With profound regret to lack of a better alternative to Simon Beaufoy of the 2017 classic between Bobby Riggs and Billie Jean King for titular adaptation, in the current context, it impresses on the impost vigilant mind that the revenues of jurisdictions at large are now engaged in what can be effectively termed as a prelude to of no less than the Star Wars classic “The Empire Strikes Back”.

From the middle 1990’s academics (a particular mention to Prof Arvid Aage Skaar and his classic “Permanent Establishment: Erosion of a Tax Treaty Principle” ) and forward thinking practitioners alike had been propagating the advent of the e-commerce juggernaut and in particular the impact of the same on its capacity to hit ability of source countries to tax transactions within their jurisdictions.

The essential paradigm that followed was that companies based physically in a totally different legal and residential jurisdiction could bypass the taxation system of source countries and still provide goods and services in those countries. The common critical question arising out of such flow of business was to “how bring such cross border transactions within the ambit of taxes?”.

The Westminster Principle (Inland Revenue Commissioners v. Duke of Westminster, http://www.bailii.org/uk/cases/ UKHL/1935/4.html) elicited by Lord Tomlin of the High Court of Justice in England, notwithstanding, it was clear that there was an attempt to bring a systemic change in the way commerce was being and was to be conducted globally.

From the processes arising, about the “fin de siècle” jurisdictions started reconfiguration of the base framework of the OECD:OCDE and after much deliberation, subsequent to the OECD:OCDE conference in Turku in 1997, came up with the Ottawa Taxation Framework 1998, which emphasised more particularly on the application of traditional income tax laws and guiding principles to tax cross border ecommerce transactions as well as traditional transactions.

2008, brought to fore events that would cause a seismic cataclysm to the propositions in the Ottawa Taxation Framework 1998. Sovereigns ran huge fiscal deficits trying to shore up their respective economies. Governments lost revenue steadily owing to contagion caused by the financial sector seeping into traditional business and individual incomes alike, with witness of a gradual but exponential increase in e-commerce activity picking up. Despite substantial co-ordinated efforts by the G20 and OECD:OCDE nations it became clear by 2013 that there had to be a paradigm shift in the ways tax policies were designed. The problem was more exacerbated by the fact that the existing framework was not only woefully inadequate to address the aggressive tax planning of digital and semi digital MNE but also fell short at addressing concerns of source countries to which goods and services were supplied via digital platforms. It follows that the most glamourous of the lot, the FAANG (Facebook, Amazon, Apple, Netflix, Google) were found to be the forerunners in matters of aggressive tax planning. Your attention is invited to the following video of Public Accounts Committee Hearing (12/11/2012) on Taxation of Multinational Corporations, witnesses: Matt Brittin (CEO, Google UK), Troy Alstead (Global CFO, Starbucks), Andrew Cecil (Director Public Policy, Amazon) (http://www.parliamentlive.tv/main/ player.aspx?meetingId=11764) p a r t i c u l a r l y intriguing as well as raising some important issues camouflaged within the parameters of morality. Chairperson British MP Margaret Hodge very clearly outlines “We are not accusing you of being illegal, we are accusing you of being immoral.” It could be gauged therefore that it was only a matter of time before “morality” was translated into “legality”.

At this point the author would invite a reading of Millar, Historical View of the English Government (1789) bk. ii, chap. 7, and of the North Caorlina Law Review Vol 23 Number 3, of a perspective of circumstances in which morality translates effectively into legality. (https:// scholarship.law.unc.edu/cgi/viewcontent.cg i?article=1651&context=nclr&hx0 03E;). The underlying intentions being very clear, and as famously attributed to Denis Healey, former UK Chancellor of the Exchequer who once said “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”, the dimensions of the wall getting blurry with MNE tax avoidance schemes.

Authors Riley Carpenter and Shaun Parsons (Wilson, Amy & Carpenter, Riley & Parsons, Shaun. (2016) in The effect of electronic commerce on the erosion of tax bases – Developing appropriate taxation laws in South Africa) have argued that there needs to be an overhaul of taxing systems around the globe in order to meet the taxation challenges in particular caused by the ecosystem around and parallel to the FAANG, and while not radically different the structure of the South African Taxation system needs to be in sync with proposed legislation in counterparts.

For the Indian scenario, India has advocated the its own strategy to counter the reduction of the resulting tax base on account of digitalisation by incorporating changes in the Finance Act 2018. In the G20 meeting at Osaka in June 2019, India advocated that its approach (equalisation levy and proposed Tax Collected at Source) be adopted by the OECD:OCDE as a possible resolution of the digitisation quagmire (https://pib.gov.in/PressReleasePage.aspx?PRID=1573765).

Ukraine has as of June 2020 amended its tax laws via the Tax Bill 1210 to bring into alignment with the BEPS project and has introduced CFC aspects into its domestic legislation.

Events such as outlined above have led to a knock-on effect by sovereign governments to act in order to protect their own interests in revenue by means of either significant economic presence tests, withholding taxes, transaction taxes (e.g., equalization levies and digital services taxes), and minimum taxes (e.g., diverted profits taxes) (Walter Hellerstein, Jurisdiction to Tax Income and Consumption in the New Economy: A Theoretical and Comparative Perspective, Georgia Law Review (2003)). Imperatively, sovereigns now under significant financial and political pressure are finding it a compulsion under nationalism to go it alone and adopt means to protect their revenue. (Desperate times, desperate measures)

Discussing a few of the measures becomes imperative

1. Economic Presence Tests: Significant economic presence tests either qualitative or quantitative offer as of the date of publication a good view of taxation of revenue on source. Academics like Arvid Aage Skaar, Luc Hinnekens, etc argue in favour of the economic presence tests. Stimulatingly, in 2013 there was an attempt by the French authorities to tax revenue attributed to social media platforms even though none of them had any presence in any territorial jurisdiction governed by France(https://convention-s. fr/wp-content/uploads/2014/06/ Taxation_Digital_Economy_Jan2013_ France.pdf). In a characteristically amusing case in the Tax Tribunals in India it was held that social media profiles of employees could be a trigger for determination of a permanent establishment (GE Energy Parts v. Addl Director of Income Tax). In a way it might be argued there is a general trend towards dilution/modification of the permanent establishment principle (Article 5 of the OECD/UN Model convention). Whether MLI alone would be sufficient to dilute the said, is a fact that would unravel in the coming times. There are some other Quantitative Economic Presence tests being proposed like GAAR and SAAR rules being automatically applicable on above a certain threshold.

   The OECD:OCDE came up with a report titled OECD:OCDE/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from Digitalisation – Interim Report 2018 (https://www.oecd.org/ctp/ tax-challenges-arising-from-digitalisation- interim-report- 9789264293083-en.htm), in which it has taken into account the significant dilution proposed by sovereign jurisdictions of Article 5 of the OECD:OCDE model convention (The PE principle) (Similar to the UN model convention) . In particular mention has been made in pages of the significant modification of the PE principle with respect to Israel (Significant Economic Presence), Slovak Republic(fixed place of business or digital platforms) and India(Significant Economic Presence).

   Effectiveness of the afore is again subject to private international law interpretations. The US-Canada tax treaty automates the application of a services PE with the 183 days rule. (However, see Tech Mahindra vs Commissioner of Taxation 20 ITLR 70(Australia) and Satyam Computer Services Ltd vs Commisioner of Taxation 21 ITLR 274 (Australia) and some conflict in Mistubishi Corporation India Pvt Ltd vs Deputy Commissioner of Income Tax Circle 6(1), New Delhi ITA 5042/DEL/11(India))

   The author is of the opinion that Quantitative Significant Economic Presence tests might be a possible solution to the quagmire considering that private international law has generally been in favour of “there is no equity about tax”.

2. Withholding Taxes: Yariv Brauner and Andres Baez in their research paper argue in favour of a globally standardized withholding tax rate of 10% on all transactions impacted by base erosion movements in favour of source jurisdictions. The alternatives to nexus based and election are left open, in opposition to the IBFD position of nexus based solution being superior to the withholding tax regimen. (https://www.ibfd.org/sites/ibfd.org/ files/content/WithholdingTaxesintheSer viceofBEPSAction1-whitepaper.pdf ). For the uninitiated reader a reading (Richard Doernberg, Electronic Commerce and International Tax Sharing, 16 TAX NOTES INT’L 1013) is also recommended on Doernberg’s arguments on imposition of withholding taxes on electronic commerce resulting transactions. Some countries have actually incorporated a broadened definition of their parameters of SAAS, (Software As A Service), sharing of music and content (http://www.ifa-luxembourg.lu/download/237/withholding-tax-in-the-era-of-beps-civs-and- digital- economy-presentation-report-30112017. pdf ) for example Greece and Malaysia. Withholding taxation on Collective Investment Vehicles(CIV) is again a controversial topic and Luxembourg wherein most of these vehicles are situated has implemented withholding tax treaties with many counterparts. The problem is exacerbated further by the fact that some of the CIV’s are treated as fiscally transparent entities in Luxembourg and not so in other jurisdictions.

3. Transaction Taxes: Although we are not anymore living in the era of infamy of the “bit” tax, transactional taxes have become very important especially in jurisdictions where FAANG and “clone” business models have significant presence. And in thus current Covid -19, scenario the impact of FAANG on supply chain has been undoubtedly universal. France and Hungary take the pole as far as imposition of transaction taxes are concerned, for example in France the turnover tax governs the delivery of online content in accordance with its proposal to tax online content. In Hungary the online delivery of advertisements is taxes according to its targeted demographic. India and Italy have very recently introduced their own versions of the equalisation levy for bring under the tax fold transactions by MNE who do not have a permanent establishment (with a baseline threshold). The author although admits it would be interesting to see how the economics of operation work out in cases of UBER and “clones”. The United Kingdom has the Digital Services Tax which came into operation on 1st of April 2020.

4. Threshold Taxes: Jurisdictions over the world are attempting to make models similar to the GILTI (Global Intangible Low Taxed Income) and the Tax Cuts and Jobs Act in the United States for Outbound Foreign Investment and other versions of diverted profits taxes for Inbound Foreign Investment. Australia has imposed the Multinational Anti Avoidance Law; India has very recently imposed a TCS on outbound ODI transactions. CFC rules in many jurisdictions have been made to identify the ultimate beneficiary and hence tax passive foreign income on the ultimate beneficiary. The case of the GILTI and the TCJA in the United States deserve a mention since FAANG are situated in the United States and its brings into its fold the CFC regime and applies corporate tax on the excess of shareholders CFC income over and above the returned Income.

5. Measures for countering “gig economy”: A recent paradigm is now witnessed whereby focus of jurisdictions is now targeted at “gig” operations rather than the long term employment market. In fact, countries are slowly opening up to the “gig” labour market in which there is a demand based employment rather than long term contractual obligations of employment of labour. OECD:OCDE has of very recent in the month of July 2020 come up with model rules with respect to the “gig” economy (https://www.oecd. org/ctp/exchange-of-tax-information/ model- rules-for-reporting-by-platform- operators-with-respect-to-sellers-in- the- sharing-and-gig-economy.pdf). For instance, the Baltic states(Lithuania, Latvia, Estonia) have been at the forefront of pushing for the nomadic gig economy for expats, and the Nordic countries are evaluating a similar proposition. How and where does the PE and the value addition principle for taxation apply in such a case.? In such cases its relatively easy for a person to have a nomadic jurisdiction less approach, while in particular cases the person still might be liable depending on his nationality. India for its part has as of this year introduced a hybrid residence- nationality based taxation system wherein a “stateless” person would be taxed as an Indian citizen and would be liable for taxes in India(Finance Bill 2020, Insertion of Section 6(1A) into the Income Tax Act 1961.). The United States has a citizenship based approach to taxing worldwide income of Citizens (Cook v. Tait, 265 U.S. 47 (1924)) and doesn’t apply the residence notion IRC 1. Norway applies the quantitative test method for determination of residence status.

Undoubtedly the afore five considerations of taxes denigrate basic principles of both Capital Import Neutrality and Capital Export Neutrality (on which most jurisdictions are supposed to be based), and are rather tending towards National Neutrality as a matter of International Tax Policy. As a consequence, it seems that the market for cross border trade and transactions would be leading to a blurring of tax treatments and also distorting an already set paradigm of income classification. Tax planning would engage in a far more complicated scenario and countries would be vying for their “fair” share of revenue and MNE’s would have to re-align their tax strategies including that of Hybrid Mismatches. This could also potentially lead to a scenario where tax offsets are relegated to such a level that this in itself leads to a trade barrier (see discussion on gig economy supra) to sharing of resources. International double taxation avoidance is the result of almost a century of hard work and negotiations since the days of 1920’s compromise, and any disruption would likely have a spiralling effect, which could be totally unwarranted.

Governments developing their own taxation frameworks and presenting them on an international arena unilaterally would lead to an unfair playing field at the cost of MNE’s

who are providing benefits of economies of scale while not engaging in aggressive tax planning. The paradigm to make a jurisdiction more lucrative by providing for tax benefits is overtaken by attempts to garner a bigger chunk of the pie. An indirect implication of this entire scenario is the additional burden of statutory compliance put on firms both MNE’s and alike.

Another challenge posed despite the stated objectives of the OECD:OCDE 2015 BEPS report, is that the current system of taxation is geared towards taxation of value addition and not as at source. So will it involve a complete overhaul? Also pertinently, even in the current system where there is a limited “gig” economy, there is no homogenous definition of value addition.

The Indian construct is defined u/s 9 of the Income Tax Act 1961 and has to be read in conjunction with Bilateral treaties more particularly with reference to Articles 5 & 7 in the general form and also reference to BEPS article 7 with particular emphasis on artificial avoidance of PE status. Courts in India have generally leaned towards interpretation of Articles on the Bilateral framework. Guiding principles being provided by the Vienna Convention on the Law of Treaties subsequent to the landmark in Ram Jethmalani v. Union Of India (Writ Petition (Civil) No. 176 Of 2009). It might be noted that India although has not ratified the convention, adjudicative law in India has nonetheless used the guiding principles therefrom. Courts have also on occasion had the instance to go beyond the define treaty and the Act to render adjudicative law. (ABB FZ, LLC v. Deputy Commissioner of Income Tax I.T (TP)

http://www.kluwertaxblog.com/wp-content/ uploads/sites/59/2017/08/Bangalore-Tribunal- Ruling.pdf).

Private International Law assumes significance as countries might be prone to adopt a particular manner of interpretation of principles of international taxation to suit their own needs and hence might create a no win scenario for the business as such (see ABB FZ LLC supra). The apparent conflicts in the Dell Products cases, wherein in one jurisdiction since Dell Products Norway was accorded not a PE since did not have authority to bind the principle and in the other case it was deemed a PE on totally different grounds. (See Spain vs. Dell, June 2016, Supreme Court, Case No. 1475/2016 and Dell Products v. Staten v/Skatt ost, Case HR- 2011-02245-A, See also France vs Zimmer Ltd CE 31/03/2020 304715)

Academics like Cockfield (Reforming the Permanent Establishment Principle through a Quantitative Economic Presence Test, 38 CAN. BUS. L. J. 400 (2003)) argue in favour of Quantitative Economic Presence Permanent Establishment test for MNE’s on a worldwide basis, so that the hitherto sacrosanct principles of Capital Export and Capital Import Neutrality be kept sacrosanct. Although there are some arguments in favour of Qualitative tests (See South Dakota vs Wayfair Inc 138 S.Ct. 2080 (2018) which overturned the ruling in Quill Corp. v. North Dakota (1992), See also Direct Marketing Ass’n v. Brohl particularly the commentary by Justice Kennedy) , by and large the administration of such a test could lead to a administrative nightmare and overhauling the established frameworks under the Convention on Mutual Administrative Assistance in Tax Matters.

There has to be made a fine distinction between MNE’s operating on a bigger scale who are actually able to hurt revenue jurisdictions materially and MNE’s operating on a much smaller scale who don’t have a material impact on revenue. Primarily owing to the fact that significant exercise on the latter might not be in favour of smaller business and start-ups who would anyway be constrained by resources for application. And secondarily conducting such a costly exercise might not provide a favourable cost benefit exercise for Revenue.

An incremental change in fiscal as well as international tax policy of the comity of nations is possibly the only way forward in the interest of business as well as growth of revenue of jurisdictions. The way forward from value addition to source would pave the way to reducing harmful tax conflict and also juridical double taxation, which would be undoubtedly harmful to business in the short run and revenue in the long run as competition intensifies all around the globe. The OECD/ UN model double taxation convention and the BEPS 2.0 framework particularly that on Pillar 1 (Although the United State posed some objections on Pillar 1 especially with reference to GILTI and TCJA) although have a consensus of almost 129 countries (excepting notably the United States), the way forward into multilateralism and nationalism in taxes at least is challenging and fraught with interesting negotiations and trade deals.

This article endeavours to the interpret compulsory issue of notice under section 143(2) in case of “Section 153A- Assessment in case of search and requisition”/“Section 153C Assessment of income of other person” or where assessment is framed “under section-147 Income escaping assessment” of the Income Tax Act, 1961. It has forever been a conflict as to how the section must be interpreted, in order to decide whether the procedure of regular assessment i.e. issuing notice under section 143(2) has to be followed in the proceeding under section 153A or under section 147. This article tries to decode the mixed opinions of the court with regard to whether it is the compulsory to issue notice u/s 143(2) before completing an assessment under section 153A or under section 147. The author, based on thorough analysis of Section 153A and Section 147 and keeping in view the language of the both the section and the interpretations attached to it by the Judiciary, have tried to resolve the conflict.

I. Introduction

This research paper mainly discusses the various interpretations given by the Courts with respect to issue of notice under section 143(2) in case where assessment is completed under section 153A or under section 147 of the Income Tax Act, 1961 (hereinafter referred to as Act). Further, it talks about the importance of a notice being issued to the assessee when any assessments are to be made, with the purpose of finalizing the assessment or otherwise. Thus, the provisions should be read as a “whole” and as such they exist, and there is no necessity of reading them down or providing casus omissus. Where the search is conducted, there is a mandate on the Assessing Officer (A.O) to issue notice calling for return of all six/ extended period commencing from assessment years preceding the current assessment year in which search was executed. Thereafter, the first proviso casts a duty on him to assess or reassess the total income in respect of each assessment year. Whereas, Reassessment under section 147 is another distinguished weapon which empowers the Assessing Officer to assess, reassess or recompute income which has escaped assessment.

II Issue of notice under section 143(2) is not compulsory where assessment is completed under section 153A/153C

1. Every clause of a section should be construed with reference to the context and other clauses thereof, so that, the construction to be put on a particular provision makes a consistent enactment of the whole statue. The section 153A starts with non obstante clause and it pertinent to mention that section 139 is one of the sections which is covered in the notwithstanding clause. The notice under section 143(2) is required to be issued when return has been furnished under section 139 or in response to notice under section 142(1). In the case of section 153A, the section 139 has specifically been kept aside. The words “so far as may be” in clause (a) of sub section (1) of Section 153A could not be interpreted that the issue of notice under Section 143(2) was mandatory in case of assessment under Section 153A. The use of the words, “so far as may be” cannot be stretched to the extent of mandatory issue of notice under Section 143(2). It is noted, a specific notice is required to be issued under Clause
   (a) of sub-section (1) of Section 153A calling upon the persons searched or requisitioned to file return. That being so, notice under Section 143(2) could not be contemplated compulsory for assessment under Section 153A. The same view has been affirmed by various court1

   1. However in view of the decision of the Honourable Supreme Court in case of Hotel Blue moon in 321 ITR 362 has held that omission on the part of the assessing authority to issue notice under section 143(2) cannot be a procedural irregularity and the same is not curable and, therefore, the requirement of notice under section 143(2) cannot be dispensed with. It is to be noted that the above said judgment was in the context of Section 158BC. Clause (b) of Section 158BC expressly provides that “the AO shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of Section 142, sub sections (2) and (3) of Section 143, Section 144 and Section 145 shall, so far as may be, apply. The law laid down in Hotel Blue Moon, is thus not applicable to the facts of the present situation of 153A and 153C. This decision has been followed by various tribunals and courts and has decided the matter in the favour of assessee. But the decision as given by the Apex courts only applicable in the context of section 158BC and not in the context of section 153A and 153C. Therefore, the said issue is highly debatable, and it is not correct to rely straightway upon the decisions as given by some courts that the notice u/s 143(2) is necessary for proceedings u/s 153A/153C.2

   2. The provisions of section 143(2) of the Act did not give option to make an assessment under Section 143(3) but make it obligatory to comply with these provisions before making assessment under section 143(3) or section 144 as the case may be. However, the assessment of the “search year” has to be completed u/s 143(3) or u/s 144, and issue of notice u/s 143(2) is mandatory for that year. The same view has been purported by many courts.3 It is important to note that non issuance of notice is not a curable defect by following the provisions of section 292BB4

2. The provisions of section 143(2) are not applicable in case of assessment under section 153A or 153C and the same gets clear by the language as referred in section 153C (2). The section 153C comes into play where a search is carried out u/s. 132 of the IT Act on person, various assets and documents may be found and seized or requisition is made u/s. 132A. It is possible that several of “assets/documents” may not actually belong/relates to the “person searched” but may belong to such “other person”. In that case, provisions of section 153C gets attracted which clearly provides that proceedings as prescribed in section 153A will be initiated against such “other person” if conditions as laid down in section 153C are satisfied. That such “assets/documents” belongs to or relates to the person other than ” searched person”. The same shall be handed over to the AO having jurisdiction of such“other person”. Now, AO (having jurisdiction) has to be satisfied that “assets/documents” seized or requisitioned have a bearing on the determination of the total income of such “other person”. Then only the AO (having jurisdiction) can proceed under section 153C against such “other person” in the manner provided u/s. 153A. The legislative has designed section 153C(2) (a) to (c) to cover possible situation related to “search year”, where no notice in terms of Section 143(2) has been issued to the “other person”, and the time as provided in law u/s 143(2) has expired by the time AO of “other person ‘receives the papers from the AO of “searched party”. In that case assessment for that year can be done in the manner provided in section 153A. The assessment of that particular year will be completed without issuing notice u/s 143(2). The simple notice will be enough to complete the assessment.

3. For instance, the search took place on 24.05.2017 and the documents related to F.Y 2017-18 has been handed over to the AO of “other person” on 10.10.2019.

   The AO of “other person” will frame assessment U/s 153C for Assessment year 12-13 to A.Y 2017-18. However, the assessment for A.Y. 2018-19 will be made under section 143(3). The “other Person” has furnished return for A.Y. 2018-19 on 20.09.2018. The practical problem in this case is that time period for service of notice under section 143(2) has been expired (i.e. 30.09.2019) whereas the books were handed over to the AO on 10.10.2019. The legislature has covered this possible situation by introducing 153C (2). The relevant extract of section 153C(2) is as under: –

   (2) Where books of account or documents or assets seized or requisitioned as referred to in sub-section (1) has or have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income for the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A and in respect of such assessment year—

   1. no return of income has been furnished by such other person and no notice under sub-section
      (1) of section 142 has been issued to him, or

   2. a return of income has been furnished by such other person but no notice under sub-section
      (2) of section 143 has been served and limitation of serving the notice under sub-section (2) of section 143 has expired, or

   3. assessment or reassessment, if any, has been made before the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person, such Assessing Officer shall issue the notice and assess or reassess total income of such other person of such assessment year in in the manner provided in section 153A.]

   In the given case as far as the pending assessment year is concerned, the return was filed on 20.09.2018. No notice in terms of Section 143(2) can be issued to the assessee, as the time provided by law (i.e. 30.09.2019) has been expired by the time its AO received the papers (i.e. on 10.10.2019) from the AO of the “searched party”. Notice issued, necessarily, in terms of Section 153C (2) had to be in the light of the satisfaction that the books of account or materials seized relates to “other person”. The assessment for such assessment year shall be made in the manner as provided in section 153A. Therefore, the said assessment shall be valid even if no notice under section 143(2) was served. This section makes it clear that notice under section 143(2) is not compulsory to be issued for framing assessment under section 153A. It is pertinent to mention here that the language used in section 153C(2) is “assess or reassess total income of such other person of such assessment year in the manner provided in section 153A.”. By using such language it has been cleared that there is no need for issue of notice u/s 143(2) in case of search proceedings.

4. Conclusion

   The issue whether notice u/s 143(2) is mandatory in case of six years or extended period as per section 153A/153C is highly debatable. But as per the author opinion and keeping in view the above analysis, it can be concluded that issuing of notice under section 143(2) is not mandatory requirement for the years for which notice under section 153A/153C was issued and even in case of situation covered u/s 153C(2). The use of the words, “so far as may be” cannot be stretched to the extent of mandatory issue of notice under Section 143(2). Therefore, notice under Section 143(2) could be not be contemplated compulsory for assessments to be made under Section 153A/153C.

III. Whether Issue of notice under section 143(2) is compulsory where assessment is made under section 147 ?

1. There has been always litigation on the

   issue that whether the notice u/s 143(2) is compulsory where the assessment has been framed u/s 147 in response to the return filed u/s 148. The notice u/s 148 requires an assessee to file the return within the stipulated period as mentioned in the notice. It is evident that section 148 specifically provides that all the provisions of Act shall be applicable in respect of return of income u/s 148 as if the same was return furnished u/s
   139. But by only taking this argument, the litigation will not stop. It is therefore necessary to go to the roots of the section to decide this issue. In this regard, kind attention is required to be drawn towards first and second provisos to section 148 that provides the time limit for issuance of notice u/s 143(2) on the basis of date of filing return of income u/s 148. The said amendment was made as many courts have held that assessment under section 147 is invalid5 if the notice under section 143(2) is not served within 12 months from the end of the month in which return under section 148 was filed. To cure such defect, the law has been amended retrospectively. Two new provisos to sub-section (1) have been inserted retrospectively with effect from 1-10-1991. As per the said amendment, all the notices which were issued after the period as mentioned in section 143(2) shall be deemed to be valid notice. Further, an explanation has been inserted, with effect from 1-10-2005 in section 148(1) so as to clarify that the provisions of the aforesaid provisos shall not apply in relation to any return which has been furnished on or after 1-10-2005 in response to a notice served under section 148(1).

   1. Thus, so far as returns furnished on or after 1-10-2005 are concerned, the pre-amendment law will apply and the notices will have to be served within a period of 12/6 months specified in section 143(2). Thus, it is not discretionary rather mandatory for an assessing officer to issue notice u/s 143(2) once the return of income is filed by assessee. The only relaxation in the case of re assessment is that notice u/s 143(2) can be issued at any time before the expiry of time limit for completing assessment/ re assessment and the same would be deemed as valid notice.

   2. Therefore, the completion of the assessment/reassessment proceedings without issue of notice u/s 143(2) will make the whole assessment without jurisdiction. The department cannot take shelter by applying provisions of section 292BB that the assessee has participated in the proceedings and therefore assessment/reassessment made u/s 147 without issue of notice u/s 143(2) will be valid. The same position has been cleared by recent judgement by the Apex Court in the case of [2019] 108 taxmann.com 183 (SC) CIT v. Laxman Das Khandelwal that complete absence of notice under section 143(2) is not a curable defect by under section 292BB. The notice u/s 143(2) must have emanated from department and it is only infirmities in manner of service of notice that section seeks to cure and it is not intended to cure complete absence of notice itself.

   3. Conclusion

      Keeping in view the above analysis, it can be concluded that issue of notice under section 143(2) is mandatory requirement before completion of assessment u/s
      147. Thus, it is not discretionary rather mandatory for an assessing officer to issue notice u/s 143(2) once the return of income is filed by assessee in response to the notice u/s 148. The failure to issue notice is not a curable defect and will make whole assessment/reassessment invalid. Therefore, requirement of issue notice u/s 143(2) cannot be dispensed with in case of assessment/reassessment framed under section 147. The same gets support from the decisions of various courts.6

   (Disclaimer: Views of Author are personal, and can be reached at [email protected])

1. Ashok Chaddha v. ITO [2011] 337 ITR 399/[2012] 20 taxmann.com 387 (Delhi) (Para No.7). Tarsem Singla v. DCIT, Central Circle-III, Ludhiana [2017] 81 taxmann.com 347 (P & H) (par 9). Roshan Lal Verma v. DCIT, Central Circle-II, Faridabad [2018] (6) TMI 1462 – ITAT DELHI (par 9).

2. [2010] 188 Taxman 113 (SC)-Supreme Court of India – ACIT v. Hotel Blue Moon [2010](1) TMI 1184 – ITAT Indore M/S. S. K. Jain, Smt. Rekha Jain and others [2010] (2) TMI 690 – ITAT, Indore DCIT, Circle 1 (1), Ujjain v. Sushil Kumar Jain Yogeshwar Goel (ITAT Delhi)

3. 2017 (8) TMI 80 – Allahabad High Court- CIT (Central) Kanpur v. Sri Moins Iqbal 2012 (8) TMI 1053 – ITAT Pune – Akbani Salim Abdul Gaffar v. DCIT, Central Circle, Kolhapur

4. [2019] 108 taxmann.com 183 (SC) CIT v. Laxman Das Khandelwal.

5. Raj Kumar Chawla v. ITO [2005] 94 ITD 1 (Delhi)(SB)]

6. [2016] 74 taxmann.com 239 (Kerala)- High Court of Kerala – Travancore Diagnostics (P.) Ltd
   [2015] 64 taxmann.com 22- Delhi High Court – PCIT-08 v. Shri Jai Shiv Shankar Traders Pvt. Ltd.
   [2010] 192 Taxman 197 (Allahabad)- High Court of Allahabad – CIT v. Rajeev Sharma
   [2012] 25 taxmann.com 341- Madras High Court – Sapthagiri Finance & Investments v. ITO, Kandhipuram
   [2019] (7) TMI 751 – Gujarat High Court – PCIT v. Jignesh Bhagwandas Patel
   [2018] (11) TMI 874 – Rajasthan Hgh Court – PCIT, Jaipur-III, Jaipur v. Kamla Devi Sharma

1. Relevant sections in brief

1. Voluntary contributions are made taxable vide the definition of income under Section 2(24) (iia) which reads as under-

   2(24)(iia) Voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.

   Explanation — For the purposes of this sub-clause, “trust” includes any other legal obligation.

   Apparently this covers the donations to the corpus fund also.

2. However, exceptions are carved out for donations to corpus fund which are as follows-

   1. Section 2(24)(xviii) refers to assistance from Govt. but excludes the same towards corpus 2(24)(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than,—

      1. the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or

      2. the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institutionestablished by the Central Government or a State Government, as the case may be;

   2. Section 11(1)(d) contains a specific provision as follows- [inserted by Finance Act 1989 w. e. f. 1-4-1989]

      Income from property held for charitable or religious purposes.

      11. (1) Subject to the provisions of sections 60 to 63, the following income shall not     be included in the total income of the previous year of the person in receipt of the income—

      (d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

   3. Section 12 (1) [Originally Sec.12 only which was numbered sub section (1) by Finance Act 2000 w.e.f.1-4-2001] reads along with its heading as follows –

      Income of trusts or institutions from contributions.

      12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

   4. There is an old clarificatory Circular No. F. NO. 20/10/67-IT(AI) DT. 1st MAY, 1967 as follows-

      1. There appears to be certain amount of misconception in minds of some ITOs regarding the provision against the accumulation of income in excess of 25%, contained in s. 11(1) of the IT Act. It may be clarified that the provisions in s. 11(1), prohibiting accumulation of income in excess of 25% apply only to the income derived from property held under trust, but such restrictions are not applicable to capital receipts. The donations received by a charitable trust from the members of the public, being capital receipts, cannot be regarded as income of the trust. Accordingly, the donations received by the trust should be excluded from the income of the trust for the purpose of calculating the accumulation limit of 25% except in cases covered by s. 12(2) of the Act.

      2. The above position will also be clear from s. 12(2) of the IT Act, which specifically provides that contributions made to a charitable trust by another trust, to which the provisions of s. 11 apply, should in the hands of the trustee, be deemed to be income derived from property for the purposes of s. 11. Such contributions should, of course, be included in the total income of the receiving trust for the purpose of applying the limit of 25% under s. 11(1) of the IT Act.

2. The issue

Although the law and the clarificatory circular provides that the donations to the corpus of a trust is a capital receipt and hence not taxable, the Dept. tries to tax the voluntary contributions or donations to the corpus of a trust especially the donations to the trusts which are not registered under section 12A/AA.

The donations to the corpus fund have been held as exempt being a capital receipt and hence not taxable.

There are practically umpteen number of cases reported in this matter with many facets covered in each one in the matter right from what is voluntary contribution deciding even when it is not expressly conveyed by written direction by the donor, and going to the extent of treating even the income earned on the corpus fund also exempt treating it as part of the corpus. But, the matter of trusts not registered under the Act remained controversial at least for the Dept.

There is an old judgment of Hon. Supreme Court in the case of R. B. Shreeram Religeous and Charitable Trust (1988) 233 ITR 53. A detailed discussion is made on the issue of corpus donations and various High Court decisions are considered. However, while dismissing the appeal it did not specifically address the issue of corpus donations and has not made any categorical statement to deviate from those High Court decisions and thus left the issue open.

3. The case of Mata Amrithanandamayi Math

First case is of a trust called Mata Amrithanandamayi Math, for the assessment years 2007-08 to 2009-10 and 2012-13. The trust received donations of ₹ 6,99,89,712 over a period and earned interest of ₹ 37.76 crores and both were claimed exempt. The letters from donors were submitted with details like total number

of donors who have given specific direction to accumulate interest on corpus fund donated by them in respect of interest added to the corpus during the relevant year, period specified by them etc. and evidences supporting the same. The AO added the same to income and taxed.

1. The first appeal before CIT(A)

The CIT(A) gave consolidated order dt. 02/02/2016 in favour of the trust and allowed both the items as exempt. In the well-reasoned order passed by learned CIT(A), crux of the reason given was –

I carefully examined the captioned issue. On a plain reading of section 12 of the Act, it is obvious that any voluntary contribution which is made with a specific direction that it shall form part of the corpus of the trust would not be deemed to be income derived from the property held by the trust and it cannot be treated as income of the receiving trust for the purpose of section 11(1)(d) as well. When the voluntary contribution made with a specific direction that it shall form part of the corpus of the trust itself cannot be treated as income both u/s 11 and u/s 12 then how the interest earned on such voluntary contribution kept in term deposits with banks could be treated as income of the trust.

In the reasons the CIT(A) also explained that the corpus fund by way of fixed deposits is property held in trust and income earned till the time the fund is actually used is also exempt. He relied on the following judgments in holding the assessee eligible for the said exemption-

CIT v. Vanchi Trust & Another (127 ITR 227) (Ker)

CIT v. Sthanakvasi Vardhanman Vanik Jain Sangh (260 ITR 366(Guj))

CIT v. Haryana CM Relief Fund (309 ITR 275 (P&H))

CIT v. Punjab Energy Development Agency (323 ITR 463 (P&H))

In one of the grounds the Dept. contended that, Intention of the donor can be restricted only to the amount of corpus donations made and not the income earned thereon. There is no such restriction in the Income Tax Act whatsoever and therefore that ground is also not sustainable. Unless the income is received in a particular year, it cannot be applied. The interest from corpus deposits is also taken the corpus fund and hence the assessee had rightly excluded the interest income on Term Deposits with Bank which were accrued but not due. This is being consistently followed by the assessee.

The CIT(A)’s reason against the said contention was –

In ITO v. Shrisachyaya Mataji Trust Osian, Jodhpur ITA No.538/Jodh/2013, dated 09/05/2014, the Jodhpur bench of ITAT held that if a voluntary contribution is made with a specific direction, it shall be treated as capital of the trust for carrying on its charitable or religious activities. Then such an income falls under section 11(1)(d) as is not liable to tax. If the intention of the donor is to give that money to a trust to keep in trust the account in deposit and utilise the income therefrom for carrying on a particular activity, it satisfies the definition part of the corpus. The assessee would be entitled to the benefit of exemptions from payment of tax.

The CIT(A)’s conclusions were as follows-

1. The interest got added on to the deposit by virtue of specific directions to do so and both the principal and interest continuously remained with the bank.

2. The income does not reach the hands of the assessee as it gets added on to the deposit. In other words, income should actually be earned and cannot be due from, which is a notional income and cannot be actually spent for charitable purposes.

3. It is not the case of the AO that the assessee had failed to bring out documentary evidence for donations received and mandate given. All these were verified by the AO.

2. Second appeal before Hon. ITAT Cochin  went in appeal before the Hon. ITAT Cochin. which upheld the order of the CIT(A) and answered specific grounds taken by the Dept. in negative as follows-

   1. In the Grounds of Appeal, in point 2(a), the Department has taken a stand that neither the intention of the donor nor the objects of the trust will be fulfilled since both the capital and interest will not be applied for the objects of the trust in the interest of beneficiaries and continue to remain unutilised perpetually. This argument is incorrect since the mandate is for specific number of years for which period alone the interest gets added to the corpus. Thereafter the interest on such corpus becomes available for the objects of the trust. Therefore, this argument of the department is incorrect.

   2. In Ground 2(b) the department has taken a stand that there is no provision under the Income Tax Act which exempts interest income out of deposits made out of the corpus donations u/s 11(1)(d) of the IT Act. In the case of the assessee: the issue is not with regard to exempting interest income out of the deposits made of corpus funds, but the question is whether the interest earned on such corpus donations kept as deposits with a specific mandate to accrue the interest on the principal, would not amount to the corpus itself by virtue of an overriding title created as a result of the mandate.

   3. In Ground 2 (c), the department has taken a ground that intention of the donor can be restricted only to the amount of corpus donations made and not the income earned thereon. There is no such restriction in the Income Tax Act whatsoever and therefore that ground is also not sustainable. Unless the income is received in a particular year, it cannot be applied. The interest from corpus deposits is also taken to the corpus fund and hence the assessee had rightly excluded the interest income on Term Deposits with Bank which were accrued but not due. This is being consistently followed by the assessee.

   4. In ITO v. Shrisachyaya Mataji Trust Osian, Jodhpur ITA No.538/Jodh/2013, dated 09/05/2014, the Jodhpur bench of ITAT held that if a voluntary contribution is made with a specific direction, it shall be treated as capital of the trust for carrying on its charitable or religious activities. Then such an income falls under section 11(1)(d) as is not liable to tax. If the intention of the donor is to give that money to a trust to keep in trust the account in deposit and utilise the income therefrom for carrying on a particular activity, it satisfies the definition part of the corpus. The assessee would be entitled to the benefit of exemptions from payment of tax.

   5. In view of the aforesaid reasoning and the judicial pronouncements, we hold that the CIT(A)’s order is correct and in accordance with law no interference is called for. It is ordered accordingly.

   ACIT v. Mata Amrithanandamayi Math, (2016) 48 CCH 0503 Cochin Trib, ITA No 185 to 188/ Coch/2016

3. Appeal before Hon. High Court of Kerala The common questions of law framed for the consideration of the Court were the following:

   1. Whether the ITAT has erred on facts and law in treating the interest on corpus funds received by the assessee as corpus donations u/s. 11(1)(d) of the IT Act, to be exempt from Income Tax while section 11(1)(d) covers donations with specific direction that they shall form part of corpus and not interest thereon since it will result in exemption to interest in perpetuity defeating the legislative intent?

   2. Whether voluntary contributions received by a trust with specific direction that they shall form part of the corpus includes interest accruing/credited on deposits from above donations?

   After considering the facts, the Hon. High Court ruled as follows-

   We are of the view that the question that is framed has to be answered in the light of Section 11(1)(d) of the Act. A reading of Section 11 shows that subject to the provisions of Sections 62 and 63, the incomes enumerated therein shall not be included in the total income of the previous year of the person in receipt of the income. The person in receipt of the income, insofar as these cases are concerned, is the respondent assessee. One of the income that is enumerated in clause (d) of sub-Section (1) of the Section is the income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. The fact that the donors had instructed that the interest earned shall be added to the corpus of the trust is undisputed. If that be so, the interest earned on the contributions already made by the donors would also partake the character of income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust. If that be so, conclusion is irresistible that the Tribunal has rightly held that the interest earned would qualify for exemption under Section 11(1)(d) of the Income Tax Act.

   CIT (Exemption) v. Mata Amrithanandamayi Math Amritapuri, (2017) 99 CCH 0449 KerHC

4. SLP before Hon. Supreme Court

   Dept. further went before Hon. Apex Court with a SLP and after condoning the delay and hearing, Hon. Court dismissed the SLP saying that-

   We do not find any ground to interfere with the impugned order(s).

   CIT (Exemption) v. Mata Amrithanandamayi Math Amritapuri, (2018) 102 CCH 0050 ISCC, (2018) 256 TAXMAN 0062 (SC), dt. 14-5-2018

   In Kunhayammed and others v. State of Kerala and Another 2000 AIR (SC) 2587 – Hon. Apex Court has ruled about effects of dismissal of SLP that An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that Court was not inclined to exercise its discretion so as to allow the appeal being filed.

   Although dismissal of SLP does not amount to a binding precedent as the same is under article 136 and not under article 141, as per general rules for interpretation, it might be taken as the affirmation of the High Court’s views on merits of the case. There is no reason to dilute the binding nature of precedents in such cases.

   (Refer Interpretation of Taxing Statutes, published by AIFTP, December 2005 first edition, page 158)

4. The case of Basanti Devi and Chakkhanlal Garg Educational Trust

1. DIT (Exemption) v. Basanti Devi and Chakkhanlal Garg Educational Trust– Civil appeal disposed.

   The appeal in this case is under article 141 in a SLP with Civil and is disposed of. Briefly the case is as under-

   The assessee trust received a sum of ₹ 1,06,55,343/-, as infrastructure fund. Holding that this amount was not allowable as a deduction u/s 11 of the I.T. Act, the AO brought it to tax for AY 2002-03 in a reopened case.

   Before this, the ITAT had decided the matter in favour of the assessee’s own case for AY 2003-04 on the same issue, confirming the CIT(A)’s order in favour of assessee and against the AO.

   By the time the case for AY 2002-03 came before the ITAT, the Hon. Delhi High Court had already upheld the matter in favour of the assessee on 23-9-2009 (ITA no. 927/2009) and Dept. had filed a SLP before Hon. Apex court which had granted leave to file appeal against the Hon. High Court order, but without a stay to the HC order.

   The High Court order available on its portal is a very short and reads as follows-

   The respondent/assessee is admittedly a Charitable Organisation which is a trust registered under the Indian Trust Act which has also been granted registration under the Income Tax Act w. e. f. 1.4.2003. The assessee received certain donations towards its corpus which had been deposited in the bank and the money was admittedly spent for acquiring land for construction of a college. In these circumstances, we are of the opinion that the CIT(A) as well as ITAT rightly concluded that the donations received towards corpus of the trust would be capital receipt and not revenue receipt chargeable to tax. No question of law arises. Dismissed.

   For AY 2002-03, Dept. took a view before the Hon. ITAT that the aforesaid High Court order is under challenge before the Hon’ble Supreme Court by way of a SLP filed by the Department. But, Hon. ITAT did not agree saying, “this, however, is not premise enough to allow the Department’s appeal, particularly when the High Court order has not been shown to have been stayed.”

   Hon. ITAT allowed the appeal on 19-1-2011, respectfully following the High Court decision(supra) in the assessee’s own case for assessment year 2003-04, and rejected the grievance of the Department and held as follows-

   The assessee received certain donations towards its corpus which had been deposited in the bank and the money was admittedly spent for acquiring land for construction of a college. In these circumstances, are of the opinion that the CIT(A) as well as ITAT rightly concluded that the donations received towards corpus of the trust would be capital receipt and not revenue receipt chargeable to tax. No question of law arises. Dismissed.

   Hon. Apex Court has dismissed the appeal on 17-9-2018.

   (CA No. 002201/2013, SLP (C) CC No.004610/2013, SLP (C) No.010535/2013, all regd. on 4-3-2013 and disposed on 17-9-2018).

2. The disposal is due to increase in monetary limits by CBDT to file appeal

The order reads as – “Delay, if any, is condoned. Leave granted. In these appeals, the tax effect is less than ₹ 1,00,00,000 (₹ One core) and are covered by the Circular of CBDT. These appeals are, accordingly, dismissed.”

This is a little twist in the matter. The SC has disposed of the appeals as an effect of increase in monetary limits of filing appeals by the Revenue vide CBDT circular No. 3/2018, of 11-7-2018. Hence, the binding effect needs to be examined.

Para 2 and 11 of the circular reads as under-

2. It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the case.

11. The monetary limits specified in para 3 above shall not apply to writ matters and Direct tax matters other than Income tax. Filing of appeals in other Direct tax matters shall continue to be governed by relevant provisions of statute and rules. Further, in cases where the tax effect is not quantifiable or not involved, such as the case of registration of trusts or institutions under section 12A/12AA of the IT Act, 1961 etc., filing of appeal shall not be governed by the limits specified in para 3 above and decision to file appeals in such cases may be taken on merits of a particular case.

The circular clearly states that the decision to file appeals in cases having important matters is to be decided on merits.

Hon. Supreme Court has exhaustively dealt with the issue of whether the CBDT circulars in the matter operate retrospectively and in the course has analysed the Instruction No.3 of 2011 dated 9.2.2011 and the National Litigation Policy in the case of DIT v. S.R.M.B. Dairy Farming Pvt. Ltd. (2018) 400 ITR 0009 (SC) dt.27-11-2017.

Hon. Apex court has quoted CIT & JCIT v. Ranka & Ranka, (2013) 352 ITR 0121, and stated that –

11. We consider it appropriate to refer to some of the observations in the judgment of the Karnataka High Court, which have our imprimatur, as under:

“22. The Government has formulated the National Litigation Policy with a view to ensure conduct of responsible by the Central Government and urges every State Government to evolve similar policies. Its aim is to transform Government into an efficient and responsible litigant. “Efficient litigant” means ensuring that good cases are won and bad cases are not needlessly persevered with. The litigation should not be resorted to for the sake of litigating. The Government must cease to be a compulsive litigant. The philosophy, “that matters should be left to the courts for ultimate decision”, has to be discarded. The easy approach, “Let the court decide,” must be eschewed and condemned. The purpose underlying this policy is also to reduce the Government litigation in courts so that valuable court time would be spent in resolving other pending cases, so as to achieve the goal in the National Legal Mission to reduce average pendency time from 15 years to 3 years. All pending cases involving the Government has to be reviewed with the intention of filtering frivolous and vexatious matters from the meritorious one. Panels have to be set up to implement categorization, review such cases, to identify cases, which can be withdrawn. These include cases which are covered by decisions of courts and the cases which are found without merit. Such cases have to be withdrawn. This must be done in a time bound fashion.

Hon. Supreme court has also quoted in para 10 of the judgment, the National Litigation Policy and the para of Review of Pending cases reads as under-

Review of pending cases

1. All pending cases involving the Government will be reviewed. This due diligence process shall involve drawing upon statistics of all pending matters which shall be provided for by all Government departments (including public sector undertakings). The Office of the Attorney General and the Solicitor General shall also be responsible for reviewing all pending cases and filtering frivolous and vexatious matters from the meritorious ones.

2. Cases will be grouped and categorized. The practice of grouping should be introduced whereby cases should be assigned a particular number of identity according to the subject and statute involved. In fact, further sub- grouping will also be attempted. To facilitate this process, standard forms must be devised which lawyers have to fill up at the time of filing of cases. Panels will be set up to implement categorization, review such cases to identify cases which can be withdrawn. These include cases which are covered by decisions of courts and cases which are found without merit withdrawn. This must be done in a time bound fashion.

It is obvious that the dismissal of appeal by Hon. Supreme Court in the case under discussion must have been done after considering the merits of the matter as compelled in the policy. But, the binding nature needs to be examined by experts in the constitution and civil laws and comments on the same are welcome.

5. Donations held towards corpus when not expressly stated by donors

At this juncture, it is proper to refer the decisions clarifying as to what constitutes the donations to corpus especially when it is not expressly conveyed by the donors.

1. If the receipts issued to the donors clearly mention that they were given towards corpus, then it had to be construed that the contributions were made with a specific direction that they shall form part of the corpus –  A. Ramachandra Raja Charity Trust v. First ITO (1985) 14 ITD 230 (Mad. Trib.); Meherangarh Museum Trust v. Asstt. CIT (2014) 48 taxmann.com129 (Jodh. Trib)

2. If the trust deed clearly provides that donations received by trustees shall be deemed to be accretions to the trust and imposes an obligation on the trustees to hold such donations as part of the corpus of the trust, then contributions could be received only towards corpus of the trust – Hakmuddin Mulla Hasanbhai Singaporewala Charitable Trust v. 5th ITO [1985] 23 TTJ 43 (Bom. Trib.)

3. If the intention of the donor is to give that money to a trust which will keep it in trust account in deposit and the income from the same is utilised for carrying on a particular activity, it satisfies the definition part of the corpus – DIT v. Sri Ramakrishna Seva Ashrama [2012] 18 taxmann.com 37, 205 Taxman 26 (Kar.)

4. Donations received towards ‘Building Fund’ and ‘Kayami Fund’ (Permanent Fund) were held to be towards corpus –
   ITO v. Satya Kabir Sahabani Gadi [1994] 50 TTJ501 (Ahd. Trib.)

5. Contribution received towards specific purpose of construction of Wadi was held to be forming part of corpus – CIT

6. Sthanakvasi Vardhman Vanik Jain Sangh [2003] 131 Taxman 270 (Guj)

7. Voluntary contributions made by the donors with a specific direction that they were made towards construction of a building in the premises of the assessee for its use –  Ann’s Home for the Aged v. ITO [1980] 10 TTJ 144 (Bang. Trib.)

8. No specific letter was received from the donors that the donations were Towards corpus. However, the counter foil of receipts showed that they were received for construction of temple and Dharamshala. The Tribunal held that the preamble to the trust deed, directions of the donors and the contents of the receipts showed that the donations could be treated as corpus donations – Shri Vasu Pujiya Jain Derasar Pedhi v. ITO [1991] 39TTJ337 (JP. Trib.)

9. Although the receipts indicated that the donations were received towards corpus, in some cases the donors had not specifically stated that the donations were towards corpus. The donations were utilized towards the objects of the trust to establish a technical institution. The Tribunal held that the donations were a part of the corpus – ITO v. Sardar Vallabhbhai Education Society [2012] 26 taxmann.com 174 (Ahd. Trib.) (TM)

10. Donation received towards purchase and investment in Sidha Land Project which was a capital project was a corpus donation – Dharma Pratishthanam v. ITO [1985] 11 ITD40 (Delhi- Trib.)

11. Donation towards construction of stadium for indoor games was a corpus donation – CIT v. Indore Table Tennis Trust [1997] 92 Taxman 199 (MP)

6. Donations towards corpus are exempt even if there is no registration under sec. 12A/AA with different facts –

It is worth considering various cases which had different issues and facts, but ultimately the donations are held exempt.

1. DCIT v. Nasik Gymkhana, (2001) 72 TTJ 0467, (Pune) AY 1984-85

   This is an interesting case. The trust had received donations from unidentified donors which was not attributed to the corpus. Donations attributed to the corpus by shop owners belonging to the assessee, proved not voluntarily made as they were allotted extended area in consideration. Hon. ITAT observed as under-

   Accordingly, such donations, though not voluntarily made, are held as capital receipts and consequently, cannot be considered as income of the trust. Even assuming for the sake of convenience that such donations were made voluntarily, as contended by the counsel for the assessee, the same cannot be held as income since such donations were, given towards corpus of the trust. The receipts issued by the trust clearly show that donations were received towards buildings reserve and general maintenance fund. The receipts are duly signed by the donors. All the donations received were transferred to this fund. Further, there is nothing on the record to suggest that this fund was not used for construction of building. Later on, all the donors have certified that such donations were given towards corpus of the trust. No adverse inference can be drawn from the fact that receipts were issued by one person or the fact that the amount was given towards building fund was printed on the receipts. There is sufficient material to hold that donations were towards corpus of the trust. Hence, such donation cannot be considered as income of the assessee. The legal contention of the Departmental Representative that prior to 1st April, 1989, donations towards corpus were not exempt is without force. prior to 1st April, 1989, the donations towards corpus were exempt under s. 2(24)(iia) itself. Therefore, this contention of the Revenue is rejected.

2. CIT v. Trustees of Visha Nima Charity Trust, (1982) 138 ITR 0564 (Bom HC) – AY 1965-66

   One of the clauses of the deed of Trust authorised the trustees to invite and receive or without such invitation, receive voluntary contributions from any person and that all such contributions shall be treated as forming part of the Trust fund. The assessee organised a charity show and invited advertisements in souvenirs which brought a net receipt of ₹ 96,771 which was transferred to the trust fund or corpus. The amount collected was used for the payment of the price of the ownership flats purchased by the assessee. The ITO took the view that the said income was income from property held under a trust wholly for charitable purposes, which would have been exempt from tax under the terms of s. 11(1)(a) if applied to such purposes, but since it was accumulated for application to such purposes it was held that exemption was available only to the extent of 25% thereof and after granting the same he brought the balance to tax. Hon. High Court held as under-

   The object of the Trust was to have a permanent home for providing shelter for a short duration which was in the nature of general public charity. It is hardly likely that on the facts and circumstances of the case and taking into account the nature of the Trust, the persons to whom the appeal for tickets and advertisements was issued and other relevant factors, any one would have given an advertisement in this souvenir for any purpose other than the charity and as a voluntary contribution and the same can be said about the persons who must have purchased the tickets for the said show. In these circumstances the contributions made by way of tickets and for advertisements should, on the facts and circumstances of this case, be regarded as merely voluntary contributions and in view of this the exemption contained in sub-s. (1) of s. 12 would be clearly attracted, even assuming that these receipts constituted the income of the assessee and not the corpus thereof. Moreover, these contributions could never be regarded as income derived by the assessee- trust from property. Accordingly, the entire income contribution received by the assessee trust was exempt.

   Amount received by assessee trust from sale of charity show tickets and advertisement in souvenir were from voluntary contributions, exempt under s. 12(1).

   This judgment is referred to in many other orders & judgments.

3. CIT v. Sri Durga Nimishamba Trust, (2011) 79 CCH 0890 KarHC – AY – Not mentioned

   Tribunal had set out decision on which Appellate Commissioner relied on to come to conclusion that contribution made towards corpus fund could not be treated as income for purpose of levying of tax— Even if that corpus fund was misused it could not be treated as income and income tax levied—Only course was to seek for cancellation of registration granted u/s 12A of Act—In that view of matter court did not saw any merit in this appeal—Application for condonation of delay was dismissed, as cause shown do not constitute sufficient cause under section 5 of Limitation Act—Revenue’s appeal dismissed.

   This Karnataka HC has settled that even if there is misuse of corpus fund, still the same cannot be taxed but the course open is to cancel the registration u/s 12A/12AA.

4. ITO v. Gaudiya Granth Anuved Trust, (2014) 65 SOT 0137 (Agra) ((URO)) – AY 2007-08

   The question arises whether such corpus donation is taxable as income or not even in the cases in which the trust is not registered u/s 12AA because for those trusts which are registered u/s 12AA, exemption to corpus donation has been provided as per provision of section 11(1)(d). Corpus donation being in the nature of capital receipt are not chargeable to income Tax.

   The ITAT AM delivering the order further observed that,

   I have also come across another decision of Hon’ble ITAT, Kolkatta in case of Shri Shankar Bhagwan Estate v. ITO dated 13.01.1997 reported in (1997) 61 ITD 196 (Cal) in which, the taxability of corpus donation has been examined in the light of section 12 read section 2(24(iia) of the Income Tax Act and in this decision, it has been held as under :-“So far as section 2(24)(iia) is concerned, this section has to be read in the context of the introduction of the present section 12 it is significant that section 2(24)(iia) was inserted with effect from 01.04.1973 simultaneously with the present section 12, both of which were introduced from the said date by the Finance Act, 1972. Section 12 makes it clear by the words appearing in parenthesis that contributions made with a specific direction that they shall from part of the corpus of the trust or institution shall not be considered as income of the trust. The Board’s Circular no. 108 dated 20.03.1973 is extracted at page 1277 of Vol. I of Sampat Iyengar’s Law of Income tax, 9th Edn. In which the inter-relation between section 12 and section 2(24) has been brought out. Gifts made with clear directions that they shall form part of the corpus of the religious endowment can never be considered as income. In the case of R.B. Shreeram Religious and Charitable Trust v. CIT (1988) 172 ITR 373/39 taxman 28 it was held by the Bombay High Court that even ignoring the amendment to section 12, which means that even before the words appearing to parenthesis in the present section 12, it cannot be held that voluntary contributors specifically received towards the corpus of the trust may be brought to tax. The aforesaid decision was followed by the Bombay High Court in the case of CIT v. Trustees of Kasturbai Scindia Commission Trust (1991) 189 ITR 5/57 taxman 38. The position after the amendment is a forori. In the present cases the Assessing Officer on evidence has accepted the facts that all the donations have been received towards the corpus of the endowments. In view of this clear finding, it is not possible to hold that they are to be assessed as income of the assessees. We, therefore, hold that the assessment of the corpus donations cannot be supported.

   This order is invariably referred to in many orders/judgments. Similar view is expressed in the following orders/judgments-

5. CIT v. Pentafour Software Employees’ Welfare Foundation, (2019) 418 ITR 427 (Mad HC) –

AY 1998-99, 1999-2000 & 2002-03

43. The assessee filed appeal before the CIT(A), who held that the amounts paid by the businessmen towards advertisements could not be considered as “donations”. On appeal to the Tribunal, the Tribunal following the judgment of the Bombay High Court in CIT v. Trustees of Visha Nima Charity Trust (1982) 28 CTR (Bom) 227: (1982) 138 ITR 564 (Bom), held that the amounts received by the society could not be treated as “trading receipts” and they were mere voluntary contributions. Further, the Tribunal confirmed the finding recorded by the authorities that the society was not a charitable institution. When the matter was carried on appeal to the Bombay High Court, the question referred was whether the Tribunal was correct in holding that the amount received by way of advertising charges are voluntary contributions or donations and are not trading receipts. After taking note of s.2(24) of the Act, it was held that the assessee society has been held as not a charitable institution and it is not also one of the institutions which are satisfied under s. 2(24) of the Act which are treated as “income” within the meaning of s. 2(24) of the Act and therefore, voluntary contributions received by the assessee society cannot be treated as “income” or “trading receipts”. This decision applies with full force in support of the assessee herein and the Revenue is not able to put forth any submission to dislodge such conclusion.

6. Bank of India Retired Employees Medical Assistance Trust v. ITO (Exemption)

   (2018) 196 TTJ 0706 (Mumbai)-AY 2012-13

   In this case the trust was registered with the Charity Commissioner. It was for the object of not for the benefit of the general public, but was solely dedicated for the welfare of the retired employees of the bank, and the same could not be held as a charitable trust as contemplated u/s 2(15). It had received voluntary contribution towards corpus of the trust. The AO added the donation to income and taxed. CIT(A) confirmed the addition. But Hon. ITAT allowed the same as exempt being capital receipt.

7. Chandraprabhu Jain v. ACIT, (2016) 47 CCH 0650 MumTrib, AY 2011-12

In this case the trust’s registration copy was not traceable, hence it applied for copy of registration u/s 12A/AA but there was no communication from the authority. For want of the registration certificate the AO denied the exemption to corpus donations and taxed at maximum marginal rate. CIT(A) upheld the AO’s order but reduced the rate of tax to normal rate, object being a public trust.

ITAT allowed the claim of the trust and held the corpus donations as capital receipt. In the process it has discussed various decisions holding the corpus donations as capital receipt and exempt from tax.

8. ITO v. Serum Institute of India Research Foundation, (2018) 195 TTJ 0820 (Pune), AY 2005-06

   In this case the issues in corpus donations are exhaustively discussed. This case was a second round of appeal in assessee’s case before Hon. ITAT for the same year. Provisions of Sec. 2(24)(iia), 11 and 56(2) are discussed and position after amendment in 1989. The ld. DR had argued that the cases hitherto decided by various authorities merely held the corpus donations as capital receipt, being for the period prior to the amendments and were decided without going into the amended provisions of the Act and hence were not applicable to the case.

   Hon. ITAT has discussed the provisions in detail, rejected the ld. DR’s contentions, and still concluded that –

   The Corpus-specific-voluntary contributions are outside the taxation in case of an unregistered Trust u/s.12/12A/12AA of the Act too. From this point of view, and for this reason, the decision of the CIT(A) in granting relief to assessee does not call for any interferences. Accordingly, grounds of appeal raised by the Revenue are dismissed.

7. Registration u/s 12A/AA

To make the discussion complete, at least a brief mention about the amendment in Sec. 12A(2) is necessary. These are held to be retrospective. Thus, once the registration is granted, the same is held effective retrospectively. Following cases give an interesting insight in the issue-

1. Shree Bhanushali Mitra Mandal Trust v. ITO, (2016) 47 CCH 0197 AhdTrib – AY 2011-12

2. Punjab Educational Society v. ITO, (2018) 192 TTJ 0037 (Asr) ((UO))- AY 2011-12

3. ITO v. M/s. Shri Vishwakalyan Jivraksha Pratishthan, 2013/PN/2014, dt. 22-07-2016 – AY 2011-12

4. Shree Halar Deshodhharak P.Pu. Vijammrusurji Smarak Trust v. ITO (Exemption), ITA.No.2494/Ahd/2015 – AY 2008-09

Finance Act 2020 has made many changes in taxation of trusts and one of them is amendments in Sec. 12A.

The existing proviso to Sec.12A(2) which is interpreted in the foregoing cases is amended and is now a second proviso. However, the contents are kept as it is except that the new Sec.12AB is also mentioned along with 12AA.

In my personal view, this has not disturbed the view already settled in the issue.

I may quote the observation of Hon. ITAT Ahemdabad in the case of Shree Halar Deshodhharak case referred above. In that case Hon. ITAT Ahmedabad has quoted the order of Hon. ITAT Kolkata in the case of Sree Sree Ramkrishna Samity v. CIT, (2016) 156 ITD 0646 (Kolkata), and one paragraph especially in respect of interpretation which worth quoting as follows –

We also hold that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. It is only elementary that a statutory provision is to be interpreted “ut res magis valeat quam pereat”, i.e. to make it workable rather than redundant. Applying this legal maxim, it would be just and fair to hold that the amendment in section 12A is brought in the statute to confer benefit of exemption u/s 11 of the Act on the genuine trusts which had not changed its objectives and had carried on the same charitable objects in the past as well as in the current year based on which the registration u/s.12AA is granted…….

8. Conclusion

To avoid any controversy, it is better –

• to obtain a letter from the donor with specific direction that the donation is towards corpus of the trust;

• issue the receipt specifically conveying that the donation is accepted towards corpus of the trust; and

• entries in the books of account must be correctly reflecting the donation towards corpus;

• preferably have a clause in trust deed to accept the donations towards corpus.

Philanthropy in taxation of trusts is getting complicated day by day due to various reasons on both sides of the table.

John Rockefeller once said, “The best philanthropy is constantly in search of the finalities — a search for a cause, an attempt to cure evils at their source.” Based on Rockefeller’s quote, I may say in the matter that, philanthropy in taxation, at least in India, is also in search of finality constantly.

1. Introduction

The determination of Indian tax liability of a foreign enterprise has been a contentious and litigious matter under the Indian tax law regime. One of the issues involved is the determination of whether a foreign enterprise is conducting its business in India through a permanent establishment (‘PE’), and the resultant Indian tax liability of the enterprise. Many foreign enterprises have been involved in litigation with the Indian tax authorities over this issue since many years. This article briefly covers, by way of background, the concept and definition of PE and thereafter analyses the most recent Supreme Court judgment in the case of Samsung Heavy Industries Co. Ltd.

 

2. Overview of PE

   1. The general principle of taxation is that a person, who is resident of a country, would normally be taxable on its global income. However, as a rule of exception to this general principle, a person may also be taxed in the country of source i.e., the place where the business of a person is carried on, though he may be a resident of another country.

   2. Section 5 of the Income-tax Act, 1961 (‘the Act’) provides that a non-resident shall be liable to income-tax only on the income, that is received or deemed to be received in India, or that accrues or arises or is deemed to accrue or arise in India.

   3. Section 9(1)(i) of the Act inter alia states that income shall be deemed to accrue or arise in India if it accrues or arises, whether directly or indirectly, through or from any ‘business connection’ in India. The definition of Business connection under the Act is continuously a subject matter of expansion and now it also includes a new phrase called Significant Economic Presence. However, in international tax treaties, the term Permanent Establishment (PE) is a widely used concept used to determine the right of the source country, i.e., to tax the profits of a non-resident from a business carried on by such non-resident in the source country. Nevertheless, the PE shall be liable to be taxed in the source country only to the extent of its business profits which are attributable to such PE. The Tax payer has the choice to apply the Business Connection test as is available under the Act while comparing it with Permanent Establishment provision available under the applicable Tax treaty.

   4. In the context of the Transfer Pricing Provisions as per section 92F(iiia) of the Act, ‘Permanent Establishment’ includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. This is similar to the definition as found in most of the Treaty whereas Sec 9 while dealing with the general attribution rule employs the Business Connection test which is more wider than the test of PE as laid down under the Tax Treaty.

   5. Further, as per section 90 of the Act, the Central Government has the power to enter into an agreement with other country for avoidance of double taxation or for the exchange of the information or for recovery of Income Tax under this act (‘DTAA’ or ‘Tax Treaty’).

      Also, as per section 90(2) of the Act, if the DTAA provisions are more beneficial to a Tax Payer than the provisions of the Act, then he may choose to apply DTAA provisions. Therefore, the provisions of DTAA will supersede the provisions of the Act to the extent they are more beneficial to the assessee.

      In these DTAA agreements, the broad definition of Permanent Establishment has been elucidated and most of India’s agreements have adopted the definition of OECD’s Model Tax Convention on Income and on Capital.

   6. Article 5 of both the “Organisation for Economic Co-operation and Development (OECD) Model Tax Convention” and the “United Nations Model Double Taxation Convention (UN Model)” defines the term PE, and this definition has been adopted by countries globally in their tax treaties. The main purpose of tax treaties is to encourage international trade and commerce by avoiding double taxation, eliminating tax avoidance and providing certainty by clearly delineating the taxing rights of each jurisdiction.

   7. Definition of PE:

      Relevant extracts of the definition of PE as per Article 5 of OECD Model Convention are given here under for convenience:

      1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

      2. The term “permanent establishment” includes especially:

         1. a place of management;

         2. a branch;

         3. an office;

         4. a factory;

         5. a workshop, and

         6. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

      3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

      4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:

         1. the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

         2. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

         3. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

         4. the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

         5. the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity;

         6. the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs
            a) to e),

         7. provided that such activity or, in the case of subparagraph f), the overall activity of the fixed place of business, is of a preparatory or auxiliary character.

   8. Concept of Service PE:

      1. The concept of Service PE was first inserted in the U.N. Model Tax Convention in 1980 under which services provided by a non-resident may give rise to a PE. This concept has led to controversy whether a Service PE requires a fixed place of business in the source country. India’s tax treaties e.g. with UK, USA also provide for clauses relating to Service PE.

      2. The relevant Article 5(3) of the U.N. Model is given below:

         3. The term “permanent establishment” also encompasses:

         1. A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months;

         2. The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days in any 12-month period commencing or ending in the fiscal year concerned.

         It may be noted that usually, in most treaties, the provisions relating to Service PE are included in Article 5(2) itself. It may be noted that Article 5(2) starts with the words “The term ‘permanent establishment’ includes especially” and then goes on to list various types of fixed places of business and also includes the supervisory nature of activities or the furnishing of services through employees without actively specifying whether such PE requires fixed place or not.

      3. Thus, the issue often arises is whether a Service PE requires a fixed place of business and whether it requires physical presence of employees. The controversy emanates due to interpretation of whether Article 5(1), which defines PE as a fixed place of business in the source country is independent of Article 5(2) although Article 5(2) uses the words “includes especially” while providing for inclusions to the definition of PE.

         In the case of ABB FZ-LLC [(2017) 83 taxmann.com 86], the Tribunal observed that Article 5(2) of the India- UAE Tax treaty broadened the scope of Article 5(2). Therefore, Article 5(2) was not a prerequisite to fulfilling the requirement of Article 5(1), as Article 5(2) is independent of Article 5(1) and the condition of fixed place of business is not attached. Accordingly, it determined that ABB FZ had a Service PE and held that the presence of employees is not required in the source country for a Service PE to exist. The rationale behind the Tribunal’s decision appears to be contrary to the concept of tax neutrality between a sale of goods and provision of services. Profit arising from a transaction that involves a simple sale of goods from a non-resident is not taxable in the source country in the absence of a PE of such non-resident seller. By similar reasoning, services performed outside India for an Indian resident should also be free of tax in India, if only to preserve similar treatment for sales and services.

         The Johannesburg Tax Court also reached a similar conclusion in AB LLC and BD Holdings LLC v. Commr. SARS, [(13276) 2015 ZATC 2] when it observed that, by using the phrase “includes especially”, the drafters of the treaty intended that the factors referred to in Article 5(2)(k) of the U.S. – South Africa Tax treaty be made part of the definition referred to in Article 5(1); otherwise, they would not have used the words “includes especially.” The Tax Court, therefore held that the contents of Article 5(2)(k) must be read as an integral part of Article 5(1).

         Based on this analysis, an enterprise becomes liable for taxation in the non- resident country as soon as its activities fall within the ambit of Article 5(2)(k). There is no need to examine whether a fixed place of business exists under Article 5(1).

      4. To conclude, the Service PE clause was first inserted in the U.N. Model Tax Convention in 1980 when electronic commerce was unheard of. It is therefore understandable that the drafters did not intend to impose tax on services provided there was no physical presence in the source country. However, with advances in technology, the concept of a fixed base seems to be out of touch with today’s business practices and hence there is a discerning trend amongst various jurisdictions to move towards taxing of such digital or electronic services. Recent E.U. proposals to tax the income of U.S.- based digital companies, such as Amazon and Google, reflect a similar approach.

   9. Dependant Agency PE and Independent Agency PE:

      A Dependent Agency PE (‘DAPE’) is created when an enterprise resident of a contracting state becomes taxable in another host country on its business profit, if it is represented by an agent in the host country, and the agent has and habitually exercises an authority to conclude the contract. The provisions relating to DAPE are stipulated in Article 5(5) of the OECD Model. Article 6(6), which deals with Independent Agent, states that Article 5(5) shall not apply where the person acting in a Contracting State on behalf of an enterprise of the other Contracting State carries on business in the first-mentioned State as an independent agent and acts for the enterprise in the ordinary course of that business.

      When determining the profit attributable to the DAPE, it would logically follow that if the DAPE is paid for its services equivalent to what would have been payable to an Independent agent, then no further attribution of income or profits may be required to be made on the DAPE. However, jurisprudence and OECD commentary in this regard differs with this interpretation.

      In the case of Set Satellite (Singapore) [2007 106 ITD 175 Mum], it was observed that in respect of the DAPE, the issue to be addressed is one of determining the profits of the non-resident enterprise which are attributable to its dependent agent PE in the host country (i.e., as a result of activities carried out by the dependent agent enterprise on the non- resident enterprise’s behalf). For this situation, Article 7 will be the relevant article. Further, the quantum of that profit is limited to the business profits attributable to global trading operations performed through the PE in the host country. Accordingly, in order to attribute profits to the DAPE, the arms’ length principle as per the authorized OECD approach involving a FAR analysis i.e. functions undertaken, assets used and risks assumed should be followed.

   10. PE and BEPS Action Plan & MLI:

       1. As part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, the OECD has published in Oct. 2015 its final report on Action Plan 7 “Preventing the artificial avoidance of permanent establishment status” (BEPS Report). Action Plan 7 contains changes to the definition of PE to prevent its artificial circumvention, e.g., such as arrangements through which taxpayers replace subsidiaries that traditionally acted as distributors, by commissionnaire arrangements, with a resulting shift of profits out of the country from where the sales took place, without a substantive change in the functions performed in that country.

       2. Action Plan 15 provides an analysis of legal issues related to the development of a multilateral instrument (MLI) to enable countries to streamline the implementation of the BEPS treaty measures. Accordingly, Article 12 and Article 13 of the MLI deal with “Artificial Avoidance of Permanent Establishment Status through Commissionnaire

       3. Arrangements and Similar Strategies” and “Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions” respectively. The Government of India, on 6th June 2017, has provided the provisional list of expected reservations and notification pursuant to Article 28(7) and 29(4) of the MLI, and India has accepted certain provisions of Articles 12 and 13 of the MLI.

3. Supreme Court Judgment in the case of DIT-II New Delhi Vs Samsung Heavy Industries Co. Ltd. [DIT New Delhi Vs Samsung (Civil Appeal No. 12183 of 2016)]

   1. This recent judgment of July 2020 is concerned with the preparatory or auxiliary activities exception to permanent establishment, otherwise known as the specific activity exemption. The case involves the India – Korea DTAA.

      As per Article 7(1) the said DTAA, the business profits of such enterprise would generally be taxable only in Korea, unless the enterprise engages in business through a PE situated in India. In such a case, the profits of enterprise would be taxable in India as well. However, only that portion of the profits which can be attributed to the Indian PE may be taxed in India. For this, the Indian Revenue has to first establish that there is a PE of the enterprise in India.

   2. Facts of the case

      1. In 2006, the Oil and Natural Gas Corporation, a state-owned enterprise of the government of India, awarded a turnkey contract to a consortium comprising of Samsung Heavy Industries (‘Samsung’), a company incorporated in South Korea, and an Indian company.

      2. The scope of the contract was to carry out work, inter alia, of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of the entire facilities covered under the Vasai East Development Project.

      3. Samsung set up a project office in Mumbai to act as a communication channel with the Oil and Natural Gas Corporation for the project. Pre-engineering, survey, engineering, procurement, and fabrication activities took place abroad.

      4. Samsung ’s India income tax return declared a loss in relation to its activities carried out in India.

   3. Assessment Officer’s findings

      1. The assessing tax officer issued a show cause notice, alleging that Samsung’s offshore supply and services should be taxed in India as they were attributable to a permanent establishment in India. According to the assessing officer, the project office was involved in the core activity of execution of the project the designing or fabrication of materials and therefore was a permanent establishment of Samsung in India within the meaning of Article 5.1 of the India-Korea DTAA.

      2. Samsung argued that the offshore supply and services were not attributable to the permanent establishment in India as the project office was acting as a mere communication channel and therefore was used merely for preparatory and auxiliary activities which are specific exempt activities.

      3. However, the assessing officer alleged that the project in question was a single, indivisible “turnkey” project which could not be split up and, therefore, the entire profit from the project should be taxable in India and accordingly attributed 25% of the revenues allegedly earned outside India as the profit attributable to the permanent establishment in India. The order of the assessing officer was upheld by the Dispute Resolution Panel.

   4. Tax Tribunal ruling

      1. In appeal by Samsung, the tribunal relied on an application that was submitted by Samsung to the Reserve Bank of India for the registration of the project office. The application referred to a board resolution of the company for opening the project office in India, which stated that “the company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project”. The tribunal held that it was clear from the board resolution that the project office was opened for coordination and execution of the project. It then held that the project office was a fixed place of business of Samsung Heavy Industries in India.

      2. Samsung argued that even if there was a permanent establishment, the activities of the permanent establishment met the test of preparatory or auxiliary activities in Article 5.4. The tribunal rejected this argument, stating that the onus of proving that the activities were preparatory or auxiliary was on Samsung and that it brought no material on record to prove this fact.

         Samsung produced the accounts of the project office to demonstrate that there was no expenditure related to the execution of the project. Samsung also demonstrated that only two people worked in the project office, neither of whom was qualified to perform any core activity of Samsung. The tribunal rejected these arguments, stating that the accounts were in the hands of Samsung and that the mere mode of maintaining the accounts alone cannot determine the character of a permanent establishment.

      3. The tax tribunal, however, remanded the matter back to the tax officer to reconsider the deemed profit of 25% attributed by the tax officer to the permanent establishment. The tribunal found that there was insufficient information on record to ascertain the extent of business activities carried on by Samsung Heavy Industries through the project office.

   5. High Court ruling

      The Uttarakhand High Court allowed the appeal only on the question of whether the tax officer used an arbitrary profit rate of 25% without examining whether it was attributed to the activities of the permanent establishment. According to the High Court, neither the tax officer nor the tribunal made any effort to bring on record any evidence to justify this figure.

   6. Supreme Court ruling

      1. In appeal by the tax department in the Supreme Court, the tax department again argued that the project office was connected with Samsung’s core business.

      2. However, Samsung reiterated that the Mumbai project office consisted of only two employees, neither of whom had any technical qualifications to execute the project. Further, the project office accounts demonstrated that it had not incurred any expenditure for execution of the project.

      3. The Supreme Court relied on the board resolution enclosed with the application to the Reserve Bank of India for the registration of the project office, which stated that the project office was established for coordinating and executing “delivery of documents in connection with construction of offshore platform modification of existing facilities for Oil and Natural Gas Corporation above”.

         The Supreme Court stated that the findings of the tribunal were perverse to the extent of its conclusion that the project office was involved in the core activity of execution of the project and that merely maintaining accounts cannot determine the character of permanent establishment.

      4. The Supreme Court thus concluded that the activities performed by the project office were of auxiliary nature as the project office acted as a communication channel between Samsung and ONGC. In deriving the above conclusions, the Supreme Court relied on its rulings in Morgan Stanley & Co. Inc. and E-Funds IT Solutions, Inc., where, depending on the specific facts of the case, certain back office and support functions were held not to give rise to a fixed place permanent establishment.

   7. Key takeaways

      1. In addition to the current judgment in the case of Samsung, there have been quite a few landmark judgments on the matter of fixed place PE viz. DIT Mumbai
         v. Morgan Stanley & Co. (2007) 292 ITR 416, CIT v. Hyundai Heavy Industries Co. Ltd. (2007) 7 SCC 422, Ishikawajma-Harima Heavy Industries Ltd. v. DIT Mumbai (2007) 3 SCC 481 and ADIT New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294.

      2. A reading of the aforesaid judgments makes it clear that when it comes to “fixed place” permanent establishments under DTAAs, the deciding factors are as follows:

         1. The condition precedent for applicability of Article 5(1) of the DTAA and the ascertainment of a “permanent establishment” is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on.

         2. The profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment.

         3. The maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5.

         4. It is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment.

      3. The current ruling of Samsung as well the ruling in UAE Exchange Center demonstrates that the test of ‘preparatory or auxiliary’ activities is very factual. In this case of Samsung, the Supreme Court relied on the Reserve Bank of India registration and the accounts of the project office to determine the scope of the activities of the project office. Even in the UAE Exchange Center case, the Supreme Court relied on permission granted by the Reserve Bank of India (among others) in concluding that the activities of UAE Exchange Center’s liaison office in India were ‘preparatory or auxiliary.’

         The reliance by the Supreme Court on the Reserve Bank of India permission is a significant development in jurisprudence relating to the interpretation of permanent establishment. Both of the above rulings demonstrate that assessees having a project office or liaison office should perform activities within the realm of the permission of the Reserve Bank of India.

      4. The rulings also highlight the importance of a taxpayer’s ability to demonstrate, through appropriate documentation, that activities performed by it are indeed preparatory or auxiliary. Also, the Supreme Court reiterated that the onus of proving that a taxpayer has a permanent establishment in India is on the tax authorities and not the taxpayer.

4. Conclusion and Post MLI position India and Korea has adopted an option A as provided in Article 13 dealing with the specified activities that do not constitute PE and fact pattern of this case does not even trigger application of the anti-fragmentation rules and hence there is no avoidance of the PE through specific exemption activities. In view of the above the decision the case will not be impacted by the MLI as the activities of the Samsung is limited to the one covered in the exempted activities.

 

Dear Members,

Battle with Covid-19 is on – Please do not miss to take utmost care –

Although we all are looking forward to being active again as opening ups are being announced by individual State Governments, I am afraid we can’t afford to reduce the precautions which we must continue to follow strictly.

I say so because it deeply saddens me to inform my dear members that an active secretary of South Zone Adv Shri M. A. Prakash succumbed to the Covid-19 on 23rd August 2020. One of the most active secretary of the Zone, whom many of you may have seen during the South Zone programmes.

I am informed there are two or three more members of our Association who have left us for heavenly abode fighting Covid-19 battle. I am extremely sorry to inform that Mrs Pratima, wife of our regular column writer and Associate editor Shri C. B. Thakkar (Bombay) left for heavenly abode after fighting the battle against Covid-19, for more than one and half month on 18th August 2020.

We pray Almighty to bestow eternal peace to the departed souls. Our deepest condolences to near and dear ones. We pray God to give their families strength to bear this irreparable loss.

It is therefore extremely important for each of us, not for our own self but also for our near and dear ones that we continue to strictly follow the Government guidelines of wearing three ply face mask, washing hands frequently, maintaining 6 feet distance (Even when you meet your friends) and avoiding public crowded places.

The hearings with any authority including appellate authorities can now be held through virtual mode. We will have to accept virtual mode of hearing as a way of life for many more months to come.

The concept of Mutuality & Federation –

The Editorial of this month is written by our Past President Shri M. V. K. Moorthy who has in a lucid language explained the application of the recent Larger Bench decision of Supreme Court in case of Calcutta Club to the Federation. The Committee is appointed to look into this aspect and we would shortly be making detailed representation to the Finance Minister & GST Council to clarify the stand of the Government in this aspect. We may have to challenge the provisions before High Court if the situation so demands.

Faceless Assessment – a new step forward

Recently the Hon’ble Prime Minister Shri Narendra Modi launched a platform for transparent taxation system and theme of honouring the honest.

The faceless assessment, faceless appeal and taxpayer charter are announced as a way forward. The hon’ble Prime Minister also announced that there would be no intrusive and survey action by the field officer. Only investigation wing and TDS wing can carry on the investigation, that too, after approval by the officer of the level of Chief Commissioner or above. The selection would be through the system.

Implementation of this system would mean abolition of territorial jurisdiction. There will be no physical interface with the jurisdiction officer. Gone would be the days of frequent visits to the Income Tax Office. A very welcome step. However, the Income Tax Department will have to ensure that the proceedings are not abruptly closed for want of time and the assessees are given more than one E-hearing if the situation so demand. The original system of target based assessment and applauding the officer who created heavy demand (especially the demands which cannot stand the test of law) should be stopped immediately.

We, as taxpayers and the tax consultants, are fully aware of the paper demand raised by some of the officers only to meet the target. The entire system formulated by this announcement appears to be very attractive. Especially the tax payers charter has specifically declared the commitment by the Income Tax Depart to the public at large, especially tax payers. They are directed to be fair, courteous and give reasonable treatment and professional assistance in all dealings to the tax payers. The tax payers are presumed to be honest unless there is reason to believe otherwise. For the first time, the Department is directed not to disclose any information provided by the taxpayer unless authorized by law and the officials are going to be held accountable for their action in implementing the citizen charter.

While the commitment to the taxpayers is declared, the charter also specify what is expected from the taxpayer. The taxpayer is expected to be honest and complied. The most important expectation is that taxpayers should know what information and submission are made by his authorized representative. The taxpayer is also expected to be aware of his compliance obligation under the tax law and seek the help of the Department if needed apart from making regular tax payment and maintaining accurate record.

Both faceless assessment and faceless appeal look attractive; however, as pointed out earlier, neither side should take advantage of the system. What is required is the change of mindset on both sides and an honest attempt by both sides, i.e., the authorities and the taxpayers, to implement and put in practice the system announced by the Prime Minister.

This is the first taxpayer charter conceptualized by the taxpayer-friendly Government. However, in past we had citizen charter which remained a decorative piece in paper. The benevolent scheme and the system announced by the Government are at times made complicated by inserting numerous rules and formalities. Let’s hope we do not see the same fate of the scheme this time.

In my personal opinion, the power of the officer passing hurried order at the fag end of the time- barring period should also be kept under rein. Such officers should be treated as erring officers. The power of rectification has remained untouchable for majority of the matters on account of the phrase “mistake apparent on record”. This phrase and the power of rectification have been viewed and interpreted differently by different Courts under different circumstances. In my opinion, a liberal approach is required so that just and fair treatment is meted out to the taxpayers. Many a times the submissions made on record are either considered or summarily dismissed by the concerned authorities without any reason. The order without reason should also be subjected to the scope of rectification if the material, documents, evidence are already on record without detailed arguments. Non-consideration of the material on record should invite investigation of the officer. It is only when stern actions are taken against erring officers and dishonest taxpayers then the real object of the present scheme would be implemented.

The department has been honouring the honest taxpayers; however, the medium level and smaller taxpayers who are honest and paying regularly the tax liability, in my opinion, deserve to be appreciated.

The show cause notices issued so far at times had no base, nor they could prima facie stand the test of law, nonetheless the taxpayer has to go through rigmarole of filing appeal, second appeal etc. The Courts normally refuse to entertain writs at this juncture. This is creating a bad image and undue harassment to the genuine taxpayer.

I sincerely hope we see a golden era where the taxpayer community increases many fold and the administrator behave in just, fair professional manner.

While the taxpayer charter has taken care of the honest citizen, a very important suggestion, I would like to make is to give the social security pension to the taxpayer above 65 years of age, based on the amount of tax they have paid over years and may continue to pay. It would be a noble feature where the taxpayer would have greater incentive to pay due tax during their young age itself as they are assured of some return out of the said tax paid throughout their peak of their earning, in their old age. This would ensure due compliance by all citizens who are covered by the tax bracket.

Representation for Indirect Taxation

The Indirect Tax Representation Committee headed by Shri H L Madan is preparing a pre-budget memorandum to be submitted to the Hon’ble Finance Minister and GST Council. I request all the members to give their valuable suggestions and inputs my e mail to our Head Office so that we can make a meaningful representation.

([email protected])

Activities of the Federation

This would be perhaps the last month when we would be sending the e-journal to the subscribers. On account of lockdown and partial opening up, the Post Office which has been taking delivery of our journal has not been able to accept our journal for delivery. We hope in the month of September we would be able to deliver the hard copy of the journal. Meanwhile, may I request the members who have not paid the subscription so far, to renew their subscription at the earliest. I also invite the new members to subscribe for the journal as the journal gives them opportunity to keep themselves updated on Direct and Indirect Taxes as also to read the articles of the members from all over India. This would obviously widen the horizon and the views of the tax consultants of different parts of the country can be appreciated and applied by a member.

Meanwhile, the Federation continues to hold free Webinars in the interest of the members. I am happy to inform that we would be soon crossing a century of webinars which have provided us the opportunity to make the presence of the Federation felt by the tax consultants in the remotest rural area of the Country. The zones have been able to reach to more than 500 members at a time, normally, to achieve our moto of spreading knowledge and education.

I must congratulate the Central Zone, Chairman Shri Vinay Jolly and his team, Vice President Shri Rajesh Mehta and ever enthusiastic senior member Shri Pankaj Ghiya to have maximum webinars with maximum participation. They have completed the certificate course of GST. The North Zone is going to start the certificate course on GST on 25th August 2020.

The West Zone Chairman Shri Bhaskar Patel has announced a two-day National Conference, with free registration to all the members. I request all the members to join for a unique experience as for the first time ever the Principal Chief Commissioner of Income Tax NeAC, Dr. Pushpinder Puniha and the Joint Secretary, Government of India, Shri Kamlesh C. Varshney have agreed to be part of the active panellists for a session on ‘Faceless Assessment’’ charting a road map for a painless tax regime and seamless tax regime and compliance” along with renowned international tax expert Shri Mukesh Patel and our past president Sr. Adv. Shri Ganesh Purohit. The other subjects are also of prime importance for day-to-day practice of Direct and Indirect Tax.

The North zone under the able leadership of Shri Asim Zafar is planning a two day NTC on 2nd and 3rd October 2020. The Central zone is planning a two-day National Tax Conference on 31st October and 1st November 2020.

Dear Members, kindly continue to attend all our programs to enrich your knowledge. Let me appreciate that the inputs and the queries raised by the participants also help in enhancing and enriching the deliveries by the faculties. In my opinion, active participation by the delegates is the most important aspect for success of any programme. For all our future programmes kindly visit our website www.afiftponline.org.

Stay safe, stay Blessed.

 

Nikita R. Badheka
National President, AIFTP

AIFTP – A NEW FACE

The year 2020 has experience a changed outlook for Societies, Trusts as also Clubs incorporated under the respective statutes with the pronouncement of a celebrated and encomious decision of the Hon’ble Supreme Court by a Three Judge Bench. This decision obviously and indisputably impacted the liability to service tax as also income tax at the hands of the entities mentioned supra. This is how I have perceived a new look or face for the glorious federation in regard to its liability under the present GST regime as also the Income Tax under Income Tax Act,1961. To pen down further lines as a fortiori to my view are indispensable to be narrated.

On 11th November 1976 the All India Federation of Tax Practitioners, herein after for brevity called AIFTP was incepted in the presence of towering personalities in Judiciary, Legal Profession as well as Accountancy. As is known to everyone, The stalwarts, a Treo namely Justice JC Shah of the Supreme Court, a renowned Jurist A Nani Palkiwala and a national reputed charted accountant N. C. Mehta and objects for which federation was founded as premier association of multi color fabric namely Advocates, Chartered Accountants, Tax Practitioners, Company Secretaries and Cost and Management Accountants, are laudable. It is thus a Unique organization with an inclusive concept.

However AIFTP was registered under the provisions of Societies Act, 1860 and also under the provisions of Bombay Public Trust Acts, in 1996. Being public trust, AIFTP has been claiming exemption from payment of Income Tax by virtue of proceedings of exemption in terms of 12 of Income Tax Act.

Service Tax for the first time was administrated in our country through Finance Act, 1994 and on the basis of the expansion of tax net, in respect of the amounts collected towards delegate fee in connection with organizing National Tax Conferences as well as National Tax Conventions. The federation was also required to take out a centralized registration for the purpose of payment of service tax. AIFTP is designed to function through five zones comprising of different states falling within the respective regions.

While the taxation liability at the hands of federation stood on the lines explained above there has been a well textured revolution in indirect taxation by way of emergence of Goods and Service Tax Law on 01-07-2017.

However even under GST regime, AIFTP has taken out registration under the Act and also been paying tax on the transactions of supposed supply of services to its enrolled members in large number and handsome of non members. Though the federation by virtue of registration under two different enactments, claimed the status of the society as well as a public trust at the same time and as already explained above in the status of registered trust, exemption from Income Tax was being claimed. At any point of time before the decision of Supreme Court by a Three Judge Bench in the case of State of West Bengal and Others Versus Calcutta Club Limited was pronounced and reported, the Doctrine of Mutuality Interest between the federation and its members, it was never considered to put forth a claim of exemption either from service tax or for that matter GST. It is well known fact, that federation is “for the members of profession, of the members and finally by the members”. Therefore as a matter of fact, a valid and justifiable claim of exemption from tax ought to have been put forth and maintained. However the reason behind perhaps might be payment of tax by virtue of collection from the members and other participants, despite a big rate of tax that ultimately impacted potentially the aspect of determination of delegate fees.

Be that as it may, not being troubled to the discharge of liability, AIFTP comprising of professionals, a section of elite of the society, shall at least now consider as its duty to implement the principles of Law evolved by the Judiciary especially in the recent decision of three judge bench of Supreme Court as enshrined in Article 141 of the Constitution of India. Therefore let us keep aside the point of payment of GST on collection basis and employ all best and concerted efforts to give a new face to the organization with a beneficial share to the members that would in the final analysis slice down delegate fee at a reduced competitive cost. For this purpose through this editorial contribution, I would honestly suggest to the management to take up the issue with the Union Government including GST Council that would serve the members at large and there are considerable number of personalities to take care of the plea of federation for a positive and fruitful decision.

JAI HIND

Dr. M. V. K. Moorthy,
Member, Editorial Board