Time for tax clarity on transactions

The Government has announced a series of committees to relook tax laws, GAAR, DTC and others to bolster investor confidence. This is also, perhaps, the time to build clarity on certain aspects of transactions to help the Indian entrepreneur raise more finances internationally. Currently, transactions for investments related to future performance are challenged on grounds of income tax and exchange control. The need is to balance the risks with rewards in a manner that is fair to all stakeholders navigating parameters such as income tax, foreign investment policy, SEBI laws, corporate laws and securities, which at times could create conflicts.

Swiss law firm’s fee taxable in India

For decades, benefits claimed by partnership firms through international tax treaties have been under litigation. The complexities of legislations, jurisdictions and variance in tax treatments have kept alive the controversy on the topic. Recently, the AAR dealt with one such issue in the case of Schellenberg Wittmer, a Switzerland-based partnership firm whose partners are Swiss residents. The firm engaged in law practice in Switzerland was appointed by an Indian company for representation in an adjudication proceeding in that country. The controversy was over whether the firm could be treated as a resident of Switzerland under the India-Switzerland tax treaty.

The AAR held that the definition of ‘person’ in the tax treaty includes a company, body of persons, or any other entity ‘which is taxable under the laws in force in either contracting state’. Section 2(31) of the Income Tax Act, 1961 confers the status of a ‘person’ on a partnership firm, but there is no corresponding definition in Swiss law. Also, the partnership firm is not a taxable entity in Switzerland. Even though the partners are residents, they cannot invoke the tax treaty as they are compensated by the firm and not the Indian company. Further, the source of income for rendering professional services is in India.

Accordingly, the firm will not be treated as a resident under the tax treaty, and cannot benefit from it. Therefore, the legal fees received will be taxable in India.

Tax relief for inter-State gas sale

Since the inception of VAT (local sales tax) and Central Sales Tax (CST) laws, the issue of whether a sale would qualify as intra-State (subject to VAT) or inter-State (subject to CST in the originating State) has been under intense litigation.

More so in the oil and gas sector, where it has surfaced time and again as oil and gas for different buyers is transported through a common pipeline. Hence, the destination State often tries to levy VAT on the transaction (as such oil and gas is appropriated to the buyer at the exit point) while the originating State demands CST.

The Allahabad High Court, in a recent writ petition filed by Reliance Industries Ltd, has tried to settle this ambiguity. RIL was shipping gas from Gadimoga in Andhra Pradesh to Auraiya in Uttar Pradesh. The company was depositing CST on the sale in AP, while UP demanded VAT by treating it as a local sale.

The Court held that according to contracts executed, the delivery point is Gadimoga. From the seller’s perspective, the sale concludes at Gadimoga as all the rights and liabilities (that is, title of natural gas) are transferred at the delivery point. Therefore, it is an inter-State sale subject to CST.

The Court further held that if the contention of revenue were to be accepted, then every buyer would be required to install his own pipeline to transmit such gas, which is practically not possible. Accordingly, the Court while allowing the writ petition also directed the UP authorities to refund the VAT collected by them.

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