Equalization levy, corporate veil and survey statements: Madras HC held reimbursement-based liability cannot be fastened without clear statutory basis.

Equalization levy cannot be extended to reimbursements paid by an Indian assessee to its overseas subsidiary for online advertising expenses where the statutory charging provision covers consideration received by a non-resident for specified services and does not expressly include reimbursement. The corporate veil of the subsidiary cannot be pierced without proof that the structure was a sham or device for impropriety or tax evasion; prior existence of the subsidiary and earlier reimbursement arrangements weighed against such a finding. Statements recorded during survey under the Income-tax Act, standing alone, are insufficient to fasten liability. On these grounds, the refund rejection was set aside and reconsideration directed.

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Issues: (i) whether equalization levy could be imposed on reimbursement made by the Indian assessee to its overseas subsidiary for online advertising expenses incurred with a non-resident service provider; (ii) whether the corporate veil of the overseas subsidiary could be pierced on the facts to treat the assessee as the real payer; and (iii) whether statements recorded during survey under the Income-tax Act could be relied upon to fasten liability.

Issue (i): whether equalization levy could be imposed on reimbursement made by the Indian assessee to its overseas subsidiary for online advertising expenses incurred with a non-resident service provider

Analysis: The charging provision of equalization levy applied only to consideration received or receivable by a non-resident for a specified service from a resident in India or a non-resident having a permanent establishment in India. The services in question were rendered by one non-resident to another non-resident, and the statutory text did not include reimbursement within the scope of specified service. The legislative committee report had recommended inclusion of reimbursement of such expenses, but the Finance Act did not adopt that recommendation. A taxing provision could not be extended by inference, analogy, or substance-over-form reasoning beyond its language.

Conclusion: Equalization levy could not be imposed on the reimbursement in the absence of an express statutory basis, and the finding went in favour of the assessee.

Issue (ii): whether the corporate veil of the overseas subsidiary could be pierced on the facts to treat the assessee as the real payer

Analysis: Piercing the corporate veil is an exception requiring control plus impropriety, and the company structure must be shown to be a device or fac ade to conceal wrongdoing or avoid tax. The record showed that the overseas subsidiary had been in existence long before the levy was introduced and that similar reimbursement arrangements had existed prior to the levy. On those facts, the subsidiary could not be characterised as a fac ade created for tax evasion, and mere involvement of the Indian personnel in operational matters was insufficient without proof of impropriety.

Conclusion: The conditions for lifting the corporate veil were not made out, and this issue was decided in favour of the assessee.

Issue (iii): whether statements recorded during survey under the Income-tax Act could be relied upon to fasten liability

Analysis: Statements recorded during a survey under section 133A do not, by themselves, have evidentiary value in the same manner as sworn statements recorded during search proceedings. The impugned order substantially relied on such survey statements, although the surrounding documents also indicated that the actual payments were made through the overseas subsidiary's bank accounts and supported the reimbursement character of the transactions.

Conclusion: Survey statements could not, by themselves, establish liability, and this issue was also decided in favour of the assessee.

Final Conclusion: The impugned rejection of refund could not stand. The matter was sent back for reconsideration of the refund claim after verification, with directions to grant the appropriate refund in accordance with the Court's findings.

Ratio Decidendi: A taxing levy cannot be imposed on a transaction unless it falls squarely within the charging provision, and the corporate veil may be lifted only where the structure is shown to be a sham or fac ade used for impropriety or tax evasion.

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