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In regard to the disallowance of interest, the following were considered:
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Thus there is no ambiguity that the Assessee is not the Central Government and thus the employees shall not be treated as employees of government for perquisite valuation.
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The Union Budget 2021 had proposed self-certification of Form GSTR-9C (GST audit report) instead of compulsory audit by CA/CMA hitherto. Now the Government has notified the said amendment proposed in Budget 2021. From the financial year 2020-21, businesses having their aggregate turnover above ₹5 crores can now self-certify reconciliation statement in Form GSTR-9C.
Further to ease compliance burden, Government has exempted small taxpayers having an aggregate turnover up to ₹2 crores from filing annual return in Form GSTR-9. For ease of understanding, applicability of GST annual return and reconciliation statement is explained in table below:
The Madras High Court recently had an occasion to determine whether reversal of Input Tax Credit (ITC) is mandated in terms of Section 17(5)(h) of the CGST Act, 2017, towards normal loss arising out of consumption of inputs during the course of the manufacturing process.
The appellant M/s. ARS Steels & Alloy International Private Limited had been engaged in the manufacture of iron and steel products. The Hon’ble Madras High Court observed that the manufacturing process essentially entails a normal loss of small proportion of inputs. Being occasioned out of the actual consumption of inputs, such unquantifiable loss is inherent to the manufacturing process. Further, such loss is beyond appellant’s control as it entirely depends on external factors.
In pre-GST era, in similar case of Rupa & Co. Ltd. V. CESTAT, Chennai [2015 (324) ELT 295], the Division Bench of the Hon’ble Madras High Court had allowed CENVAT Credit on the total amount of inputs used notwithstanding that the entire amount of inputs did not figure out in the finished product. When there is no dispute that each manufacturing process would automatically result in some kind of normal loss such as evaporation, creation of by-products, etc., the total quantity of inputs that goes into the making of the finished product would represent the inputs of such products in entirety. Relying on this decision, the Hon’ble Madras High Court held that normal loss arising out of consumption of inputs during the process of manufacture is not subject to the rigors of Section 17(5), and thus proportionate reversal of ITC in such cases in uncalled for.
In this month’s newsletter, we bring you few judgements on the topic of ‘intermediary’ services. As you may be aware, not all services rendered to foreign customers qualify as ‘export’ under GST law to enjoy zero-rated benefits. One of the conditions to claim zero-rated benefit is that the ‘place of supply’ of services must be outside India. If the place of supply is in India, then it is not export and GST is payable even if the customer is located outside India and payment is received in foreign exchange. GST is a destination-based consumption tax. The situs of ‘place of supply’ achieves this destination-based principle. Constitution of India authorizes the Parliament to formulate the principles for determining the ‘place of supply’. So, the ‘place of supply’ is a legal prescription and in order to determine what constitutes ‘export’, one must unmistakably identify ‘place of supply’ rather than solely relying on location of customer and currency of transaction. In this backdrop, here is a synopsis of a few judgements on taxability of cross border ‘intermediary’ services.
In a recent judgement, divergent views have emerged among the division of the Hon’ble Bombay High Court in the case of Mr. Dharmendra M Jani wherein the constitutional validity of Section 13(8)(b) read with Section 8(2) of the IGST Act, 2017 has been challenged.
The appellant in this case is engaged in providing marketing and promotion services to its overseas principals, whereby it finds customers in India for the goods manufactured by appellant’s overseas principals. Subsequently, all the legs of goods supply transactions, viz. PO, Sale Invoice, Payment and Delivery of goods take place between the overseas principal and Indian customer. Towards such marketing and promotion services, the appellant raises its commission invoice and receives the same from its overseas customer in convertible foreign exchange. The appellant claimed that such arrangement amounts to ‘export of service’ in terms of Section 2(6) and challenged the levy of GST on such services as “intermediary services’ under Section 13(8)(b) read with Section 8(2) of the IGST Act, 2017.
Justice Ujjal Bhuyan of the Hon’ble Bombay High Court upheld the appellant’s challenge to the constitutional validity of 13(8)(b) read with Section 8(2) of the IGST Act, 2017 where he observed that the said provisions do not confirm with the overall scheme of the CGST and IGST Acts, as well as with the provisions of the Article 245, 246A, 269A and 286(2) of the Constitution of India. While the said provisions ought to uphold the fundamental principle that GST is a destination-based consumption tax, they completely run opposite when they subscribe to the principle of origin-based taxation. The extra-territorial impact of Section 13(8)(b) of the IGST Act, 2017 is in no way connected with the GST regime in India, and thus, the same is ultra vires the GST regime and unconstitutional.
On the contrary, Justice Abhay Ahuja took a divergent view and observed that neither Section 13(8)(b) nor Section 8(2) of the IGST Act, 2017 are unconstitutional, nor these provisions are ultra-vires the IGST Act, 2017. When the Constitution itself empowers the Parliament to formulate the principles determining the ‘place of supply’, Section 13(8)(b) of the IGST Act, 2017 cannot be said to be ultra vires the charging section of GST law.
In view of such difference in opinion, the matter is likely to be placed by the Chief Justice before the larger bench of the High Court to decide constitutional validity of ‘intermediary services’.
The West Bengal Authority for Advance Rulings (AAR) in the case of M/s Teretex Trading Private Limited services has held that arranging / facilitating sale of goods shall be classified as ‘intermediary service’ and cannot qualify as ‘export of service’ as defined under Section 2(6) of the IGST Act, 2017.
Facts of the case are that the applicant is engaged in supplying facilitation services by way of: (a) locating prospective overseas/Indian buyers; (b) understanding buyers’ requirement of goods; and (b) arranging sale of goods from foreign manufacturers/ traders to the prospective buyers. The applicant does not play any role in actual delivery of goods to buyers. Towards such facilitation services, the applicant receives consideration in the form of commission in convertible foreign exchange from the overseas suppliers.
The AAR observed that although the applicant does not actually supply goods on his own account, the supply of aforesaid facilitation services by the applicant is inextricably linked with the supply of goods by the overseas supplier. The applicant can neither change the nature and value of supply of goods, nor does he hold the title of the goods at any point of time. Thus, the AAR observed that the applicant squarely satisfies all the conditions laid down under Section 2(13) of the IGST Act, 2017 and ruled that the applicant qualifies as an ‘intermediary’. Further the AAR has held that since the place of supply in this case lies within India, such supply of services would be treated as an intra-state supply in terms of Section 8(2) of the IGST Act, 2017. Consequently, the facilitation services provided by the applicant do not qualify as ‘export of service’ in terms of the provisions of Section 2(6) of the IGST Act, 2017.
The Karnataka AAR recently had an opportunity to decide taxability of intermediary services in the case of M/s Airbus Group India Private Limited. The applicant in this case is involved in identifying the local capabilities in India to source the raw materials, parts, assemblies, systems, equipment and services for Airbus group. Further, the applicant also provides various support services in connection with onsite assessment and performance review of the suppliers under the global supplier development program. The applicant contended that services rendered by them do not qualify as ‘intermediary’ services on two main grounds. First, the applicant renders the services to Airbus group entities on a principal-to-principal basis and they are not an agent or broker of such entities. Second, their remuneration is fixed on a cost plus mark-up basis and is not linked to the purchase prices. Therefore, the applicant claimed that they do not fit into the definition of ‘intermediary’, and the services provided by them would qualify as ‘export of service’ under GST law. However, the Karnataka AAR noted that it is not necessary that commission payment is always involved in ‘intermediary’ services and cost plus mark-up arrangement can also be the basis for payment. So long as the applicant is involved in arranging or facilitating the supply, the applicant would qualify under the ‘intermediary’ definition. As regards the argument of the applicant that they are independent contractor and not agent or broker, the AAR noted that, there can be difference between agent, broker and an intermediary. In the case of an agent or broker, activity is undertaken on another’s behalf which is not necessary in the case of an intermediary. Therefore, the reliance on principal-to-principal relationship or calling oneself as an independent contractor is not relevant for the purpose of determining an ‘intermediary’ as per the definition. Finally, the AAR held that since the place of supply in case of intermediary services is in India in terms of Section 13(8) of the IGST Act, 2017, the services rendered by the applicant do not qualify as ‘export of services’ and would be liable to GST at 18% under HSN 998599 ‘other support services nowhere else classified’.
The Kerala AAR in the case of India Branch of M/s. Sutherland Mortgage Services Inc. (“SMSI”) USA has held that the services exported by India Branch office do not qualify for ‘export’ and are liable to GST up to 26 July 2018. However, due to specific exemption introduced under the IGST Act, the applicant is eligible for GST exemption from 27 July 2018.
The applicant in this case is primarily engaged in the business of providing information technology enabled services such as mortgage orientation and related services. The applicant was established as a branch of SMSI, USA as the mortgage laws of United States of America prevented its Head Office from outsourcing of its work to any other third party. The applicant and its USA Head Office entered into Inter-Company Agreement for providing aforesaid services. According to the applicant, the Agreement is entered only for the purpose of transfer pricing regulation as the branch has no separate legal entity. USA Head Office reimburses the applicant on cost plus mark up to comply with the transfer pricing regulations.
The applicant pointed out that the scope of work (SOW) between their USA Head Office and the customers specifically provides the India branch office locations as service providing locations and the invoice raised by USA Head Office to the customers clearly show the bifurcation of the services provided by the on-site location (Head Office) and the off-site location (the applicant).Thus, the applicant contended that they provide services directly to the customers of Head Office located outside India and not to their USA Head Office. Therefore, according to applicant, services provided by them would qualify as export of services.
The AAR noted that the explanations to Section 8 of the IGST Act creates a legal fiction that the establishment of a person in India and any other establishment of the same person outside India are two separate legal persons for the purpose of GST law. Thus, even though the applicant and its USA Head Office cannot be treated as distinct persons under the law of contracts or in commercial or accounting parlance, they are separate legal persons / distinct persons as far as the applicability of GST law is concerned. Therefore, the recipient of services as per the agreement ought to be determined in the light of this legal fiction.
On a perusal of the various clauses of the Inter-Company Agreement, the AAR observed that the services are provided by the applicant to its USA Head Office and not to the customers of Head Office. The AAR further noted that in view of the aforesaid deeming fiction, the contract entered by the customers with USA Head Office and the payment made by them to Head Office cannot be considered as contract executed with or payment made to the applicant. Thus, the AAR rejected the contention of the applicant that the service recipient in this case is customers of its USA Head Office. Finally, AAR concluded that the services rendered by the Applicant to its USA Head Office are liable to GST up to 26 July 2018 and exempt thereafter in view of the specific exemption introduced in the IGST Act.
Well, the story goes like this. GST is exempt on contributions collected by RWAs for an amount up to ₹7,500 per month per member. The bone of contention is if let’s say the monthly contribution is ₹9,000 then whether GST is payable on entire ₹9,000 or only on the contribution in excess of ₹7,500, that is, ₹1,500 in this case. In the early days of GST, CBIC had issued a clarification that only excess contribution would be liable to GST in such case and not the entire contribution. However, in 2019 Tamil Nadu Advance Ruling Authority in one case issued an adverse ruling that RWAs must pay GST on the entire contribution if the monthly contribution exceeds ₹7,500. Taking a cue from this Ruling, department took a U-turn and quickly issued a clarification on the lines of this advance ruling. Against this backdrop, the Madras High Court in a batch of writ petitions has recently held that contributions to RWA only in excess of ₹7,500 would be taxable under GST law. In arriving at its conclusion, Hon’ble High Court perused various exemption entries under erstwhile service tax law, central excise law, even under GST law and observed that the term “up to” connotes an upper limit and is interchangeable with the words “till” and thus in this case it means that any amount till the ceiling of ₹7,500 would be exempt for the purposes of GST.
The Kerala AAR in the case of M/s South Indian Federation of Fishermen Societies has held that supply of goods or services during warranty period without consideration is not liable to GST. The applicant in this case posed several questions before AAR with respect to classification and rate of GST on marine engines and spare parts of fishing vessels and repairs and maintenance of fishing vessels. One of the questions raised by the applicant was with respect to the supplies during warranty period.
In this connection, the AAR noted that the warranty is a promise or guarantee made by a seller of the goods or a provider of services as a part of the contract of sale or service. The consideration received for the original supply includes the consideration for promise to repair or replace during the promised warranty period. Hence, a separate consideration is not charged for warranty repairs / replacement. Therefore, the AAR ruled that the supply of goods or services during warranty period without consideration in discharge of the warranty obligation is not liable to GST. This a welcome ruling not just because it is favourable to the taxpayers but the facts of the case and industry practices appear to have been objectively considered by the AAR.
Liquidated damages are a predetermined sum of money agreed by the contracting parties that must be paid as damages for failure to perform under a contract. Failure to perform covers non-performance, late-performance, inadequate performance. Both under erstwhile service tax law and GST law, ‘agreeing to tolerate an act’ is a declared service. Whenever there is a recovery of any sum by the aggrieved party towards damages for breach of contract by the other party, department invoked this declared service of ‘agreeing to tolerate an act’ to levy tax on such liquidated damages. On this very issue, last month the service tax tribunal delivered three judgements all in favour of taxpayers. The facts in each case and the analysis of these judgments
The appellant in this case has set up a project of generating electricity using wind energy and has installed wind turbine generators (WTG). For operation and maintenance (O&M) of WTG, the appellant has given a contract to O&M service provider. In terms of the machine availability clause under the contract, in case of machine downtime below a specified limit, O&M service provider is under an obligation to compensate a predetermined amount to the appellant from the O&M service charges already recovered. The department demanded service tax under the category ‘agreeing to tolerate an act’ on the compensation amount received by the appellant under machine availability clause. The Tribunal on a perusal of various provisions of the service tax law observed that the service tax liability is on the gross amount charged for the services provided and thus there must be a nexus between the amount charged and taxable service rendered. In the instance case, the credit note issued for the compensation amount by the O&M service provider is towards refund of excess amount paid by the appellant to O&M service provider. There is no service which has been rendered by the appellant to O&M service provider so as to attract service tax. Machine availability clause cannot be in the nature of an act of tolerance by the appellant even from the perspective of dictionary meaning of word ‘tolerance’. Amount received by the appellant under machine availability clause is merely an amount to safeguard the loss of the appellant and the said amount cannot be called as consideration for the tolerance of service provided. Basis these reasons, the Tribunal set aside the service tax demand on the compensation amount received under machine availability clause.
The appellant in this case has awarded turnkey contract to M/s BHEL and considering that the time is the essence of the contract, liquidated damages were agreed upon in case BHEL fails to adhere to the stipulated timelines under the contract. Considering the delay in performance, the appellant recovered liquidated damages from BHEL for non-adherence to agreed time schedule. The department demanded service tax from the appellant on the said liquidated damages under the category ‘agreeing to tolerate an act’.
In this case also, the appellant recovered liquidated damages under the contract for failure to adhere to various timelines stipulated under the contract. The damages were towards failure to deliver consignments within the delivery schedule, forfeiture of Earnest Money Deposit for failure to make full payment within the date specified in the sale order. The department demanded service tax on the liquidate damages so recovered by alleging that the appellant has tolerated an act and liquidated damages are consideration towards such act of tolerance.
In both the above judgements (M/s Neyveli Lignite Corporation Ltd and M/s Steel Authority of India Ltd) the Chennai CESTAT set aside the service tax demand on liquidated damages. The CESTAT in both the cases relied upon the judgement of CESTAT Delhi in the case of M/s South Eastern Coalfields Ltd., in arriving at its decision. It appears that, the courts are giving due importance to intention of the parties in determining taxability of amounts received as liquidated damages. In case of breach of contract, the parties to contract do not intend to flout the terms of the contract so as to attract penal clauses. Thus, the courts seem to be in favour of the view that damages are not in the nature of consideration for any services rendered. Further there also appears to be consensus among courts on this issue that the declared service of ‘agreeing to do an act or to refrain from an act or to tolerate an act’ is attracted only when there is a dominant intention of the parties to do so like in case of non-compete agreements etc.
The Monetary Authority of Singapore (MAS) has lifted dividend restrictions on local banks and finance companies, noting that they have maintained strong capital adequacy ratios and the economic recovery is progressing well.
Last year, the authority asked banks and finance companies to cap their financial year (FY) 2020 dividends per share at 60 per cent of the previous year’s and offer shareholders the option of receiving the remaining dividends to be paid for FY2020 in shares in lieu of cash.
The global economic outlook has since improved. While some uncertainties remain, Singapore’s economy is expected to continue on its recovery path, given strengthening global demand and progress in our vaccination programme. Local Banks and Finance Companies have maintained strong capital adequacy ratios and continued to meet the credit needs of individuals and businesses, despite higher levels of provisioning made during the pandemic. Under MAS’ latest stress tests, these ratios are projected to remain resilient even under an adverse macroeconomic scenario of a stalled global recovery associated with delays in vaccine deployment and a global resurgence in the pandemic due to mutated virus strains, leading to the Singapore economy slipping again into recession in 2021.
Ms Ho Hern Shin, Deputy Managing Director, MAS said, “Local Banks and Finance Companies have weathered the pandemic well and are in a strong position to support the economic recovery. As downside risks remain, Local Banks and Finance Companies should exercise continued prudence in their discretionary distributions, whilst prioritising support to customers. Particularly when COVID-19 is not yet endemic, businesses may face added liquidity strains when COVID-19 measures are tightened from time to time. Banks and Finance Companies will do well to proactively work with customers to navigate these challenges.”
The Bank for International Settlements Innovation Hub in Singapore has published a proposed blueprint for enhancing global payments network connectivity.
The blueprint, also supported by the Monetary Authority of Singapore (MAS), aims to improve network connectivity via multilateral linkages of countries’ national retail payment systems.
Titled Project Nexus, the proposal outlines how countries can fully integrate their retail payment systems onto a single cross-border network, allowing customers to make cross-border transfers instantly and securely via their mobile phones or internet devices.
The Nexus blueprint comprises two main elements:
Under the Nexus blueprint, participating countries will only need to adopt the Nexus protocols once to gain access to the broader cross-border payments network. This removes the need for countries to negotiate payment linkages with each jurisdiction on a bilateral basis.
The Nexus blueprint was developed through extensive consultation with multiple central banks and financial institutions across the globe. It builds on the pioneering bilateral linkage between Singapore’s PayNow and Thailand’s PromptPay launched in April 2021, and benefits from the experience of the National Payments Corporation of India’s (NPCI) development and operation of the Unified Payments Interface (UPI) system. The blueprint can be built upon through continued research and engagement with regulators, payment operators, banks, and other industry participants collaborating towards a technical proof-of-concept.
Sopnendu Mohanty, Chief FinTech Officer, MAS, said “To achieve significant cost-reduction in cross-border payment transfers, enhancements must be made on two fronts: direct connectivity between domestic faster payment systems, and frictionless foreign exchange on shared common wholesale settlement infrastructures. The BIS Innovation Hub Singapore Centre is working on both. The Nexus project maps out a much-needed set of standards to achieve seamless cross-border payment systems connectivity.”
On 14 July 2021, an agreement was signed between the Government of the Republic of Singapore and the Government of the Hashemite Kingdom of Jordan, for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (“DTA”).
The summary of the key terms in the Singapore-Jordan DTA is as follows:
With effect from 1 August 2021, Singapore Exchange Regulation (“SGX RegCo”) will have a wider range of enforcement and administrative powers, including the power to require a director or executive officer to resign from an existing position with an issuer listed on the Singapore Exchange Securities Trading Limited (“SGX-ST”). With effect from 1 January 2022, issuers listed on the SGX-ST Mainboard and Catalist (“listed issuers”) will be required to state in their annual reports that they have put in place a whistleblowing policy, starting with their annual reports relating to financial years commencing from 1 January 2021.
Starting from 1 August 2021, SGX RegCo will have the power to, amongst others:
Form C-S/C for the FY 2020 -30-November-2021
Estimated Chargeable Income (ECI) (June year-end)- 30-Sep-2021
GST Return: July 2021 – September 2021- 31 October 2021