Page 23 – Vaish Associates Advocates

Taxbuzz | Royalty paid on inter-company sales not at Arm’s Length

Payment of royalty on the sales made to the associated enterprise has always been disputed by the Indian Transfer Pricing department as not satisfying the arm’s length test. In a recent ruling[1], the Hon’ble Delhi Bench of Tribunal was pleased to delete the transfer pricing adjustment made in respect of payment of royalty on invoices raised by CRM Services India Private Limited (‘TP India’ or ‘the Company’) on its AE, Teleperformance USA (‘TP USA’).

The dispute raised in the various years cantered around the royalty paid by the company pursuant to Licensing Agreement dated 02.01.2002 read with Foreign Collaboration Agreement with TP USA of even date, whereby the Company paid royalties on the ‘accumulated gross revenue’ from sale of voice-based call center services by TP India to third parties, including in respect of invoices raised on TP USA for the services to the clients of TP USA. In the unique business of TP India being a voice-based call center service provider, the services were rendered to third party customers of TP USA, as calls were made by third party customers who were attended to by the company in India.

DRP concluded that TP India is obliged to make payment of royalty to TP USA only on the sales made to third parties as royalty paid to TP USA qua revenues received from TP USA does not mean sale of services to third parties and therefore, did not form part of “accumulated gross revenues”.

Thereafter, the Company entered into the addendum to the Licensing Agreement on 22.08.2014 which clarified that ‘third parties’, for the purpose of payment royalty to TP USA in terms of the Licensing Agreement, shall mean entity or entities to which TP India has rendered services either directly or indirectly or through an affiliate.

Nevertheless, it was submitted that Section 62 of the Indian Contract Act, 1872 provides for alteration in the original contract upon consent of the parties to the contract, meaning thereby, that as such, alteration in a contract is not prohibited under the law.

The ITAT rejecting the contention of the TPO that the addendum to the Licensing Agreement executed by the company on 22.08.2014 clarifying the terms of the Licensing Agreement so as to enable payment of royalty on invoices raised on TP USA as also on the invoices raised on third parties, was a post facto exercise for avoiding tax liability and therefore, is to be disregarded. Thus, the ITAT while approving payment of royalty by CRM on its entire sales, i.e. on direct sales made to third parties as well as on sales made to TP USA for services rendered to its customers, held as under:

Payment of royalty in terms of licensing agreement dated 02.01.2002 was accepted upto at arm’s length price before AY 2007-08. Consistency in the conduct of parties to the transaction is relevant to interpreted or construed the transaction, agreement and addendum.
There is no requirement under the provisions of the Act to have an underlying agreement, much less a registered or notarized agreement for undertaking an international transaction with the group companies. The mutual conduct of parties over time is often determinative of actual intentions.
When clauses of Collaboration Agreement dated 02.01.2002 between TP USA and the Company are read along with the licensing agreement dated 2^nd January, 2002, the only conclusion that can be drawn is that there was consensus ad idem between parties that royalty is to be paid with respect to the entire sales revenue of the assessee in regard to overseas clients of TP USA, including sales to third party customers for TP USA for which Revenue is received from TP USA. The addendum was entered upon to just bring more clarity to this understanding and it cannot be said that this post facto addendum was made with intention to undo the findings of DRP.

Comments –

Clause (v) of section 92F of the Act defines the term “transaction” to include an arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing. Rule 10B(2) of the Rules, providing for comparability of a transaction with uncontrolled price, suggests that the contractual terms of the inter-company agreement are the one which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions. Thus, the Tribunal has rightly looked in the real intention of the parties and their conduct over period of time, to determine the arm’s length price of the transaction.

The appeal was successfully argued by Shri Ajay Vohra, Sr. Advocate, along with Vaish team – Neeraj K. Jain and Abhishek Agarwal.

For any details and clarifications, please feel free to write to:

Mr. Neeraj Jain at [email protected] and Mr. Abhishek Agarwal at [email protected]

[1] CRM Services India Private Ltd. v. DCIT: ITA No. 1518 & 1519/Del/2022

Tax Alert | Underwent Business Reorganization – The Clock Is Ticking

We are pleased to share our thoughts on the recent CBDT order dated 13 March 2024, wherein blanket approval has been granted to successor companies to furnish the return of income with modified particulars for the relevant assessment year(s) in accordance with and limited to the order of business reorganization (amalgamation or demerger or merger) sanctioned by the competent authority by using functionality on e-filing portal. Such approval has been granted where orders of the competent authority has been issued after 01 June 2016 but prior to 01 April 2022.

The move is expected to give significant relief to successor companies that have undergone business reorganisation or have been acquired under the Companies Act, 2013 and/ or under the Insolvency and Bankruptcy Code, 2016. It would be advisable for the taxpayers to avail of this short window provided by the CBDT order to file modified return rather than leaving the same to uncertainty after the closure of the timelines.

Considering the stringent timelines involved, entities having undergone business reorganisations wherein approvals from the competent authority have been received between 01 June 2016 to 01 April 2022, are required to furnish applications along with details prescribed in the proforma on or before 30 April 2024.

We trust that you will find the same useful.

For any details and clarifications, please write to Mr. Rohit Jain at [email protected]

Looking forward to receiving your valuable feedback.

Legalaxy | Monthly Newsletter Series – Vol XI – April, 2024

In the April edition of our monthly newsletter “Legalaxy“, our team analyses some of the key developments in securities market, banking and finance, intellectual property rights, pharmaceuticals, information technology, heavy industries, insurance and environment.

Below are the key highlights of the newsletter:

SEBI relaxes additional disclosures by FPIs fulfilling certain objective criteria
SEBI allows introduction of beta version of T+0 rolling settlement cycle in equity cash market
SEBI issues safeguards addressing concerns of investors on transfer of securities in dematerialized mode
RBI amends the master direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022
Ministry Of Finance amends The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019
The Patents (Amendment) Rules, 2024 – Notified
The Patents (Second Amendment) Rules, 2024 – Notified
Cinematograph (Certification) Rules, 2024 – Notified
Department Of Pharmaceuticals issues the Uniform Code for Pharmaceutical Marketing Practices, 2024
Advisory on prohibition of advertising, promotion, and endorsement of unlawful activities
MeitY issues advisory for the intermediaries and ai platforms to undertake due-diligence obligations under the IT Rules, 2021
Ministry of Heavy Industries provides a boost to manufacturing of electric passenger cars in India
IRDAI (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations, 2024 – Notified
IRDAI (Protection of Policyholders’ Interests, Operations and Allied Matters of Insurers) Regulations, 2024 – Notified
Ministry of Environment, Forest and Climate Change notifies the E-Waste (Management) Amendment Rules, 2024
Hazardous and Other Wastes (Management and Transboundary Movement) Amendment Rules, 2024 – Notified
Plastic Waste Management (Amendment) Rules, 2024 – Notified
Battery Waste Management Rules – Notified
Maharashtra Stamp Duty Amnesty Scheme, 2023 – Timelines extended
Home Ministry gives charge to Indian Cyber Crime Coordination Centre to pass orders to remove data under The Information Technology Act, 2000

We hope you like our publication. We look forward to your suggestions.

Please feel free to contact us at [email protected]

TaxBuzz | Section 153C: Limitation, Computation and Satisfaction

We are pleased to share with you a copy of our in-house publication – “TaxBuzz… Vaish in Courtroom”, wherein we have analysed the recent ruling of the Delhi High Court in a batch of matters titled Ojjus Medicare Pvt Ltd. The High Court in the said ruling, has delved into aspects relating to determination of the trigger point for computation of 6 years/ 10 years period under section 153C read with 4th proviso to section 153A of the Income Tax Act, 1961. In their ultimate analysis and resulting conclusion, the Court has clarified the legal position as laid down by apex Court.

The said ruling is likely to impact the reassessment proceedings initiated under section 153C pursuant to unearthing of some material during search action on some other person, and thus, requires attention of such assessees.

We trust that you will find the same useful.

Looking forward to receiving your valuable feedback.

For any details and clarifications, please write to:
Mr. Rohit Jain at [email protected]

Competition News Alert – Determination of Monetary Penalty Guidelines, 2024

We are pleased to share our latest publication ‘Competition News Alert‘, on the Determination of Monetary Penalty Guidelines 2024, notified recently by the Competition Commission of India (CCI) on 6th March 2024.

The Guidelines were much awaited and have brought in clarity and reduced elements of subjectivity in the discretion of the CCI in imposing monetary penalties on the enterprises and individuals held responsible for violation of the various provisions of the Competition Act, 2002 (Act) related to anti competitive market conduct, abuse of dominant position, combinations, and contraventions of CCI orders passed under the Act.

We trust that you will find the same useful.

Looking forward to receiving your valuable feedback.

For any further information/clarification, please feel free to contact/write to:

Mr. MM Sharma, Advocate
Head – Competition Law Practice
E: [email protected]

NCLAT: Definition of financial debt under IBC does not use the expression that disbursement should be made to corporate debtor only

The National Company Law Appellate Tribunal (“NCLAT”), vide its order dated January 2, 2024, in the matter of Rajeev Kumar Jain v. Uno Minda Limited [2024 SCC OnLine NCLAT 28], has held that the definition of financial debt does not use the expression that disbursement should be made to the corporate debtor only. It further observed that the disbursement made on behalf, or at the instructions, of the corporate debtor will tantamount to disbursal made to the corporate debtor.

Facts

M/s. Unicast Autotech Private Limited (“Corporate Debtor”) was engaged in the business of manufacturing aluminium die casts and M/s. Uno Minda Limited (“Respondent”) was engaged in the business of supplying automotive solutions to original equipment manufacturers. Mr. Rajeev Kumar Jain (“Appellant”) was an ex-director and one of the shareholders of the Corporate Debtor.

The Corporate Debtor and its promoters including the Appellant approached the Respondent to discuss sale of 100% stake in the Corporate Debtor to the Respondent. The Appellant and other promoters of the Corporate Debtor agreed to transfer the Corporate Debtor along with its asset for INR 3 Crores against its outstanding dues through a Non-Binding Offer made by the Respondent (“NBO”).

In furtherance of the NBO, the Corporate Debtor and its promoters entered into a Business Support Agreement (“BSA”) with the Respondent. The BSA provided that the Respondent will acquire 100% shareholding of the Corporate Debtor and further agreed to supply raw material funding and critical capital working requirements and it was decided that all such money lent would be considered as unsecured debts given by the Respondent to the Corporate Debtor.

In May 2021, the Corporate Debtor approached the Respondent for further financial assistance. During discussions, the Respondent asked the promoters to pledge their entire shareholding in the Corporate Debtor and also furnish respective guarantees and accordingly the promoters along with its sister concern, M/s. Kiran Udyog Private Limited (collectively referred to as “Promoter Group”) pledged their shares, vide a Share Pledge Agreement dated May 12, 2021 (“SPA”), and issued the deed of guarantee.

The Respondent continued to provide support to the Corporate Debtor in acquiring goods required for its operations and between April, 2021 to May, 2021 certain payments were made by the Respondent amounting to INR 1.15 Crores. However, due to financial distress of the Corporate Debtor, the same could not be repaid to the Respondent.

Respondent issued a notice terminating the BSA and called upon the Promoter Group to repay INR 1.43 Crores as outstanding amount along with interest as per the BSA. The Appellant did not reply to the said notice. However, the Corporate Debtor repaid INR 24 Lakhs to the Respondent. The Respondent issued a legal notice for invoking guarantee furnished by the Promoter Group and calling them to pay outstanding dues and ultimately filed an application under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) which was admitted by the National Company Law Tribunal, New Delhi (“NCLT”), vide its order dated July 8, 2022 (“Impugned Order”).

Being aggrieved by the Impugned Order, the Appellant filed an appeal before the NCLAT.

Issue

Whether the debt given by the Respondent to the Corporate Debtor was a financial debt or an operational debt.

Arguments

Contentions of the Appellant:

The Appellant argued that the Impugned Order is illegal as there was no financial debt against the Corporate Debtor and the money owed to the Respondent could not have been treated as financial debt as no financial assistance has been provided by the Respondent and there was no time value of money involved.

The Appellant stated that the NCLT erred in concluding that the debt was a financial debt because it is secured by SPA and deed of guarantee, whereas the Corporate Debtor never agreed to repay the debt to the Respondent. The Appellant submitted that the understanding between the parties was that such unsecured debts would become payable only from the promoters.

The Appellant argued that except the BSA, the Respondent was also in charge of the Corporate Debtor, both in respect to company affairs and financial affairs and the Respondent cannot assume the character of a financial creditor.

Contentions of the Respondent:

The Respondent argued that the default was committed in making repayment to the Respondent and referred to several clauses of the BSA and SPA in support of its arguments that there was clear financial debt and not operational debt. The Respondent argued that the debt and the liability of the borrowers was an admitted position between the parties and once default takes place, it is the right of the financial creditors to approach NCLT. The Respondent contended that BSA was entered into by both the Corporate Debtor and its promoters and only the Corporate Debtor had been repaying the amount so far to the Respondent.

The Respondent highlighted that the BSA stated that both the Corporate Debtor as well as its promoters were to make the payments and also defined the joint and several liability on both the Corporate Debtor as well as its promoters.

Respondent denied that it was looking after the management of the Corporate Debtor and submitted that clause 3.2 of BSA was incorporated only to protect the financial interest of the Respondent, which provided that any withdrawal and borrowing of money or operation of the bank account of the Corporate Debtor was required to be approved by two persons, one from the Corporate Debtor and one from the Respondent.

Observations of the NCLAT

The NCLAT observed that financial debt means debt along with interest, if any. This means that interest is not sine qua non, therefore, interest may or may not be payable by the Corporate Debtor and it is the understanding between the parties which is significant and relevant to ascertain the existence of time value of money which can be in several forms, other than pure payment of interest.

The NCLAT observed that the definition of financial debt under Section 5(8) (Definition of ‘financial debt’) of IBC does not use the expression that disbursal should be made to a corporate debtor only. Hence, it can be implied that any disbursal made on behalf of the Corporate Debtor or at the instructions of the Corporate Debtor may also tantamount to disbursal made to the Corporate Debtor. The NCLAT also observed that the Corporate Debtor was the beneficiary of such disbursal made by the Respondent.

The NCLAT observed that the BSA, SPA and deed of guarantees were made jointly by the Corporate Debtor, its promoters and the Respondent. The Corporate Debtor procured raw material from vendors for which payments were made by the Respondent, at the instructions of the Corporate Debtor and therefore it assumes the character of financial debt. The NCLAT also observed that the Respondent was only supplying funds for working capital needs of the Corporate Debtor which is nothing but financial debt. The NCLAT observed that any financial assistance towards working capital cannot be treated as operational debt and has to be taken only as financial debt.

Decision of the NCLAT

In view of the above, the NCLAT held that there was a financial debt and default which was rightly appreciated by NCLT in the Impugned Order and accordingly the appeal was dismissed by NCLAT.

VA View:

The NCLAT has rightly observed that while ‘financial debt’ under IBC means a debt along with interest, if any, however the element of interest is not absolutely necessary and it is the understanding between the parties which is significant and relevant to ascertain the existence of time value of money which can be in several forms, other than pure payment of interest.

Further, NCLAT has correctly noted that the definition of financial debt under IBC does not use the expression that disbursement shall only be made to a corporate debtor. Therefore, NCLAT was correct in arriving at the conclusion that disbursement made on behalf, or at the instructions, of a corporate debtor will tantamount to disbursement made to a corporate debtor. Since the corporate debtor is the beneficiary in these scenarios, the disbursed amount shall assume the character of financial debt.

For any query, please write to Mr. Bomi Daruwala at [email protected]