Indo International Tabacco Ltd.


Additional Director General, DGGI & Ors.

[Manmohan, & Navin Chawla, JJ]

W. P. (C) No. 2420 of 2021

Date of Decision: January 11, 2022

Search and Seizure – Territorial Jurisdiction – Multiple Search operations–Repeated Summons– Search by Multiple Agencies- Parallel Investigations – Centralization of Investigations with DGGI by transfer order – Availment and utilization of inadmissible ITC – Section 6(2)(b) of CGST Act, 2017 – Overlapping exercise of Jurisdiction by the Central & State Tax Officers – Circular dated 05.10.2018 clarifying initiation of Intelligence based enforcement action– – Notifications empowering proper officer – Notification No. 2/2017 – Notification 14/2017– Central Tax Officers with all India jurisdiction – Transfer of Investigation to DGGI – justified – Petition Dismissed. Sections 2(91), 6(2)(b) of CGST Act, 2017.

The petitioners are engaged in the business of manufacturing & selling of tobacco products. Being aggrieved of multiple search operations and repeated summons by multiple agencies, petitioners filed this Writ Petition to challenge the conduct of alleged parallel investigation by officers of CGST, DDGI Ahmedabad and Delhi Unit, Joint Commissioner (AE), etc. Petitioner firm’s GST registration was also cancelled by the Respondents for alleged availment and utilization of inadmissible ITC. The thrust of contentions of petitioner was that the issuance of such multiple summons by multiple agencies is violative of the mandate of Section 6(2)(b) of the CGST Act and also the Circular No. D.O.F. No. CBEC/20/43/01/2017-GST (Pt.) dated 05.10.2018 issued u/s 168 of CGST Act clarifying initiation of Intelligence based enforcement action. They submitted that it is only the jurisdictional Commissionerate that has the jurisdiction to carry out the entire process of investigation, including the issuance of Show Cause Notices, adjudications, recovery, etc. He further submitted that Section 6(2) of the CGST Act, 2017 states that if the SGST Officer of the State Government has already initiated proceedings, then the CGST Officers cannot exercise any power on the same subject matter, which is intelligence-based enforcement action on the entire taxpayers.

On the other hand, respondent contended that the Central Government and the State Governments have issued notifications empowering the ‘proper officers’. Vide Notification No. 02 of 2017 dated 19.06.2017, issued by the CBEC, various Central Tax Officers have been appointed vesting them with jurisdiction on specified territories i.e. for limited territorial jurisdiction. Whereas, vide Notification No. 14/2017 dated 01.07.2017, the CBEC has appointed the Central Tax Officers with All India jurisdiction. It submitted that where the subject matter is of all-India jurisdiction, then only the Officers appointed under Notification No. 14 of 2017 dated 01.07.2017 can exercise power under Section 6(2)(b) of the CGST Act, 2017. Furthermore, the present case appeared to be a fake ITC scam perpetuated by various entities spread across the country and involved the misuse of ITC of more than ₹300 crore. The same required a thorough investigation by a specialised investigating agency having all-India jurisdiction. The DGGI, AZU, vide letter dated 01.03.2021, had requested all the concerned formations of the DGGI to transfer the investigation to the DGGI, AZU.

Hon’ble court observed that, the investigations that were initiated by various jurisdictional authorities against the Petitioners and the same have been transferred to officials of the Respondent to be brought under one umbrella. Furthermore, in the course of investigating of a tax entity, a situation may arise where the investigation may have to be carried out from entities which are not within the territorial jurisdiction of the Officer appointed or with the limited territorial jurisdiction. It cannot be said that in every such case, the ‘proper officer’ having limited territorial jurisdiction must transfer the investigation to the ‘proper officer’ having pan India jurisdiction. Thus the Hon’ble Court held that, the Circular cannot be extended to cover all and myriad situations that may arise in the administration and the functioning of the GST structure. Moreover, Section 6 of the CGST Act and the above said Circular clearly has a limited application, which is of ensuring that there is no overlapping exercise of jurisdiction by the Central and the State Tax Officers. It is to bring harmony between the Centre and the State in the implementation of the GST regime.

It was held that transfer of all the cases to DGGI, Ahmedabad was correct and the challenge to such transfer if not sustainable. Petition dismissed.


Sourav Bajoria


Union of India

[Hitesh Kumar Sharma, J]

Bail Appln./1718/2021

Date of Order/Decision: 23.08.2021

Bail Application – Issue of Invoices without actual supply of goods – Bail u/s 439 of CrPC, 1973 – Fake Invoices – Fraudulent practices of availment & utilization of ITC – Bail Application by Tax Consultant – Search proceedings in the office of Tax Consultant – Incriminating Documents – Fake Invoices – No Individual Role in commission of offence – Huge Economic Offence – Detailed Investigation essential – Petitioner on Bail likely to hamper the investigation and tamper evidence –Bail Application Rejected. Sections 69/132 of CGST Act, 2017.

Applicant filed a Bail Application under Section 439 of the Cr.P.C. seeking Bail of the accused under Section 132(5) of CGST Act, 2017. The allegation against him was that he had managed/collected the fake invoices and facilitated commission of the offence by the co-accused Amit Kumar. He was accused of fraudulent practices of availing as well as passing on ITC accumulated through issuance of fake GST invoices and corroborating the same through issuance of E-way bills without actual supply of goods. The Applicant was the Tax Consultant of the M/s Maruti Traders and was in custody for over a month. During search proceedings at his office, incriminating documents such as E-way bills, invoices were found. It came out from the materials so far collected by the Investigating Agency was clearly suggestive that he was arranging fake invoices. He submitted that being a Tax Consultant, he had no individual role in the commission of the offence and had done his duty as a Tax Consultant only on the basis of the materials given to him. The Hon’ble High Court held that complaint alleged a huge economic offence and therefore, a thorough and detail investigation is essential. Further, considering the materials so far collected by the Investigating Agency and the role of this petitioner in facilitating commission of the offence of huge tax evasion of ₹ 28,97,85,917/-, the enlargement of the Petitioner on bail, at this stage, would likely to hamper the investigation and tamper evidence which may amount to compromising with the entire investigation of the case. Hence, Bail Application rejected.


LGW Industries Ltd.


Union of India

[Md. Nizamuddin, J]

WPA No.23512 of 2019

Date of Decision: 13.12.2021

Input Tax Credit – Genuineness and identity of suppliers – Registered Taxable Person – Goods in question are fake and non-existing – Registration of supplier had already been cancelled with retrospective effect – payment through banking channels –Transactions made before cancellation – Transactions are genuine and supported by valid documents – GSTR 2A – Cancellation of Registration of Suppliers – Verification of genuineness of suppliers – No failure on the part of petitioner – Cases Remanded Back with directions to Revenue to prove ingeniousness of the transaction failing which ITC to be allowed. – Section 16(2) of CGST Act, 2017

GST authorities alleged that the suppliers from whom the petitioners/buyers were claiming to have purchased the goods in question were all fake and non-existing and the petitioners had not verified the genuineness and identity of the aforesaid suppliers who were Registered Taxable Persons (RTP) before entering into any transaction with those suppliers. The registration of suppliers in question had already been cancelled with retrospective effect covering the transactions period in question. Petitioners contended that the transactions in question were genuine and valid by relying upon all the supporting relevant documents required under law. Moreover, they had paid the amount of purchases in question as well as tax on the same through banks and all the purchases in question invoices-wise were available on the GST portal in Form GSTR-2A. Thus, the Hon’ble Court held that if all the purchases and transactions in question are genuine and supported by valid documents and transactions in question were made before the cancellation of registration of those suppliers and in the event the petitioners shall be given the benefit of ITC in question. It cannot be said that that there was any failure on the part of the petitioners in compliance of any obligation required under the statute before entering the transactions in question or for verification of the genuineness of the suppliers in question.

High Court remanded the matter back to consider the documents relied on by the petitioner to prove genuineness of its purchases (including payment of value of goods and GST thereon to suppliers). if purchases are found to be genuine and were undertaken prior to cancellation of registration, benefit of ITC should be allowed to the petitioners.


Manish Scrap Traders


Principal Commissioner



Date of Decision: 05.01.2022

Provisional attachment of Cash Credit Account¬– GST DRC 22– Section 83 of CGST Act, 2017 – Debtor creditor relationship – provisional attachment of a cash credit account is no longer res integra – Prima Facie Commissioner committed contempt – Explanation sought as to how he distinguished the binding judgments that Cash Credit Account cannot be attached.

Subject matter of challenge is the order of provisional attachment of the Cash Credit Account which has been passed in the Form GST DRC-22 in exercise of powers under the provisions of Section 83 of the CGST Act, 2017. The Bank and the writ applicant do not have the debtor – creditor relationship. The Hon’ble Court held that the law as regards the provisional attachment of a cash credit account is no longer res integra. Furthermore, the Principal Commissioner, CGST, Surat is in contempt and he owes an explanation as to on what basis he has distinguished all the orders passed by this Court over a period of time taking the view that a cash credit account could not be provisionally attached in exercise of powers under Section 83 of the CGST Act, 2017.


Ranjana Singh


Commissioner of State Tax & Ors.

[Piyush Agwawal, J]

WRIT TAX No. – 1084 of 2021

Date of Decision: 09.12.2021

GST Registration – Relevant documents – Section 25 of UPGST Act – Rule 8 & Rule 9 of UPGST Rules – Inspection at business premises – Notice for seeking information & documents – Cancellation of Registration – Harassment of Assessee – Submission of House Tax Receipt – Non-submission of Electricity Bill – Right to carry on business – Grant of GST Registration Certificate –Writ petition allowed with cost to respondent – Section 25 of UPGST Act, 2017.

Petitioner is engaged in the business of providing employment through consultancy. The Petitioner applied for grant of registration under the UPGST Act through online mode and had provided the documents as per Section 25 of the UPGST Act and Rule 8 and 9 of the UPGST Rules, 2017. Thereafter, inspection was made at the business premises of the petitioner and notice was issued for providing certain information and documents in support thereof. In compliance with the Notice, the Petitioner had submitted the explanation regarding the nature or possession of the business premises as the owner and submitted the House Tax Receipt. On submission of reply, the application of the petitioner was rejected. The Hon’ble Court observed that the Petitioner had every right to carry on her business lawfully and that the two authorities of the State had acted only with a view to harass the petitioner. The Hon’ble court had set aside the rejection of application of GST registration on the ground that if for the purpose of proof of business ownership there is an option to furnish either house tax receipts or electricity bill receipts, then application cannot be rejected on the basis of non-compliance, if receipt of electricity bills are not furnished. The writ petition allowed with cost to the respondent.


Infosys Ltd.


Deputy Commissioner of SGST

[Ujjal Bhuyan, Chillakur Sumalatha, JJ]

W.P.Nos.527 & 616 OF 2020

Date of Decision: 05.11.2021

Export of Services – Accumulation of ITC – Refund of utilized ITC – Section 54(3) of Telangana SGST Act, 2017 r.w. Section 54(3) of CGST Act, 2017 & Section 20(xiii) of IGST Act, 2017 – Application for refund –Refund claim rejected – Rule 92 of CGST Rules, 2017 – audi alteram partem – Essence of opportunity of being heard – principles of Natural Justice – No substitution by telephonic conversations or emails – petition allowed – Section 54 of CGST Act, 2017

Petitioner is engaged in the business of exporting software and information technology services. In connection with the export business of the petitioner, Input Tax paid on input services and capital goods gets accumulated as unutilized credit in the books of account of the petitioner. As a result, petitioner has been filing refund claims for refund of utilized Input Tax Credit under Section 54(3) of the Telangana SGST, 2017 read with Section 54(3) of the CGST Act, 2017 and Section 20(xiii) of the IGST Act, 2017. In pursuance to this, Respondent rejected such claim for refund on the ground that petitioner had not submitted the required documents in hard copies for verification. Petitioner relied upon the Rule 92 of CGST Rules, 2017, where in proviso it is mentioned that no application for refund shall be rejected without giving the applicant an opportunity of being heard. Thus, the Hon’ble Court held that the expression ‘opportunity of being heard’ is not an expression of empty formality. It is a part of the well-recognized principle of audi alteram partem which forms the fulcrum of natural justice and is central to fair procedure. When the law requires that no application for refund shall be rejected without giving the applicant an opportunity of being heard, the same cannot be substituted by telephonic conversations and exchange of e-mails. Consequently, Impugned Memo is set aside and directed respondent to hear afresh applications for refund.


Advent India PE Advisors Private Limited


Union of India and Ors.



Date of Decision: 03.12.2021

Electronic Credit Ledger – Sub Rule (1) & Sub-rule (3) of Rule 86A of CGST Rules, 2017 – Unblocking of ITC – Restriction ceased on expiry of one year – provisions of Rule 86A of CGST Rules, 2017 – Statutory mandate – Unblock ITC after one year – petitioner’s co-operation with department – Petition disposed of – Rule 86A of CGST Rules, 2017

Petitioner filed this writ petition seeking direction to unblock the ITC availed by the petitioner in its Electronic Credit Ledger with interest at appropriate rate for period during which the Petitioner was deprived of its property. In pursuance to this, Petitioner relied upon the provisions of Rule 86A of the CGST Rules, 2017 and in particular sub-rule (3) thereof, which provides that restriction imposed under sub-rule (1) would cease to have effect after expiry of one year from the date of imposition thereof. The Hon’ble Court observed that having regard to the statutory mandate in sub-rule (3) of rule 86A, the ITC ought to have been unblocked immediately after one year of the restriction being imposed under sub-rule (1) thereof. Whereas, if the respondents were of the view that the petitioner had not been cooperating with the department, they ought to have proceeded against it in a manner known to law. Petition disposed off.


Vageesh Umesh Jaiswal


State of Gujarat



Date of Decision: 06.01.2022

Registration – Cancellation of – Show Cause Notice for cancellation of Registration – Form GST REG-17/31 – Rule 22(1) of CGST Rules, 2017 – Vague Notice issued – Allegation of bogus billing – SCN not supported by reasons and documentary evidence – Registration cancelled – Writ filed seeking quashing of cancellation order – Allowed – Section 29 of CGST Act, 2017

The premises of the Writ Applicant was searched by the Asst. Commissioner of DGGI (Directorate General of Goods & Services Tax Intelligence), Ahmedabad and various documents like purchase invoices, ledger copies etc. were seized by the officer. Thereafter, respondent issued a Show-cause Notice (SCN) for cancellation of Registration in the Form GST REG-17/31 under Rule 22(1) of the CGST Rules, 2017. Thereafter, Writ applicant filed its reply and brought to the notice of the Commercial Tax Officer that the SCN was as vague as no details of the name of the supplier etc. had been furnished. Subsequently, final order was passed cancelling the Registration.

The Hon’ble court expressed its disappointment for two reasons; first the mode and manner in which the entire exercise had been undertaken by the Commercial Tax Officer in cancelling the registration and secondly the vehemence with which the respondents have opposed the writ application despite serious shortcomings in the impugned action. Being no reasons assigned in the show-cause notice, the final order was passed cancelling the registration. There was just one line stated “Dealer is engaged in bogus billing”.

The Hon’ble Court further held that the whole object of issuing a show-cause notice is to make the recipient of the notice understand what the authority is trying to convey and what the nature of the allegations are. In this case, there were allegations of bogus billing, it was expected of the authority to at least furnish some information about such bogus billing. At this stage, petitioner submitted that along with the show-cause notice, there is always few documents attached which would indicate what the authority wants to convey about the bogus billing. Show cause notice is a mandatory requirement for raising any demand under the CGST Act, 2017 except payment of interest u/s 50 and assessment of non filer of returns u/s 62 of the Act. The issue of SCN is not only to make aware the taxable person against whom the action is intended to be taken but must contain brief facts of case and grounds relied upon for the proposed action and language in precision, the reading of which makes the person concerned understand the case that he has to defend. It should not be issued on assumptions and presumptions. The allegations and findings in the SCN should be supported by some documentary evidences. The Hon’ble Court allowed this Writ application and quashed the impugned order cancelling the registration.


State Tax Officer


Y. Balakrishnan


RP NO. 630 OF 2021


WP(C) 18169/2021

Date of Decision: 29.11.2021

Section 130(2) of Customs Act, 1962 – Order of prohibition – Rule 139(2) & Rule 140 of CGST Rules, 2017 –Release of goods, before orders of confiscation are issued – Provisional release of goods under section 130 of the Customs Act, 1962 – discretion of Tax Officer to pass an order of confiscation – release of goods during adjudication and post adjudication – Market value u/s 2 (73) of the Customs Act, 1962– fine on release of goods in confiscation

Review petition had been filed by the State Tax officer against the interim order passed under Original Writ Petition by which it was directed to release the goods leading to question whether section 130(2) of the Customs Act, 1962 contemplates the release of goods by payment of fine in lieu of confiscation, even before orders of confiscation are issued.

By going through the brief facts, an inspection and seizure was conducted by Kerala GST Department as per Rule 139(2) of the CGST Rules, 2017. Orders of prohibition were later issued under Rule 140 of the CGST Rules, 2017. Thereafter, by an interim order, the Hon’ble Court observed that the assessee could approach the Tax Officer for release of goods. In the meantime, the Tax Officer issued three separate show-cause notices, proposing to confiscate the goods and the conveyances and levied penalty under section 130 of the Customs Act, 1962. The notices specified, apart from tax and penalty, the quantum to be paid as fine in lieu of confiscation of the goods. Another writ petition was filed, alleging that the goods were not liable for confiscation and that perishable goods cannot be detained indefinitely. It was claimed that the goods were liable to be released on a provisional basis, upon execution of a bond or a bank guarantee. Again, the Hon’ble Court directed the Tax Officer to release the goods in favour of the assessee, on payment of the amounts contemplated under section 130(2) of the Act. Then the review petition was filed by the State Tax Officer contending that the discretion rests upon the Tax Officer to pass an order of confiscation immediately or later, depending upon the circumstances and it is only thereafter that the goods could be released.

By going through submissions of both sides, the Hon’ble Court held that the provisions of section 130 of the Act contemplates release of goods on payment of fine in lieu of confiscation at two stages (i) during the process of adjudication, under section 130(2) and, (ii) post-adjudication under section 130(3) of the Act. Moreover, at the time of release of goods under section 130(2) of the Act, the owner of the goods is required to pay the fine in lieu of confiscation alone, while penalty tax and other charges can be paid after adjudication and the basis for calculating the fine in lieu of confiscation under section 130 of the Act is only the market value as defined under section 2(73) of the Act and not the maximum retail price.


Saiher Supply Chain Consulting Pvt. Ltd.


Union of India


WRIT PETITION (L.) NO. 1275 OF 2021

Date of Order/Decision: 10.01.2022

Refund Application – Exclusion of period due to COVID pandemic – Rejection of time barred refund application – Circular No. 20/16/04/18-GST dated 18.11.2019 – Section 54(1) of CGST Act, 2017 – exclusion of period 15th March 2020 and 2nd October 2021 –period condoned – Supreme Court order dated 23.09.2021 – Refund Application allowed – Section 54 of CGST Act, 2017.

In this case, petitioner had filed two refund applications which were rejected in view of some discrepancies. The Petitioner thereafter filed third refund application which was however rejected by the Respondent by Order on the ground that the said application was time barred. The Petitioner filed the Writ Petition praying for restoration of the third refund application and for various other reliefs. Petitioner contended that the third refund application, which was required to be filed within two years in accordance with the Circular No. 20/16/04/18-GST dated 18.11.2019, u/s 54(1) of the CGST Act, 2017. The limitation period fell between 15th March 2020 and 2nd October 2021, which period was excluded by the Hon’ble Supreme Court in all such proceedings irrespective of the limitation prescribed under the general law or Special Law whether condonable or not till further Order/s to be passed by the Hon’ble Supreme Court in those proceedings. The Hon’ble Supreme Court by Order dated 23rd September 2021 in Misc. Application No. 665 of 2021 issued further directions that in computing the period of limitation in any Suit, Appeal, Application and or proceedings, the period from 15th March 2020 till 2nd October 2021 shall stand excluded. Consequently the balance period of limitation remaining as on 15th March 2021, if any shall become available with effect from 3rd October 2021.

In view of above, the Hon’ble court held that the Respondent is also bound by the said Order dated 23rd March 2020 and the Order dated 23rd September 2021 and is required to exclude the period of limitation falling during the said period. The third refund application filed by the Petitioner thus was within the period of limitation.


Aditya Energy Holdings


Directorate General of GST Intelligence


WP.No.9654 of 2021


WMP.No.10223 of 2021

Date of Order/Decision: 10.12.2021

Refund of amount recovered during investigation – Treatment of such amount paid in the course of investigation – petitioner contended that amount paid under coercion – Section 54(1) of CGST Act, 2017 – Amount paid to be treated as “under protest” and is subject to the final appropriation – Section 73 & 74 of CGST Act, 2017 – photo copies of seized documents to be Returned – Case Disposed of.

Petitioner filed this Writ petition claiming the refund of the amount paid by the petitioner during the course of investigation regarding the alleged wrong availment of Input Tax Credit. Petitioner contended that the said amount was paid under coercion. Whereas, Respondent opposed the same with the contentions that the ITC was wrongly availed and summons were also issued to the petitioner, Mahazar was drawn and Seizure Memo was also issued to the petitioner on the same date, the petitioner also appeared to have sent a representation.

Hon’ble Court held that the amount paid by the petitioner shall be treated as amount paid by the petitioner “under protest” and would be subject to the final appropriation in the proceedings to be initiated under Sections 73 / 74 of CGST Act, 2017. Hence, the Writ Petition disposed off with directions to the proper officers concerned to complete the investigation and to return the photo copies of the seized documents and in original which were not required. The respondent shall clearly spell out the reasons and give details of the Relied Upon Documents based on which the demand is proposed to be made against the petitioner.


Some of us may argue that transfer of software is a “supply of goods” and others may treat it as “supply of service”. Can such transfer of software be considered as supply of goods in one situation and “supply of services” in another? Efforts have been made in this article to bring clarity on this.

Can a Software Programme be termed as “Goods” under GST Law?

Let us understand the above mentioned question having regard to the rate of GST.

  1. Notification No. 1/2017-IT (Rate), read with Notification No. 1/2017-C.T. (Rate), if pre-developed or pre designed software is supplied in any medium / storage (commonly) brought off-the-shelf) or made available through the use of encryption keys, the same is treated as a “supply of goods” classifiable under the Heading 8523 of the above notification and tax shall be charged at the rate of 18%.

  2. Notification No. 17/2017-C.T.(Rate) read with notification no. 8/2017-IT (Rate), “supply of services” of the description as specified hereunder, falling under heading 9973, shall be levied at the rates specified below:

    1. Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology Software – tax rate @ 12%.

    2. Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology Software tax rate @ 12%.

Information Technology Software:

  1. Let us understand the meaning of Information Technology Software. It means any representation of instructions, data, sound or image, including software code and object code, recorded in a machine readable form and capable of being manipulated or providing inter activity to a user by means of a computer or an automatic data processing machine or any other device or equipment – para 4, explanation (v) of Notification No. 11/2017-CT (Rate) and No. 8/2017-IT (Rate) both dated 28-6-2017 effective from 1-7-2017.

  2. The term “Intellectual Property Rights (IPR)” has not been defined in GST Law, M.F. (D.R.) Circular No. 82/8/2004-TRO dated 10-9-2004 states as follows:

“Intellectual property emerges from application of intellect which may be in the form of an invention, design, product, process, technology, book, goodwill etc. legislation in India are made in respect of Intellectual Property Rights (IPRs) such as patients, designs, trademarks and copyrights.

Can the Software be treated as “Goods” or “Services” in GST?

A software is an intellectual property having value. GST law does not recognize or make distinction between tangible and intangible property. Under GST law, the definition of “goods” makes it clear that all property whether tangible or intangible capable of being moved would fall within the definition of goods. Goods has following attributes: (a) utility (b) capable of being bought and sold (c) capable of being sold, transferred, delivered, stored and possessed.

If a software whether customised or non-customised satisfies the attributes mentioned above, the same could be treated as “Goods”. It is very essential for an article to be termed as “Goods”, it is its marketability.

It is important to note that when a person purchases a software programme especially canned software implanted in some tangible medium,, he does not become owner of such software programme, but only a license holder, i.e., he is not entitled to use, enjoy the software embedded in the said media, he cannot use of its own will.

Refer: Tata Consultancy Services Vs. State of Andhra Pradesh (2004) 178 ELT 22 (SC). The said judgment is discussed below:

Tata Consultancy Services v. State of Andhra Pradesh

Appellant provided consultancy services including computer consultancy services. They used to prepare and load on un-canned software and also cell canned software. Appellants were licensees with permission to such license these packages to others.

The software is classified into two parts, namely canned software and customized software. Canned software means a software that is designed and created for sale to more than one person and is designed in such a way that large number of people can use its on a variety of hardware and it is also called “Packaged Software” or “Normal Software” or “Branded Software”. On the other hand, customized software means the software created for a single person or a specific customer to meet the specific requirement and it is also called as “Tailor made Software” or “Specific Software (Refer: Infotech Software Dealers Vs. Uol). The Commercial Tax Officer, Hyderabad, passed a provisional order of assessment under the provisions of Andhra Pradesh General Sales Tax Act, 1957 holding that the software was goods.

The question that was raised in this appeal was whether the canned software sold by the Appellant could be termed to be “goods” and as such assessable to sales tax under the said Act.

Arguments of the Appellant:

Appellant submitted before the Hon’ble Court that the term “Goods” defined in Section 2(h) of the Act include tangible moveable property and the words “all materials, articles and commodities also cover only tangible moveable property”.

The said Act defined as “Canned Software” as under:

“Canned Software” means that is not specifically created for a particular consumer. The sale or lease of, or granting a license to use, canned software is not automatic data processing and computer services, but is a sale of tangible personal property. When a Vendor, in a single transaction, sells canned software that has been modified or customized for that particular consumer, the transaction will be considered the sale of tangible personal property, if the charge for modification constitutes no more than half of the price of the sale.

The matter came before Supreme Court – The observations of Hon’ble Supreme Court – The following issue was Hon’ble Supreme Court. Whether or not a software programme (which by its very nature is incorporated and intangible) which had become an inextricable part of the disc would fall within the definition of the terms “Goods” so as to attract AP sales tax?

Hon’ble Supreme Court observed that we are not concerned with a programme which is not a part of the disk but a programme contained in a disk.

Observations by S.N. Variava J

The term “goods” as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of moveable properties, whether tangible or intangible. Hon’ble Court was in agreement with the observations made the Court in Associated Cement Companies Ltd. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marked, it becomes goods which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of paintings) or computer discs or cassettes, and marked would become “goods”, we see no difference between a sale of software programme on a CD/floppy disc from a sale of music on a cassette / CD or sale of film on a video cassette in all such cases, the intellectual property has been incorporated on a media for the purposes of transfer sale is not just of the media which by itself has very little value. The software and media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music of films, the buyer is purchasing the intellectual property and not the media, i.e., the paper or cassette or disc or CD. Thus, a transaction sale of computer software is clearly a sale of “goods” within the meaning of the term as defined in the said Act. The term “all materials, articles and commodities” includes both tangible and intangible / incorporated property which is capable of obstruction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.

Observations by J.S.B. Sinha

The definition of “goods” in sale of Goods Act is also of wide import which means every kind of moveable property. Property has been defined therein to mean the general property in goods and not merely a special property. It is not much in dispute that “goods” would comprehend tangible and intangible properties, materials, commodities. If a distinction is sought to be made between tangible and intangible properties, materials, commodities and articles and also compared and in compared materials, the definition of goods will have to be re written of comprising tangible goods only which is impermissible. This Court, therefore, will have to confine itself to the question as to whether the concerned software would come within the purview of “goods”. In the constitution, goods as such is not defined. An expansive definition with the said expression has been given which is indicated by the expression “includes” such an expression is also of wide amplitude. It is true that Court found that Computer Software. It is true that in compuserve, Inc (supra), the Court found that the computer software developed by the Appellants therein was intangible property, but a perusal of the said judgment shows the other views of the other Courts were noticed therein wherein computer software was held to be a tangible property on the ground that the computer programmes was coded on a tangible medium such as a computer tape.

The definition of goods in the said Act does not merely include personal chattels but all articles, commodities and materials. The definition of goods in the said Act was wider in term than in the sale of Goods Act, 1979 and the supply of Goods and Services Act, 1982. Furthermore, here, we are not concerned with a programme which is not a part of the disk but programme but programmed contained in the disk.

A software may be intellectual property but such personal intellectual property contained in a medium is bought and sold. It is an article of value. It is sold in various forms like floppies, disks, CD-ROMs, punch cards, magnetic tapes etc. Each one of the mediums in which the intellectual property is contained is a marketable commodity. They are visible to senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regards leviability of tax under the fiscal statute, it may not make a difference. A programme containing instructions in computer language is subject matter of a license. It has its value to the buyer. It is useful to the person who intends to use the hardware, viz., the computer in an effective manner so as to enable him to obtain the desired results.

Hon’ble Supreme Court made the observations that in situations where a software programmes through electronic medium / internet satisfies the prerequisites / attributes of goods which are:

  1. Its utility;

  2. Capable of being bought and sold, and

  3. Capable of transmitted, transferred, delivered, stored and possessed on the point of determination of “Goods” and therefore, such supply should be treated as “supply of goods” instead of “supply of services”. However, at this juncture, it is important to advert to Schedule II of the CGST Act which classifies certain activities or transactions as “supply of goods” or “supply of services”. As per para 5(c) of the Schedule II of the CGST Act, following two activities relating to “Intellectual Property Rights (“IPR”) shall be taxable as “supply of service”.

    1. Temporary transfer of IPR by the owner or such IPR to any person for a consideration, or

    2. Permitting the use or enjoyment of any IPR by the owner of such IPR to any person for a consideration.

Moreover, as per para 5(d) of the Schedule II “Development, Design, Programming, Customisation, Adoption, Upgradation, Enhancement or Implementation of Information Technology software shall be treated as “supply of services”.

Therefore, from the above discussion, following conclusions may safely be drawn.

  1. Supply of canned software (which invariably contains EULA through electronic medium / internet would always be treated as “supply of service” as per Schedule II, para 5 (c).

  2. Supply of canned software (which invariably contains EULA) through tangible medium like CD/DVD/ Pen Drive might be treated as “Supply of Goods” as per decision of the Hon’ble Supreme Court in TCS v. SOAP. Interestingly, though the CGST Act defines development of software as “Service” software in physical form (branded as well as trailor made), “Information Technology Software” is goods in Customs Tariff Act under heading 8523 80 20.

  3. Supply of customized software through any medium would be treated as “Supply of Services” as per Schedule II, para 5(d). However, supply of software which is not designed and developed specific to any customer and sold without any customization, qualifies as “Supply of Computer Software as Goods” classifiable under Heading 8523 (refer in 2020 (36) G.S.T.L. 411 (AAR GST – Kar.)/[2020] 118 Taxmann.com 98 (AAR Karnataka).

It would be worthwhile to note the following:

  1. Temporary or permanent transfer of IPR falls in service classification under Section 7 of the Act and Heading 9973, which covers renting and leasing services.

  2. Software in physical form is “goods” and has classification in GST Tariff Heading 8523 80 20. Software, service in non-physical form comes under service group 9973, licensing services for right to use computer software and data bases falls under service tariff 997331.

  3. Permission to allow brand name would be classified as “supply of services” as “Intellectual Property Service” to licensee / manufacturer and brand owner will be liable to pay service tax (now GST). C.B.E. & Co. Letter No. 249/1/2006-CX-4 dated 27th October, 2008 (20 STT 16 (St.) (Clarification in respect of alcoholic liquor, but principle applies in all cases. Refer Hero Honda Motors v. CST 21 Taxmann.com 117 = 2012 (27) S.T.R. 409 (Tribunal).

  4. Temporary or permanent transfer or permitting use or enjoyment of Intellectual Property Rights (IPR) in respect of goods (other than software) falls under service heading 9973, whereas, temporary or permanent transfer or permitting use or enjoyment of Intellectual Property Rights (IPR) in respect of software falls under service group 99733.

Temporary Transfer of IPR (other than software) is service. The GST rate of 12% (6% CGST and 6% SGST/UTGST) or 12% IGST. Permanent transfer of IPR (other than software) is “goods” and GST rate is 12% (6% CGST plus 6% CGST / UTGST) or 12% IGST. The HSN classification is “Any chapter Sr. No. 243 of Schedule II of Notification No. 1/2017 – CT (Rate) both dated 28th June, 2017 inserted with effect from 15th November, 2017.

However, Temporary or permanent transfer of IPR of software or permitting the use or enjoyment of IPR in respect of Information Technology software is service. The GST rate is 18% or 18% IGST vide Sr. No. 17(ii) of Notification No. 11/2017-C.T. (Rate) and No. 8/2017 I.T. (Rate) both dated 28th June, 2017.


The above mentioned law relating to transfer of software programme is complicated and unfriendly for the taxpayers. It will affect adversely the liquidity of taxpayers to the extent of restrictions and obstacles.

Interplay between ‘Income from House Property’ and ‘Profits and gains from Business and Profession’

Many disputes arise between the taxpayers and the Income-tax department as to whether rental income from house property should be assessed under the head “Income from House Property” (HP) or under the head “Profits and Gains from Business or Profession” (PGBP)? The dividing line is very thin, and the courts have also taken different views on seemingly similar facts. It is said that none of the heads of income under the Act can be treated as general or specific for the purpose of any one source of income. These heads are mutually exclusive. Where an item of income falls specifically under one head, the same is to be charged under that head and no other. However, for assessment purposes, decision about the head under which rental income is to be assessed, is to be taken.

Income from rental property has different connotations depending on whether it is treated as house property or business income –

  • Rental income from a property could be treated as income from House Property and/or income from Business and Profession.

  • If the property income is declared as business income, then the owner can claim a tax deduction on actual expenses.

  • Property income is considered as income from house property if the property is not used by the owner for business or professional purposes.

An individual would prefer to show rent as business income, which allows her/him to deduct all the expenses incurred to maintain the property, claim depreciation and not pay notional rent when the property is not let out. Whereas, Taxability as House Property provides a standard deduction which is limited to 30% of the income along with a deduction on interest paid on borrowed capital for the purposes of acquisition, construction, repair, reconstruction, (subject to limitations provided under the Act).

Taxpayers will always go to option of including rental income as business income which will in turn mean revenue loss for the government. The IT department, therefore, scrutinises every such case in detail to dissuade taxpayers from claiming it as business income.

The disputes also occur as the IT Act doesn’t provide definite guidelines on the treatment of rent.

On a plain reading of section 22 of the Income Tax Act, though it mentions income from house property as a heading, the section goes on to mention ‘’property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner’’. Thus, creating ambiguity on the nature of property, which should be considered for offering rental income under the head Income from House Property.

Further, according to the tax authorities the deciding factor is not the ownership of the land or leases, but the nature of the activity of the taxpayer and the nature of the operations in relation to the same. Further, the Apex/Supreme court (SC) has emphasised that for income to be characterised as business income, the activities actually carried out by the taxpayer need to be in line with its main object, according to its constitution documents.

As there are no limits or restrictions on deductions under the head PGBP, taxpayers are attracted towards classifying rental income received from lease of immovable property as PGBP. Obviously, this requires the support of facts in every case.

According to section 50 of Income tax act if an assessee has sold a capital asset forming part of block of assets (business purpose) (building, machinery etc) on which the depreciation has been allowed under Income Tax Act, the income arising from such capital asset on transfer/sale is treated as short term. Further, Section 54, 54EC & 54F talks about the capital gain arising on transfer of long-term capital assets and one may note that depreciable assets if held for a period of more than 24/36 months becomes a long-term capital asset. Section 54/54EC/54F are an independent sections & don’t make any distinction between Depreciable assets vis a vis Non-Depreciable Assets. Section 50 does not have an overriding effect over the said sections. All the Sections (54/54EC/54F) have an application where long-term capital asset is transferred. Therefore, capital gain received by an assessee on the transfer of a depreciable asset (if all other necessary conditions mentioned u/s 54EC/54F are complied with by the assessee) is eligible for the benefit under the relevant section.

The tax authorities, on the other hand, argue that rental income should be chargeable to tax as HP Income, perhaps the ease (and limitation) of deductions under HP being the driving force.

Further, if any assessee has a loss from house property, the same can be adjusted and carry forwarded under the Income Tax Act as under:

  1. Inter-source adjustment (section 70):Any loss from house property can be set-off from income of other house property. It is also called as intra-head adjustment.

  2. Inter head adjustment (section 71):The unadjusted loss can be set-off against income under any other head during the current year (no loss can be set-off against winning from lotteries, races, etc.). The assessee can set off such loss from house property up to a maximum of 2,00,000 only.

  3. Carry Forward and Set off (section 71B): Loss from house property can be carried forward for a maximum period of 8 years for set-off against income from house property.

The trend of judicial precedents and directions released by the Central Board of Direct Taxes (CBDT) reveal that the authorities are now accepting that ownership of property and leasing it out may also be done as part of a business, apart from as a mere owner. As recently as April 2017, the CBDT issued a circular, wherein it has been clarified that the income from letting out of premises or developed space along with other facilities in an industrial park or SEZ is to be charged to tax under the head PGBP and has guided the department in not filing any appeals on this issue and to withdraw or not press upon appeals already filed.

Some of these judicial precedents and directions are as follows:

1) Chennai Properties & Investments Ltd v. CIT.- [2015] 373 ITR 673 (SC) – Business Income/ PGBP

Wherein it has been held that where in terms of memorandum of association, main object of assessee-company was to acquire properties and earn income by letting out same, said income was to be brought to tax as business income and not as income from house property.

2) Rayala Corporation Pvt. Ltd v. ACIT. [2016] 386 ITR 500 (SC)- Business Income/ PGBP

Resolves business income vs house property controversy on lease-rentals in assessee’s favour:

SC reverses Madras High Court (HC) judgement and holds that rental income arising to assessee from leasing property taxable as ‘business income’ and not ‘house property’ income, notes that assessee has only one business of leasing its property. SC rules that ‘’The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income’’; SC accepts assessee’s reliance on ruling in Chennai Properties & Investments Ltd wherein the Apex Court had held that rental income received by assessee having a business of renting the property, shall be taxed as business income. Also rejects Revenue’s reliance on Apex Court ruling in G. Mercantile Corpn. (P) Ltd.

3) National Storage (P.) Ltd 1967] 66 ITR 596 (SC) – Business Income/PGBP

Income earned through letting of vaults for business purpose, taxable as business income SC concludes income earned through letting of vaults for business purpose, taxable as business income and not house property.

4) Pr. CIT v. Classique Associates Ltd- ITA No 1216 of 2016- Bombay High Court- Business Income/PGBP

Assessee is a partnership firm and is engaged in the business of development of real estate and had earned an amount of Rs.1.51 crores (rounded off) by leasing out certain flats and treated such income as the business, which was held as income from house property by assessing officer. On appeal HC relying on Commissioner of Income-tax v. Neha Builders (P.) Ltd. reported in 2008 (296) ITR 661 and of the Supreme Court in the case of Chennai Properties and Investments Ltd. v. Commissioner of Income-Tax, reported in [2015] 377 ITR 673 concluded that income generated from such source was assessee’s business income and not the assessee’s house property.

5) Keyaram Hotels P Ltd [2015] 235 Taxman 512 (SC)- Income from House property

Dismissed taxpayer’s SLP against HC-ruling holding property leasing as house property income

SC dismissed assessee’s SLP against Madras HC judgement, wherein HC had held that rental income derived from leasing of commercial property was taxable as ‘income from house property; Revenue had assessed the rental income under the head of income from house property on the ground that assessee was not engaged in any business activity; HC had applied the ratio laid down by SC in East India Housing and Land Development Trust Ltd wherein it was held that where the owner of the property exploited the property by leasing out the same and realised income byway of rent, the same was to be assessed under the head ‘Income from house property’ and not as business income; HC had also referred to principles laid down by SC in Universal Plast Ltd., Guntur Merchants Cotton Press Co. Ltd; Thus, applying SC decision in East India Housing to the facts established by the AO that assessee was not engaged in any business activity, HC had ruled that income received from letting out of the property was assessable as ‘income from house property’ and not business income

6) Shambhu Investments Pvt Ltd v. CIT- [2003] 263 ITR 143 (SC)- Income from House property

Prime object of assessee under an agreement was to let out portion of a said property to various occupants by giving them additional right of using furniture and fixtures and other common facilities for which rent was being paid month by month in addition to security free advance covering entire cost of said immovable property High Court held that it would be wrong to say that assessee was exploiting property for its commercial business activities and such business activities were primary motto and letting out property was secondary one and from agreement between two parties, it was clear that primary object was to let out portion of said property with additional right of using furniture and fixtures and other common facilities for which rent was being charged from month to month and, therefore, income derived from said property was income from property which should be assessed as such.

7) Ansal Housing & Construction Ltd v. CIT-1- [2016] 243 Taxman 144 (SC) – Income from House property- (held by HC)

Assessee’s SLP against the order by Delhi HC has been admitted by the SC vide order dated September 19, 2016. Final SC order pending

HC allowed Revenue’s appeal challenging ITAT order for AY 1994-95 and held that assessee was engaged in business of construction of house property and many flats were lying unsold. Thus, provisions of sections 22 and 23 would be applicable and assessee would be liable to pay tax on annual letting value of unsold flats as income from house property. Distinguishes assessee’s reliance on SC decision in Chennai Properties & Investments Ltd. as the main object of assessee therein was holding the properties and earning income by letting out properties. as against assessee’s case where letting out of properties wasn’t a part of its object

8) CIT 12 v. Sane & Doshi Enterprises- /[2017] 245 Taxman 128 (SC)- Income from House property- (held by HC)

SLP granted against High Court’s ruling that rental income received from unsold portion of property constructed by assessee, a real estate developer, is assessable as income from house property. Final SC order pending.

HC had held that rental income received from unsold portion of property constructed by assessee, a real estate developer, is assessable as income from house property and not business and once it is held that income is derived from property, treatment given in books of account as stock-in-trade would not alter character or nature of income.

9) CIT v. Gundecha Builders [2019] 102 taxmann.com 27 (Bom.)- Income from House property

The honourable HC took note of the fact that the respondent-assessee was engaged in the business of developing real estate projects and letting out of property was not the business of the assessee. The honourable Court did not agree with the contentions of the revenue that the issue stood resolved in favour of revenue by the judgments of the Supreme Court in cases of Chennai Properties & Investments Ltd. (supra) and Rayala Corporation (P.) Ltd. (supra) as the Supreme Court ruling in both these cases was on a different footing. Accordingly, the High Court distinguished both these cases with the present case.

Therefore, the Court dismissed the appeal of the revenue and decided that the assessee had correctly shown its income from letting out of property under the head income from house property as the same did not pertain to its regular business.

Cases on Composite Contracts

  • Leasing of shops in a mall along with various other facilities held as assessable as business incomeand not as income from house property held in PCIT v. Krome Planet Interiors (P.) Ltd. (2019) 265 Taxman 308 (Bom) (HC)

  • Leasing the hotel and charging one percentage of total revenue held as assessable as business incomeand not as income from house property, held in CIT v. Plaza Hotels (P.) Ltd. (2019) 107 taxmann.com 287/265 Taxman 90 (Bom.)(HC)

Further, SLP of revenue is dismissed, CIT v. Plaza Hotels (P.) Ltd. (2019) 265 Taxman 89 (SC)

  • Exploitation of property commercially by way of complex commercial activities. Held rental income earned is to be taxable as income from businessand not as Income from House Property. Held in PCIT v. City Centre Mall Nashik Pvt. Ltd (Bom)(HC)- [2020] 424 ITR 85 [Bom HC]

Question raised before the HC is “Whether, on the facts and in the circumstance of the case and in law, the Hon’ble Tribunal was justified in holding that the assessee had exploited its property commercially by way of complex commercial activities and hence, the rental income received by the assessee to be taxable as income from business and not under the head “Income from House Property’ ?” The Honourable Court considered the object clause of the company and various services provided such as marketing and promotional activities and also organising various events and programs. The Intention of the Assessee is also a material circumstance and the objects of Association, the kind of services rendered clearly point out that the Income is from Business. All the factors cumulatively taken demonstrate that the assessee had intended to enter into a Business of renting out commercial space to interested parties.

Key Take away:

The principle of law that can be derived not only from the judgment of the Mumbai High Court but also from the judgments of the Supreme Court cited above, the determining factor of treatment of a rental income under appropriate head of Income Tax law, is the real intent and main object of business/nature of trading operations of the assessee. Where it is difficult to assess the real intent behind earning a rental income, regard must be had towards the nature of trading operations or main objects of business.

Over time and after many cases, certain key principles have emerged as cornerstones or templates for characterisation of rental income.

Some of the salient principles are as follows:

  1. Intent of the taxpayer– this intention can be gathered from the agreement for lease, Memorandum of Association and subsequent conduct of the parties.

  2. Active ownership of property– if a property yields rental income by virtue of its own legal existence it would be classified as passive ownership and may be classified as income from house property.

  3. Documents available with the taxpayer– which could further provide the main object of the assessee. The activities carried out by the taxpayer should be in line with the constitution documents.

  4. Nomenclature given– The dividing line, whether rental income from house property should be assessed under the head business or under the head “house property”, is very thin. The issue should be decided in the facts and circumstances of each case and on the basis of intention of the party. The nomenclature given to the said income is irrelevant.

  5. Regular Income or Occasional Income– Where earning income by way of letting out properties does not constitute main business of the assessee and such income is earned only under occasional circumstances, it is taxable under the head ‘income from house property’. On the other hand, if facts and circumstances of the case indicate that letting out of properties is part of main business of the assessee, such income should be treated as an income from business or profession and not under income from house property.

Thus, treatment of rental income would depend upon whether it is a regular income or merely occasional income.

To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, section 44ADA and section 44AE.

Meaning of presumptive taxation scheme

As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited. A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited. For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below:

  1. The presumptive taxation scheme of section 44AD.

  2. The presumptive taxation scheme of section 44ADA.

  3. The presumptive taxation scheme of section 44AE.

The Central Board of Direct Taxes (CBDT) explained the intention behind introducing the above provisions in Circular No. 684 dated 10 June 1994. As per the said circular, Reforms Committee chaired by Dr Raja J. Chelliah had also recommended gradual introduction of the Estimated Income Method in certain areas to facilitate better tax compliance. Accordingly, Section 44AD was inserted in the Income tax Act (Act) with a view to providing for a method of estimating income from the business of civil construction or supply of labour for civil construction work. This section was applicable to all the assessee whose gross receipts from the above mentioned business did not exceed INR 40 Lakhs. The income from such business was estimated @ 8% of the gross receipts paid or payable to the assessee. Further, Section 44AE provided for a method of estimating income from the business of plying, hiring or leasing trucks owned by a tax payer owning not more than 10 trucks.

Section 44AE was not applicable to the persons who did not own any truck but operated trucks taken on hire. It was clarified that all deductions under Sections 30 to 38 including depreciation, would be deemed to have been already allowed and no further deduction would be allowed under both these sections. The written down value would be calculated, where necessary, as if depreciation as applicable had been allowed. It was further clarified that in the case of firms, the deduction for salary and interest to partners to the extent permissible under clause (b) of section 40 would be allowed. However, originally in both the Sections such deduction to firms was not clearly provided for. Therefore, a proviso to sub-section (2) of Section 44AD and to sub-Section (3) of Section 44AE was inserted by the Finance Act, 1997 with effect from April 1, 1994 to provide that in case of firm, the deduction on account of salary and interest paid to partners would be allowed, subject to conditions and limits specified in clause (b) of Section 40. Schemes under both the Section 44AD and 44AE were optional.

Thereafter, the Section 44AD was amended by the Finance (No. 2) Act, 2009 from Assessment Year 2011-12, which provided applicability of this section to “eligible assessee” and for “eligible business”. The Finance Act, 2016 introduced a new Section 44ADA incorporating a similar scheme for presumptive taxation of professionals from Assessment Year 2017-18. Section 44ADA is applicable to a person who is a resident of India and having income from profession referred in section 44AA(1) viz., legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration and any other profession as notified by the CBDT; and the gross receipts on account of such profession do not exceed INR 50 lakhs. Once the above said conditions are satisfied, the assessee has an option to declare either 50% or more of the gross receipts as income from such profession. While arriving at such presumed income it would be deemed that all deductions under the provisions of Sections 30 to 38 have been given effect to and the written down value of the assets used for the purposes of such profession would be deemed to be calculated as if the person would have claimed depreciation.

Disallowance for personal purposes u/s. 38 is highlighted in SHRI RAM KARAN YADAV VERSUS ITO – 2018 (9) TMI 1090 – ITAT JAIPUR and Unabsorbed depreciation loss u/s. 32(2) in DCIT VERSUS SUNIL M. KANKARIYA – 2007 (1) TMI 242 – ITAT PUNE-B

However, if the person claims his income from profession to be lower than 50% of the gross receipts from such profession and whose total income exceeds the maximum amount not chargeable to income-tax then the person has to maintain the required/specified books of account, documents and get the accounts audited as per the provisions of the Section 44AB i.e. obtain a report in Form 3CA or 3CB along with the Form 3CD, as the case may be.

Certain Issues

1) Deduction of partners’ remuneration and interest

With effect from Assessment Year 2017-18, second proviso to sub-section 2 of Section 44AD has been omitted which provided for deduction under Section 40(b) with regard to the salary and interest to partners. Therefore, the issue would arise is whether a deduction under section 40(b) with regard to the salary and interest of partners can be claimed. The CBDT vide its Circular no. 684 dated 10 June 1994 while explaining the scope of Sections 44AD and 44AE stated that the deduction under section 40(b) of partners’ salary and interest would be allowed from the income computed on the presumptive basis.

However, later the CBDT issued another Circular No. 737 dated 23 February 1996 holding that Circular No. 684 dated 10 June 1994 was erroneous to the extend it allowed deduction under section 40(b) and deleted the relevant portion of the earlier circular with retrospective effect from 1994. This gave rise to wide spread litigations but the controversy was laid to rest by the Finance Act, 1997 which inserted the proviso in Sections 44AD and 44AE specifically providing for deduction under section 40(b) with retrospective effect from Assessment Year 1994-95. The High Courts [Goswami & Bros v. UOI (250 ITR 359) (Raj) and Ranjan Constructions & Ors v.CBDT (232 ITR 76) (Ori)] struck down the CBDT Circular No. 737 dated 23 February 1996 in light of the said amendment.

Section 44ADA does not contain the provision similar to that of Sections 44AD and 44AE extending the deduction under Section 40(b) and more over the Finance Act, 2016 has omitted the said proviso from section 44AD though not from section 44AE. This would give rise to fresh round of litigation. It would be open for an assessee to argue that only deductions under Sections 30 to 38 have been specifically deemed to have been allowed but not under other sections and hence, the deduction of partners’ salary and interest under section 40(b) is to be allowed.

Applicability of Section 44ADA to a partner of firm receiving remuneration and/or interest from the firm. What will happen in case of partner of a professional firm who receives remuneration in the form of salary and interest from the firm. Such receipts would normally be taxed as professional income by virtue of Section 28(v) and therefore, the issue that would arise for consideration is whether such a partner can opt for the presumptive scheme under Section 44ADA. In this connection, attention is invited to the decisions of Kolkata bench of the Income Tax Appellate Tribunal in the case of Amal Ganguli v. DCIT (ITA No. 2135/Kol/2008) and Sagar Dutta v. DCIT (ITA No. 692/Kol/2012) wherein it was held that a partner would be liable to tax audit under Section 44AB if his salary from the partnership firm exceeds the threshold limit prescribed under Section 44AB. In the case of Amal Ganguli, the Tribunal observed that partner is carrying out his profession as a partner of the firm though not individually. Further, it held that if the salary, commission, bonus or interest received by a partner of the firm exceeds the limit prescribed for tax audit then the partner has to comply with the tax audit provisions in his individual capacity also. This implies that where a person is carrying out his professional as a partner of a firm, he satisfies the condition laid out in Section 44ADA of being ‘engaged in a profession referred to in Section 44AA(i) and once the salary and interest are taxed as income from profession, all other sections of Chapter IV-D – “Profits and gains of business or profession” would apply to such income. Consequently, the provisions of Section 44ADA should also be applicable to the partner of a professional firm. It can be contended that in case of a partnership, salary, bonus, interest etc. are nothing but profits of the firm provided to the partner on different accounts implying that taxation of salary, interest in the hands of the partner is nothing but extension of taxation of profits of the firm in different hands.

However, if this argument holds good, then the effect of, disallowances as a consequence of non-observation of TDS and TCS provisions, disallowance of cash payments and allowability of government taxes/duties, employee welfare fund contributions etc. on cash/ payment basis, also need to be given effect to. In other words, the income from profession would be 50% of the gross receipts which would be further increased or decreased as per the provisions of Sections 40, 40A(Disallowance u/s 40A(3) highlighted in case of BV. PRABHU VERSUS INCOME TAX OFFICER – 2010 (1) TMI 882 -ITAT, BANGALORE and 40(a)(i)(a) in case of JAHARLAL MUKHERJEE VERSUS I.T.O., WARD-29 (1), KOLKATA), 41, 43A, 43B (GOOD LUCK KINETIC VERSUS ITO, WARD-2, MARGAO – 2015 (6) TMI 648 – ITAT PANAJI) and 43C, the resultant amount would be the income from such profession.

In RM. Chidambaram Pillai (1977 AIR 489) (SC), it was held that a firm is not a ‘legal person’, though it has some attributes of a personality. In Income-tax law, a firm is a unit of assessment, by special provisions, but is not a full person. Thus, salary to a partner may be considered as only share of profit under a different name. In view of the above, partner receiving the remuneration in the form of salary or interest can be covered by the provisions of Section 44ADA, subject to fulfilment of other conditions. Reference can be made to MR. A. ANANDKUMAR VERSUS ACIT – 2019 (2) TMI 165 – ITAT Chennai

Addition made under Section 69 when income was offered under presumptive scheme of Section 44AD

The Income Tax Appellate Tribunal of Jaipur in the case of ITO v. Devi Singh Solanki (99 TTJ 890) in the context of addition made under Section 69 when income was offered under presumptive scheme of Section 44AD, it held that Section 44AD has limited overriding effect only over Sections 28 to 43C; but not over the other sections of the Act. Reference can also be made to CIT v. G. S. Tiwari & Co (41 Taxmann.com 17) (All). Hence, the argument put forward in the above para may not sustain.

2) Share of profits of a partner – Gross receipts for the purpose of Section 44ADA

One of the condition for applicability of Section 44ADA is that the ‘total gross receipts’ of the assessee engaged in the profession should not exceed INR 50 lakhs. Whereas Section 44AD provides ‘total turnover or gross receipts’. The words gross receipts or total turnover are not defined in the Act and therefore, one needs to understand their meaning under commercial parlance. The Guidance Note issued by the Institute of Chartered Accountants of India on “Tax Audit” clarifies that in case of gross receipts of the business it will include all receipts whether in cash or in kind arising from carrying on of the business and it specially provides that for the purposes of Section 44AB it would exclude partners share of profit which is exempt under section 10(2A). Though the said exclusion is provided for arriving at the gross receipts of the business; the same logic can be extended while arriving at the gross receipts of the profession. The Mumbai Bench of the Income Tax Appellate Tribunal in the case of ACIT v. India Magnum Fund (81 ITD 295) also held that in order to trigger the provisions of Section 44AB, there should be first computation of profits and gains of business or profession i.e. computation of total income as per Section 4. As the income exempt under Section 10 does not form part of the total income, such exempt income cannot be subjected to the provisions of Section 44AB. Consequently, one may argue that share of partners profit which is exempt under section 10(2A) would not be considered for the purposes of the gross receipts.

3) Maintenance of books of account

Section 44AA deals with maintenance of books of account. The books of account are not required to be maintained by assessees who opt to offer income under presumptive taxation. In other words, if the assessees intend to offer income lower than the specified percentage, then they are required to maintain the books of account. This is specifically provided in Section 44AA only with reference to those assessees who are covered by Sections 44AD and 44AE. However, Section 44AA is silent in relation to the assessees who are covered by Section 44ADA. This implies that the Section 44ADA overrides only Sections 28 to 43C and not Section 44AA and therefore, Revenue may take a stand that it is mandatory for the professional who is covered under Section 44ADA to maintain books of accounts though he has opted for the presumptive taxation scheme. Although, the Memorandum to the Finance Bill, 2016 provides that an assessee opting for Section 44ADA would not be required to maintain books of account under Section 44AA(1), the same has not been brought out clearly in the Section 44AA. One may rely upon the legislative intent put forth by the Memorandum to the Finance Bill and also the fact that without the exception to maintain books of account the very purpose of the presumptive taxation scheme would be defeated.

The Finance Act, 2016 further amended sub-section 4 of Section 44AD with effect from Assessment Year 2017-18 whereby if a person opts for the presumptive taxation scheme, he is also required to follow the same scheme for next 5 years. If he fails to do so, then presumptive taxation scheme will not be available to him for the next 5 years. For example, an assessee claims to be taxed on presumptive basis under Section 44AD for Assessment Years 2017-18, 2018-19 and 2019-20 and he offers income on the basis of the presumptive taxation scheme. However, for the Assessment Year 2020-21, he opts not to be governed by the presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of the presumptive taxation scheme for the next five Assessment Years, i.e. for Assessment Years 2021-22 to 2025-26. Further, he is required to keep and maintain books of account and he is also liable for tax audit as per Section 44AB from the Assessment Year in which he opts out from the presumptive taxation scheme. This would be irrespective of threshold limit of gross receipts prescribed under Section 44AB. Similar consequences of not following the presumptive taxation scheme continuously for 5 years are absent in the case of assessees who are covered by Section 44ADA.

Other Issues

  1. Can a professional declare his income equal to 50% of his gross receipts as per provisions of Section 44ADA “EVEN” if his actual income comes to, say 75% of his gross receipts after meeting all his expenses related to profession?

  2. Can the Department in future claim the difference of his investments and returned income as undisclosed income in later years?”


One of the views which was vehemently argued was that the assessing officer (AO) has no option but to accept the income declared as per benchmark set in the respective sections i.e. Sections 44AD, 44ADA, 44AE.

The Punjab and Haryana High court in Naresh Kumar v. CIT 393 ITR 389 has held cash deposited in bank is chargeable under section 69A as the assessee failed to link purchases and sales and the deposit of money in bank by the assessee returning income based on 44AF. So, it is incorrect to say that AO cannot take any action and apply section 69, 69A, 69C etc. It all will depend on facts of each case. Punjab and Haryana High court distinguished and overruled its own decision in CIT v. Surinder Pal Anand 48 DTR 135 in which cash deposited in bank was held from business itself. The provisions of presumptive taxation are enacted to facilitate computation of total income and filing of return of income. It does not give a license to the assessee to declare lower income despite the assessee having a higher income. The assessee is legally bound to return higher income if the same is higher than the benchmark given.

4) Whether actual profit declared must be higher as per books than presumptive

This can be highlighted with an example. Suppose Mr A is in trading business. His turnover is Rs 120 Lakhs, Commission income is Rs 2 Lakhs, Net Profit is Rs 15 Lakhs, and total income is 14 Lakhs and he files return for Rs 14 Lakhs. Is sec 44AD applicable as net profit is above 8%.

In this case since the assessee is receiving commission income, he is not eligible to claim benefit of Sec.44AD and 44AB(A) is applicable. Also as turnover exceed Rs 1 Cr. Audit also has to be carried out.

Income at the higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%. Income at a lower rate (i.e., less than 8%), can be declared. However, if assessee does so, and his income exceeds the basic exemption limit, then he will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.

With regards to sec 44AE, if the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can also be declared as per the wish of the assessee.

5) Whether the GST component will be calculated while calculating the Gross turnover for the applicability of the 44AD/44AE/44ADA?

This is a debatable and unending issue and no direct reference can be made to the judgment of the hon’ble courts and tribunals. Whether the GST component should be included while calculating the threshold limit of the 2 crores, reference can be made to the judgment of the hon’ble SC in case of the Chowranghee Sales Bureau Pvt Ltd back in the 1961 where the apex court has held the indirect tax component should be included while calculating the gross turnover or the sale receipts. Referring to the above judgment the SC has further provided the two judgments in case of the Jonnalla Narashimharao and co (1993) (SC 2000ITR 58) AND CIT v T. Naggi Reddy (1993) (1200 ITR 253) where the apex court has followed its own decision in case of the the Chowranghee Sales Bureau Pvt Ltd. Section 145A also provides the inclusive method while calculating the gross turnover and the sale receipts. However the said section limits itself to the computation of the income from the profits and gains from the business and profession. Thus keeping the view the literal interpretation the said section is restrictive in nature and cannot be applied while calculating the threshold limits in case of the applicability of the section 44AD limit of the 2 crores. Thus it is crystal clear while calculating the threshold limit of 2 crores the GST component will be excluded.

E.g. If an assesse has the turnover of the Rs 1.90 lakhs along with the GST component of the 20 Lakhs, now whether the GST component will not be included and assesse will be entitled to the benefit of the section 44AD. Another question that arises is whether the tax rate of the 8 percent or 6 percent as the case may be, will be applied to the GST component. Section 145A speaks that while calculating the turnover the said amount shall be adjusted to include the effect of the any taxed charged. Thus keeping in view the said section the turnover shall also include the GST component while calculating the 8 percent limit. However when one reads the section 44AD it starts with the non obstantate clause and reads as follows “Notwithstanding to the sections 28 to 44DB”. Accordingly it can be inferred that section 145A is not applicable to the section 44AD since the section 145A is itself applicable to the computation of the income in case of the profits from the business and profession. So the merit has to be given to the method of the accounting regularly employed by the assesse. Therefore of the books of the accounts are maintained on the exclusive basis then the GST will not be included or vice versa

6) Implications of deduction u/s 43B

A very interesting issue on the disallowance u/s 43B of the Income Tax Act,1961 has been considered by Panaji Tribunal in case of Good Luck Kinetic v. ITO (2015) 58. The Tribunal held that 44AD starts with “notwithstanding anything to the contrary contained in Sec. 28 to 43C” whereas section 43B starts with the words “notwithstanding anything contained in any other provisions of this Act”. The non-obstante clause in Sec. 43B has far wider amplitude. Hence, disallowance could be made by invoking the provisions of Sec. 43B.

This is because the said provisions u/s 28 to 43C are provisions relating to the computation of business income of the Assessee. However, a perusal of the provisions of Sec. 43B shows that the said provision is a “restriction” on the allowance of a particular expenditure representing statutory liability and such other expenses, claimed in the profit and loss account unless the same has been paid before the due date of filing the return. Further, the non-obstante clause in Sec. 43B has far wider amplitude because it uses the words “notwithstanding anything contained in any other provisions of this Act”. Therefore, even assuming that the deduction is permissible or the deduction is deemed to have been allowed under any other provisions of this Act, still the control placed by the provisions of Sec. 43B in respect of the statutory liabilities still holds precedence over such allowance. This is because the dues to the crown has no limitation and has precedence over all other allowances and claims. The disallowance made by the AO by invoking the provisions of Sec. 43B of the Act in respect of the statutory liabilities are in order even though the Assessee income has been offered and assessed under the provisions of Sec. 44AF of the Act. Therefore, considering the view held by the aforesaid Tribunal, addition/ disallowance can be made u/s 43B even though the income has been declared u/s 44AD, 44ADA or 44AE Example: Mr. X, having turnover of Rs. 70,00,000 declared profit at 8% amounting to Rs. 5,60,000. He has not deposited employer share of EPF of Rs.25,000 up to due date of return filing. Also, he has not paid bonus amounting to Rs.40,000 to his employees. Whether addition can be made u/s 43B if Mr. X opts for sec 44AD? Yes, addition can be made u/s 43B even if income is declared u/s 44AD. In this case the income will be assessed as:

Profits declared u/s 44AD

Rs. 5,60,000

Add:-Disallowances u/s 43 B


EPF not deposited up to due date of return filing

Rs. 25,000

Bonus not paid up to due date of return filing

Rs. 40,000

Assessed Income

Rs. 6,25,000

An important Issue X & Co. a partnership firm opts for Section 44AD during the Previous Year 2019-20 fails to pay interest of Rs.5 Lacs to the scheduled Bank. Assessing Officer while making the Assessment U/s 143(3) enhanced the assessment by Rs.4 Lacs by invoking the disallowances U/s 43B be a Non-Obstante Clause. The Firm paid such interest during the Previous Year 2020-21 & claim allowances of such Interest while filing the ROI. Assessing Officer disallows the Interest contending that Section 44AD(2) restricts the assessee claims of any expenditure U/s 30 to 38 & Interest Expenditure is governed as per Section 36. Comment on the action of the Assessing Officer. The Action of the Assessing Officer is not as per the law. Once the disallowances of interest were attracted U/s 43B the same will be allowed as per Section 43B itself. It means normally interest expenditure is allowed U/s 36 read with Section 43B on the payment basis if it is payable to the scheduled Bank. If Assessee fails to pay the interest then such interest will be disallowed as per Section 43B. Further, the proviso to Section 43B allows such expenditure during the Previous Year in which it is paid. Therefore, in the given case the Assessee firm is eligible to claim the Deduction of the Interest since such allowances are as per Section 43B & not as per Section 36. If Interest paid is further disallowed it will tantamount to Double Taxation. Additions can be made u/s 43B even if income is declared u/s 44AD.


Presumptive taxation is one way, though not the only way, by which the process of fiscal reform currently under way in the country may be further advanced. Another element to take into account in evaluating whether and how presumptive approaches should be used is that presumptions can involve the granting of a tax preference. Depending on how a presumption is determined and applied, it can result in a reduced burden for certain kinds of taxpayers. If the scope of the scheme is extended, a large set of the income earners may voluntarily opt for it, since fear of the taxman and lethargy in complying with the provisions of law will be reduced. Deterrent measures, such as penal interest, penalties and prosecutions, often have only a limited impact since they can be effective only if detection mechanisms are robust and implementation is unbiased. A presumptive scheme would in fact encourage greater compliance at all levels, thereby redirecting the policing efforts of the department. It will also lower litigation costs and reduce interest outflow for the government on account of refunds having to be issued in a vast majority of cases. The manner in which the scheme is devised will effectively reduce the interaction with the tax department and will create no ambiguity when it comes to determining the total income of the taxpayer opting for the scheme. The simplicity of the scheme would enable the taxman to instead focus his efforts in detecting cases of errant taxpayers who are outside the tax net altogether.


“Now, the tax system is turning faceless, but it promises fairness and fearlessness to the taxpayer. This will end the era of ‘jaan pehchan’ in getting tax scrutiny and notices settled” With these words of Prime Minister, Narendra Modi was introduced the Faceless Appeal Scheme in August, 2020.

However, the announcement of required change in the legislature which would allow to introduce such faceless scheme was brought into by Finance, act 2020. In the budget speech delivered by the Finance Minister, Mrs. Nirmala Sitharaman in 2020, reference was made to the proposal of enabling the conduct of appeal hearings in a faceless manner on similar lines as the faceless assessment. The relevant extract from the budget speech is reproduced below:

“Our government is committed to bringing in transformational changes so that maximum governance is provided with minimum government. In order to impart greater efficiency, transparency and accountability to the assessment process, a new faceless assessment scheme has already been introduced. Currently, most of the functions of the Income Tax Department starting from the filing of return, processing of returns, issuance of refunds and assessment are performed in the electronic mode without any human interface. In order to take the reforms initiated by the Department to the next level and to eliminate human interface, I propose to amend the Income Tax Act so as to enable Faceless appeal on the lines of Faceless assessment”.

Sub sections 6B, 6C and 6D are introduced by the Finance Bill, 2020. The Finance Bill, 2020 got assent from the President on 27th March 2020 and the proposed amendment in section 250 of the Act came to be made effective from 1st of April 2020. The same are reproduced as under:

“(6A) In every appeal, the Commissioner (Appeals), where it is possible, may hear and decide such appeal within a period of one year from the end of the financial year in which such appeal is filed before him under sub-section (1) of section 246A.

(6B) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of disposal of appeal by Commissioner (Appeals), so as to impart greater efficiency, transparency and accountability by—

  1. eliminating the interface between the Commissioner (Appeals) and the appellant in the course of appellate proceedings to the extent technologically feasible;

  2. optimising utilisation of the resources through economies of scale and functional specialisation;

  3. introducing an appellate system with dynamic jurisdiction in which appeal shall be disposed of by one or more Commissioner (Appeals).

(6C) The Central Government may, for the purposes of giving effect to the scheme made under sub-section (6B), by notification in the Official Gazette, direct that any of the provisions of this Act relating to jurisdiction and procedure for disposal of appeals by Commissioner (Appeals) shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification:

Provided that no direction shall be issued after the 31st day of March, 2022.

(6D) Every notification issued under sub-section (6B) and sub-section (6C) shall, as soon as may be after the notification is issued, be laid before each House of Parliament.”

The Hon’ble Prime Minister on August 13, 2020 launched the platform for Honouring the Honest where he announced three schemes to enable their mission, namely Faceless Assessment, Faceless Appeals and Tax Payer’s Charter. Under the powers given in section 250 (6B), National Faceless Appeal Scheme was introduced on 25-09-2020.

Following three notifications issued on 25th September, 2020 laid the foundation to faceless appeals:

  • Notification No. 77 empowered under section 250(6C) of the Act, the Central Government has issued directions that the provisions of sections 2(16A), 120, 129, 131, 133, 134, 136 and Chapter XX of the Act shall apply to the procedure in appeal per the scheme subject to the exceptions, modifications and adoptions as specified in the notification.

  • Notification No. 80 issued under sections 120(1) and 120(2) of the Act specified that authorities of the National Faceless Appeal Centre shall have their headquarters at Delhi. It also specified that who shall exercise the powers and perform functions to facilitate the conduct of Faceless Appeal Proceedings in respect of cases specified by the Board.

  • Notification No. 81 issued under sections 120(1) and 120(2) of the Act whereby Income-tax authorities of the Regional Faceless Appeal Centre have been specified. RFAC shall exercise the powers and perform functions to facilitate the conduct of Faceless Appeal proceedings in respect of cases specified by the Board.

Faceless Appeals are indeed a revolutionary and path-breaking initiative of the Government. It aims at reforming and overhauling the tax administration system by curbing the undesirable practices prevailing in the system and by eliminating the personal interface between the assessee and the appellate authority.

Though, there are lot of merits to this scheme, there were several legal lacunas to the scheme as well and therefore it was challenged for its constitutional validity at various courts. Focus of this article shall be to point out several challenges in the functioning of the new system and some suggestions with which we can make it more effective and sustainable for a longer run.

Before we discuss the legal parameters, let us have a glance at the salient features of the faceless scheme which was introduced in 2020.

Salient features of Faceless Appeal Scheme, 2020 (hereinafter referred as FAS, 2020)

  • The faceless scheme applies with effect from 25th September, 2020 and all pending appeals as on that date with immediate effect.

  • The exceptions of the scheme as per the press release dated 25-09-2020 are appeals relating to serious frauds, major tax evasion appeals, sensitive & search matters, international taxation matters and Black money Act matters.

  • The scheme totally works with no physical human interaction. The only hearing which the appellant gets is through video conference facility. All other communications to be catered electronically only through income tax portal of the assessee.

  • National Faceless Appeal Centre (NFAC), Regional Faceless Appeal Centre (RFAC), and Appeal Units (AU) are the three main functioning units of this scheme. NFAC shall be the only communication link between the assessee and the authorities. AU shall be the main functioning body which shall call for information, read the submissions made by assessee and make draft orders based on the given information.

  • The major change in this scheme as compared to the erstwhile procedures done physically is the mandate to pass a draft appeal order. The same if challenged shall be allotted to some other appeal unit to consider the objections of assessee and the latter AU shall then pass review draft order and send it across to NFAC.

  • If the appellant wants an oral hearing through video conference facility, the request can be put up before the authorities. However, it shall be at the discretion of the Chief Commissioner or the Director General of RFAC to approve the request or not.

The Legal Battle

The most debatable legal issues under the faceless appeal scheme was discretion given to the revenue authorities to decide whether a hearing by way of video conference should be given or not to the assessee. This ignited into various writ petitions filed across many states challenging the provisions of the scheme. One of the matters is pending before the Apex Court in this regard in case of CBDT v. Lakshya Budhiraja & Anr etc. The hearing though still has to reach conclusion but the Hon’ble Apex Court did pass an interim direction asking CBDT to clarify the government stand to make changes in Faceless Appeal Scheme. With the new scheme announced on 28-12-2021, the Apex Court vide their order dated 10-01-2022, have held that all the transfer petitions made by various High Courts to the Apex Court have now become infructuous and therefore the said petitions are disposed of. With that effect all transfers which were sought to be made by Bombay, Allahabad, Delhi & Telangana & Kerala High Courts stands dismissed and these High Courts shall have to deal with the matters independently.

A Public Interest Litigation (PIL) is also filed by Chamber of Tax Consultants before the Bombay High Court and the matter is also stayed based on directions to be issued by the Apex Court in a similar matter. Interestingly, in a hearing before the Hon’ble court on 04-12-2021, the Additional Solicitor General Anil Singh put up a fact that around 56100 appeals are already disposed of under the faceless appeal schemes and out of those only one of the applicants had sought a personal hearing (though these numbers were challenged by the Advocate for petitioner counter arguing that all matters for hearing are stayed because of the pending decision of Apex Court). The matter before Bombay High court is stayed as of now till further hearing. There are various other issues taken up in the PIL apart from personal hearing which seems to be not addressed in the revised scheme. For those open-ended issues, one shall have to wait and watch the outcome of the PIL before the Hon’ble Bombay High Court.

Some Practical Hindrances in the functioning

  1. Silence about the remand report- The FAS,2020 has a provision for asking details from the NaFAC or AO on any of the matters and requires it to submit such a report. The FAS, 2020 however, mentions that such report so received shall be forwarded by NFAC to the appeal unit. The scheme is silent on whether such reports shall be given to the appellant or not. Under the erstwhile physical hearing of appeals, a copy of the remand report as made by the AO, was always furnished to the appellant for their submissions or objections on the same. This was a fair practice, as no material or submission received can be taken into consideration without giving opportunity to parties to the appeal.

  2. Application for additional evidence- As per the FAS, if any additional evidence is to be submitted by the appellant, the same shall be submitted to the NFAC and the same shall be forwarded to the NaFAC for their comments on the admissibility of such additional evidence. After receiving such comments, the appeal unit shall decide whether such evidence is to be accepted or rejected. Now, ideally only if the additional evidence is admitted, the appellant can form it part of submissions and place reliance for it. So, the ideal procedure shall be to first make an application for additional evidence along with those documents on which reliance is placed and wait for a response from NFAC to admit or reject it for a further course of action. However, the scheme is silent as to in how much time this process shall be over and that brings the uncertainty.

    Further, practically there have been cases where the appellant has submitted the additional evidence application along with submissions and there has been no response by the NFAC on the additional evidence acceptance or rejection. Rather, the NFAC has asked for some more details to proceed with the matter. So, in such a scenario one certainly wonders, that the procedure is really in place currently or is just applicable in theory. The FAS should have brought the time limit to remove this hindrance and accelerate the proceedings. Now, under the faceless appeals, this shall create more uncertainty as there is no procedure to even follow up with the CIT(A) or their staff, unlike the physical proceedings.

  3. Revised grounds of appeal- Generally, under the physical proceedings, the CIT(A) used to accept the revised grounds of appeal. The FAS does not speak anything about the revised grounds at all. So, if the appellant after filing grounds of appeal realizes some error or mistake, there seem to be no provisions under the FAS to rectify the same. Although it seems that revised grounds application can be made with the submissions itself. The appellant has to be very careful while drafting the grounds of appeal keeping in mind that the possibility of revising grounds is minimised.

  4. No format of additional evidence or additional ground is specified or made available as contemplated in the scheme: The FAS states that the appellant shall be allowed to submit additional grounds of appeal and application for additional evidence in the specified form. To date there is no specified form that has been prescribed under the FAS.

  5. Request for condonation of delay: The FAS specifies that if the appeal is time-barred, the appeal unit may accept the condonation, if it is satisfied that the appellant had sufficient cause of not filing the appeal within time limits. In a physical era, if there was a delay in appeal filing, the appellant was required to file a condonation application to condone the delay along with an affidavit mentioning the reasons thereof. This application normally is considered in the first hearing. The FAS is silent about such application or affidavit requirements. Also, if the appeal is not accepted, there is no provision about granting the appellant an opportunity on representing as to why the condonation should be granted and why the appeal should be admitted. Form 35 also demands reasons for the delay in filing of the appeal, so one should be careful to provide elaborate and genuine reasons for delay while at filing stage itself.

  6. No provision to withdraw the appeal: There is no provision under the scheme whatsoever, as to how the appellant can make an application for withdrawal of the appeal. Ideally, the appeal should be withdrawn only under exceptional circumstances and at the discretion of the CIT(A). However, now that there is no personal interaction with CIT(A), the FAS ought to be clear as to the procedure for withdrawal of appeals. In absence of any provision, the appellant may be advised to make an application for withdrawal with reasons when notice of hearing is received and at the same time to not respond to any further notices by way of submissions or facts as that would be deemed to be the intent to proceed with the appeal. As per our recent experience we have filed withdrawal request in the first hearing notice, and the same has been accepted by way of a speaking order.

  7. No provision to apply for stay proceedings: Once the demand is raised under section 156 and issued along with the assessment order, the assessee has an option to apply for stay of demand by making an application to CIT(A) or PCIT. The CIT(A) and PCIT have equal powers to stay the demand for sufficient reasons. the scheme has not envisaged the provisions pertaining to a stay of demand.

  8. No provision to may an early hearing application: The Commissioner (Appeals) has the inherent power to give an early hearing due to the urgency of the matter. In an appropriate case, the appellant can make an application for an early hearing of the appeal. In case the application is rejected or not responded the appellant can approach the High Court by filing Writ Petition.

    The Scheme has not laid down any procedure for an appellant to apply for an early hearing. The appellant can respond only if there is a submission tab available on the portal. Such a response tab gets activated only when the hearing notice is issued.

  9. No time limits between processes and also for passing order of CIT(A): There are procedures set out for rectification of appeal order, for issuance of the draft order, for review of draft order etc. These procedures involve various units and even NaFAC at some of the instances. However, strangely the FAS is silent on the time limits of such authorities or units to revert back to NFAC with whatever is assigned to it. If the stringent deadlines are not agreed to especially when multiple parties are involved in concluding one appeal, it may delay the procedure significantly and not achieve the end purposes of faceless procedures of bringing about quicker process time. No time limit has been specified for admission or rejection of appeal filed by the assessee thereby hampering the achievement of the objective of “greater efficiency”!

  10. Right to Cross-examine before the NFAC: The scheme enables the NaFAC or Assessing Officer to claim cross-examination of witnesses, however, no such provision is made whereby the appellant can ask for cross-examination where the Assessing Officer relies on a statement of a third party. Though not specifically provided in the scheme, one needs to know that right to cross-examine is inherent to the constitutional rights of any assessee and the same can be exercised even if the same is not provided for. There may be situations when AO relies on some third-party statements in and no opportunity was given during the assessment process. The powers of CIT(A) being co-terminus to powers of AO, suitable provisions should be made to empower FAS so as to allow the assessee to cross examine at appellate stage too.

Salient features of Faceless Appeal Scheme, 2021 (hereinafter referred as FAS, 2021)

With the advent of increasing litigation on the validity of the FAS, 2020 and the growing issues as discussed above, the Faceless Appeal Scheme, 2021 (hereinafter referred to as FAS, 2021) was released vide notification dated 28th December, 2021. This Act shall supersede the earlier FAS, 2020.

There have been some significant changes in the Faceless Appeal Scheme, 2021, the most important ones are enumerated as under:

  • The opportunity to hear appellant through video conference facility is not left at the discretion of Chief Commissioner or Director General. This was one of the major point of litigations once the earlier scheme was announced and was also one of the main grounds in all the writ petitions filed which challenged the constitutional validity of the scheme on the principle of natural justice.

  • The concept of draft order and review of draft order has been removed from the new scheme. This has also been rightly brough about as having a review of an appellate order made by one CIT(A) from another CIT(A) was demeaning the authority itself.

  • Every appeal unit shall now have only one CIT(A) as against one or more in earlier schemes. This is also a welcome step as there is no requirement to have two appellate authorities for one single matter.

  • The direct interaction of CIT(A) with the AO shall enable simplified and speedier processes.

  • By removing the Regional Faceless Appeal Centre and by removal of need Review Unit, a lot of layers in the erstwhile scheme are removed and therefore it shall simply procedures.

  • The notification F No. 279Misc./M-102/2021_ITJ dated 29-12-2021followed by the new scheme, has set out guidelines for priority or out of turn disposal of urgent matters. In genuine and exceptional circumstances, the jurisdictional Pr.CIT may allow to entertain an early hearing in following cases:

    1. Cases having demand above 1 crore;

    2. Cases where refunds as claimed in income tax return are in excess of Rs.100,000/-

    3. Cases where directions to this effect are issued by courts;

    4. Cases where request made by Senior Citizens and super senior citizens.

    5. Any other case of genuine hardship.

Below is a snapshot of comparison between both the schemes:

Faceless Appeal Scheme, 2020

Faceless Appeal Scheme, 2021

Effective date: from 25-09-2020 to 27-12-2021

Effective date- from 28-12-2021 and onwards

Automated examination tool meant an algorithm for standardised examination of draft orders, by using suitable technological tools, including artificial intelligence and machine learning, with a view to reduce the scope of discretion.

This definition has been removed from the new scheme. However, the automated allocation system still is part of the scheme.

“originator” shall have the same meaning as assigned to it in clause (za) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000);

The definition of originator has been removed from the FAS, 2021, reasons not known why the same is deleted.

National Faceless Appeal Centre to facilitate the conduct of e-appeal proceedings in a centralised manner, which shall be vested with the jurisdiction to dispose appeal in accordance with the provisions of this Scheme

a National Faceless Appeal Centre to facilitate the conduct of e-appeal proceedings in a centralised manner. (the jurisdiction part is removed correctly as Faceless Appeals cannot have NFAC as jurisdiction to dispose considering the fact that disposal happens by the Appeal Unit)

Regional Faceless Appeal Centres as it may deem necessary to facilitate the conduct of e-appeal proceedings, which shall be vested with the jurisdiction to dispose appeal in accordance with the provisions of this Scheme

The concept of Regional Faceless Appeal Centre is removed from the FAS, 2021. This is a welcome move, as there was no requirement to have an another layer of authority above the Appeal Units.

Appeal units, as it may deem necessary to facilitate the conduct of e-appeal proceedings, to perform the function of disposing appeal, which includes admitting additional grounds of appeal, making such further inquiry as thinks fit, directing the National e-Assessment Centre or the Assessing Officer, as the case may be, for making further inquiry, seeking information or clarification on admitted grounds of appeal, providing opportunity of being heard to the appellant, analysis of the material furnished by the appellant, review of draft order, and such other functions as may be required for the purposes of this Scheme

Appeal units, as it may deem necessary to facilitate the conduct of e-appeal proceedings by the Commissioner (Appeals). The functions of appeal units are made more generic by the new scheme and that makes it wide to interpretation.

The appeal unit shall include one or more Commissioner (Appeals) and such income tax authority, ministerial staff, executive or consultant to assist the Commissioner (Appeals) as considered necessary by the Board.

The appeal unit shall include one Commissioner (Appeals), and such other income-tax authority, ministerial staff, executive or consultant to assist the Commissioner (Appeals) as considered necessary by the Board. The appeal unit shall now comprise only of one CIT(A) as compared to earlier provisions. This makes sense now, as for appellate function two appeal authorities are not required.

NFAC shall allocate appeals to AU within any RFAC based on automated allocation system.

The NFAC shall directly allocate appeals to CIT(A) in the AU based on automated allocation system.

In case of appeal filed after expiration, the AU if satisfied that the cause is sufficient for not filing the appeal, then shall admit otherwise shall reject the appeal.

May condone the delay in filing appeal if the appeal is filed beyond the time permitted under section 249 of the Act and record the reasons for such condonation or otherwise in the appeal order passed.

All interaction between the appeal units and the appellants and between the appeal units and the Assessing Officer shall be only through NFAC.

CIT(A) shall call for information from the assessee by sending notice through NFAC and shall also send a copy of notice to AO directly or through NFAC.

One striking change in the language of functions of CIT(A) is that the words ‘shall’ have been replaced by ‘may’, making the provisions little liberal. Also, whenever there is an interaction with AO the CIT(A) is allowed to directly communicate. However, with assessee CIT(A) has to do it only through NFAC.

Remand report shall be assigned and obtained by

Remand report shall be obtained from AO directly or through NFAC whenever additional evidences are submitted by the assessee.

The appellant can file additional evidence on portal and it shall be send to the appeal units through NFAC.

The appellant is allowed to submit application for additional evidence to CIT(A) directly or through NFAC.

The Appeal unit shall make a draft order and send that across to NFAC who shall in turn send it to the appellant with a show cause notice as to why action should not be taken as per the draft order. There was also an option of review of draft order by another appeal unit if the assessee objects to the first draft order.

After obtaining all information from appellant and AO, the CIT(A) shall prepare appeal order in writing stating points of determination, the decision thereon, and reasons for decision, shall sign the order digitally to NFAC along with penalty proceedings if any to be initiated thereon.


This is the most welcome step which has been made by FAS, 2021. The concept of draft order and review of draft order are done away with.

Prior approval from Board is required for transfer to CIT(A).

The appeal at any stage may be transferred to CIT(A) if considered necessary by an order u/s.120.

Authentication of electronic record through digital signature of NFAC

The authentication of electronic record shall sent by CIT(A) shall be through his own digital signature.

In this scheme, the delivery of any communication shall be to the registered account, registered email address or on mobile app and followed by real term alert. Sending a real time alert was mandatory irrespective the first mode of communication.

The delivery shall be either through placing copy on appellants registered account or to registered email address or uploading the copy on appellants Mobile App followed by real time alert. (that means now SMS shall be sent only if the communication is sent through mobile app)

The Chief Commissioner or the Director General, in charge of the Regional Faceless Appeal Centre, under which the concerned appeal unit is set up, may approve the request for personal hearing if he is of the opinion that the request is covered by the circumstances referred to in clause (xi) of paragraph 13 of the said Scheme.

The appellant or his authorised representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the Commissioner (Appeals), through the National Faceless Appeal Centre, under this Scheme. The concerned Commissioner (Appeals) shall allow the request for personal hearing and communicate the date and time of hearing to the appellant through the National Faceless Appeal Centre.

Way forward and some suggestions to improve the effectiveness of the scheme

As can been seen many of the positive changes and amendments in the FAS, 2021 are based on the various grounds filed in writ petition before Supreme Court. However, there are still some suggestions which can make the scheme better over the period of time, some of those are listed as under:

  • The scheme mentions about specified formats for application of additional evidence and additional grounds. However, no such formats are till date specified. The same should be specified well in advance so that there is uniformity in procedures.

  • The authentication under FAS, 2021 is to be done through the digital signature of the CIT(A) who is passing the order. At various places the CIT(A) has been given a free hand to directly communicate with the AO and surpass the authority of NFAC. At one of the places where the assessee is required to make additional evidences, it is stated that the assessee can directly make application for additional evidences to CIT(A). When the CIT(A) is known to the assessee and the assessing officer directly or indirectly because of various relaxations brought about in the scheme, one really wonders whether is there any ‘faceless’ element remains in the scheme or not. The CIT(A) being faceless would be far from reality with introduction of the new scheme. Therefore, it would be nothing but e-appeals as against the faceless appeals.

  • Uploading of several written submissions with supporting is still a haunting task for assessee and authorised representatives. Though relatively, since the size of attachments have been increased to 10MB, things are better. However, that does not solve the issue of submissions of voluminous data at one time. The technology upgradation in the portal has to be up-to-date and allow the data and traffic on website.

  • Currently it has been seen that the notices issued for hearing gives considerably lesser time for appellant to make submissions. An average 5-7 days are only given to the appellants to make written submissions. Most of the times, the appellant receives the intimation of notice only late and therefore there are hardly any days left to make a response. Considering the fact that this is the first appellate authority and submission are generally more detailed in nature and that people are still getting used to the new systems, minimum 15 days time should be given for every notice of hearing issued.

  • If the functioning of scheme, totally depends upon the electronic medium, then it goes without saying the robust IT Infrastructure should be the first priority of government. The current systems in place are low grade and have lot of updation required thereto. Because the software providers have changed there has been a long-haul disruption in the data uploaded online. Sometimes the data uploaded by assessee cannot be seen altogether, sometimes the hearing notices appear as many 5 times on the portal. The old appeal records are still missing in several cases. All this toils up to cumbersome user experience and creates nothing but poor appellate process. It is high time that systems start working seamlessly thereby making the appeal procedures smooth.

  • Cyber threat is real and the most under rated threat as of now in faceless appeals. A lot of confidential data is being transmitted by assessee online to comply with the notices. The government needs to guarantee security of the data submitted online. Steps should be taken to secure such private and confidential data of assessee. It shall be the job of government and CBDT to assure the citizens that suitable measures are taken to protect their privacy. Any significant policy making decisions in this area can be successful only if it wins the trust of taxpayers.

  • The Faceless assessments have a detailed and exhaustive – standard operating procedures (SOPs) in place for each of the units involved and for uniform internal functioning of assessments. Similar SOPs should also be drafted for faceless appeals so that there is standardisation of appeal processes.

  • The cases which are set- aside by ITAT for fresh or limited consideration to the file of CIT(A), should be preferably excluded from faceless appeal schemes. The set aside cases should be continued with the same CIT(A) who had passed the original order, that shall make things better and the appellate be saved from ordeal of re-submitting and explanation of all details to some new CIT(A).

  • One of the major drawbacks that remains of the faceless appeal schemes, is how abruptly it came into effect. The scheme was made applicable from 25-09-2020 without any prior notice and was made applicable to all pending cases as on that date. This is unfair for the assessee and the appellate authorities who have already heard multiple hearings and concluded matters pending passing the order. The pending matters should be continued the physical ways. Faceless appeals should have been applied to the appeals which have been filed after 25-09-2020. Submitting all data again and explaining the matter afresh is waste of time, money and resources for the taxpayers and taxmen.

  • There is a requirement to bring suitable clarification of miscellaneous powers of CIT(A) like granting stay of demand or sanctioning prosecution etc. as to how these functions are to be performed by CIT(A) within an Appeal unit. The scheme is silent about it, and since there is no concept of Jurisdictional CIT(A) like we have for AOs, the clarification to these regards can bring clarity.

  • Faceless Appeal scheme does not envisage an incidence for ex-parte hearing and orders. A suitable clarification to the scheme may clarify the position.

  • The Scheme provides for the initiation of penalty for non-compliance of any notice, direction or order issued under the scheme, however there exists no such provision under the Income Tax Act 1961 empowering the CIT(A) to initiate such penalty proceedings.

  • When the faceless assessment and appeal schemes were introduced by the Prime Minister, at the same time Taxpayer’s Charter was also announced in the scheme of Honouring the Honest. It was hoped that with the Prime Minister’s announcement, the Taxpayer’s Charter shall see the light of the day and shall be enacted in law. Ironically, the faceless schemes did make it to the statute however, the Tax payer’s Charter did not get enacted. It is seen still under the proposal stage itself and therefore when it comes to protecting the rights of the assessee, the administrative functions are tad behind. There should be time limits set for disposal of appeals and also for submission of remand report by AO. The timebound procedures would enable speedy and effective disposals.


FAS,2021 undoubtedly is simplified and after considering the stakeholders. It will be the booster in reducing the overall timeframe for litigation and reduction in time gap, as a high percentage of the pending appeals is expected to be taken up in a faceless manner. The faceless appeals have been challenged in the Apex Court and various HCs for testing its constitutional validity. In the coming duration, we shall know more about the fate of faceless appeals and it would be interesting to see what is there in store for us. One thing seems certain here that faceless appeal scheme seems to stay. There may be tweaks, amendments, revisions, however a complete abolishing of scheme seems to be far-fetched. The FAS is at a nascent stage with several grey areas. To make FAS, a path-breaking and revolutionary initiative it is crucial to take suitable measures to overcome the bottlenecks and hurdles. If implemented effectively, it can be a game-changer in the entire tax administration system not only in India but worldwide. India could emerge as one of the first countries globally to make it’s appellate procedures completely digital with zero human interaction.

1.0 Introduction

NRIs/OCIs play a very important role in our economy, considering the same in mind, RBI has allowed the investment in immovable property In India by NRIs/OCIs under automatic route (i.e. without any approval), subject to certain conditions.

NRI/OCIs are permitted to invest in both residential and commercial properties. However, there are a few restrictions as to the investment in (a) agricultural land or (b) plantation property or (c) farmhouse property; (hereinafter called “Restricted Property”). The immovable property in India can be acquired by the NRI/OCIs either by direct purchase or a gift or inheritance. The rules governing the acquisition of immovable property in different modes are listed below:

2.0 Relevant Definitions

2.1 Non-Resident Indian

“NRI” or “Non-Resident Indian” means an individual resident outside India who is a citizen of India1

Non-Resident Indian (NRI) is a citizen of India, who stays abroad for employment/carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad.

2.2 Overseas Citizen of India

Overseas Citizen of India (OCI)2 means a person resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955.

Following categories of foreign nationals are eligible for registration as OCI Cardholder:

  • Who was a citizen of India at the time of, or at any time after the commencement of the Constitution i.e. 26.01.1950; or

  • who was eligible to become a citizen of India on 26.01.1950; or

  • who belonged to a territory that became part of India after 15.08.1947; or

  • who is a child or a grandchild or a great grandchild of such a citizen; or

  • who is a minor child of such persons mentioned above; or

  • who is a minor child and whose both parents are citizens of India or one of the parents is a citizen of India; or

  • spouse of foreign origin of a citizen of India or spouse of foreign origin of an Overseas Citizen of India Cardholder registered under section 7A of the Citizenship Act, 955 and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the presentation of the application.

However, no person, who or either of whose parents or grandparents or great grandparents is or had been a citizen of Pakistan, Bangladesh or such other country as the Central Government may, by notification in the Official Gazette, specify, shall be eligible for registration as an Overseas Citizen of India Cardholder.

2.3 Transfer3

“Transfer” includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.

2.4 Person of Indian Origin (PIO)4

‘Person of Indian Origin (PIO)’ means a person resident outside India who is a citizen of any country other than Bangladesh or Pakistan or such other country as may be specified by the Central Government, satisfying the following conditions:

  1. Who was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or

  2. Who belonged to a territory that became part of India after the 15th day of August 1947; or

  3. Who is a child or a grandchild or a great grandchild of a citizen of India or of a person referred to in clause (a) or (b); or

  4. Who is a spouse of foreign origin of a citizen of India or spouse of foreign origin of a person referred to in clause (a) or (b) or (c)

Explanation: for the purpose of this sub-regulation, the expression ‘Person of Indian Origin’ includes an ‘Overseas Citizen of India’ cardholder within the meaning of Section 7(A) of the Citizenship Act, 1955.

3.0 Nature of the transaction

Investment in immovable properties (IP) by a Non-Resident is a capital account transaction. And as a rule, all capital account transactions are prohibited unless specifically permitted.

4.0 Prohibition on transfer of immovable property in India5

Save as otherwise provided in the Act or rules, no person resident outside India shall transfer any immovable property in India. However,

  1. the Reserve Bank may, for sufficient reasons, permit the transfer subject to such conditions as may be considered necessary.

  2. a bank which is an authorised dealer may, subject to the directions issued by the Reserve Bank in this behalf, permit a person resident in India or on behalf of such person to create charge on his immovable property in India in favour of an overseas lender or security trustee, to secure an external commercial borrowing availed under the provisions of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000;

  3. an authorised dealer in India being the Indian correspondent of an overseas lender may, subject to the directions issued by the Reserve Bank in this regard, create a mortgage on an immovable property in India owned by an NRI or an OCI, being a director of a company outside India, for a loan to be availed by the company from the said overseas lender :

Provided further that :- (i) the funds shall be used by the borrowing company only for its core business purposes overseas; (ii) in case of invocation of charge, the Indian bank shall sell the immovable property to an eligible acquirer and remit the sale proceeds to the overseas lender.

5.0 General Permission

From time to time, general permissions are given to certain non-resident person to acquire immovable property in India and those permissions were enshrined in following regulation and rules.

  • Notification No. FEMA 21 /2000-RB, Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000 dated 3rd May 2000

  • Notification No. FEMA 21(R)/2018-RB, Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 dated 26/03/2018

  • Chapter X titled Acquisition and transfer of immovable property in India in the rules called Foreign Exchange Management (Non-debt Instruments) Rules, 2019 dated 17/10/2019

Each subsequent regulation/rule superseded previous regulation.

6.0 Restrictions in acquiring IP in India

  • Property Based restriction– Agricultural land /plantation property/farmhouse in India cannot be acquired by way of purchase by a Non-Resident including NRI/OCI.

  • Citizenship based restriction –

    • Citizens of eleven countries (viz. Citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan or Macau or Hong Kong or Democratic People’s Republic of Korea (DPRK) ) cannot acquire IP in India irrespective of their residential status unless they obtain prior RBI approval. However, this prohibition shall not apply to an OCI card holder.

    • Citizens of these eleven counties can acquire IP on lease for a period not exceeding five years.

  • Foreign nationals of non-Indian origin resident outside India are not permitted to acquire any immovable property in India unless such property is acquired by way of inheritance from a person who was resident in India (Sec 6(5) of the Act). However, to sell the said inherited property he will have to obtain prior permission of the RBI.


(1) Mr. Abdul who is a citizen of Bangladesh has come to India for employment and living in India for past three years. Now he thinks to buy a house in India. Can he acquire a house?

Ans: Mr Abdul is working in India for past three years and under FEMA, he is a resident of India. Even though he is a resident of India, he cannot acquire an immovable property in India as he is a citizen of Bangladesh.

(2) Mr. Khan who is now a citizen of Bangladesh and he is holding OCI Card whether he can buy a property in India?

Ans: Though Mr Khan is a citizen of Bangladesh which is one of the eleven countries, citizens of which are prohibited from acquiring property in India, he can acquire a property in India as he is holding OCI Card.

(3) Mr Patel who is resident of USA and holding OCI Card. He wants to buy an agricultural land with farm house in India. Can he buy under automatic route?

Ans: Agricultural land /plantation property/farmhouse in India cannot be acquired by a Non-Resident even if they are NRI/OCI

7.0 Change in residential status from Resident to Non-Resident

Section 6(5) reads as – A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.

Section 6(5) permits a Non-Resident individual to hold, transfer or reinvest IP in India when his residential status changes from resident to nonresident subject to fulfillment of the conditions stated in the section.


(1) Mr. Balbir was born and brought up in India. He is a farmer. He has inherited as well as purchased agricultural land in India. In the year 2020, he left India and became resident of Canada. Can he continue to hold those lands and or sell?

Ans: As per section 6(5) of the FEMA (Act), Mr Balbir can hold and or sell the said agricultural land.

(2) Mr. Patel is living in USA for past several years and holding US Citizenship. He is not holding OCI Card. He has inherited an agricultural land from his father who is a resident of India. Whether he can sell the said land?

Ans: As per section 6(5) of the FEMA (Act), Mr Patel can sell the said land which he has inherited from his father.

8.0 Acquisition of the Immovable Property in India

As per Chapter X of Foreign Exchange Management (Non-debt Instruments) Rules, 2019, several types of Non-Resident can acquire /Transfer IP in India under automatic route subject to certain conditions to be fulfilled. Let’s discuss in detail.

8.1 Acquisition of the Immovable Property by way of Purchase other than Restricted Properties

A NRI or an OCI may acquire immovable property in India other than agricultural land or farmhouse or plantation property.

Provided that the consideration, if any, for transfer, shall be made out of

(i) funds received in India through banking channels by way of inward remittance from any place outside India ; or

(ii) funds held in any non-resident account maintained in accordance with the provisions of the Act, rules or regulations framed thereunder:

Provided further that no payment for any transfer of immovable property shall be made either by traveller’s cheque or by foreign currency notes or by any other mode other than those specifically permitted under this clause.


(1) Mr. Shah and Mr. Patel are NRIs and are resident of USA. Mr Patel has a house in India which he wants to sell to Mr Shah and take consideration in US Dollar in USA itself. Is this transaction permissible?

Ans: This transaction is not permissible. The consideration must be paid through Indian banking channels.

8.2 Acquisition of the Immovable Property by way of Gift other than Restricted Properties

NRI or OCI can acquire any immovable property in India other than agricultural land or farm house or plantation property by way of gift from a person resident in India or from an NRI or from an OCI, who is a relative as defined in clause (77) of section 2 of the Companies Act, 2013

8.3 Acquisition of the Immovable Property by way of Inheritance (Including Restricted Properties)

NRI or OCI can acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these rules; or from a person resident in India. There is no restriction on acquisition of agricultural land or farm house or plantation property which are acquired by non-residents through inheritance.

8.4 Transfer of Immovable Property in India

NRI or OCI can

(i) Transfer any immovable property in India to a person resident in India.

(ii) Transfer any immovable property other than agricultural land or farmhouse or plantation property to an NRI or an OCI.

8.5 Summary

RI = A person resident in India

ROI = A person resident outside India

Restricted Properties = agricultural land or farmhouse or plantation property

Following transactions are permitted under automatic route.



Type of the property

By way of

Regulation no.

RI or NRI or OCI*


Property in India other than Restricted Properties.



RI /NRI/ OCI, who is a relative as defined in sec 2(77) the Companies Act, 2013


Property in India other than Restricted Properties.





Any property including Restricted Properties.




A person resident in India

Any property including Restricted Properties.

Any form of transfer




Property in India other than Restricted Properties.

Any form of transfer


* The rule 24(a) silent about whether the nonresident must be NRI or OCI. However, FAQ published by the RBI on its website states transferor as NRI/OCI.

8.6 Joint acquisition of the Immovable Property by the spouse of a NRI or an OCI6

The joint acquisition has also been allowed by the spouse of an NRI/OCI of immovable property other than restricted property i.e. (a) agricultural land or (b) plantation property or (c) farmhouse property, subject to the following conditions:

Consideration: shall be paid from (i) funds received in India through banking channels, or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act;

Marriage: the marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the acquisition of such property.

Other condition: The non-resident spouse is not otherwise prohibited from such acquisition.

8.7 Acquisition by a long-term visa holder residing in India

A person being a citizen of Afghanistan, Bangladesh or Pakistan belonging to minority communities in those countries, namely, Hindus, Sikhs, Buddhists, Jains, Parsis and Christians who is residing in India and has been granted a Long Term Visa (LTV) by the Central Government may purchase only one residential immovable property in India as dwelling unit for self-occupation and only one immovable property for carrying out self-employment subject to the following conditions subject to certain conditions.

9.0 Repatriation/Remittance of sale proceeds of the property.

9.1 Repatriation of the sale proceeds of the property (other than restricted properties) outside India.7

Repatriation means sending money back which were invested in India in foreign exchange. When an NRI/OCI have invested in IP in India by sending money from abroad or using NRE or FCNR Account, they can repatriate sale proceeds of the said property back to their home country. Following are the rules.

In the event of sale of immovable property other than agricultural land or farm house or plantation property in India by an NRI or an OCI, the authorised dealer may allow repatriation of the sale proceeds outside India, provided the following conditions are satisfied, namely:-

  1. the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition or the provisions of these rules;

  2. the amount for acquisition of the immovable property was paid in foreign exchange received through banking channels or out of funds held in Foreign Currency Non-Resident Account or out of funds held in Non-Resident External Account;

  3. in the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.

9.2 Remittance upto USD 1 million8 Scheme

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) may remit through an authorised dealer an amount, not exceeding USD 1,000,000 (US Dollar One million only) per financial year,

  1. out of the balances held in the Non-Resident (Ordinary) Accounts (NRO accounts) / sale proceeds of assets/ the assets acquired by him by way of inheritance/ legacy on production of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter;

  2. Under a deed of settlement made by either of his parents or a relative (relative as defined in Section 2(77) of the Companies Act, 2013) and the settlement taking effect on the death of the settler, on production of the original deed of settlement;

Where the remittance is to be made from the balances held in the NRO account, the account holder shall furnish an undertaking to the Authorised Dealer that:

The said remittance is sought to be made out of the remitter’s balances held in the account arising from his/ her legitimate receivables in India and not by borrowing from any other person or a transfer from any other NRO account and if such is found to be the case, the account holder will render himself/ herself liable for penal action under FEMA.

9.3 Remittance exceeding USD 1 million9

The Reserve Bank may, for sufficient reasons, permit any person to make remittance of any asset held in India by him or by any other person.

9.4 In a nutshell

Following are broad rules related to the Immovable Property situated in India to be held by a person resident outside India

Citizen of eleven neighboring countries unless they hold OCI Card

RBI approval required.

Foreign nationals of non-Indian origin resident outside India.

Prohibited in acquiring property in India but can inherit it. However, they will require RBI approval at the time of sale.

Foreign nationals of Indian origin who have obtained OCI Card and resident outside India

General Permission

Indian national and resident outside India

General Permission


  1. Sub-clause (aj) to clause 2 , Foreign Exchange Management (Non-debt Instruments) Rules, 2019

  2. Sub-clause (ak) to clause 2, Foreign Exchange Management (Non-debt Instruments) Rules, 2019

  3. Section 2(ze) of the Foreign Exchange Management Act (the Act)

  4. Clause 2(x), Notification No. FEMA 5(R)/2016-RB

  5. Rule 30, Foreign Exchange Management (Non-debt Instruments) Rules, 2019

  6. Rule 25, Foreign Exchange Management (Non-debt Instruments) Rules, 2019

  7. Rule 29, Foreign Exchange Management (Non-debt Instruments) Rules, 2019

  8. Clause 4(2), Notification No. FEMA 13 (R)/2016-RB

  9. Clause (3) Notification No. FEMA 13 (R)/2016-RB

1 MAP Concept In brief (Article 25 of OECD Model convention)

1.1 MAP is one of alternate dispute resolution mechanism provided in double tax avoidance agreement (‘DTAA’ or ‘tax treaty’) for the resolution of international tax disputes

1.2 MAP resolution is provided in all DTAA entered by India with various countries

1.3 It provides resolution of disputes through the intervention of the Competent Authorities (‘CAs’) of each country who discuss and reach out for mutually acceptable solution

1.4 Scope under MAP is limited only to issues pertaining tax treaty and may not extend to issues covered under domestic tax laws

1.5 It is a process / mechanism for dispute resolution through a settlement by negotiated means

1.6 Relief under MAP is in addition to the dispute resolution mechanisms available under domestic tax laws, so both the proceedings can continue simultaneously.

2 Eligibility to apply for MAP

2.1 A person who is a citizen or resident of a Contracting State, can request assistance from the competent authority of that State, if the person believes that the actions of the Contracting State, a treaty country, or both, cause or will cause a tax situation not intended by the treaty between the two countries.

2.2 If the request provides a basis for competent authority assistance, the competent authority of the respective Contracting State will consult with the treaty country competent authority on how to resolve the situation.

3 Designated Indian Competent Authorities

3.1 All matters pertaining to Non-residents are dealt with by the Foreign Tax and Tax Research (FT&TR) Division in the CBDT.

3.2 Division negotiates tax treaty, interact with tax authorities of other countries. They also represent India in International Organisations, MAP, APA, etc.

3.3 The division is headed by Joint Secretary (FT&TR) – there are two CA’s. Work is allocated based on Zonal criteria (i.e. Europe and North America and other than Europe and North America) The Joint Secretaries are the CAs for India, based in Delhi

4 Need for MAP

4.1 DTAA are available for capturing and curtailing juridical double taxation.

4.2 DTAA’s generally do not cover instances of economic double taxation. MAP provides relief in cases of economic double taxation.

5 MAP process vis-vis normal tax litigation process

There is an urgent need for MAP due to following challenges faced in normal tax litigation process.

5.1 On an Average, MAP proceedings gets concluded within 3 years, as compared to litigation, which may take around 10-12 years

5.2 MAP proceedings are binding on revenue, whereas in litigation, revenue has a right to prefer an appeal

5.3 MAP is binding only if the same is accepted by Taxpayer, where as in case of appeal, it is binding, taxpayer may prefer an appeal, if it does not accept the order of relevant authorities

5.4 In MAP proceedings, there is a suspension of collections of tax in case of few countries as India has MOU with USA, UK, Sweden and Denmark. In case of MOU, demand is suspended on furnishing of bank guarantee, equal to the amount of tax demand, whereas certain minimum amount is required to be paid in litigation process. Stay is granted at the discretion of the revenue and appellate authorities

5.5 In MAP process, generally correlative adjustment is available, whereas in case of litigation, there is a double tax exposure, if the appeal is decided against the taxpayer

5.6 In MAP process, there is a more scope for CA’s to negotiate and arrive at a compromise agreement, whereas under tax litigation, there is a legalistic approach and there is no scope for negotiation

6 Correlative /corresponding Adjustment permitted

Under the Transfer Pricing legislation, every country has a power to re-determine the transaction price between the associated enterprises, if the same is not an Arm’s Length Price (“ALP”). The correlative adjustment arises in the other country on account of the primary adjustment made under the TP regulations.

For example, X Ltd. in India enters into an agreement with Y Ltd of Australia. The Indian revenue authorities consider that the price agreed between X Ltd. and Y Ltd. is not an ALP and hence the price is adjusted. The issue that arises is consequent to adjustment made by revenue authorities in the assessment of X Ltd. whether Y Ltd. is entitled for the adjustment in Australia

One more issue arises is whether corresponding adjustments are mandatory, for which following points to be noted:

6.1 The corresponding adjustments by the other country are not mandatory consequent to primary adjustments made by one country. The other country can resort to corresponding adjustment if the same is in accordance with provisions of its domestic legislation

6.2 The right to carry the corresponding adjustment in the other country primarily arises due to provisions of Article 9(2) of the OECD Model

6.3 If the countries have inserted the provisions of Article 9(2) in the double tax treaty, then those countries can make a corresponding adjustment provided the other country accepts the principle and quantum.

6.4 India under MLI, have accepted this article and now corresponding adjustments would be provided to all the countries, in case of transfer pricing adjustments.

7 Time limit to file a MAP

Time limit for presenting the case for MAP is three years from the first notification of the action alleged to have resulted in taxation not in compliance with the tax treaty.

In the Guidance issued in August 2020, it has been further clarified that where tax treaty provide a different time limit, India would change such time limit to three years in accordance with BEPS Action plan 14. It is also being mentioned that efforts are being made to amend those tax treaty having different time limit.

8 Tax framework for MAP under Income tax Act, 1961 read with rules and under DTAA framework

Guidance note issued in August 2020

The Central Board of Direct Taxes (CBDT) issued a detailed Guidance on MAP in August 2020 for the process to be followed by an Indian Competent Authority (‘CA’) and field officers, and comprehensive guidance on issues related to MAP processes. The said guidance is introduced to make the MAP resolution process rule-based, effective and predictive. It would include the introduction, access & denial, technical issues and implementation of MAP. Guidance is covered in Part A to Part D.

8.1 Part A of Guidance note – Introduction and basic information

MAP request can be made by a taxpayer when it considers that the actions of the tax authorities in one or both the treaty partners result or would result in taxation not in accordance with relevant DTAA.

MAP cases would involve cross-border double taxation that would either on account of Juridical double taxation [same income taxed twice in the hands of same entity in two different jurisdictions] or it could be on account of Economic double taxation [same income taxed twice in the hands of two separate entities, who are Associated Enterprises (“AE’s”) in two different jurisdictions]

8.2 MAP Process to be followed

Briefly, MAP process is provided below:

8.2.1 An Indian taxpayer needs to make an application to Indian CA in Form 34F.

8.2.2. In case AE or related party of an Indian taxpayer submits an MAP Application before the CA of its country of residence (DTAA partner) in respect of order / action of the tax authorities in India, a copy of MAP Application must also be provided to Indian CA

8.2.3. Once MAP application is accepted / rejected by Indian CA, it shall communicate its decision to CA of tax treaty partner through written communication. The decision as to whether MAP application is accepted / rejected is also to be communicated to Indian taxpayer by Indian CA The CA of Tax Treaty partner would provide the position to Indian CA. Indian CA, would exchange views and come to a decision and present a negotiated position from its side. Once resolution is reached, the CA of tax treaty partner would communicate the terms and conditions of resolution to taxpayer Where due to any reason, it is not possible to reach a resolution, the MAP would be closed and recorded as unresolved.

Internationally, in case, where it is not possible to reach a solution, matte would be referred for Arbitration. However, India has not accepted Arbitration and hence in India’s case, matter would remain unresolved.

Part B – Access and denial of MAP

8.3 Access to MAP is available:

8.3.1 Issues pertaining to determination of residential status under the tax treaty

8.3.2 Issues relating to existence of Permanent Establishment

8.3.3 Adjustment arising from Transfer Pricing assessment

8.3.4 Issues relating to Attribution of profits to Permanent Establishment, whether or not admitted by taxpayers

8.3.5 Issues related to Characterisation or re-characterisation of an item of expense or payment (Royalty or FTS or Interest)

8.3.6 Issues related to Characterisation or re-characterisation of an item of receipt as taxable income (Royalty or FTS or Interest)

8.3.7 Issues relating to Interpretation of provisions of tax treaty

8.3.8 When the Indian tax authorities apply domestic anti abuse provisions

8.3.9 When the obligation to deduct TDS on a payment made by Indian taxpayer to non-resident entity is enforced by an order passed under Section 201 of the Act and the same is disputed by non-resident entity, in anticipation an event of double taxation or taxation not in accordance with tax treaty (Please note that in this case, MAP discussions can be taken once assessment order is passed in the case of non-resident entity)

8.3.10 In case where Unilateral Advance Pricing Agreement (“UAPA”) applications have already been filed and accepted, then MAP for same issues for the same years should not be made by the taxpayers

8.3.11 If say, UAPA application is under consideration and negotiation, then Indian CA would allow access to MAP, but would keep MAP application under hold, till UAPA is entered. Once UAPA is entered, Indian CA would not change the terms and conditions of UAPA, but would request Tax treaty partner to provide correlative adjustment for the same.

8.3.12 Where UAPA is not entered into, Indian CA would process MAP Application

8.3.13 Where the Indian or Non-resident taxpayer has applied safe harbour provisions and Return of Income is accepted by Indian tax authorities, then CA’s of other countries may accept MAP Applications from their taxpayers in respect of any decision of tax authorities of other countries, if such a position / decision affects the return filed, and then can inform Indian CA

8.3.14 The Indian CAs would allow MAP Application, but would not change ALP [for the International transactions covered by safe harbour provisions] and would request the CAs of DTAA partners to provide correlative adjustment.

8.3.15 Order passed by the Tribunal in respect of the same disputes being examined under MAP (In case ITAT order is passed before implementation of MAP, it would have priority over MAP and Indian CA would request other CA to provide correlative adjustment to that effect)

8.3.16 In case where order of tribunal is set aside the issue to be reconsidered, then the access to MAP would be provided again after the decision is revaluated by Indian tax authorities

8.4 Denial of access to MAP

8.4.1. If MAP Application is filed beyond the timelines provided in tax treaty

8.4.2. Indian CA’s feel that objection raised by taxpayer is not justified

8.4.3 MAP application is incomplete, or the information / documents requested by the Indian CA’s are not provided by the taxpayer

8.4.4 Where the taxpayer has obtained the order or application is pending with settlement commission on the same issue

8.4.5 Issue covered squarely by Indian domestic law

8.4.6 Taxpayer has obtained the advance ruling on the same issue

8.5 PART C – Explanation provided for Certain Technical issues

8.5.1 No Downward adjustment i.e. Indian CA’s cannot go below the returned income, due to specific prohibition under Indian tax laws. However, in a case where MAP cases involving adjustments made by Tax Treaty Partner, the Indian CA’s may go below the returned income of the Indian taxpayer to implement the MAP

8.5.2 Indian CA’s may provide / resolve recurring issues on the same principles as agreed in a prior years MAP resolution, however, they do not have a mandate / authority to resolve the issue in advance

8.5.3 Indian CAs would be obligated to make secondary adjustment as part of MAP resolution in cases pertaining to FY 2016-17 onwards [Concept of Secondary adjustment has been explained briefly below]

8.5.4 In cases, where Bilateral and Multilateral APA is filed, MAP would not be accepted on the same issues for same years. In case where application under APA fails, then MAP application can be made on the same issues for the same years.

8.5.5 Indian CA’s does not have mandate to consider consequential issues of Interest and penalties and negotiate dispute arising from such issues

8.5.6 Suspense of collection of taxes during the pendency of MAP is based on MOU with various countries is provided. For Example, India have entered into MOU with USA, UK, Sweden and Denmark. Where there is no MOU entered, then domestic law of India would govern the procedures

8.5.7 In case of order passed under Section 201, the payment of tax [excluding interest] may be allowed to be adjusted against the tax liability of the non-resident taxpayer (payee)

8.6 Part D – Guidelines on implementation of MAP

The intimation of acceptance of MAP resolution by the taxpayer to be made in 30 days. The tax office to make the MAP resolution effective within one month from the end of month in which it receives the letter from the Indian CA.

9 Concept of Secondary adjustment

The provisions of secondary adjustment are applicable from Financial Year 2016-17, if the amount of primary adjustment exceeds INR 1 Crore. It applies in following situations:

9.1 Taxpayer on its own accord makes primary adjustment; or

9.2 Assessing officer makes primary adjustment which is accepted by the taxpayer; or

9.3 Primary Adjustments are determined in APA / arising as a result of resolution under MAP/ made under safe harbour rules

10 Concept of Multilateral MAP

Multilateral MAP is applicable, where in a dispute, more than two participating countries are involved.

It would be executed, if following conditions are satisfied:

10.1 All the participating countries have a tax treaty with each other;

10.2 The transaction or issue in dispute has bearing, directly or indirectly, on all tax treaty partners; and

10.3 The CAs of all participating countries agree to negotiate Multilateral MAP

11 Framework of Multilateral Instrument (“MLI”)

As a process of International consensus, following framework of MLI has been agreed and accepted by various countries

11.1 In the past, Multinational Enterprises (“MNE”) have arranged their corporate structures to artificially shift profits to no or low-tax locations where there is little or no real activity

11.2 Base Erosion and Profit Shifting (“BEPS”) refers to tax planning strategies that exploit gaps and mismatches in tax rules

11.3 In order to combat the above, the BEPS Project was launched in 2013 and Final report on 15 Action Plans was issued in 2015

11.4 BEPS Action plan need to be implemented by way of changes in domestic law and tax treaties

11.5 Traditionally, a change in DTAA can be introduced by way of protocol after extensive bilateral discussions and renegotiations, which is time consuming. To modify existing tax treaties in an efficient manner to implement BEPS measure, Action Plan 15 – Developing a Multilateral Instrument (“MLI”) to Modify Bilateral Treaty provide an innovative approach that enables jurisdictions to swiftly modify their bilateral tax treaties by introducing MLI

There are four minimum action plans that are mandatory for effective implementation of BEPS programme. One of such programme is “Action 14 – Making dispute resolution mechanisms more effective” under which MAP is covered.

12 India’s position for MAP under MLI

12.1 Action plan 14 is implemented through Article 16 to 26 of MLI. Although this is minimum standard, not all the provisions of this article are minimum standard and hence reservation can be made by respective countries

12.2 Article 16 briefly states the following:

“A person can approach the competent authority of either Contracting Jurisdiction (regardless of any remedy provided under domestic law), if person considers that the actions of one or both of the Contracting Jurisdictions results in taxation not in compliance with the provisions of the relevant tax treaty”

India has accepted the above subject to reservation. India has reserved its right for not adopting the modified MLI provisions on the basis that it will meet the minimum standard by allowing MAP access in the resident state and implementing bilateral notification or consultation process.

12.3 Article 17 briefly states the following:

It requires contracting states to make appropriate corresponding adjustments in transfer pricing cases.

12.4 India has chosen to apply the said provision of corresponding Adjustment in all CTAs, except for CTAs where the provisions already exist.

CBDT Circular issued for Bilateral APA and Transfer pricing MAP cases

12.5 In relation to number of requests received by CBDT from time to time regarding the acceptance of applications pertaining to Transfer Pricing MAP cases and bilateral APAs where the AE of the Indian entity is resident of a country with which India has entered into a DTAA, but the DTAA does not contain Paragraph 2 of Article 9 (or its relevant equivalent Article) relating to ‘Corresponding Adjustment’, it is clarified by CBDT vide press release dated 27 November 2017 that in such cases, it has been decided to accept such cases as well, regardless of the presence or otherwise of Paragraph 2 of Article 9 in the DTAAs.

12.6 Article 18 to 26 briefly states the following:

If, under the MAP process, the CAs do not agree on the correct Interpretation of the DTAA, the CAs can submit the matter to an independent arbitrator (or a panel of three arbitrators) for decision. The arbitrators will decide which of the CAs is correct.

India has not accepted the above and reserved this article completely as India is of view that it would affect its sovereignty

13 Role of Taxpayer in MAP process

The negotiation process between the CA’s under MAP, are generally a ‘closed door’ event. Thus, the taxpayer would not have access to and cannot participate in the negotiation process between the CA’s. Taxpayers can work with the CA’s to explain their own case and positions prior to the negotiation meetings between the CA’s.

14 Judicial decisions under MAP

14.1 Issue 1 – Whether MAP would be binding for subsequent years

Hon’ble SC in the case of Asstt Director Of Income Tax I New … vs M/S E Funds It Solution Inc (298 CTR 505)(SC) has assessed the above issue

Brief Facts

E-Funds USA and its group company entered into contracts for providing Information Technology Enabled Services to their clients in the USA. These contracts were assigned or sub-contracted to E-Funds India, an indirect subsidiary of E-Funds USA in India, for execution. Indian and USA CA had initiated proceedings under the MAP article of the India – USA DTAA and had entered into an agreement as to attribution of profits between the USA entities and E-Funds India.

High Court decision

MAP proceedings had been initiated on a without prejudice basis and that the existence of a PE was a question of law that needed to be determined purely on merits

Brief explanation for Hon’ble SC decision

  • SC rules that a fixed place PE is only created where the foreign entity has a physical location in the source state at its disposal, and over which it exercises control, and through which the business is conducted;

  • If the services rendered by the entity in the source state are not provided to customers located in that state, there cannot be a service PE;

  • MAP procedure and agreement are relevant, but cannot be primary basis for determination of a PE. Further they cannot be used as a precedent for subsequent years;

Apart from PE related issues [which is not discussed here], one of the issues raised before Supreme Court was whether admissions made in the course of the Mutual Agreement Procedure under the India – USA Tax Treaty could be used to justify the creation of PE?

In response to above issue, Hon’ble SC has stated the following:

In this case, the competent authorities of India and the USA had initiated proceedings under the MAP article of the India – USA Tax Treaty and had entered into an agreement as to attribution of profits between the US entities and E-Funds India. The Revenue contended that the PE issue stood determined owing to certain statements made in the MAP Settlement Agreement to the effect that the US entities had PEs in India. It was argued that these statements should continue to remain applicable to the E-Funds Group as there had been no subsequent change in the factual position of the Group.

On this point, the High Court had concluded that MAP proceedings had been initiated on a without prejudice basis and that the existence of a PE was a question of law that needed to be determined purely on merits. Referring to Paragraph 3.6 of the OECD Manual on MAP Procedure, the Supreme Court observed that it was “very clear” that a MAP Settlement Agreement was time and case specific and could not be considered precedent for subsequent years. Thus, statements made in a MAP Settlement Agreement for a previous year could not be used in determining PE status for a subsequent year. One may refer relevant observations of SC is provided in Para 26 to 29 for the reason for arriving at the decision.

14.2 Issue 2 – Benefit of Section 10A allowed in case of MAP (for the amounts settled under India-USA MAP)

M/s. Dell International Services India Private Limited v. The Deputy Commissioner of Income tax (Bang ITAT) (73 taxmann.com 24)

Facts of the case

  • M/s. Dell International Services India Private Limited (“Taxpayer”) is a wholly owned subsidiary of Dell International Inc. Taxpayer provides support services to its group entities. The services provided by the taxpayer are Call Centre, Shared services and Offshore development Centre (testing and support).

  • Taxpayer was rendering Software Development Services (SWD) as well as Information Technology Enabled Services (ITES) to its AE. As far as international transaction of rendering ITES services is concerned, taxpayer received a consideration of Rs.629,43,81,078 towards call centre services and Rs.149,59,17,786 towards back-office support services. Both the aforesaid services were classified as ITES.

  • As regards the ITES segment, the TPO found that there was a shortfall in the price received by the taxpayer from AE and the shortfall was added to the total income of the taxpayer an adjustment under Section 92 of the Act.

  • Against the aforesaid addition, the taxpayer preferred an appeal before the CIT(A).

MAP option pursued

  • During the pendency of the taxpayer’s appeal before the CIT(A), the taxpayer’s AE in the USA had approached the Competent Authority under Article 27 of the DTAA between India and the USA seeking resolution as per MAP for determining the Arm’s Length Price in relation to the transaction between the Company and its Associated Enterprises in USA.

  • The competent authorities of the USA and India mutually arrived at terms with respect to the markup on cost to be earned by the Taxpayer for the ITE services rendered to US tax residents.

Order passed by CIT(A)

  • The CIT(A) passed an order inter alia rejecting the additional ground raised by the taxpayer and held that the upward adjustment made as per MAP is undisclosed in books of accounts and hence the same cannot be allowed as deduction.

Issue raised and order by the Tribunal

  • The issue raised in this case was whether CIT(A) has erred in not allowing deduction under section 10A of the Act on the enhanced export income amounting to Rs. 310,517,297 determined as per Mutual Agreement between the Competent Authorities of India and USA and as accepted by the Appellant.

  • The tribunal while setting aside the order of CIT(A), allowed the deduction under section 10A of the Act on the income determined as per Mutual Agreement between Competent Authorities of India and USA.

14.3 Issue 3 – Attachment of Bank Accounts during Pendency of MAP process is not allowed

In case of Motorola Solutions – [P & H HC] (263 CTR 215) quashed demand recovery notice based on peculiar facts.

Facts of the case

Motorola Solutions (‘Motorola’) had applied for MAP in respect of the adjustment made by tax authorities for particular tax year. Motorola had requested for stay of demand from tax authorities pursuant to provisions of India-USA DTAA. Tax authorities attached the bank account of the Motorola during pendency of admission of MAP application by CA.

For action of attachment of Bank accounts, revenue argued that bank guarantee had lapsed on account of expiry of time and it was not provided in the prescribed format.

Further, revenue also stated that confirmation from foreign tax division, in respect of MAP application for subsequent year was pending for admission

Ruling of High Court

  • There is no provision in the India -USA DTAA or the MOU for a process of formal admission or confirmation from the Indian Tax Authority

  • Bank guarantee agreement contained a clause which stated that, if the same is not renewed after expiry of time, the bank will send such intimation to tax authorities

  • No intimation sent by bank to tax authorities. Hence, agreement was automatically renewed

  • Affidavit by CA indicates that MAP was admitted subsequently

  • Bank has given statement that the guarantee still stands [which is contrary to stand taken by the tax authorities]

In view of above, facts, P & H HC has quashed recovery of demand notice.

14.4 Issue 4 – Stay to be granted for subsequent years under consideration in MAP (if application for MAP is pending for admission)

Bombay High Court in the case of UPS Worldwide Forwarding Inc [267 CTR 162] (Bombay) has held that stay of demand to be granted once MAP application is made.

Facts of the case

UPS Worldwide (‘UPS group’) stated that, income from its transactions during certain years was not taxable in India. Taxpayer initiated MAP under India-USA DTAA for these years. Tax authorities granted stay of tax demand considering the MOU provisions of India-USA DTAA. Taxpayer submitted application for inclusion of subsequent year in above MAP application and asked for stay of demand in respect of this year.

Tax authorities rejected the request for stay of demand in respect of subsequent year on contention that no relief in respect of subsequent year is provided as stay of demand order pursuant to MOU does not take into account the subsequent year and Confirmation from Foreign Tax Division of CBDT in respect of admission of MAP application for subsequent year was pending till date.

Decision of High Court

No provision exists either in the USA DTAA or the MOU for a process of formal admission or confirmation from the Indian Tax Authority for stay to be granted. Stay of demand should be granted once MAP application is made. Subsequent tax year is also covered if the same is covered under original MAP application

Certain other decisions on various issues raised is provided as under:

14.5 Issue 5 – MAP arrangement for ALP agreed for one related party country (AE party) can be applied for transactions with AE party of other countries

J.P. Morgan Services India (P.) Ltd. [2019] 105 taxmann.com 40 (Bombay)

IBM Daksh Business Process Services (P.) Ltd. [2020] 119 taxmann.com 404 (Delhi – Trib.)

14.6 Issue 6 – MAP arrangement entered can be applied for other years as well

Flowserve India Controls (P.) Ltd. [2019] 108 taxmann.com 376 (Bangalore – Trib.)

14.7 Issue 7 – AO cannot take different view and reopen the assessment contrary to view already taken in MAP in earlier years

Turner Broadcasting Systems Asia Pacific Inc. [2015] 62 taxmann.com 120 (Del HC)

Based on above and certain judicial precedents, following principles have emerged

  • Grievances intended to resolve under MAP that were not resolved, can be adjudicated by the Tribunal

  • MAPs resolved can be applied to the year not covered under MAP.

  • ALP determined under MAP for most international transactions with one country can be applied to the remaining transaction with other country

15 Time taken for resolving the MAP

India is committed to resolve MAP cases within 24 months. However, the said timeframe is not to resolve the MAP disputes but for endeavour to resolve such disputes.

If due to some or other reasons, it both the CAs are unable to resolve the dispute through MAP, then they would close such MAP dispute as unresolved. Consequently, the CAs of India having jurisdiction over the case shall inform the Indian taxpayer about the non-resolution of the dispute.

16 Effectiveness of MAP / Conclusion of MAP over normal litigation process

Circular issued in August 2020, is in line with International best practices to resolve the MAP dispute within 24 months by mutual negotiation. MAP in future would be more effective, considering litigation would take more than 10 years to settle. It would be speedier and faster process. Effective dispute resolution through MAP in a time bound manner would put India to be placed in top countries in parameters of “effective dispute mechanism” in future years to come.

Warm New Year greetings to all my colleagues, Friends at the outset I would like to thank you all for having bestowed upon me the responsibility for leading this August Federation as a National President for the year 2022, I would like to thank the collegium for having shown their trust in me for the same. I would also like to Congratulate Advocate Pankaj Ghiya ji from Jaipur for being unanimously nominated as the Deputy President and all the NEC members who have been elected unanimously for the term 2022 & 2023.

Friends, we had organised a very successful National convention on 24th, 25th & 26th Dec., 2021 at Lucknow with a theme of “VIDYA DADATI VINAYAM”. Chief Guest of the function Sh. S. P. Singh Baghel, M.O.S Law & Justice along with our own Member Hon’ble Mr. Justice Rajesh Bindal, Chief Justice, Allahabad High Court as Guest of Honour graced the inaugural function. In his inaugural Speech Professor Baghel appreciated the Federation for giving 18 members as Judges to High Court & further informed that during last “One Year” Government was instrumental in appointing 111 Judges to High Court & 11 Chief Justices since Country got Independence. He further promised to help to our fraternity while informing about allocation of 900 crores for infrastructure to Courts also. He also complemented by naming Justice Bindal as KUL SHIROMANI of our family of Federation. Justice Bindal while addressing the Audience lauded the Federation’s efforts in sharing of knowledge by Senior with all other Member. He also emphasized that knowledge of one increases by sharing knowledge with others & makes you humble it brings Competence & confidence & stressed the need for Federation Member to become Economic warriors by contributing to the Nation by giving proper advice to all Stakeholders including Government. After the successful valedictory session on 26th Dec., 2021 where in Past Presidents Shri P. C. Joshi, Smt. Prem Lata Bansal, Dr. Ashok Saraf, Smt. Nikita Badheka showered their blessings on convention organising team. Trip on 27th Dec., 2021 to Ayodhya was organised to get the blessing of Lord Ram Lala which was satisfactorily completed & appreciated by all visitors. Overall Lucknow convention was appreciated by all who attended including Technical sessions, Deliberations by Eminent speakers and Hospitality of Organising Team and of Hotel as well. Friends, outcome of this Programme besides appreciation by all, we had a good surplus in financial Term which has happened due to hard work and contribution of all Team Members and of NEC members also. Out of the Total Surplus of ₹ 6,46,000/-, We have allocated ₹ 2,50,000/- for the SOCIAL RESPONSIBILITY COMMITTEE, we have also given ₹ 1,25,000/- to AIFTP HO, ₹ 1,25,000/- to AIFTP North Zone, ₹ 21,000/- to ROTI Bank, Varanasi and Balance has been distributed to the partnering associations The U. P. Tax Bar Association, Punjab Tax Bar Association, Lucknow Income Tax Bar Association, G.S.T Bar Association, Varanasi and Ghaziabad Bar Association.

Friends the year of 2022 is coming with hopes & aspirations amongst all. After a long pandemic situation, a fresh wave at Lucknow happened & again we are little slowed down physically but not mentally & soon after speedy Recovery Rate across the country we shall bounce back with Physical Programmes.

As we move into the new year, we are still in the midst of the third wave of the COVID Pandemic and keeping that in view, I have decided to continue the COVID Relief Committee and members are requested to take benefit of the scheme already in vogue. Besides the above we have formed a Social Responsibility Committee headed by Smt. Anupama Gandhi comprising all Lady Members under the advice & guidance of Past President Dr. Ashok Saraf. The purpose behind this committee is to serve the under privileged & to help to improve the basic infrastructure of schools especially in Rural / Remote / Tribal Areas & this shall be possible only with the Active Participation of A.I.F.T.P. Members.

Friends, we have planned a series of Conferences and programmes throughout the year, starting with the First NTC with NEC which is proposed to be held in Kolkata on 26th and 27th February, 2022 along with a Ganga Sagar Tour, The Eastern Zone Chairman, Mr. Sanjeev Anwar and Conference Chairman Achintya Bhattacharjee have assured us that the Conference will be a combination of Education & Spiritual Attainment as well.

International Committee is headed by Mr. Sanjay Kumar who has already plans for International Tour in the year 2022. All other committees have also been formed & from 15th of January, all committees shall be working to its fullest in the interest of Federation.

The second Conference is planned to be held in Surat in April, 2022 and the Western Zone Chairman CA. Mitish Modi is quite geared up to welcome us all. I personally would like to request all the members to register in large numbers and make the conferences a grand success.

I would also like to take this opportunity to thank the Hon’ble Finance Minister for having accepted our request who has extended the due dates for filing Audit Reports and Income Tax Returns, giving the much needed relief to Tax Practitioners and the assesses in these hard times of the pandemic.

Friends we are also awaiting the Union Budget which would be presented by the Hon’ble Finance Minister on 1st February, 2022, Our DTR/INDTR Committees are in the process of submitting a pre-budget memorandum to the ministry of Finance and we are quite hopeful that our views shall be considered by the Government in a fruitful manner.

I once again wish you a very “HAPPY REPUBLIC DAY’’ to be celebrated with “AZADI KA AMRIT MAHOTSAV”

With Best Wishes

D. K. Gandhi
National President, AIFTP

Dear friends

Wish you all a very happy, prosperous, healthy and wealthy year 2022. While I pen this editorial, India is celebrating Makar Sankranti. I wish all the readers a very happy Makar Sankranti. This festival is celebrated all over the country, in diverse ways, with different names. This festival of harvest brings hope and dispels the gloom, caused by COVID-19, through different variants. While economic activity is showing signs of recovery the current growth rate is more than the Pre COVID-19 growth rate. The latest variant of COVID-19 ‘Omicron’ is threatening to disrupt these gains, made by the economy. The onus is on us to thwart this attempt by adhering to COVID-19 appropriate behavior.

I would like to discuss an anomaly, caused by a recent decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Communications [Civil Appeals 7110 and 7111 of 2021 dated 3rd Dec. 2021]. In this decision, while considering the scope of powers of Income Tax Appellate Tribunal [ITAT] under section 254(2) of the Income tax Act, 1961 (hereinabove referred to as “the Act”), the Hon’ble Supreme Court observed that “Even the observations that the merits might have been decided erroneously and the ITAT had jurisdiction and within its powers may pass an order recalling its earlier order which is an erroneous order, cannot be accepted. As observed hereinabove, if the order passed by the ITAT was an erroneous on merits, in that case, the remedy available to the assessee was to prefer an appeal before the High Court, which in fact was filed by the Assessee before the High Court, but later on the assessee withdrew the same in the instant case.”

It is interesting to note that the same provisions were considered by the Apex Court on earlier occasions and came to different conclusion. The observations, made by the Apex Court, especially in the case of ACIT vs. Saurashtra Kutch Stock Exchange Ltd (2008) 305 ITR 227 (SC), are at variance with the above observations. Similarly, the Hon’ble Supreme Court in the case of Honda Siel Power Projects Limited vs. CIT (2007) 295 ITR 466 (SC) observed that “As stated above, the expression “rectification of mistake from the record” occurs in section 154. Also finds place in section 254 (2). The purpose behind enactment of section 254(2) is based on the fundamental principle that no party appearing before the Tribunal, be it an assesse or the department, should suffer on account of any mistake committed by the Tribunal. This fundamental principle has nothing to do with the inherent powers of the Tribunal.” The Hon’ble Court further observed that “Rule of Precedent” is an important aspect of legal certainty in rule of law. That principle is not obliterated by section 254(2) of the Income tax Act, 1961. When prejudice results from an order attributable to the Tribunals mistake, error or omission, it is the duty of the Tribunal to set it right. Atonement to the wronged party by the court or Tribunal for the wrong committed by it has nothing to do with the concept of inherent power to review.”

It is quite interesting to note that the above mentioned Civil Appeals were preferred by the Department against the decision of Bombay High Court in WP 1406 of 2017, 1431 of 2017 and 1432 of 2017 wherein the order of the ITAT under section 254(2) of the Act to recall its order dated 6th September, 2013 under section 254(1) of the Act. The ITAT, it is important note that, while passing the order under section 254(1) dated 6th September, 2013 had followed the ratio laid down by the Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. (2012) 345 ITR 494 (Kar.). The Assessee’s grievance was, during the course of hearing, across the bar it had cited several decisions of the coordinate benches of the ITAT and the decision of Delhi High Court in the case of DCIT vs. Ericsson AB (2012) 343 ITR 470. However, the ITAT preferred to follow the ratio laid down by the Karnataka High Court. The Assessee moved the miscellaneous applications to point out these mistakes apparent on record. The ITAT allowed the miscellaneous applications filed by the assessee. Now it is interesting to note that the above referred decision of the Karnataka High Court CIT versus Samsung Electronics Co Ltd is subsequently reversed by the Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited versus CIT (2021) 432 ITR 471(SC). Thus, the anomaly is, the issue on merits is concluded by the Apex Court in favour of the assesse. However, the above decision puts the assesse in the same situation as it was, after the ITAT’s decision under section 254(1) dated 6th September, 2013. It seems the decisions referred to herein above were not brought to the notice of the Apex Court. Otherwise, the Hon’ble Court may have come to a different conclusion. The decisions of the ITAT are final with respect to facts. Certain times, the law is applied by appreciating the facts in a wrong manner then such mistake may have to be rectified by the ITAT which may amount to change the outcome of the appeal. Now, such error can be rectified only through an appeal under section 260A of the Act. Our experience shows that an appeal filed before the High Court under section 260A of the Act takes years before it is finally heard.

In this issue of the AIFTP-Journal eminent professionals have contributed their articles. I thank them for sparing their valuable time for the journal.

K. Gopal,