Tax Matters: Rulings on secondment arrangements

PwC | Updated on November 23, 2017 Published on October 20, 2013

The State Government can levy VAT on the sale agreement of the developer/ owner with the buyer of a flat as it is a works contract .   -  Business Line

Over the years, revenue authorities have held that reimbursement of the salary costs of employees deputed by an Indian subsidiary to its foreign parent, which has disbursed the salary, would be in the nature of Fees for Technical Services (FTS). Consequently, such payment should be subject to tax withholding in India. In the past month, the Mumbai Income Tax Appellate Tribunal has passed two rulings on this issue.

It follows, therefore, that if the payments to the foreign entity are at cost (reimbursements), the deputed employees work under the control and supervision of the Indian company, and appropriate employment-related taxes paid abroad have been deducted and remitted, any cross-charge of such salary costs by the Indian company would not attract tax withholding in India.

Also, if the seconded employees do not render any services in India on behalf of the overseas entity, a service PE (permanent establishment) of the overseas entity is not constituted.

GAAR rule notified

GAAR (general anti-avoidance rules) provisions have been incorporated in the Income-tax Act with effect from FY 2015-16. While some of the guidelines are already present in the Act, others were recently notified by the Central Board of Direct Taxes.

GAAR provisions shall apply only where the tax benefit from an arrangement (all parties in aggregate) in a relevant year exceeds Rs 3 crore. Further, foreign institutional investors and P-Note holders have been granted immunity from GAAR provisions, subject to conditions.

Although the GAAR provisions have been grandfathered, they would include past transactions and arrangements if any tax benefit is obtained on or after April 1, 2015. Also, the scope of GAAR provisions would be restricted to the alleged ‘part’ of the impermissible avoidance arrangement.

While the rules provide some certainty on the application of GAAR, there is still some ambiguity left, which the Government will hopefully clarify ahead of time.

First ruling under negative list regime

The Authority for Advance Rulings recently held that the ‘place of provision’ of promotion and marketing services for the recipient’s product in India would be determined by Rule 3 of the Place of Provision of Service Rules, 2012. The rule prescribes the service recipient’s location as the place of provision of such services. The AAR also held that the activity qualifies as export of services as the other conditions in Rule 6A of the Service Tax Rules, 1994 are satisfied.

The marketing services, in this case, includes demonstrating the product to the customer, management of dealer accounts and projects, assisting prospective customers in selecting products, providing written reports on various market aspects such as potential customer contacts, market development initiatives, advertisement strategy, potential or new market for competing products and their pricing.

The ruling would be binding only on the applicant. However, the principles laid down by it would have persuasive value in other cases as well. The added importance is that it is the first ruling under the ‘negative list of services' regime.

VAT payable on sale of flats: SC

The division bench of the Apex Court in the case of Larsen & Toubro differed with the legal position laid down by the division bench in the matter of K. Raheja Development Corporation over whether the sale agreement of the developer/ owner with the buyer of a flat is a works contract that attractsVAT.

The matter was referred to a larger bench which, while affirming the legal position laid down in the K. Raheja case, has held that a contract for sale of flats where the consideration is received in instalments and is linked to construction is a works contract. Accordingly, the State Government can levy VAT on such a sale.

The decision brings to rest the long-pending dispute on the applicability of VAT on an agreement for sale of flats linked to construction. It will impact the real estate business in India, including the end-customer.

Published on October 20, 2013
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