In this edition, we bring you an article on the much await judgment by Honourable Supreme Court in the matter of tax withholding obligations for payments for usage of software by residents to non-residents. The decade long litigation, where tax payers argue that the said payments were not in the nature of royalty and where tax authorities claim that payments are in nature of royalty requiring tax payer withholding tax, finally settled in favour of the tax payer. We bring you the article in series of two parts, the first one deals with issues and arguments made by tax payers and tax authorities and in second part, the analysis and conclusions arrived by Honourable Court are discussed.

The next article is on one of the burning issues in GST law, the applicability of tax on guarantees extended by directors to the company. The tax authorities started claiming that said services are taxable under reverse charge mechanism in the hands of company, where tax payers countered stating that the said services form part of shareholder’s activity and accordingly not taxable. We have to wait and see how the law unfolds in near future.

I hope that you will have good time reading this edition and please do share your feedback. I will also urge clients to mail us topics or issues on which you want us to deliberate in our future editions, so that we can contribute to the same.

Read more: SBS Wiki E Journal Mar 2021

This article is on one of the vexatious issues of taxation on the software payments made by residents to non-residents. The said issue was put to an end by the Honourable Supreme Court in the matter of Engineering Analysis Centre of Excellence Private Limited[1] (for brevity ‘EAC’) in favour of the tax payer. Let us proceed to understand the core issues, the history involved surrounding the issue, the arguments by and against tax payer, the analysis by Supreme Court and conclusions therein.

Read more: Copyright - Reproduction v. Usage - Much Awaited Judgment of Decade - Engineering Analysis Centre...

Section 194Q – An Interceptor to TCS under Section 206C (1H):

We all know that through the Finance Act, 2020, a new clause (1H) has been inserted to Section 206C for collection of tax at source in order to bring-in certain transactions in respect of sale of goods under the purview tax collection at source (for brevity ‘TCS’). Under the amended provisions through Finance Act 2020, any seller who has made domestic sales, being sale of goods, to any person in any previous year in excess of INR 50 lakhs is liable to collect tax at the rate of 0.1 percent from the buyer on such amount exceeding INR 50 lakhs[1].

Now, through the Finance Act, 2021, a new Section 194Q has been inserted in similar lines with section 206C (1H). Under the new provisions, a buyer who is responsible for making any payment to any resident in respect of purchase of goods in a previous year in excess of INR 50 lakhs is required to deduct tax at source at the rate of 0.1 percent on value exceeding INR 50lakhs.

Read more: All About Section 194Q, Higher Rates of Tax and Issues Thereof

Introduction:

One of the objectives for implementation of GST in India is to ensure seamless flow of credit among business to shift the entire tax burden to ultimate consumers of the supply. In line with this objective, Section 16(1) of the CT Act[1] facilities input tax credit (‘ITC’/’Credit’) availment by a registered taxable person on all inward supply of goods or services that are used in the course or furtherance of his business. However, Section 17(5) blocks credit availment on certain inward supply of goods and services specified thereunder. Clause (h) of section 17(5) provides blocks credit on goods lost, stolen, destroyed, written off or disposed by way of gifts. The presence of this clause in section 17(5) coupled with the Revenue’s perception on the meaning of the term ‘gift’ let the taxpayers into defense. They are forced to forego credit on certain expenditure to avoid potential litigation. These expenditures include expenses incurred towards incentives and promotional schemes, promotional gift articles, dairies, pens etc., to promote brand name and expenses towards Corporate Social Responsibility (‘CSR’) Activities. In the humble opinion of the paper writers, credit is available on this expenditure and are not covered by section 17(5)(h). An attempt is made in this article to bring out the reasons why credit can be claimed on these expenditures.

Read more: Blocked Credit on Free of Cost Supplies - The Gloomy Picture and a Glimmer of Hope