EY tax ruling may be a ray of hope for Chinese companies

Chinese companies under the scanner may get some reprieve as the Income Tax Appellate Tribunal (ITAT) recently permitted Ernst & Young to contest Rs 6.6 crore tax bill from the I-T Department, The Economic Times reported on July 15.

According to the report, after accessing the British company’s foreign remittances for four years, a top I-T official had raised the tax demand. The said official, an assistant commissioner of income tax, international taxation, termed these remittances as royalty paid to the parent company.

The tax was classified as under global wide area network (GWAN) connectivity charges, global technology charges and software charges, the report added.

EY opposed the tax claiming payments received from its Indian member firms were only reimbursement of costs which is not taxable as per the I-T Act and under the UK and India’s Double Taxation Avoidance Agreement.

While the Authority of Advance Ruling (AAR) upheld the tax demand, the Delhi High Court had struck down liability, that payments received from providing computer software to member firms didn’t amount to royalty.

Agreeing with the HC’s ruling, the ITAT directed the official to follow the order effectively.

Legal experts opine that this case could be precedence for similar cases involving other foreign companies including Chinese telecom firms.

Moneycontrol could not independently verify the report.

A senior advocate and former assistant solicitor general, Chetan Mittal told ET that the judgement will have “far reaching” effects and may benefit others who find themselves in similar tax disputes.

Quoting corporate litigator Aditya Dewan, the report said that Chinese representative may use the ruling to argue their case, it may not pan out. This he said is because it is the Indo-Chinese Double Taxation Avoidance agreement that would be considered.

Chinese firms under scanner
The Enforcement Directorate (ED) had frozen the bank accounts of Vivo, after search-and-seizure operations at the company’s premises. The ED alleges tax evasion and money laundering by Vivo.

Vivo is the second Chinese mobile company, after Xiaomi, to face ED wrath over foreign remittances.

While Xiaomi was charged with violation of Foreign Exchange Management Act (FEMA), action against Vivo has been carried out under the Prevention of Money Laundering Act (PMLA).

Another Chinese smartphone maker, Oppo, has also come under the scanner, with the Directorate of Revenue Intelligence (DRI) alleging custom duty evasion worth Rs 4,390 crore.

Vivo, on July 13, won an interim relief from the Delhi High Court, which allowed it to operate its bank accounts, frozen by the ED. However, the company itself is not off the hook. The case will be heard next on July 28. Moneycontrol