee for e-journals could not be considered a royalty due to the ruling made by the Supreme Court in Engineering Analysis. The idea that the subscription fee should be classified as FTS or, alternatively, as royalty has been raised for the first time in the written submissions, in contrast to the submission.

According to us, the argument that a subscription fee should be classified as FTS cannot be recognised because the appellant and revenue did not take this stance before the Tribunal. This flip-flop was made by respondent/assessee would do well to abjure. 

Considering that there is no evidence on file indicating that the respondent/assessee has granted the right in respect of copyright to the relevant subscribers of the e-journals, we also believe that the subscription fee cannot be classified as royalty. The only thing the respondent/assessee did was sell the publication that was protected by a copyright to the relevant organisations without granting any copyright to the content in question.

Given the ruling issued by the Supreme Court in the instance of Engineering Analysis, we believe the Tribunal acted correctly when it erased the addition made under this heading. For the aforementioned causes, we believe that there isn’t a significant legal issue that warrants our examination. The judgements mentioned above address the problems that were presented.

 As a result, the appeal is dismissed.

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Written By – Shreyanshu Gupta

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Secured Creditors and the Rainbow Impact on IBC

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Abstract

This article is based on the decision given by the hon’ble supreme court on STATE TAX OFFICER ( 1 ) VERSUS RAINBOW PAPERS LIMITED LNIND 2022 SC 596  and it will further dissect the legal question raised in this case along with the previous precedents of the hon’ble SC in similar cases.

The Verdict in this case basically held that the resolution plan proposed by the Committee of Creditors (COC) wouldn’t pass the scrutiny of law if the debtor fails to pay off the tax dues owed by him to the relevant tax authority, in such a case the Debtor is bound to liquidate its assets under section 53 of the IBC.

It goes without saying that the aforementioned judgement has raised worries within the insolvency sector, and as a result, the stakeholders have been considering what has to be done in order to comply with the aforementioned ruling.

Introduction

The controversy brought up in the judgement was outstanding taxes under the Gujarat Value Added Tax Act of 2003 (the “GVAT”) and how they conflicted with the waterfall system under Section 53 of the IBC. The waterfall mechanism, which is covered by Section 53 of the IBC, was only implemented as a legal tool to establish a hierarchy for prioritising the payment of obligations at the time of the corporate debtor’s liquidation. In essence, the dispute in the case is around outstanding claims from governmental bodies and privately secured debts. It is essential to review the ruling at this time and comprehend how it affects the IBC’s goal. Section 48 of the Gujarat Value Added Tax Act, 2003 (“GVAT Act”), according to the Supreme Court (“SC”), is not in conflict with or in contravention of Section 53 of the Insolvency and Bankruptcy Code, 2016 (“the Code”).

Analysis of the Court

In reaching the aforementioned conclusion, the Court made an important ruling by concluding that because the State Government has first charge over the property and is considered a “secured creditor” under the Gujarat Value Added Tax, 1974, it will also be treated as such under Section 53 (1) (b) (ii) of the IBC for liquidation purposes.

The State’s claim has been ruled to be untimely by the adjudicating authority (NCLT) and the appellate authority (NCLAT). Regulation 12 of the 2016 Regulations addresses the deadline for submitting a claim and supporting documentation, which is outlined in the public notification made according to Section 15 of the IBC. However, the time period is merely a guide and not required.

It also observed in the case of Vishal Saxena & Anr. v. Swami Deen Gupta where NCLT held that the time limit under Regulation 12 for submitting a claim is directory and not necessary in the matter of Resolution Professional. In its ruling and decision of June 10, 2021 in Assistant Commissioner of Customs v. Mathur Sabhapathy Vishwanathan, the NCLT adopted a similar stance. Thus, State’s claim cannot be rejected without violating the law.

The Adjudicating Authority may only approve the Resolution Plan, as approved by the Committee of Creditors (CoC), if the Adjudicating Authority is satisfied that the Resolution Plan complies with Section 30(2) of the IBC. This is made clear by Section 31 of the IBC, which governs the approval of a Resolution Plan by the Adjudicating Authority. The Resolution Plan cannot be authorised if it does not adhere to Section 30(2)’s standards.

The hon’ble court also took note of, Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.,

“A simple reading of Section 31 of the I&B Code would also make it abundantly clear that the corporate debtor, as well as its employees, members, creditors, guarantors, and other stakeholders, are bound by the resolution plan once it has been approved by the adjudicating authority and it has determined that the resolution plan as approved by CoC satisfies the requirements referred to in Subsection (2) of Section 30. Such a clause is necessary since one of the main goals of the I&B Code is to revive the corporate debtor and turn it into an operating business.”[1]

“The resolution plan submitted by the successful resolution applicant must include a number of provisions, including a payment provision for the costs of the insolvency resolution process and a payment provision for operational creditors’ debts, which must not be less than the amount that would be paid to those creditors in the event that the corporate debtor was liquidated in accordance with Section 53, or the amount that would have been paid had the amount to be distributed under that section been less. The resolution plan must also include provisions for paying the obligations of financial creditors who reject the resolution plan, which also must not be less than the sum paid to those creditors in accordance with Section 53, subsection (1), in the event that the corporate debtor is liquidated. To dispel confusion, Explanation 1 to Clause (b) of Subsection (2) of Section 30 of the I&B Code specifies that a distribution made in line with the terms of the aforementioned clause must be just and equitable to such creditors. The resolution plan must also include provisions for the administration of the corporate debtor’s affairs following approval, as well as for the execution and oversight of the resolution plan, Clause a(e) of sub-section (2) of Section 30 of the I&B Code also casts a duty on RP to examine that the resolution plan does not contravene any of the provisions of the law for the time being in force.”[2]

A resolution plan approved by the Committee of Creditors in accordance with Subsection (4) of Section 30 of the IBC may, under Section 31 of the IBC, only be approved by the Adjudicating Authority if the Adjudicating Authority is satisfied that the resolution plan meets the conditions outlined in Subsection (2) of Section 30 of the IBC. The fulfilment of Sub-Section (2) of Section 30 of the IBC criteria is a prerequisite for the approval of a resolution plan.

The Central Government, any State Government, any statutory or other authority, any financial creditor, or any other creditor to whom a debt in respect of dues arising under any law currently in effect is owed would be bound by a resolution plan that is valid and complies with Sub-Section (2) of Section 30 of the IBC. When there are still unpaid statutory obligations owed by a corporate debtor, such a resolution plan would not be binding on the State.

It also held that a company must be liquidated and its assets sold and distributed in accordance with Section 53 of the IBC if it is unable to pay its debts, which should include any statutory obligations to the government and/or other authorities, and there is no plan that envisages dissipation of those debts in a phased manner, uniform proportional reduction.

In the opinion of the court, the Committee of Creditors—which may include financial institutions and other financial creditors—cannot secure its own obligations at the expense of any other obligations, including statutory obligations to any government or governmental authority. Section 48 of the GVAT Act is not in conflict with Section 53 of the IBC or any other IBC requirements. According to Section 53(1)(b)(ii), debts payable to a secured creditor—which, under the GVAT Act, would include the State—rank equally with other specified obligations, including debts related to workman’s compensation for the 24 months prior to the liquidation beginning date. the GVAT Act designates the State as a secured creditor. A creditor to whom a security interest is credited is referred to as a secured creditor in Section 3(30) of the IBC. Such a security interest might be established legally. Any government or governmental authority is not excluded from the IBC’s definition of secured creditor.

Thus, the Court allowed the appeal of the appellant and set aside the order of the tribunal.

Claims Countering the verdict

The legal position is quite poles apart from this verdict, as the apex court had already stated in its verdict in “PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited”, where it categorically held that “IBC has overriding effect on the every existing law inconsistent to it including the Income tax law. Further, the Apex Court also took a note that because Income Tax debts are in the nature of Crown Debts, they do not take precedence even over secured creditors who are private individuals, citing the case of Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co., reported in 2000 (5) SCC 694 [LNIND 2000 SC 721].”[3]

The Bombay High Court recently held that secured debt shall take priority over “Government” dues/tax dues in the case of M/s Edelweiss Asset Reconstruction v. M/s Tax Recovery Officer, 5 dated July 28, 2021. The court based this decision on the fact that the Income Tax Act makes no reference to the obligations of the Income Tax Department taking precedence over secured debt. The Revenue was not permitted to impede the petitioner’s rights as a secured creditor. The order for attachment was invalid.

“The tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of section 53(1)(e) of the Code. If the Legislature, in its wisdom, assigned the fifth position in the order of priority to such dues, it is not for this Court to delve into or belittle the rationale underlying the same”[4]

A secured creditor often falls under the category of financial creditors. However, there may be circumstances in which even an operating debtor qualifies as a “secured creditor.” For instance, the National Company Law Appellate Tribunal recognised an operational creditor as a secured creditor in the Concast Steel & Power Ltd. v. MSTC Limited case because of a pledge agreement that had been made with the corporate debtor.

Conclusion

Thus it is advised that the Supreme Court must review the current ruling and clarify the law in light of this. It is obvious that if the existing legal situation is allowed to continue, it would harm the goal that the Code is meant to accomplish. As a result, the added responsibility of paying current or potential government and legislative dues is likely to deter any prospective resolution application. In the end, it could lead to fewer settlement requests, lower asset valuations, and higher haircuts for creditors.

[1] Para 65 Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.

[2] Para 66 Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.

[3] Para 4, PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited

[4] Leo Edibles & Fats Limited v. Tax Recovery Officer, Writ Petition No. 8560 of 2018.

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The High Court of Delhi instructs the AO to furnish Vodafone Mauritius with data in order to assess the TRC’s legality.

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Case Title: VODAFONE MAURITIUS LIMITED Versus ACIT

Date: 30.05.2023

W.P.(C) 7622/2023 & CM Nos.29564-65/2023

CORAM: HON’BLE MR. JUSTICE RAJIV SHAKDHER HON’BLE MR. JUSTICE GIRISH KATHPALIA

Introduction

The Delhi High Court has ordered the AO to give Vodafone Mauritius with information in order to assess the authenticity of the Tax Residency Certificate (TRC).

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia stated that no information or substance was presented to the petitioner, implying that the TRC delivered to the petitioner was not a legally valid document. The petitioner has disputed the Assessing Officer’s decision and notice without respect to the Tax Residency Certificate (TRC) granted in its favour.The transaction that the AO has attempted to bring under the jurisdiction of the Income Tax Act of 1961 involves the petitioner’s selling of shares in an Indian corporation.

Courts analysis and Decision

The shares were sold by the petitioner to a company called Bharti Enterprises (Holding) Pvt. Ltd. Concededly, the transaction occurred within Fiscal Year (FY) 2015-16.

The shares were sold for Rs. 1,295 crore by the petitioner. The petitioner received the compensation without being taxed at the source.

The petitioner stated that because it was given a TRC under Mauritius legislation, it is entitled to benefit from the India-Mauritius Doube Taxation Avoidance Agreement (DTAA) reached between India and Mauritius.The AO decided that the TRC provided to the petitioner was insufficient to show its residence status, making the petitioner eligible for treaty benefits. The court noted that the AO inferred a purpose to the assessee, namely that it would engage in tax evasion, including treaty shopping, without providing any material or information to it.

Judgment- click here to review the judgment2

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Emphasizing the importance of “tangible” material in reassessment proceedings and protecting taxpayers’ rights: Bombay High Court

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The High Court of Bombay passed a judgement on 04 May 2023, addressing the validity of a reassessment notice issued by the Income Tax Department. The petitioner sought to challenge the notice, which proposed to reopen the assessment for the Assessment Year 2014-15. The case of CHANCHAL BHAGWATILAL GOKHRU VS. UNION OF INDIA & ANR.  IN WRIT PETITION NO. 2014 OF 2022 which was passed by the division bench comprising of HONOURABLE SHRI JUSTICE DHIRAJ SINGH THAKUR & HONOURABLE JUSTICE G. S. KULKARNI, KAMAL KHATA.

Facts

The petitioner had filed her income tax return for AY 2014-15 on 28th July 2014. The Assessing Officer (AO) subsequently passed an order under section 143(3) of the Income Tax Act, 1961, on 18th November 2016. This order added a specific amount to the petitioner’s total income based on the withdrawal of exemption claimed under section 10(38) of the Act. The petitioner paid the tax on the additional amount as directed by the AO. Furthermore, the petitioner was granted a waiver of penalty for AY 2014-15 on 31st January 2018, based on an application made under section 273A of the Act.

However, to the petitioner’s surprise, a notice under section 148 of the Act was issued on 26th March 2021, proposing to reopen the assessment for AY 2014-15. This notice was issued after a significant gap of four years. In response, the petitioner filed a return of income on 14th April 2021, followed by notices under sections 143(2) and 142(1) on 10th November 2021 and 15th November 2021, respectively. The petitioner provided the requested details and expressed objections to the reassessment through a communication dated 28th January 2022. The objections were disposed of on 11th February 2022. Another notice was issued on 25th February 2022, leading to the filing of the present petition.

Judgment

The court meticulously examined the reasons recorded by the AO for reopening the assessment. The AO primarily relied on the claim made by the petitioner regarding the purchase and sale of shares of penny stock scrips. The AO concluded that the long-term capital gain should be considered as unexplained investment/income from other sources rather than a capital gain, suggesting that the transactions were merely an accommodation entry designed to generate unexplained investment and bogus profits.

However, the court found no indication of the petitioner’s failure to disclose any material facts. It noted that the AO had already considered these transactions during the original assessment proceedings and had added the corresponding amount to the petitioner’s total income. The petitioner had duly paid the tax on this additional income. The court, therefore, found no substance in the AO’s claim that income chargeable to tax had escaped assessment. It emphasized that the mere change of opinion regarding the calculation of tax payable did not provide a valid basis for reopening the assessment. The court reiterated the well-established principle that reassessment proceedings require fresh “tangible material” to justify their validity.

Considering the settled legal position and the facts of the case, the court delivered the following order:

The impugned notice dated 26th March 2021, issued by Respondent No. 2 for AY 2014-15, was quashed, and set aside. All actions taken in furtherance of the notice were prohibited.

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JUDGEMENT REVIEWED BY VETHIKA D PORWAL, BMS COLLEGE OF LAW

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In our opinion the order passed by the Tribunal warrants no interference. No substantial questions of law arise in the present appeal: Bombay High court

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The High Court of Bombay passed a judgement on 04 May 2023, in a recent legal battle under the Income Tax Act. The case of PR. COMMISSIONER OF INCOME TAX-19 VS. VISHWASHAKTI CONSTRUCTION IN INCOME TAX APPEAL NO. 1016 OF 2018 WITH INCOME TAX APPEAL NO. 1026 OF 2018 two appeals were filed challenging an order passed by the Income Tax Appellate Tribunal (ITAT) in Mumbai. The appeals were related to the assessment years 2009-10 and 2010-11 and were brought forth by a partnership firm engaged in road repairs and construction as a contractor for the Municipal Corporation of Greater Mumbai.

FACTS

The appellant, a partnership firm, filed a return of income for the assessment year 2009-10, declaring a total income of Rs. 37,04,810. During the assessment proceedings, the assessing officer (A.O.) noticed that the firm had claimed purchases totalling Rs. 88,53,059 from various entities. However, suspicions arose when the Sales Tax Department provided information about certain bogus parties, whose TIN matched with those from whom the purchases were allegedly made.

The A.O. issued notices under Section 133(6) of the Act to the parties involved, but there was no compliance. The firm also failed to produce the said parties, and as a result, the A.O. treated the amount of Rs. 88,53,059 as bogus purchases and added it back to the total income. The CIT(A) concurred with the A.O. on the bogus purchases but held that only the profit element embedded in the disputed purchases should be assessed as income, estimating it at 12.5%. The ITAT upheld the CIT(A)’s view and decision.

LAWS INVOLVED

The appeals were preferred under Section 260A of the Income Tax Act, 1961, which allows for appeals against orders of the ITAT. The case involved the interpretation and application of various provisions of the Act, including Section 143(3) and Section 147, which pertain to the assessment of income and reopening of assessments, respectively. Additionally, the decision of the CIT(A) was relied upon, along with the judgment of the Gujarat High Court in CIT v. Bholanath Poly Fab Private. Limited., which formed the basis for the ITAT’s decision.

ARGUMENTS

Two appeals were filed under Section 260A of the Income Tax Act, challenging the order passed by the Income Tax Appellate Tribunal. The appellant, claimed purchases from various entities, which were later flagged as bogus by the assessing officer. The firm argued that the completion of assigned projects for the Municipal Corporation of Greater Mumbai would have been impossible without genuine purchases. The Commissioner of Income Tax (Appeals) agreed partially with the assessing officer’s decision. The ITAT upheld the CIT(A)’s view, treating the purchases as bogus but retaining a portion of the addition. Similar cases were referenced to support the decision. The tribunal found no substantial questions of law and dismissed both appeals.

CONCLUSION

The case discussed highlights the legal implications and complexities surrounding the assessment of purchases made by businesses. While the court acknowledged the presence of bogus purchases, it also considered the practicality of completing assigned works if all purchases were deemed non-genuine. The decision emphasizes the need for a balanced approach when determining the tax implications of disputed purchases. Under Section 260A of the Income Tax Act, both appeals were dismissed, and the ITAT’s decision was upheld.

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JUDGEMENT REVIEWED BY VETHIKA D PORWAL, BMS COLLEGE OF LAW

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