Domestic and Direct Tax Updates

published on 31 January 2023 I reading time approx. 4 minutes

Notifications and Circulars

1. Non-Residents without PAN exempt from e-filing of Form 10F up to 31 March 2023

Non-resident entities (NREs) usually encounter a situation, wherein for the purpose of making a remittance to NREs, their Indian customers request them to furnish Form 10F along with other documents like a Tax Residency Certificate (‘TRC’), No Permanent Establishment / Business Connection Declaration, etc.

There was a recent notification by the Indian tax department, as per which, Form 10F was to be filed through the online account of the respective entity on the Income Tax website instead of manual scanned copy being submitted until recently.

Considering the practical challenges faced by non-residents, Notification F. No. DGIT(S)-ADG(S)-3/e-Filing Notification/Forms/2022/9227 has been issued stating that NRE fulfilling the following conditions is exempted from online mode of filing of Form 10F i.e. electronically, till 31 March 2023:

NRE does not have a Permanent Account Number (‘PAN’) in India; and
NRE is not required to obtain a PAN as per relevant provisions of the Income Tax Act, 1961 (‘ITA’) read with the Income Tax Rules, 1962 (‘Rules’).

Domestic Tax Rulings

1. Supreme Court denies deductibility of employees’ contribution to PF/ESIC deposited late

Contributions to social security schemes in the nature of Provident Fund/ Statutory Insurance Scheme (‘PF/ESIC’) deducted from salaries of employees are considered as income of employer. The said amount is deducted from income of employer, if it is deposited by employer within specified due date. There has been a significant debate as to whether due date as per respective laws under which contribution is made or due date of return of income should be considered as due date. In fact, there was an amendment made by the Finance Act, 2021 (effective from Assessment Year 2021-22) to settle this dispute in favour of tax department (i.e. considering due date as per respective laws under which contribution is made).

However, there had been several judicial precedents that had ruled in favour of taxpayers prior to such amendment by holding that payment made till due date of return of income is deductible. Recently, Supreme Court’s larger bench (3 judges) in the matter of Checkmate Services P. Ltd [TS-791-SC-2022] has ruled the issue in favour of tax department, even for the years prior to the aforesaid amendment by holding that employee contribution to PF/ ESIC like funds should be paid within the due date specified in the particular law in order to be deductible. Supreme Court has disapproved the view taken in favour of taxpayers in several cases by multiple High Courts.

2. Inability to deposit demand cannot be automatically considered as Directors' negligence

In case tax officer raises tax demand on scrutiny assessment of return of income filed by a taxpayer, such tax demand can be challenged by the taxpayer in appeal. In such case, there is a provision requiring deposit of 20 per cent of such demand by taxpayer, in order to stay recovery of balance demand from taxpayer. In one of the cases, taxpayer had challenged the tax demand in appeal; but did not deposit 20 per cent tax demand. Tax officer had consequently initiated proceedings against directors of the company for non-deposit of 20 percent of tax demand on filing of appeal.

In this case of Devendra Babulal Jain [TS-975-HC-2022(GUJ)], directors had filed writ petition before Gujarat High Court (HC) against the order of tax officer passed under Sect. 179 of ITA requiring directors to pay tax demand raised on the company.

HC quashed the orders and reiterated that Tax Officer is required to make efforts for recovery of the outstanding dues from the Company which has committed default in payment of the outstanding demand before invoking provisions of Sect. 179 of ITA against the directors. HC also observed that Directors have to prima facie show that non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty in their role as Directors of the Company.

The law requires a seller to collect tax at source (‘TCS’) from the buyer at the time of sale of certain specified products, one such product being sale of scrap. In the present case of Umeshkumar Harilal Shah [TS-850-ITAT-2022(Ahd)], the taxpayer was a trader in scrap. The law defines “scrap” as waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons. Basis this definition, taxpayers at times take a position that TCS is applicable only where the scrap is generated from their own manufacturing processes.

However, tax department observed that the taxpayer earned income from sale of scrap and no TCS was collected by the taxpayer on such scrap sale. Tax department held that since the taxpayer was a trader in scrap, the taxpayer was required to collect TCS under provisions of section 206C of the Income Tax Act, 1961 (‘ITA’).

The Ahmedabad Tax Tribunal referred to the Special Bench ruling of Rajkot Tax Tribunal in the case of Bharti Auto Products [2013] 37 taxmann.com 37 (Rajkot – Trib.) (SB), wherein it was held that meaning of scrap is not restricted to one arising only from manufacture or mechanical operations, and thus rejected taxpayers’ contention that TCS provisions were inapplicable since the scrap was not generated through manufacturing activity.

While deciding the case, the Ahmedabad Tax Tribunal also referred to Circular No. 18 dated 21 May 2012, wherein it was clarified that there is no requirement that the goods to be eligible for scrap should be produced/manufactured by the seller itself. The Tribunal also noted that the taxpayer did not file Form 27C for claiming exemption from payment of TCS.