Tax Street – January 2023

Introduction

We are pleased to present the latest edition of Tax Street - our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of January 2023.

The 'Focus Point' sheds light on the GST aspects surrounding co-working spaces.
• Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
• Our 'Tax Talk' provides key updates on the important taxrelated news from India and across the globe.
• Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.

We hope you find our newsletter useful and we look forward to your feedback.

You can write to us at [e-mail]. We would be happy to hear your thoughts on what more can we include in our newsletter and incorporate your feedback in our future editions.

Focus Point

No space for co-working spaces in the GST regime

Post the eruption of COVID-19, the world shifted to digitalization, and work from home became a norm. Various companies started adopting a hybrid (digital/physical) working arena approach where employees chose to work from the office or home. Largely, companies shifted from traditional rental office spaces to shared/ co-working spaces to reduce admin and rental costs. Such spaces also allowed access to flexible office space where a physical layout could be altered to accommodate fewer people, and the community shifted to digital realms.

Despite these benefits, a roadblock was the denial of GST registration when the 'Principal Place of Business' was applied for such shared/co-working spaces. The tax authority's cautious approach was owing to the increased revenue leakages where the GST registrations were fraudulently obtained and misused for fake invoicing, thereby transferring "paper input tax credit."

While the taxpayers are adopting modern business practices, the Department has also rightly contested that there is no stability in registrations obtained at such co-working places considering the limited/no documentation/records available at the place of business and also the permanency of such addresses.

Thus, as a standard practice, the officers started calling for extensive documentation such as the original registered lease agreement, notarized lease agreement between the co-working space companies, NOC from the original owner in the name of the companies, and KYC of the original owner, etc. Although these documents look preliminary, they are very difficult to obtain considering the complicated structure of the co-working space arrangement discussed below.

For a better understanding, let's examine the structure of co-working spaces. Generally, an original owner leases his property to a co-working space developer who further provides space and other services to multiple companies. Obtaining spaces differ from getting a single desk/cabin to getting the entire floor. Furthermore, it is worth noting that a co-working space not only rents out space but also certain allied services such as internet connection, phone and fax numbers, house-keeping services, kitchen amenities/drinking water, electricity usage, parking area, access to conference rooms, printing credits, etc. As this is more of a bundled service than only space rental, the co-working spaces enter into a 'Membership/ Service Agreement' with the companies, not a lease rent agreement.

As against the service agreement, the authorities are adamant about approving the registrations only if registered leave and license agreements are uploaded, which are derived from applicable state laws (E.g., Maharashtra Rent Control Act). The agreement between a co-working space and an applicant is a 'Service Agreement' for sharing premises and is not a 'lease' /'leave and license' agreement which does not require registration under the State Rent Control Act. Furthermore, GST law nowhere mandates a registered leave and license/lease agreement for obtaining registration. In fact, the GST portal and CBIC FAQs recognize shared/co-working spaces and GST registrations are allowed basis of NOC from the original owner and a copy of the electricity bill.

A general condition in the service agreement restricts the applicant from creating tenancy interest, leasehold estate or real property interest. On one hand, the taxpayer is getting rejections vis-ŕ-vis registration applications and thus litigating with the tax authorities, while on the other hand, persuading the original owners and co-working space providers for documentation. This has led to severe hardships for the taxpayer resulting in a delay in obtaining registrations owing to the piling of requirements/multiple rejections.

It is worth noting that even though Kerala Authority for Advance Ruling had affirmed that GST registration can be allowed to multiple firms operating from the same address, the Tamil Nadu Authority for Advance Ruling had rejected the same. This highlights the different mechanisms adopted by different states, adding to the agony of the taxpayers burdening them with impractical requirements.

There is no doubt that there has been a tremendous increase in bogus invoicing and detection of fraud, and it needs to be controlled and prevented, but the current practice is making genuine taxpayers willing to do business in India suffer.

There might come a point where foreign companies stop investing in India, considering the stringent registration provisions in a hybrid workflow model like today. The need of the hour is a prudent clarification by the GST Council to clear the air on the GST registration issues and devise a mechanism to check credit frauds without impacting genuine taxpayers for as fundamental a thing as to get registered for paying GST.

From the Judiciary

Direct Tax

Whether a Liaison Office would constitute a Permanent Establishment where employees conduct preparatory or auxiliary coordination?

S.R. Technics Switzerland Limited TS-1018-ITAT-2022(Mum)

Facts

The taxpayer is a foreign company incorporated in Switzerland and is engaged in the maintenance, repair, and overhaul business for aircrafts, engines, and components. The assessee also has a Liaison Office (LO) in India, which was established with RBI's approval for communication/coordination functions. The Revenue alleged that the LO in India constituted a Service Permanent Establishment (PE) or an Agency PE; accordingly, a certain portion of its income was alleged to be attributable to the Indian PE.

It was contended by the taxpayer that there is no PE in India as the LO is functioning strictly under the RBI directions and is engaged in only coordination functions, which are of preparatory/auxiliary nature. An appeal was filed with the Tribunal after not receiving relief from the Department.

Held

The Tribunal agreed with the taxpayer's contention. The LO did not carry out any activities which were beyond what was permitted by the RBI, i.e., it was not engaged in any business or trading and was just a part of the coordination and communication functions. Thus, it was held that the activities carried out by the LO are preparatory(auxiliary) in nature, which is under the specific exclusions provided under Article 5 of the India Switzerland tax treaty. Furthermore, it was also observed that the employees of the LO do not negotiate, finalize or discuss the mechanics of contracts, including pricing, with the assessee's customers, and as such, the employees of LO merely act as a communication link between the assessee and the airline companies.

Our Comments

The Mumbai Bench of the Tribunal held that the LO was only conducting preparatory and auxiliary functions of communication and coordination.

Whether IT and admin services provided to AE would constitute FTS despite of make available clause?

Bio Rad Laboratories Inc. TS-1009-ITAT-2022(DEL)

Facts

Bio Rad Laboratories Inc. is incorporated under USA laws and is engaged in manufacturing and supplying life science research, healthcare, analytical chemistry systems, etc. It rendered information technology services and some administrative services to its associated enterprise pursuant to a service agreement. The Revenue alleged that these services were in the nature of managerial services provided by the taxpayer to its Indian Associated Enterprise (AE), and such technical knowledge, experience, skill, know how, etc., were 'made available' by the taxpayer to its Indian affiliate and, therefore, they are in the nature of FTS being liable to tax at 10% under the India-USA tax treaty.

Held

The Tribunal ruled that in order to bring the managerial services within the ambit of FTS, the said services would have to satisfy the 'make available' test, and such services should enable the person acquiring the services to apply the technology contained therein.

The Tribunal further observed that it is evident that Indian AE is not enabled to provide the same services without recourse to the taxpayer, and mere incidental advantage to Indian AE is not enough to satisfy the 'make available' test. It was opined that the real test is the transfer of technology, which the Revenue failed to consider. The following observation was made by the Tribunal "in order to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end....".

Our Comments

The Delhi Bench of the Tribunal concluded that to invoke 'make available' provision, the technical knowledge and skill must remain with the person receiving the services even after the service ends.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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