Introduction:

The typical model of majority of the IT companies which are engaged in provision of software services to parent/group companies is ‘cost plus mark-up’. Under this model, the Indian companies would agree to provide a host of services to the parent/group companies and bill them on periodical basis on cost plus agreed mark-up. An agreed and transfer-pricing friendly margin/mark-up would ensure that Indian companies are always left with good enough reserves and not to worry of working capital requirements. This would ensure that Indian companies would never get into losses and concentrate on development of software and provision of other ancillary services.IT companies can start their operations in India either as SEZ or STPI or simple DTA unit[1]. Each of them have specific set of regulations and host of compliances to be adhered. The selection of the unit (SEZ/STPI/DTA) is purely the decision of promoter taking into the advantages and limitations which each set-up would provide.

The advent of MAT and phase out of Section 10A benefit under the Income Tax laws made choice of setting up a software company as SEZ unit, no longer a favorable option. The same is the case with STPI. Thereby all the companies now prefer starting the company as a DTA unit, since there are no specific pre-requisite conditions that are to be satisfied unlike SEZs and STPIs, which make the entire process of setup of DTA unit easy and hassle-free.

Read more: SOFTEX for Non-STPI Units - A Mandatory Requirement

Introduction:

In our 45^th Volume (April 2018 edition) of our wiki, we have authored an article titled “GST on Shipping Services— the unwarranted turmoil” on GST implications over the services by way of transport of goods by vessel. It has been explained by us that the ocean freight and air cargo freight were not subject to tax for the reason that the tax is collected in the form of customs duties by including these costs in the value of goods. However, levy of service tax on services by way of transport of goods by vessel has been brought in with effect from 01.06.2016 in order to provide level playing field to Indian shippers compared to foreign shippers.

It was explained therein that the Indian importers are bearing the input tax burden on various goods and services received by them for providing their services and as a result of this, their cost of services has been increased compared to foreign suppliers. Accordingly, the levy was brought on these services so that they can collect tax from the customers and adjust the input taxes while paying the output tax.

Read more: Mohit Minerals - Recipient of Service - To Be Revisited?

The taxation of a receipt under the Income Tax Act becomes challenging when the said receipt is in the nature of capital as pleaded by tax payer as against revenue by tax authorities. Needless to state, that under the Income Tax Act, 1961 (for brevity ‘ITA’), all revenue receipts are taxable unless specifically stated not taxable and all capital receipts are not taxable unless specifically stated to be taxable. This is one of the cardinal principals embodied in ITA. However, whether a receipt is in the nature of capital or revenue is always hard to find and the courts had always framed various tests to determine the nature of the receipt and consequently the taxability.

In this article, we are dealing with determination of nature of one such receipt, which is received on extinction of profit apparatus or sterilisation of profits. Let us understand the nature of receipt by taking an example.

Read more: Taxation of Receipts - Extinction of Profit Earning Apparatus

In this edition, we bring you to quite a few interesting articles.

The article on ‘Mohit Minerals – Recipient of Service – To be Revisited?’ deals with the decision of recent Honourable High Court of Gujarat in the matter of Mohit Minerals, where in the Honourable High Court has struck the levy of tax under reverse charge on importer stating that he could not be called as recipient of service. However, seen from a different perspective, we believe that the importer can be called as recipient of service and accordingly be subjected to reverse charge obligation. We have articulated our understanding and observations in the said article.

The article on ‘Taxation of Receipts – Extinction of Profit Earning Apparatus’ deals with the taxation of receipts which are in the nature of extinction of source of income. The question whether such receipt is capital or revenue has been discussed in such article and hope you will have a good read of the same.

The article ‘SOFTEX for Non-STPI Units – A Mandatory Requirement – FEMA’ is to alert all clients in the DTA units which are engaged in provision of software services to get registered with STPI as Non-STPI to comply with FEMA regulations and accordingly save themselves from penalty and compounding.

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 Feb 2020