Yearly Rewind 2024: Tax

The year 2024 has been remarkable from an Indian tax perspective marked by significant rulings pronounced on certain controversial issues. The rulings will have a profound impact on the taxpayers, with some decisions being beneficial and others having adverse effects. The Union Budget 2024-25 also amended certain provisions under the Income-tax Act, 1961 (IT Act), which will impact taxpayers, both resident and non-resident taxpayers. On the indirect tax front, the Supreme Court has put an end to numerous long-drawn contentious issues. GST on online gaming continues to be a burning issue with a flurry of show cause notices, tax demands and circulars/ clarifications from the tax authorities. The Union Budget 2024-25 clarified issues concerning place of supply, availment of input tax credits, and exemptions available to taxpayers, striving to simplify the GST regime.  

In this memo, we have captured the relevant updates on topical issues having a continuing impact on taxpayers. 

DIRECT TAX 

Indirect transfers – transactions undertaken by entities located in tax haven jurisdictions cannot lead to presumption of tax evasion (read our thoughts on the issue here) 

Indian tax jurisprudence has witnessed indirect transfers as a lingering issue with no definite conclusion, and which concerns global investors at large. The year 2024 has once again seen a discussion on this issue before the Hon’ble Delhi High Court in the case of Tiger Global International III Holdings v. AAR¹. A connected issue which has been on the forefront is the validity of tax residency certificate (TRC), specifically when coming from a tax haven jurisdiction. Time and again it has been held that the validity of TRC cannot be questioned, unless fraud can be proved. This issue is currently before the Hon’ble Supreme Court.  

The Hon’ble Delhi High Court dealt with the issue of suspicion with respect to transactions undertaken by the entities located in the tax haven jurisdictions and the conflict between the provisions of IT Act and the relevant double taxation avoidance agreement (DTAA).  

The High Court ruled that the mere establishment of a subsidiary in a tax favouring jurisdiction like Mauritius cannot lead to a presumption of tax evasion by the concerned entity. It is an acknowledged fact that multinational corporations seek to invest across the globe and the establishment of offshore companies is motivated by bonafide commercial purposes. The High Court also re-emphasised the settled position regarding the finality of TRC as evidence of residential status of an entity to claim benefits under DTAA. It has ruled that TRC is sufficient evidence of lawful and bonafide residence, however, in cases relating to tax fraud, sham transactions, where the entity has no economic substance or the transactions suspected to be aimed at camouflaging illegality, the Revenue could enquire and investigate despite obtaining TRC. The High Court also ruled that the transaction pertaining to indirect transfers is not taxable on account of the benefit under India Mauritius DTAA.  

To arrive at the above conclusions, the High Court also placed reliance on the landmark judgements of Vodafone International Holdings B.V. v. Union of India & Anr.² and Union of India v. Azadi Bachao Andolan.³

Receipts attributable to permanent establishment will be brought to tax, irrespective of loss suffered by global entity (read our thoughts on the issue here)  

The issue concerning whether profits attributable to a permanent establishment (PE) can be brought to tax, if the enterprise is incurring losses as a group at global level, has been subject to judicial scrutiny in the past as well. Pursuant to this, in the year 2022, ITAT Delhi had ruled that if the entity is incurring losses at a global level, no profit could be attributed to the PE in India. This ITAT ruling was questioned in the year 2023 by the Hon’ble Delhi High Court and was referred to the larger bench.  

Recently, in September 2024, a full bench of Hon’ble Delhi High Court in the case of Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax⁴ has taken this issue into consideration and ruled against the view taken by ITAT Delhi. It has been held that the activities of a PE are liable to be independently evaluated and ascertained, as PE is a taxable entity independent of its group enterprises. Relying on the source rule of taxation, it was observed that the source state cannot be deprived of its right to tax PE subject to the global financials of an entity. The High Court also noted that bearing in mind the well-established rule of source which applies and informs the underlying theory of taxation, the source state being deprived of its right to tax a PE or that right being dependent upon the overall and global financials of an entity cannot be countenanced. Therefore, the High Court has ruled that profits attributable to PE in the source state will be subject to tax, even though the enterprise as a group is incurring losses at a global level. This position aligns with the BEPS action plans and reduces the opportunities for MNCs to not make payment of taxes in India, though India has been a profit earning jurisdiction.  

Applicability of transfer pricing regulations in case of transactions between a foreign entity and its branch office  

It is a settled position that an entity cannot conduct business with itself or derive profits from transactions with its own branch offices/ segments.  

The special bench of ITAT Ahmedabad in the case of TBEA Shenyang Transformer Group Company Ltd. v. Deputy Commissioner of Income-tax⁵ ruled that transactions between a foreign enterprise and its PE in India can be considered as an international transactions: (i) if they fall within the definition of “Associated Enterprises” and (ii) cam be categorised as “International Transaction” as per the definition under section 92B of the IT Act involving either one or more non-resident entities. 

The special bench also observed that transfer pricing provisions and the computation of the arm’s length price are based on the concept of “enterprise” rather than a “person”. The transfer pricing rules clearly differentiate between these two terms. If an “enterprise” is considered same as a “person” for transfer pricing purposes, it could render some provisions meaningless. Therefore, for international transactions, a PE shall be treated as a distinct and separate enterprise from its head office for profit attribution. Therefore, the transfer pricing regulations shall be applicable to such international transactions.  

Telecom companies not liable to pay TDS for selling pre-paid SIM cards to distributors (read our thoughts on the issue here) 

The year 2024 had brought significant relief for telecom companies regarding their franchise agreements with distributors for selling start-up kits, which included SIM cards and coupons at a discounted price to the distributors. The margin between the discounted price and the Maximum Retail Price (MRP) is the profit earned by the distributors. The tax authorities had previously considered this profit margin as a ‘commission’ paid to agents and argued that the telecom companies were liable to deduct Tax Deducted at Source (TDS) under Section 194H of the IT Act. The Hon’ble Supreme Court in the case of Bharti Cellular Limited v. ACIT, Kolkata⁶ ruled that the liability under Section 194H arises only when there is a principal-agent relationship. In this case, the distributors buy and sell goods on their own account, with the profit margin being the difference between the purchase price and the sale price, similar to an independent contractor. The Court determined that distributors are independent contractors and not agents of the telecom companies. Therefore, telecom companies are not liable to deduct TDS, as they are not involved in the transactions between distributors and end customers. 

The Supreme Court observed that it would not be feasible for telecom companies to withhold taxes on the profit margin since they do not have access to information about the transactions between the distributors and end customers. This decision clarified that telecom companies are not required to deduct TDS on the profit margins earned by distributors, as the distributors operate independently and not as agents of the telecom companies.  

USA LLC, a fiscally transparent entities is eligible for benefits under India-USA DTAA  

One of the most prominent issues of international taxation has been eligibility to claim DTAA benefit and interpretation of the concept “liable to tax”. Recently, a widely discussed issue was raised before the ITAT Delhi with respect to providing benefits of the DTAA to a USA based LLC, which is a fiscally transparent entity not taxable in USA. The tax officer was of the view that, since the USA LLC is not ‘liable to tax’ in the USA, therefore, the entity will not be eligible to claim the benefits of the treaty in India under Article 4 of the India-USA DTAA.  

ITAT Delhi in the case of General Motors Company USA v. ACIT, International Taxation⁷ rejected the view taken by the tax officer and relying on the decision of the Hon’ble Supreme Court in the case of Union of India & Anr. v. Azadi Bachao Andolan & Anr. (supra), wherein it was observed that liability to tax is a legal situation and payment of tax is a fiscal fact. The Supreme Court had noted that for the purpose of application of Article 4 of a tax treaty, what is relevant is the legal situation, namely liability to taxation, and not the fiscal fact of actual payment of tax. Under the US federal income tax law, an LLC with a single owner is disregarded as separate from its owner unless the LLC elects to be treated as a corporation for US federal income tax purposes. The ability of the LLC to elect its tax classification under US federal income tax law also supports the legal situation or aspect of the LLC being liable to tax. Further, where an LLC is disregarded as separate from its tax owner for US federal income tax purposes, the tax owner of the LLC pays tax on the tax owner’s share of the taxable income attributed from the LLC. This further supports the legal situation of a LLC being liable to tax, i.e., the LLC is essentially ‘liable to tax’ but the income is attributed to its tax owner and such tax is imposed and paid by its respective tax owner.   

On the basis of the aforementioned reasons, it was concluded by the ITAT that a USA LLC is eligible to avail the benefits of India-USA DTAA, irrespective of it being a fiscally transparent entity in USA.  

INDIRECT TAX 

Functionality test applied – availing input tax credit on construction of immovable property (read our thoughts on the issue here) 

Honourable Supreme Court of India in the case of Chief Commissioner of Central Goods & Services Tax & Ors. v. M/s. Safari Retreats Private Limited & Ors.,⁸ has resolved a long-standing issue regarding availability of input tax credit (ITC) on input services used for construction of immovable property.  The taxpayer availed ITC on input services used for construction of immovable property against the output Goods and Services Tax (GST) payable on rental income earned through such immovable property. GST Authorities were of the view that the exception carved out in the GST legislation disallows availability of ITC on good and services used for construction of immovable property (other than plant or machinery). 

The Supreme Court on this issue has taken a contrary view and ruled that the expression “plant OR machinery” used in legislation cannot be given the same meaning as the expression “plant AND machinery” as defined. While interpreting the term ‘plant’, the Court has taken a view that if the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by Schedule II (Clause 2 and 5) of the Central Goods and Services Tax Act, 2017 (CGST Act) the building could be held to be a plant. Functionality test should be applied on a case-to-case basis to decide whether a building can be categorized as a ‘plant’, so as to avail ITC of input goods and services. 

This is a landmark ruling having the potential to unlock (and utilize) ITC on goods and services availed for construction of immovable property.  

Payment of “Royalty” on mines and mineral lands is not “Tax” (read our thoughts on the issue here) 

Supreme Court in the case of Mineral Area Development Authority v. Steel Authority of India⁹ has resolved a long pending issue concerning whether (i) royalty payable on extracted minerals constitute tax; and (ii) the State Governments have the right to impose taxes on mines and mineral-bearing lands.  

These issues arose due to contrary judgements being delivered by Supreme Court in the past. In 1999, a seven-judge bench of Supreme Court ruled that royalty constituted a tax and that the cess on royalty was beyond the legislative competence of the state government. However, in the year 2004, the five-judge bench gave a contrary view and ruled that in the earlier judgement, there was a typographical error, and the court had mistakenly written that “royalty is a tax” while meaning that “cess on royalty is a tax”. 

In the given case, the Supreme Court ruled on both the issues and held that: (i) royalty is conceptually different from tax. Royalty is paid as consideration in a private contractual arrangement, whereas a tax is imposed by authority of law; (ii) State Governments have the power to tax mineral rights under Entry 50 of the State List, subject to any restrictions imposed by Union Government. Since the Mines Act does not explicitly bar the State Governments from imposing such taxes, the State Government’s authority remains intact; and (iii) State Governments have the power to levy taxes on mineral bearing land under Entry 49 of the State List because “land” under Entry 49 includes mineral-bearing land. The value of extracted minerals can be used to calculate tax. 

After this, the question arose with respect to retrospective or prospective application of this judgement, wherein the State Governments sought retrospective application and mining companies were of the view that retrospective application will have massive financial implication due to back payments of 35 years. The Supreme Court decided a cut-off date of 01 April 2005 for the levy. Taxes can be levied on transactions made after this date, with collections to begin from 01 April 2026. Relaxation was granted by staggering the payment over 12 years, with 100% exemption for interest or penalties for the period prior to this judgment i.e. before 25 July 2024.¹⁰ 

Mobile service providers can avail CENVAT credit on mobile towers and prefabricated buildings  

Supreme Court in the case of Bharti Airtel Limited v. Commissioner of Central Excise, Pune,¹¹ dealt with a long pending contentious issue of availability of input tax credit on items like mobile towers and prefabricated buildings (PFBs) used for rendering telecom services. The questions answered in this judgment relates to whether (i) mobile towers and PFBs are movable or immovable property; (ii) mobile towers and PFBs fall within the definition of “capital goods” or “inputs” under the CENVAT Credit Rules, 2004 (CENVAT Rules); and (iii) mobile service providers can claim CENVAT credit on mobile towers and PFBs.  

In order to determine the nature of property as movable or immovable property, the following principles have been identified:  

• If the property is attached to the earth in a manner that it cannot be removed, then the property shall be considered as immovable. However, if the attachment is merely to facilitate the use of such item, then it will be considered movable despite being attached to an immovable property.  
• If the intention is of permanent attachment, then it will be considered immovable. On the contrary, if the attachment is for temporary purposes, then it shall be treated as movable.  
• If the attachment to the earth is to enhance operational efficiency of the article and for making it stable, then it is a movable property.  
• Any property which can be dismantled and moved without damage, will be considered as movable.  
• If the property is attached to the earth and is capable of being removed or sold in the market, it will be considered a movable property.  

In the given case, antennas were attached on the mobile towers for stability and could be easily dismantled without any damage and change in its nature. Further, they can be easily shifted to different locations and also marketed and sold. The attachment of mobile towers to the earth or building is not for permanent enjoyment of land or building, but for the stability of antenna and the seamless transmission of signals. Therefore, it was ruled that mobile towers and PFBs are movable in nature.  

Further, it was observed that according to Rule 3(1) of the CENVAT Rules, if the mobile towers and PFBs fall within the definition of “capital goods” or “inputs”, then CENVAT credit can be availed on its procurements and used for the payment of output tax liability. The Supreme Court ruled that towers and PFBs are classified as “goods”. Given that these goods are utilized in providing mobile telecommunication services, it follows that they also qualify as “inputs” under Rule 2(k) for the purpose of availing credit under the CENVAT Rules. 

Directorate of Revenue Intelligence (DRI) has the authority to issue show cause notices 

Supreme Court in the case of Commissioner of Customs v. M/s. Canon India Private Limited,¹² has reconsidered the judgment passed in the year 2021 with respect to jurisdiction of DRI to issue show  cause notice (SCN) under Section 28 Customs Act, 1962  (the Act), wherein it was ruled that DRI officers do not have the jurisdiction to issue SCN because only the officers directly involved in the assessment of duty under Section 17 of the Act can initiate SCN proceedings.  

In this review petition, the Supreme Court has taken a contrary view and ruled that DRI has the jurisdiction to issue show cause notices because there is no link between Section 17 and Section 28. It was observed that Section 17 of the Act allows customs officers to assess duties at the time of import or export. However, Section 28 of the Act provides the specific officers the power to recover unpaid or short-paid duties through SCNs. Importantly, the recovery process under Section 28 does not necessitate that the same officer who assessed the original duty under Section 17 issue the notices. 

This is an important judgment and will regularize all the SCNs issued by the DRI in the past and were stayed following the Supreme Court judgment of 2021. 

Online Gaming industry to face significant cash outflows on account of GST demands  

The online gaming industry faced a major blow in the year 2023, when the 50th GST council retrospectively increased the GST rates on online gaming, casinos and horse racing to 28% (from 18%) on the full value of bets or entry amounts. Several online gaming companies such as Head Digital Works and Games 24/7 have challenged this decision of retrospective imposition of 28% GST on the full value of the bets placed and not on the gross gaming revenue. The matter is yet not decided by the Courts and the online gaming companies are still arguing before the Ministry of Finance, GST Council, Courts and other relevant bodies/ associations. 

Online gaming companies are now facing a dilemma of SCNs being adjudicated, as there is a prescribed due date in the GST laws. SCNs have to be adjudicated within a prescribed timeline, else the same will be considered as lapsed. Given this, pending any ruling/ guidance from the Supreme Court/ Ministry of Finance/ GST Council, GST authorities will commence adjudicating the SCNs already issued and generate demand orders. Several online gaming companies have already received adjudication orders confirming tax demands for the financial year 2017-18. Although the taxpayers have a remedy by preferring an appeal to such demand orders, but there is a requirement of a pre-deposit of the disputed tax amount. 

Any decision of the Supreme Court will significantly influence the future of emerging online gaming sector in India, which currently operates within a legal and regulatory grey area. A ruling in favor of the interpretation adopted by the GST authorities could threaten the viability of this industry. Conversely, a more favorable outcome might stimulate growth and attract investment. 

GST issues concerning related-party transactions  

a) Import of services: Import of services from a related entity outside India is considered as supply, even when no consideration is involved in the transaction. Under the garb of this provision, the tax authorities began charging GST by attributing certain activities of the overseas related entity as a service being rendered to the Indian related entity. This has resulted in large scale protracted litigation, even though the Indian related entity was eligible to avail entire ITC of the GST paid under reverse charge. 

It is now clarified that if the Indian related entity is eligible for full ITC, the value of services stated in the self-invoice (if issued) by the Indian entity should be considered as the open market value. In cases where the Indian related entity is eligible for full ITC but does not issue a self-invoice for the services received from the foreign affiliate, the value of such services should be considered as ‘NIL’ and be treated as the open market value. Given this clarification, Indian entities eligible for full ITC can now avoid any adverse cash flow impact and any litigation on related party transactions. 

b) Loans from overseas affiliates: Loans provided by an overseas affiliate to its Indian affiliate or between the related persons in India, where there is no consideration except interest or discount and does not involve any processing, administrative charges etc., is fully exempt from GST. It is now clarified that in cases where any processing fee, administrative charges etc., are charged over and above the interest or discount, then such charges will be treated as consideration for supply of services and will be liable to GST.  

Reimbursement of cost to foreign holding company on issuance of ESOPs 

On issuance of Employee Stock Option Plan (ESOP), Employee Stock Purchase Plan (ESPP) or Restricted Stock Unit (RSU), the Indian subsidiary issuing such shares/ securities is required to reimburse the cost of such shares/ securities to the foreign holding company. GST authorities have been demanding tax from the Indian subsidiary under the reverse charge mechanism on such reimbursement.  

It has now been clarified that the purchase or sale of securities/ shares is neither a supply of goods nor a supply of services as per Section 2(52) of the CGST Act. Also, as per Entry 1 of Schedule III of the CGST Act, services by an employee to the employer in the course of or in relation to employment, shall neither be treated as a supply of goods nor services. Accordingly, any cost-to-cost reimbursement to the overseas holding company for issuance of shares/ securities will be outside the purview of GST. 

Clarification on place of supply of data hosting services  

a) Section 13(3)(a) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) provides that if any services are supplied in respect of ‘goods’ which are required to be ‘made physically available’ by the recipient of services, then the place of supply of such service will be in India (i.e. the place where the services are actually performed) and thus liable to GST. 

Data hosting service providers render comprehensive services through its premises, hardware, software and personnel.  The services inter alia include essential infrastructure such as ventilation, cooling system, uninterrupted power supply, network connectivity, security systems, etc. It is a combination of these services which essentially qualify as data hosting services, and all of these are primarily owned by the data hosting service provider and not ‘made available’ by the cloud computing service provider. 

It is clarified by the CBIC that the services provided by data hosting service providers located in India is not in connection with ‘goods’ made available (by the cloud computing service provider) for rendition of services, and thus the place of supply of such services is not the location of service provider i.e. in India. 

b) Section 13(4) of the IGST Act provides that if any services are supplied directly in relation to an ‘immovable property’, then the place of supply of such service will be the place where the immovable property is located i.e., India. Data hosting service is not a passive supply involving only an immovable property. This is a comprehensive service as mentioned in point (a).  

It is also clarified that the place of supply of data hosting services should be determined based on the default provision i.e. as provided under Section 13(2) of the IGST Act.  Accordingly, the place of supply will be determined based on the location of the service recipient and thus, will be eligible for export benefits if the cloud computing service provider is located outside India. 

Clarification on availment of ITC on demo vehicles  

CBIC has clarified that ITC on demo vehicles is not restricted under Section 17(5)(a) of the Central Goods and Services Tax Act, 2017, which restricts availment of ITC on motor vehicles. The words used in the exception are “further supply of such motor vehicles” and not “further supply of said motor vehicles”. Accordingly, since the demo vehicle is used to promote sale/ supply of similar motor vehicles, the same can be considered as used for ‘further supply of such motor vehicles’, and accordingly ITC can be availed on demo vehicles.   

In cases whether the demo vehicle is used for other purposes, such as for transportation of staff and not to promote sale of similar vehicles, the ITC on such demo vehicles cannot be availed. Also, if the authorized vehicle dealer is acting only as an agent or provides only marketing services through the demo vehicle, then ITC on such demo vehicle cannot be availed. 

Clarification on place of supply for advertising services  

Ambiguity prevails on whether ‘advertising services’ provided by advertising companies/ agencies located in India to service recipients located outside India can be treated as an ‘export of service’.  

Section 13(3)(b) of the IGST Act specifies that if any services are supplied to an individual and requires the physical presence of the service recipient along with the supplier of services, then the place of supply of such services will be in India and thus will be liable to GST. For rendition of advertising services, there is no requirement for the service recipient (if such service recipient is an individual) to be physically present to receive such services. Accordingly, it is clarified that the place of supply for advertising services cannot be determined under Section 13(3)(b) of the IGST Act. 

Consequently, the place of supply of advertising services, will be determined based on the default provision under section 13(2) of IGST Act and the place of supply will be location of the service recipient and thus will be eligible for export benefits if the service recipient is located outside India. 

There can be cases where an advertising agency is acting in the capacity of an agent to procure media space for foreign clients. In such a scenario, the Indian advertising agency can be classified as an ‘intermediary’ and liable to GST on its invoice raised to foreign clients. 

Budget Highlights (read our thoughts on the budget here) 

 

 

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.  

 

1. [2024] 165 taxmann.com 850 (Delhi) ↩︎
2. [2012] 17 taxmann.com 202 (SC) ↩︎
3. [2003] 132 taxmann.com 373 (SC) ↩︎
4. [2024] 166 taxmann.com 466 (Delhi)  ↩︎
5. [2024] 169 taxmann.com 145 (Ahmedabad – Trib.) (SB) ↩︎
6. [2024] 160 taxmann.com 12 (SC)  ↩︎
7. [2024] 166 taxmann.com 170 (Delhi Trib.) ↩︎
8. TS-622-SC-2024-GST ↩︎
9. TS-622-SC-2024-GST ↩︎
10. (2024) 10 SCC 257  ↩︎
11. (2024) 11 TMI 1042-SC ↩︎
12. Review Petition No.400 of 2021  ↩︎