BCAJ | Bombay Chartered Accountant Journal

S. 54 — Where assessee paid advance to a builder for purchase of a house, but due to inability to arrange funds, could not purchase the property and got the advance back, the conditions of purchase/construction within time specified in S. 54 are not satis

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57. 2009 TIOL 512 ITAT (Bang.)

Mrs. Shakuntala Devi v. DDIT (International
Taxation)

A.Y. : 2005-06. Dated : 23-6-2009

S. 54 — Where assessee paid advance to a builder for
purchase of a house, but due to inability to arrange funds, could not purchase
the property and got the advance back, the conditions of purchase/construction
within time specified in S. 54 are not satisfied. In such a case, exemption
can be denied only on expiry of time period of 3 years from date of transfer
of original asset.

Facts :

During the previous year relevant to assessment year
2005-06 the assessee sold two flats — one at Prithvi Apartments and another at
Embassy Diamante, Bangalore. Long-term capital gain arising on sale of these
two flats was worked out at Rs.46,51,537. The assessee advanced a sum of
Rs.98,69,970 to the builder towards the purchase of the flat at Embassy
Habitat. Accordingly, it claimed the sum of Rs.46,51,537 to be deductible
u/s.54 of the Act. In an order passed u/s.143(3) r.w.s. 147 of the Act, the
Assessing Officer stated that the assessee failed to furnish either the
registered sale deed or the purchase agreements to substantiate her claim both
for sale of two properties and also for purchase of the flat at Embassy
Habitat. He also noted that the statement of affairs as on 31-3-2006 did not
reflect the flat at Embassy Habitat as her asset. He held that the since the
title of the property was not transferred to the assessee the provisions of S.
54 were violated and accordingly, he denied the exemption claimed by the
assessee u/s.54 of the Act.

The CIT(A) confirmed the order of the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal. On behalf of the assessee it was submitted that the assessee had
entered into an agreement for purchase of a house and had paid an advance, but
subsequent to the payment of advance the assessee could not raise the
necessary funds for purchase of the flat and therefore, the agreement entered
into by the assessee was terminated and cancelled and the assessee received
back the advance paid by her. It was also contended that it is premature to
decide upon denial of exemption. It was submitted that unutilised amount is to
be brought to tax in the assessment year relevant to the previous year in
which the period of three years from the time of transfer of original asset
ends. For this proposition reliance was placed on provisions of S. 54(2) of
the Act which provides for depositing the amount of gain into a Capital Gain
Account and utilisation therefrom within the prescribed time period. Upon
failure to utilise the amount deposited in Capital Gain Account for purchase
or construction within the prescribed time period, the unutilised amount is
charged to tax in the previous year relevant to the assessment year in which
the period of three years from the time of transfer of original asset (that
resulted in the capital gains arising in the first place) ends.

Held :

Since the transaction entered into by the assessee did not
culminate into purchase of residential house either one year before or two
years after the date of transfer nor a residential house was constructed
within a period of three years after the date of transfer, the CIT(A) was
justified in denying the claim of exemption u/s.54 of the Act.

As regards the alternative contention raised the Tribunal
restored the issue to AO with a direction to decide the same as per facts and
law, after providing due opportunity of hearing to the assessee.

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Nirav Shah

S. 28, S. 45 — Gain arising on transfer of land held by the assessee as its capital asset in lieu of 50% of the constructed areas to be constructed by the developer at his own cost without any construction activity to be carried on by the assessee is char

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56. 2009 TIOL 477 ITAT (Mum.)

ACIT v. Shree Dhootapapeshwar Ltd.

A.Ys. : 2001-02 and 2002-03.

Dated : 30-3-2009

S. 28, S. 45 — Gain arising on transfer of land held by the
assessee as its capital asset in lieu of 50% of the constructed areas to be
constructed by the developer at his own cost without any construction activity
to be carried on by the assessee is chargeable to tax as capital gains.

Facts :

The assessee company was engaged in the business of
manufacturing and trading in ayurvedic medicines. It was owner of land
acquired by it in 1936 on which it had constructed a factory for manufacturing
ayurvedic products. The land was held by it as a fixed asset and was
consistently shown as fixed asset in its accounts. The assessee had not
converted this land into its stock-in-trade. The development agreement entered
into by the assessee recorded that the assessee did not have the requisite
expertise and know-how to undertake the development of the said land. As per
the agreement, the assessee was to part with the land and in lieu thereof was
entitled to receive 50% of the constructed area without carrying out any task
of development. The assessee was not required to meet any of the expenses
towards construction of the buildings.

The AO noted that — (i) the agreement described the
assessee as the owner and the developer as the licensee; and (ii) under the
agreement the assessee was given absolute rights to sell all the residential
as well as commercial property developed and handed over by the developers at
whatever rate as per the prevalent market conditions. Considering these, the
AO charged the profit arising on transfer of land under the head ‘Income from
Business’.

The CIT(A) allowed the assessee’s appeal.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that CIT(A) has observed that (a) the
constructed area was to be shared amongst the parties; (b) the parties were
free to deal with their respective areas in the manner they thought fit; (c)
this was not a case where the parties by virtue of the agreement have decided
to share the profit from the project; (d) the assessee was to receive 50% of
the constructed area, irrespective of the cost of development incurred by the
developer.

On facts and having noted the observations of the CIT(A),
the Tribunal held that the agreement could not be regarded as a joint venture
and the constructed area received by the assessee was consideration for
transfer of land. The Tribunal agreed with the conclusion of the CIT(A) and
noted that the conclusion of the CIT(A) is supported by the following judicial
decisions :

(a) CIT v. Smt. Radha Bai, (272 ITR 265) (Del.)

(b) CIT v. B. K. Bhaumik, (245 ITR 614) (Del.)

(c) CIT v. Mohakampur Ice and Cold Storage, (281
ITR 354) (All.)

The appeal filed by the Revenue was dismissed.

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Nirav Shah

S. 28, S. 45 and S. 56 — Amount of liquidated damages received by the assessee from the vendor of the property under an agreement for purchase of property constitutes a capital receipt not chargeable to tax.

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55. 2009 TIOL 511 ITAT (Bang.)

Mrs. Yogesh Aurora v. ITO

A.Y. : 2005-06. Dated : 9-4-2009

S. 28, S. 45 and S. 56 — Amount of liquidated
damages received by the assessee from the vendor of the property under an
agreement for purchase of property constitutes a capital receipt not
chargeable to tax.

Facts :

The assessee was working as a consultant with a
pharmaceutical company. She had entered into an agreement for purchase of
property for Rs.17,95,175 and paid an advance of Rs.10 lakhs. The agreement
for purchase inter alia provided that if the vendor fails to register a
sale deed within the period mentioned in the agreement in favour of the
assessee or her nominee he shall be liable to pay liquidated damages of Rs.5
lakhs. The vendor did not execute the sale deed. The assessee obtained legal
opinion and was advised that the only legal recourse available to her was to
accept liquidated damages. The assessee contended that the amount of
liquidated damages received by her constituted capital receipt not exigible to
tax.

The Assessing Officer (AO) charged this sum to
tax.

The CIT(A) was of the view that the property
sought to be purchased was huge considering the fact that the assessee was a
professional. He, therefore, held that the transaction was an adventure in the
nature of trade. However, since on the date of receipt of the amount the
adventure in the nature of trade had not come into full-fledged existence, he
held that the amount be charged to tax under the head ‘Income from Other
Sources’.

Aggrieved, the assessee preferred an appeal to
the Tribunal where it was contended that the compensation was received on
foregoing a right to acquire a capital asset and therefore, it is a capital
receipt. Reliance was placed on the decision of the Apex Court in the case of
Kettlewell Bullen and Co. Ltd. v. CIT, (53 ITR 261) and also in the
case of Oberoi Hotels Pvt. Ltd. v. CIT, (236 ITR 903).

Held :

The Tribunal noted that the Gujarat High Court in
the case of CIT v. Hiralal Manilal Mody, (131 ITR 421) and Calcutta
High Court in the case of CIT v. Ashoka Marketing Ltd., (164 ITR 664)
had considered similar issue. Following the ratio of the decisions of these
two Courts the Tribunal held the amount of liquidated damages to be capital
receipt. It also observed that because no cost can be attached to the right,
therefore, following the ratio of the decision of the Apex Court in the case
of CIT v. B. C. Srinivasa Shetty, (128 ITR 294) the amount cannot be
taxed as capital gain.

The appeal filed by the assessee was allowed.

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Nirav Shah

S. 142A r/w S. 143 — Reference to valuation cell u/s.142A can be made during the course of assessment and reassessment, and not for the purpose of initiating reassessment — Where Assessing Officer had not rejected books of accounts by pointing out any def

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54. (2009) 118 ITD 382 (Luck.)

ITO v. Vijeta Educational Society

A.Ys. : 1998-99 to 2001-02 and 2003-04 to 2004-05

Dated : 28-9-2007

S. 142A r/w S. 143 — Reference to valuation cell u/s.142A
can be made during the course of assessment and reassessment, and not for the
purpose of initiating reassessment — Where Assessing Officer had not rejected
books of accounts by pointing out any defect, reference to DVO for valuation
of cost of construction of building incurred by the assessee was not valid,
and hence, the DVO’s report could not be utilised for framing
assessment/reassessment even though the same was obtained u/s.142A.

The assessee society was granted registration u/s. 12A. In
the course of assessment, the AO referred the valuation of building
constructed by the assessee to valuation cell. However the AO completed the
assessment without considering the report as the DVO’s report was not received
in time. Subsequently, the AO received the report from the DVO, wherein it was
shown that the assessee had made additional investment of Rs.46.87 lacs in the
building. On the basis of the said report, the AO initiated reassessment
proceedings, treating the differential amount as income from undisclosed
sources.

The CIT(A) held that even if the said addition was to be
added to the assessee’s income, the same would be exempt u/s.11, and deleted
the addition.

On second appeal by the department, it was held :

1. If the assessee has maintained proper books of
accounts and all details are mentioned in such books, which are duly
supported by vouchers, no defects are pointed out and the books are not
rejected, then the figures mentioned therein will have to be followed. The
valuation report has to be taken into consideration only when the books of
accounts are not reliable, in the opinion of the ITO.

2. Further, there cannot be any reference u/s.142A when
there is no process of assessment which is initiated after filing of return
of income, or issuance of notice u/s.142(1).

3. The process of reassessment can be initiated only
after issuance of notice u/s.148(1) after duly fulfilling the formalities
mentioned therein. It is clear that invoking S. 142A is a process after
re-opening of the assessment. The use of the word ‘require’ in S. 142A is
not superfluous but signifies a definite meaning, whereby some preliminary
formation of mind by the Assessing Officer is necessary which requires him
to make a reference to the DVO u/s.142A.

4. The provisions of S. 142A cannot be read in isolation
to S. 145. If books of accounts are found to be correct & complete in all
cases, no defect being pointed out therein, then addition made on account of
difference in cost of construction on the basis of DVO’s report is not
correct. Use of such a report obtained u/s.142A is not mandatory, but
discretionary.

Hence, the order of the CIT(A) was to be upheld, though on
different grounds.

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Nirav Shah

Assessee was a mutual concern in the strict sense as all the members were travel agents in India, and convention receipts, membership and subscription fees and interest therefrom were exempt being in the nature of mutual receipts — Hence, having regard to

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53. (2009) 118 ITD 285 (Mum.)

Travel Agents Association of India v. ACIT

A.Ys. : 1997-98, 1998-99, 2001-02

Dated : 10-2-2008

Assessee was a mutual concern in the strict sense as all
the members were travel agents in India, and convention receipts, membership
and subscription fees and interest therefrom were exempt being in the nature
of mutual receipts — Hence, having regard to the fact that once said receipts
were taken out of computation of excess of income over expenditure, such
receipts could not decide the character of activities carried out by the
assessee and in such circumstances, when assessee was held to be a mutual
concern, S. 115JA was not applicable to it.

The assessee was a company incorporated u/s.25 of the
Companies Act, to promote interests of travel agents in India. Distribution of
income or property was prohibited by the Memorandum of Association & Articles
of Association. The assessee contended that it conformed with the requirements
of a mutual association and hence income was exempt from taxation on the
grounds of mutuality. The assessing authority held that even if the assessee
was a company registered u/s.25, it was liable for assessment u/s.115JA. The
CIT(A) held that as the Profit & Loss A/c had been prepared in accordance with
Schedule VI, book profit was liable to be taxed u/s.115JA.

On appeal to the Tribunal it was held :

1. S. 115JA deals with companies earning normal business
profits. The assessee was earning ‘income’ and not profits. The expression
‘income’ was a little different from ‘profits’, and hence S. 25 of the
Companies Act provides that such company has to prepare ‘Income &
Expenditure Account’, instead of ‘Profit & Loss A/c’. Companies carrying on
activities of charitable purposes or mutual interest are registered u/s.25.

2. Where the mutual association like the assessee does
not carry on any business and almost entire income is derived from mutual
activities, it is exempt from tax. Only when such a company indulges in
activity of earning profits and distributing the same, it comes out of the
tax exemption.

3. It is possible that a mutual association may earn
income from services/facilities provided to non-members. If such activity is
the major activity, then the question of taxability would arise in a
substantial way, and the rule of mutuality would be questioned.

4. In the instant case, the assessee was a professional
association and there was no case of non-members being involved in the
affairs of the company. Therefore, the activities carried on by the assessee
company were meant only for the member travel agents and were mutual in
character. It was held that the assessee was a mutual concern, it did not
declare dividends, nor distribute its income. Therefore, it did not come
under the MAT regime.

Hence, the computation of income made for the relevant
assessment years u/s.115JA was to be set aside.

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Nirav Shah

Articles 5 & 7 of India-Korea DTAA —arrangement between the parties did not give rise to emergence of AOP — Income from offshore supply is not taxable in India — In calculating threshold for Supervisory PE, duration of each project to be considered separa

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Part C — Tribunal & International Tax Decisions

Hyosung Corporation

Authority for Advance Ruling

224 CTR 329 (AAR)

Dated : 17-6-2009

Facts :

The applicant, a company incorporated in Korea, is engaged
in the business of setting up of power stations. The applicant successfully
bid for the contract awarded by Power Grid Corporation of India Ltd. (PGCIL)
for execution of works related to 800KV/400KV Tehri Pooling Station Package
associated with Koteshwar Transmission System (Project).

According to the terms and conditions of the bid and with
PGCIL’s approval, the applicant assigned a part of the contract related to
onshore supply/ services to Larsen & Toubro (L&T). The overall responsibility
for successful performance of the project continued to be on the applicant.
The applicant gave guarantee to PGCIL for successful completion of the project
and in turn, the applicant obtained a counter-guarantee from L&T for the part
assigned to L&T.

PGCIL entered into 3 separate contracts in the following
manner :

Contract no. 1 : Offshore supply contract with the applicant for design,
engineering, manufacture, testing at manufacturer’s works, Free-On-Board
(FOB) dispatch, shipment, marine transportation and insurance and CIF supply
of all offshore equipment and materials, including mandatory spares from
countries outside India and testing and training to be conducted outside
India.

Contract no. 2 : Onshore supply contract with L&T for supply of certain
equipment and materials in India.

Contract no. 3 : Onshore service contract with L&T for inland
transportation, insurance, storage, erection including associated civil
works, testing and commissioning of all equipment and materials, including
offshore equipments.

On the aspect of taxation of offshore supply, the applicant
argued that the title to the equipment and material was passed outside India
and the payment for offshore supply was also received in foreign currency
outside India. Therefore, no income accrued or arose to the applicant in India
in respect of the offshore supply contract.

The tax authorities argued that as the applicant had to
bear the overall responsibility of commissioning the project, the transfer of
property in goods and sale can be regarded completed in India. Accordingly,
part of the profits from supply of equipment was taxable in India.

In the background aforesaid, the following issues were
raised before the AAR :

Whether
the applicant, along with L&T, can be said to constitute an AOP and,
accordingly, be assessed as an AOP in relation to all the 3 components of
the contract of the project.

Whether
the consideration for offshore supply of equipment, materials, etc., is
taxable in India under the provisions of the domestic law and the applicable
Treaty between India-Korea (Treaty).

Ruling of AAR :

On the point of AOP emergence :

Based on the Memorandum of Understanding (MOU) entered into
between the parties, the Tax Department contended that the arrangement between
the applicant and L&T constituted an AOP. For this, the Tax Department relied
on the recitals of the MOU which stated that the parties desired to co-operate
with each other for the purpose of submitting a single bid for the project and
in the event of the bid being accepted, the parties would be jointly and
severally responsible for execution of the contract. The Tax Department also
referred to other clauses dealing with joint and several responsibility,
possibility of applicant paying liquidated damages for the fault of L&T, etc.

The AAR held that on the facts of the case, the
relationship did not give rise to AOP. The AAR noted that separate contracts
were entered into by PGCIL with the applicant and L&T. The assignment of
onshore supply/services by the applicant was as permitted in the bid and there
was a separate contract directly between L&T with PGCIL. L&T had worked as an
independent contractor and was entitled to separately raise and realise the
bills for the work L&T carried out for PGCIL. The individual identity of each
party, in doing the part of the work entrusted to it was preserved despite the
co-ordination between them and the overall responsibility of the applicant.

The AAR concluded that :

(a) Mere collaborative effort and the overall
responsibility assumed by the applicant for the successful performance of
the project was not sufficient to constitute an AOP.

(b) The requirement for the applicant to provide
performance guarantees for all the 3 contracts was not in furtherance of a
joint venture or a common design to produce income, but it was a special
stipulation insisted by PGCIL in the overall interest of the project. The
requisite cohesion, unity of action and the common objective of sharing the
revenue or profit were lacking and hence there was no PE.

The facts in the case of Geoconsult (304 ITR 283), wherein
the parties had entered into an arrangement as a ’consortium’ which was held
by the AAR to meet the requisites of an AOP, was held distinguishable from the
facts in the present case.

Nirav Shah

Proportionate cost of technical personnel working at HO for PE in India does not trigger disallowance in terms of S. 44C of the Act.

4 DCIT v. M/s. Stock Engineer & Contractors BV

(2009 TIOL 30 ITAT Mum.)

S. 40(a)(i), S. 44C. Article 5(2)(i) of India-Malaysia Double Tax Avoidance Agreement, Article 5(2)(j) and 5(2)(k) of India-UK Double Tax Avoidance A.Y. : 2000-01. Dated : 5-12-2008

Issues :

India-Malaysia Treaty

Manning services provided by a Malaysian company are not taxable in India.

Proportionate cost of technical personnel working at HO for PE in India does not trigger disallowance in terms of S. 44C of the Act.

India-UK Treaty

1. There is no tax implication for supervisory activity in India if the duration of such activity is less than the threshold of Supervisory PE — though the duration of such activity exceeded Service PE threshold of the treaty.

Issue 1 :

Manning services provided by a Malaysian company are not taxable in India :

Facts :

The assessee, a tax resident of Netherlands, is engaged in design and construction of oil and gas products, oil refining, chemicals and petro-chemicals. The assessee was awarded a contract in India by Indian Oil Corporation Ltd. (‘IOCL’) for engineering, procurement and construction of the Sulphur Block for the Haldia Refinery Project on turnkey basis. For the purpose of executing the contract, the assessee set up a project office in Mumbai and a site office in Haldia.

The assessee awarded a sub-contract in favour of its subsidiary company, namely, Stock Comprimo (Malaysia) Sdn. Bhd. (hereinafter called as ‘Malaysian company’). Under the agreement the Malaysian company was required to supply personnel to the assessee company for the purpose of execution of its project at Haldia.

The assessee did not deduct tax at source in respect of the payment to Malaysian company. Relying on AAR ruling in the case of Tekniskil (1996) 222 ITR 551, it was argued that the Malaysian company supplied the personnel; that, personnel supplied by the Malaysian company to the assessee were working under the direction, supervision and control of the assessee and, therefore, it could not be said that services were rendered by the Malaysian company in India.

The Assessing Officer (AO), however, held that :

(a) Malaysian company deputed its own technical personnel;

(b) the deputed personnel continued to be Malaysian company’s employees;

(d) Since duration of such services exceeded 6 months threshold of Construction PE, Malaysian company was liable to tax in India. Since the assessee failed to deduct tax at source with regard to payment made, the same was disallowable in computation of PE income in terms of S. 40(a)(i) of the Act. The CIT(A) accepted the assessee’s contention that :

(a) Malaysian company merely rendered services of supplying the personnel;

(b) since India-Malaysia treaty does not have FTS article, such amount is not taxable in India in absence of PE or presence of Malaysian company in India.

Held :

1. The ITAT noted that the following features of the service agreement between Malaysian company and the assessee supported that the role of Malaysian company was limited to supply of personnel and the Malaysian company did not have responsibility of performing supervisory activities in India.

(a) Malaysian company was engaged in the business of supplying skilled and unskilled personnel. In order to execute the contract, the assessee sought personnel from Malaysian company.

(b) Malaysian entity had no role to play after the personnel were supplied. It was not involved in carrying out supervision over the personnel supplied.

(c) The assessee was responsible for imparting/conducting training to the personnel and to equip them to carry out the desired work.

(d) Personnel performed and worked under the directions and control of the assessee.

Nirav Shah

Manning services provided by a Malaysian company are not taxable in India.

4 DCIT v. M/s. Stock Engineer & Contractors BV

(2009 TIOL 30 ITAT Mum.)

S. 40(a)(i), S. 44C. Article 5(2)(i) of India-Malaysia Double Tax Avoidance Agreement, Article 5(2)(j) and 5(2)(k) of India-UK Double Tax Avoidance A.Y. : 2000-01. Dated : 5-12-2008

Issues :

India-Malaysia Treaty

Manning services provided by a Malaysian company are not taxable in India.

Proportionate cost of technical personnel working at HO for PE in India does not trigger disallowance in terms of S. 44C of the Act.

India-UK Treaty

Issue 1 :

Manning services provided by a Malaysian company are not taxable in India :

Facts :

The Assessing Officer (AO), however, held that :

(a) Malaysian company deputed its own technical personnel;

(b) the deputed personnel continued to be Malaysian company’s employees;

(a) Malaysian company merely rendered services of supplying the personnel;

(b) since India-Malaysia treaty does not have FTS article, such amount is not taxable in India in absence of PE or presence of Malaysian company in India.

Held :

(a) Malaysian company was engaged in the business of supplying skilled and unskilled person-nel. In order to execute the contract, the assessee sought personnel from Malaysian company.

(b) Malaysian entity had no role to play after the personnel were supplied. It was not involved in carrying out supervision over the personnel supplied.

(c) The assessee was responsible for imparting/conducting training to the personnel and to equip them to carry out the desired work.

(d) Personnel performed and worked under the directions and control of the assessee.

Nirav Shah

Services rendered outside India by R but NOR are not taxable in India if the taxpayer can substantiate that presence outside India does not relate to his employment in India.

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3 ACIT v. Shri Ellis ‘D’ Rozario (2009 TIOL 138 ITAT Del.) Section/Article : S. 5

A.Y. : 2001-02. Dated : 5-12-2008

Issue :

Services rendered outside India by R but NOR are not taxable in India if the taxpayer can substantiate that presence outside India does not relate to his employment in India.

Facts :

The assessee, an Australian National, was Resident but Not Ordinarily Resident (R but NOR). The assessee was employed by a UAE Company and was posted to India as a regional manager of the Indian sub-continent. The UAE company was in the process of establishing a liaison office for collection of information from India. For the year under reference, the assessee was in India for 224 days, while he was outside India for 51 days. The assessee claimed that proportionate salary for 51 days pertaining to the period for which he was outside India was not taxable in India, as (i) his residential status was that of R but NOR; and (ii) the visits outside India were on assignments totally unrelated to Indian assignment.

The CIT(A) accepted the claim of the assessee.

Before the Tribunal, the Department claimed that the visits outside India were in connection with assessee’s employment in India and hence the entirety of salary was chargeable to tax in India. The Tax Department also claimed that as per the assessee’s own admission, he had undertaken debriefing of his Indian activities during one of his visits abroad.

The assessee relied on the following decisions to claim that having regard to his status of R but NOR, salary pertaining to the period of stay outside India is not chargeable to tax in India :

W/A Kielmann (ITR No. 4/1979) dated 9-8-1984 (Delhi HC)

J Callo and Others (ITA No. 5921-5929/Del/86) dated 2-8-1989 (Delhi)

The assessee also relied on the decision of the Delhi Tribunal in the case of Eric Marou (ITA No. 1174/ Del./2005), dated 15-2-2008 to support the proposition that no inference can be drawn as to ‘while being outside India the employee rendered services in respect of their operations in India’ and that the period of employment outside India should not be considered as services rendered in India.

Held :

The Tribunal observed :

(1) The decisions relied on by the assessee involved cases where the employment contract specifically required of the assessee to work outside India for a particular period of time. As against that, in the case of the assessee, the employment contract required the assessee to be based in India and undertake overseas travel in connection with his employment in India. According to the Tribunal, as compared to other cases, the period for which the assessee was liable to work outside India was not specified in the agreement.

(2) The facts on record showed that while being outside India, the assessee held debriefing meeting about his Indian activities. Thus, even while being outside India, certain activities relating to the Indian activities were undertaken. The Tribunal held that such part of the salary was taxable as the income can be regarded as arising in India.

(3) The Tribunal set aside the matter with a direction that to the extent the assessee can substantiate with evidence, that while being outside India the assessee did not do any activity in relation to India-specific employment, the amount of such salary would be excluded from the scope of total income.

Nirav Shah

Offshore supply of equipment is not liable to tax in India though it is a part of composite contract involving onshore service component.

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Part C — Tribunal & International Tax Decisions

M/s. Xelo Pty Limited v. DDIT

ITAT Mumbai

Before Shri R. S. Syal (AM) and

Shri D. K. Agarwal (JM)

ITA Nos. 4107 & 4108/Mum./2002

A.Ys. : 1995-96 & 1997-98. Dated : 22-6-2009

Counsel for assessee/revenue : Percy Pardiwala/ Abhijit
Patankar

Facts :

The assessee, an Australian resident, executed 3 contracts
with 3 different Indian enterprises through its PE in India. Two of the
contracts involved only onshore supply and services. The third contract
entered into with Metro Railways, Calcutta involved offshore supply of
equipment; onshore services involving supervision, installation, testing,
commissioning of integrated fibre communication system between Dumdum and
Tollygunj sections of Metro Railways, Calcutta (hereinafter the contract).
Consideration in the contract was split into three parts :

Imported
supplies on FOB basis (offshore supply)

Imported
services (offshore services)

Indigenous services (onshore services)

There was no dispute on taxation of onshore services and
income in respect thereof was offered to tax in respect of the contract. The
assessee claimed that income from offshore supply was not taxable in India
since title to the goods passed outside India.

The AO rejected the contention and brought to tax the
entire amount of the contract consideration including the offshore supply on
the grounds that :

(a) the supply of equipment was part of single composite
contract involving onshore services; and

(b) the assessee had PE in India.

On the assessee’s appeal, CIT(A) accepted the submissions
of the assessee and held that the income from offshore supply was not taxable
in India.

Before ITAT, the Tax Department raised the following
contentions :

The
contract was a single contract. There was no scope for bifurcation of
consideration towards onshore services and offshore supply of the equipment.

The
receipt towards the supply of equipment was liable to be considered as
appropriation towards consideration for single contract which involved
supply of the equipment with responsibility of supervision of installation
work in India.

As the
assessee had PE in India, having regard to force of attraction provisions of
Article 7(1)(b) of the DTAA between India and Australia, taxable income
attributable to PE would also include income from offshore supply.

Held :

The ITAT held :

Though the contract is single contract; separate
identifiable consideration has been mentioned towards supply and rendition of
services. There is no dispute that the receipt was towards ‘offshore supply’.
No income accrued to the assessee in India from the offshore supply of
equipment where the title to the equipment passed outside India.

The substance of the matter rather than its form is crucial
for the determination of the tax liability. If the intention of the parties to
the contract is clearly flowing from the terms of the contract, then it is not
permissible to negate those terms to infer to the contrary.

Reliance was placed on the Supreme Court decision in the
case of Ishikawajima Harima Heavy Industries Ltd. v. DIT, (288 ITR 408)
to support that in respect of a composite contract involving onshore and
offshore components, consideration for offshore supply and offshore services
cannot be brought to tax in India in terms of domestic law provisions. In
terms of S. 9(1)(i) of the Income-tax Act, no income accrued or arose in India
as the title to goods passed to the buyers outside India on payment of price
abroad. Also, no operations were carried out in India and therefore there was
no scope for taxation of such income.

Where the income is not taxable in terms of the domestic
law, DTAA cannot be invoked to create any tax liability. The object of DTAA is
not to create any fresh tax liability if it does not exist as per domestic
law. DTAA can only restrict tax liability if it exists.

The contentions of the Tax Department that if the assessee
has PE in India all income accrued to the assessee can be brought to tax in
terms of DTAA is liable to be rejected.

levitra

Nirav Shah

On facts, certain services rendered from outside India were not made available and hence, the consideration was not FIS under Article 12. Also, such offshore services could not be linked to PE in India for determining income attributable to the PE.

New Page 2

DIT v. Scientific Atlanta Inc.,

(2009) 33 SOT 220 (Mum.)

Articles 7, 12, India-USA DTAA

A.Y. : 1998-99. Dated : 3-7-2009

Issue :

On facts, certain services rendered from outside India were
not made available and hence, the consideration was not FIS under Article 12.
Also, such offshore services could not be linked to PE in India for
determining income attributable to the PE.

Facts :

The appellant was a tax resident of USA. It had entered
into a VSAT Agreement with an Indian company to provide Satellite Network
Communication System together with the installation and commissioning services
associated with the initial installation. During the relevant year, the
appellant earned income from various sources. It furnished item-wise detail of
the income and also the reasons for taxability or non-taxability of such
income. The appellant contended that two items of income – Project Management
& Engineering Support and Factory Acceptance Tax (‘PMES&FT’) were not taxable
because they pertained to the provision of administrative and technical
services from outside India which were provided to facilitate timely execution
of the project. Further, although such services were technical they were not
‘fees for included services’ (‘FIS’) under Article 12 of India-USA DTAA as
they did not make available any technical knowledge, experience, etc. Hence,
the income from these services would qualify as ‘business income’ and would be
governed by Article 7. The appellant stated that even though it had PE in
India for rendering installation services, income from PMES&FT was not
attributable to that PE as the services were not performed in India.

The AO did not accept contentions of the appellant. After
discussing the nature of the services in his order, the AO held that these
‘hybrid services’ were performed by the appellant to provide Satellite Network
Communication System. He further observed that when a series of technical
works/services were performed to achieve a desired result, the nature of such
works/services should be analysed in connection with the end results. He held
that, alternatively, PMES&FT consisted of development and transfer of a
technical plan or technical design. The AO concluded that in either case, the
services were in the nature of FIS subject to Article 12 of India-USA DTAA and
taxable @15%.

In appeal, the CIT(A) held that: the appellant did not make
available technology, skill, etc.; the services were inextricably and
essentially linked to the supply of equipment and should therefore take the
same character as the supply of the equipment. He also noted that since PMES&FT
services were not FIS, the income would be ‘business income’ and under Article
7, only income relatable to PE could be taxed in India. Therefore, he held
that as the services were performed outside India, income from those services
was not attributable to the PE.

Held :

To understand scope and meaning of the term ‘make
available’, the Tribunal referred to the decisions in Intertek Testing
Services India P. Ltd., In re (2008) 307 ITR 418 (AAR) and Mahindra &
Mahindra Ltd. v. DCIT, (2009) 30 SOT 374 (Mum.) (SB) and observed that the
AO had interpreted ‘make available’ in an erroneous manner. It held that by
rendering PMES&FT services from outside India, the appellant did not ‘make
available’ any technical knowledge, skill etc. and as such Article 12 did not
apply. Hence, the consideration cannot be treated as FIS.

Where a taxpayer has a PE in India, under Article 7(1),
business profits can be taxed in India only to the extent they are
attributable to the PE in India. As the consideration was received for
rendering services outside no part of the services rendered from outside India
could be linked to the PE in India for determining income attributable to the
PE in India.

levitra

Nirav Shah

Unlike sub-clause (ii), sub-clause (i) of S. 245N(a) does not specifically restrict the scope to the tax liability of a non-resident and hence, advance ruling could also be in relation to a transaction by a non-resident even if it does not involve determi

New Page 2

Umicore Finance, In re

(2009) 318 ITR 78 (AAR)

S. 245N(a), Income-tax Act

Dated : 7-7-2009

Issue :

Unlike sub-clause (ii), sub-clause (i) of S. 245N(a) does
not specifically restrict the scope to the tax liability of a non-resident and
hence, advance ruling could also be in relation to a transaction by a
non-resident even if it does not involve determination of tax liability of
non-resident.

Facts :

The applicant was a Luxembourg company. It had entered into
a transaction for purchase of the entire equity capital of an Indian company.
The Indian company was originally formed as a partnership and later registered
itself as a company under Part IX of the Companies Act, 1956. In terms of S.
47(xiii) of the Act, if more than 50% of the voting power in the company
continues to be held by the erstwhile partners of the partnership for a period
of not less than 5 years, no capital gain is chargeable. However, pursuant to
the transfer of shares, the erstwhile partners would not have held more than
50% of the shares for a period of not less than 5 years and therefore, the
relevant condition would be violated.

The AAR observed that, prima facie, the
determination sought by the applicant was in relation to the tax liability of
an Indian company and hence, it was doubtful whether the non-resident
applicant can seek advance ruling on this question. In response to the notice
issued by the AAR, the applicant stated that due to certain stipulations in
the Share Purchase Agreement, unless capital gains tax payable by the acquired
Indian company is determined, purchase consideration payable by the applicant
cannot be determined. Further, its obligation to provide the audited financial
statements of the acquired Indian company was also dependent on the
determination of capital gains tax liability. The applicant contended that the
ruling sought was within the definition of ‘advance ruling’ in sub-clause (i)
of S. 245N(a) of the Act.

Held :

In contrast to the language in sub-clause (ii), the
language in sub-clause (i) of S. 245N(a) of the Act is wider. Unlike
sub-clause (ii), sub-clause (i) does not have any specific requirement that
determination should relate to the tax liability of a non-resident. Due to the
stipulations in the Share Purchase Agreement, capital gains tax arising in
case of the acquired Indian company has a direct and substantial impact on the
applicant, the question raised by the applicant falls within the definition of
‘advance ruling’ in S. 245N(a) of the Act.

levitra

Nirav Shah

In view of Explanation 1 in S. 90, higher rate of tax applicable to foreign company cannot be said to be discriminatory.

New Page 2

JCIT v.
State Bank of Mauritius Ltd.

(2009 TIOL ITAT Mum.)

S. 37, Income-tax Act;

Articles 7, 24, India-Mauritius DTAA

A.Y. : 1997-98. Dated : 16-10-2009

Issues :

(i) In view of Explanation 1 in S. 90, higher rate of
tax applicable to foreign company cannot be said to be discriminatory.

(ii) In view of absence of ‘subject to limitation under
domestic law’ provision in Article 7(3) of India-Mauritius DTAA, restrictions
under Income tax Act on allowance of travel, entertainment, etc. expenses do
not apply.

Facts :

The appellant was a Mauritius company. It had a PE in
India.

In accordance with the provisions of the Finance Act,
stipulating 55% as the rate of tax applicable to a foreign company, the AO
sought to tax the income of the appellant @ 55%. The appellant contended that
in terms of Article 24, which provides for non-discrimination, its status was
equivalent to domestic company as defined in S. 2(22A) of the Act and hence,
the rate of tax should be 40%, as applicable to a domestic company. However,
relying on the ruling of AAR in Societe Generale (1999) 236 ITR 103 (AAR), the
AO applied tax rate of 55%.

The PE had incurred certain travelling and entertainment
expenditure. While assessing the income, the AO restricted the allowance of
expenditure by applying limitation provisions of S. 37(2) of the Act. The
appellant contended that such restriction cannot be enforced as
India-Mauritius DTAA did not incorporate such restriction.

In appeal, the CIT(A) accepted the contention of the
appellant and upheld that :

(a) The rate of tax applicable to the income of the
appellant should be the same as that applicable to a domestic company and

(b) The restriction u/s.37(2) cannot be enforced.

Held :

On appeal by the department, the ITAT held as under :

(i) Applicable rate of tax :

The Finance Act 2001 inserted Explanation 1 in S. 90 with
retrospective effect from 1st April 1962. The said Explanation provides that
in case of a foreign company, the charge of tax at a rate higher than that in
case of a domestic company shall not be regarded as less favourable. In
Chohung Bank v. DDIT, (2006) 102 ITD 45 (Mum.), the Tribunal has also
taken similar view. Following the said decision and the amended S. 90, the
rate of tax should be the higher rate applicable to a foreign company.

(ii) As regards limitation on allowance of
expenditures :

Unlike the ‘subject to the limitations of the taxation laws
of that Contracting State’ provision normally incorporated in Article 7 of
most DTAAs, Article 7(3) of India-Mauritius DTAA does not incorporate such
restriction. Therefore, restriction provided in S. 37(2) of the Act cannot be
enforced. The ITAT took note of provision of India France treaty to conclude
that restriction of income computation as per provisions of the Act needs to
be specifically agreed upon.

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Nirav Shah

No expenditure/allowance can be deducted from royalty/FTS income earned by non resident pursuant to agreement entered into prior to 1st April 2003.

New Page 2

DDIT v. Pipeline Engineering GmbH (2009) 125
TTJ 534 (Mum.)

S. 44D, S. 44DA, S. 115A, Income-tax Act;

Articles 7, 12, India-Germany DTAA

A.Y. : 2000-01 & 2001-02. Dated : 19-12-2008

Issues :

(i) No expenditure/allowance can be deducted from
royalty/FTS income earned by non resident pursuant to agreement entered into
prior to 1st April 2003.

(ii) S. 44DA does not have retrospective effect.

(iii) Authority to read down a provision vests only in a
High Court or Supreme Court.

(iv) As Article 12(5) [dealing with royalty/FTS
effectively connected with PE] excludes applicability of Article 12(1) and
(2), cap on rate of tax in Article 12(2) cannot apply.

Facts :

The appellant was a German company, and also a tax resident
of Germany. It was engaged in the business of providing engineering
consultancy services for oil and gas pipelines transmission systems. The
appellant had set up a PE in India. It entered into an agreement with an
Indian company for providing consultancy services. The agreement was entered
into before April 1, 20031.
Pursuant to the agreement, the appellant had earned royalty/fees for technical
services (‘FTS’) through its PE in India. The appellant had offered entire
income for tax in terms of S. 44D of the Act without claiming deduction of any
expenses. In the subsequent year, the appellant claimed that in terms of
Article 12(2) of India-Germany DTAA, tax should be chargeable @10% instead of
20% and further that the income should be computed after deduction of expenses
incurred by the PE. It also claimed that although the fees were within the
scope of Article 12, by virtue of Article 12(5), they should be treated as
business profits and subjected to Article 7. Thus, the income should be
computed after allowing expenses of the PE.

The AO concluded that the allowance of expenditure of PE
was subject to S. 44D of the Act and hence no deduction could be allowed.
Further, in terms of S. 115A, the income should be taxable @20%. The CIT(A)
upheld the Order of the AO.

Before the Tribunal, the appellant contended that :

As the
taxpayer had incurred loss in its Indian operations carried through PE, as
per Article 7(3) of India-Germany DTAA read with S. 44D and S. 115A of the
Act, its income cannot be taxed @20% of the gross receipts.

If
Article 7(3) is applied, actual expenses incurred for earning income should
be allowed and hence question of invoking S. 44D cannot arise.

Once the
income is to be computed as business profits, provisions of S. 44D relating
to royalty would not apply.

The
intention of insertion of S. 44DA was to harmonise the provisions of the Act
and the DTAA, to bring non-resident on par with resident as regards taxation
of royalty or FTS. S. 44DA is a clarificatory provision to be applied
retrospectively.

The
taxpayer had choice of being assessed as per Article 12, in which case, the
gross receipts would be taxed @10% without deduction of any expenditure.

Held :

(i) Allowance of expenses and deductions :

S. 44D as amended was applicable for computing royalty or
FTS received by the non-resident in pursuance of an agreement made before 1st
April 2003. The non-obstante clause in S. 44D(b) specifically provides that no
expenditure or allowance shall be allowed while computing income by way of
royalty or FTS. Hence, no deduction would be allowed even if the income is to
be computed under Article 7 of DTAA which requires computation of income to be
done in accordance with provisions of the Act.

(ii) Reading down the provisions of S. 44D :

The theory of reading down the provisions of the statute
can be applied only when such provision is violative of fundamental right.
Only the High Court or the Supreme Court can decide such issue and, if
necessary, apply the theory of reading down.

(iii) S. 44DA being clarificatory and having retrospective effect :

The Finance Act 2003 completely changed the scheme of
taxation of royalty or FTS. Hence, provisions of S. 44DA cannot be regarded as
clarificatory.

(iv) Non-discrimination article and its impact :

Article 24 of India-Germany DTAA is in two parts. The first
part provides that income of non-resident through a PE shall not be less
favourably taxed than that of a resident. The second part of Article 24 carves
out an exception to provide that limitation on deductibility of expenses in
computation of PE profit in accordance with provisions of the Act is not
protected by non discrimination article. As a result, Article 24(2) does not
affect operation of S. 44D of the Act.

(v) Applicable rate of tax :

As the recipient has PE in India and as income is
effectively connected with PE in India, such income is covered by provisions
of Article 12(5). In such situation, royalties or FTS received by non-resident
would be governed by Article 7 and paragraphs (1) and (2) of Article 12 are
expressly made non-applicable. The income is therefore to be treated as
business profits to be computed as per domestic law. Once paragraph (5) of
Article 12 excludes applicability of paragraphs (1) & (2), the cap in respect
of rate of tax in paragraph (2) cannot be applied. Hence, in terms of S. 115A,
the applicable rate of tax would be 20%.

Nirav Shah

(i) only proportionate credit of tax paid in USA can be claimed in India; and (ii) credit of State income-tax cannot be claimed as it is not a ‘tax covered’.

New Page 2

Part C — International Tax Decisions

13 Manpreet Singh Gambhir v.
DCIT

(2008) 119 TTJ (Del.) 615

Articles 2, 25, India-USA DTAA

A.Y. : 1999-2000. Dated : 30-9-2008

Issues :

Under India-USA DTAA :

(i) only proportionate credit of tax paid in USA can be
claimed in India; and

(ii) credit of State income-tax cannot be claimed as it
is not a ‘tax covered’.

Facts :

The assessee was a resident of India and had earned salary
income in the USA and in India. It also earned income from interest. The
assessee had paid Federal income-tax and State income-tax on his USA salary
income. He had claimed deduction u/s.80RRA in respect of his salary income from
the USA. He claimed credit in respect of Federal income-tax and State income-tax
by relying on provisions of Article 25(2)(a) of India-USA DTAA. The AO allowed
credit of taxes paid in the USA only to the extent of tax attributable in India
to the income earned in the USA.

In appeal before CIT(A), the assessee contended that while
allowing credit of taxes paid in the USA, not only the Federal income-tax but
also the State income-tax should be allowed. He further contended that
notwithstanding the deduction u/s.80RRA in India, as per India-USA DTAA, the
whole of the tax paid in the USA in respect of his salary income is eligible for
credit against Indian taxes payable. The CIT(A) accepted the contention that
credit should be given also for State income-tax. However, he did not accept the
other contention regarding grant of credit of whole of tax paid in the USA.

The Tribunal referred to the provisions of S. 90 of the
Income-tax Act, Article 25(2)(a) of India-USA DTAA and commentaries on OECD and
UN Model Conventions. It also referred to the decisions in CIT v. Dr. R. N.
Jhanji, (1990) 185 ITR 586 (Raj.) and CIT v. M. A. Mois, (1994) 210
ITR 284 (AP) wherein in the context of relief u/s.91(1) of the Income-tax Act,
the Courts had held that where the assessee is entitled to special deduction
u/s.80RRA to the extent of 50%, his entitlement to relief would be only to the
extent of tax paid on 50% of the foreign income. The Tribunal observed that
though these decisions were in the context of S. 91, the spirit of their ratio
would also apply to claim of credit u/s.90, as there cannot be payment of taxes
outside India and claim of refund in India if there is no liability of paying
taxes in India.

Held :

The Tribunal held that :

(i) the assessee is entitled only to the proportionate tax
credit and not the credit for the entire tax paid in the USA on the salary
income.

(ii) in terms of Article 2 (taxes covered) of India-USA DTAA, credit can be
claimed only in respect of Federal income-tax and not State income-tax.

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Nirav Shah

Where income accrues or arises u/s.5(2), S. 9(1)(i) would have no application.

New Page 2

Part C — International Tax Decisions

12 Mustaq Ahmed, in re

(2008) (AAR) (Unreported)

S. 5(2), Explanation 1(b) to 9(1)(i), Income-tax Act

Dated : 19-11-2008

Issue :

Where income accrues or arises u/s.5(2), S. 9(1)(i) would
have no application.

Facts :

The applicant was a resident of Singapore. He carried on sole
proprietary business of manufacture and sale of gold jewellery in Chennai. He
was also engaged in the activity of purchasing and exporting gold ornaments. The
exports were made to Singapore company in which the applicant held substantial
shares. The purchase orders from SingCo were accepted and sales were executed in
India. Sale proceeds were also received in the assessee’s bank maintained in
India.

Before the AAR, the applicant contended that its activities
of purchase of gold and gold ornaments for exports was unrelated to its sole
proprietary business, since the purchase and export of gold jewellery was for
the purpose of export and since the applicant was a non-resident, the income
accruing or arising through or from these operations, which were confined to the
purchase of goods in India for the purpose of exports was not taxable in India
in terms of Explanation 1(a) and (b) to S. 9(1)(i). The applicant also contended
that ‘receipt’ follows ‘accrual’ and once there is no ‘accrual’ u/s.9, tax
liability cannot arise merely on account of ‘receipt’. The applicant also
contented that since Explanation 1(b) to S. 9(1)(i) is a beneficial provision
for promotion of exports from India, it should be construed so as to advance
that objective.

Before the AAR, the tax authorities contended that deeming
provisions of S. 9 had no role to play as the charge of taxation was attracted
u/s.5(2) and consequentially exemption carved out u/s.9 as the income actually
accrued in India and was received in India. The tax authorities supported their
contention with various documents which showed that exports were not to self (i.e.,
to applicant), but to foreign companies; exports were made in regular course of
business and in accordance with rules and regulations governing resident
exporters.

Held :

The AAR referred to S. 5(2) and S. 9(1)(i) and Explanation
thereto. It also referred to the following decisions :

CIT v. Ahmedbhai Umarbhai and Co., (1950) 18 ITR 472 (SC)
Anglo-French Textile Company Ltd. v. CIT, (1953) 23 ITR 101 (SC)
Bikaner Textile Merchants Syndicate Ltd. v. CIT, (1965) 58 ITR 169 (Raj.)
Turner Morrison & Co Ltd. v. CIT, (1953) 23 ITR 152 (SC)
Hira Mills Ltd. v. ITO, [1946] 14 ITR 417 (All.)
CIT v. Ashokbhai Chimanbhai, (1965) 56 ITR 42 (SC)

The AAR observed that the expression ‘subject to the
provisions of this Act’ in S. 5(2) would mean that a non-resident’s income from
whatever source derived on account of actual or deemed receipt or actual or
deemed accrual shall be computed in accordance with other provisions of the Act.

After considering the modus operandi of the business
of the applicant, the AAR held that the right to receive payment had arisen in
India; once the income actually accrued or arose in India, Explanation 1(b) did
not have the effect of altogether preventing the accrual of income. Hence, the
income derived by the applicant from purchase and exports activities undertaken
by him attracted charge to tax u/s.5(2), as it represented income accrued or
received in India. The AAR held that benefit of exception of Explanation 1(b) to
S. 9(1)(i) was not available to the applicant.

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Nirav Shah

Interest received by non-resident company having PE in India on refund of income-tax is effectively connected with PE and hence, should be characterised as ‘business profits’ and not ‘interest’ and taxed accordingly

New Page 2

Part C — International Tax Decisions

11 BJ Services Company Middle East Ltd.
v. ACIT

(2008) 119 TTJ (Del.) 553

Articles 7, 12, India-UK DTAA

A.Y. : 2002-2003. Dated : 30-9-2008

Issue :

Interest received by non-resident company having PE in India
on refund of income-tax is effectively connected with PE and hence, should be
characterised as ‘business profits’ and not ‘interest’ and taxed accordingly.

Facts :

The assessee was a UK Company (‘UKCo’), which was
tax-resident of UK. UKCo had a PE in India. UKCo had received interest on the
refund of income-tax.

The AO held that the interest was earned by UKCo through its
PE in India and therefore, in terms of Article 12(6) of India-UK DTAA, it should
be characterised as business profits. Accordingly, tax rate applicable to
business income (i.e., 48%) and not that applicable to interest (i.e.,
15%) was applied. The CIT(A) upheld the Order of the AO.

Editorial note :

Article 12(6) provides that if beneficial owner of interest
carries on business through a PE and the debt-claim in respect of which the
interest is paid is effectively connected with that PE, provisions of Article 7
(business profits) apply to taxation of such interest income.

Before the Tribunal, UKCo’s representative relied upon AAR’s
ruling in Application No. P 17 of 1998, In re (1999) 236 ITR 637 (AAR)
wherein the AAR had ruled that : the applicant did not have a PE in India;
interest had not arisen out of any business operation in India; the debt-claim
was not connected with any activity of a PE in India; and hence, it was a case
falling under Article 12 and liable to concessional rate of tax.

The tax authorities’ representative submitted that since
interest had arisen through PE situated in India, Article 12(2) cannot apply.
The Department contended that the AAR ruling was also not applicable, as in the
case before AAR the non-resident applicant admittedly did not have any PE in
India.

Held :

The Tribunal held that : UKCo was a non-resident having PE in
India; it was carrying on business in India through a PE in India; the interest
was effectively connected with that PE in India; and therefore, in terms of
Article 12(6), the interest was chargeable under Article 7 as business profits.
The Tribunal also held that the AAR ruling relied upon by UKCo was
distinguishable on facts.

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Nirav Shah

(i) Reimbursement of customs duty by an importer to a service provider is not taxable u/s.44BB. (ii) Interest received by non-resident company on refund of income-tax to be characterised as ‘interest’

New Page 2

Part C — International Tax Decisions

10 Transocean Offshore Deep Water Drilling
Inc v. ACIT
(Delhi Trib.) (Unreported)

ITA No. 2160/Del./2006

S. 44BB, Income-tax Act; Article 11, India-USA DTAA

A.Y. : 2004-2005. Dated : 24-10-2008

Issues :

(i) Reimbursement of customs duty by an importer to a
service provider is not taxable u/s.44BB.

(ii) Interest received by non-resident company on refund
of income-tax should be characterised as ‘interest’ and taxed at the relevant
rate mentioned in Article dealing with ‘interest’.

Facts :

(i) The assessee was an American company (‘USACo’) which
was tax-resident of the USA. USACo was engaged in providing services in
connection with exploration and extraction of mineral oils. USACo had paid
customs duty on import of certain items which were imported by ONGC. ONGC
reimbursed the customs duty to USACo.

The AO charged tax on the income of the assessee u/s.44BB
of the Income-tax Act. Relying on the decisions in Sedco Forex
International Inc. v. CIT, (2008) 299 ITR 238 (Uttarakhand) and USACo’s
own case in CIT v. Trans Ocean Offshore Inc, (2008) 299 ITR 248
(Uttarakhand), the AO also included the aforesaid reimbursement of customs
duty in the income of USACo.

(ii) USACo had received interest u/s.244A on income-tax
refund. The AO assessed the income as income from other sources and charged
tax @ 41%. USACo claimed that it should be taxed either @15% in terms of
Article 11 of India-USA DTAA, or @ 20% u/s.115A(1)(a)(ii) of the Income-tax
Act if provision of India-USA DTAA are considered not to apply.

Held :

The Tribunal held that :

(i) Payment of customs duty is primarily the obligation of
the importer, namely, ONGC; USACo discharged ONGC’s primary liability; the
payments made by ONGC to USACo were not on account of provisions of services
and facilities in connection with, or supply of plant and machinery on hire
used, or to be used, in the prospecting for, or extraction or production of,
mineral oils in India and thus, reimbursements were not in connection with the
services mentioned in S. 44BB of the Income-tax Act; and therefore, it was not
includable for determining profits and gains u/s.44BB of the Income-tax Act.

(ii) In respect of chargeability of interest on refund, the
Tribunal relied on AAR decision in Application No. P 17 of 1998, In re
(1999) 236 ITR 637 (AAR), in the context of India-UK DTAA, where AAR held that
interest derived in respect of tax lying with Revenue authorities was covered
by the definition of interest in terms of Article 12(2) and in absence of PE
in India should be entitled to benefit of reduced withholding rate of 15%.

Tribunal held that the provisions of India-USA DTAA are
identical to India-UK DTAA; since the issue involved is identical, interest on
income-tax refund should be taxed under Article 11 (interest) of India-USA
DTAA @ 15%.

Editorial note :

As regards the issue whether interest on the Income-tax Act
refund should be characterised as ‘interest’ or as ‘business profits’, in BJ
Services Company Middle East Ltd. v. ACIT, (unreported) (digested above), on
similar facts, the Delhi Tribunal itself had held that such interest should be
characterised as ‘business profits’. Possibly, unlike the earlier decision, in
this case, the tax authorities do not appear to have brought out that USACo had
a PE in India and the interest on income-tax had a nexus with that PE.

levitra

Nirav Shah

Liaison office of non-resident is chargeable to FBT even if no income is earned in India

New Page 2

9 Singapore Tourism Board, in re

(2008) 307 ITR 34 (AAR)

S. 115WA, S. 115WB, Income-tax Act

Dated : 17-10-2008

Issue :

Liaison office of non-resident is chargeable to FBT even if
no income is earned in India.

Facts :

The applicant was a company incorporated in Singapore with
the objective of promoting Singapore tourism (‘SingCo’). SingCo had set up
several liaison offices in India and had employees based in India, working in
these liaison offices. SingCo did not carry on any business activities through
these liaison offices; no income accrued or arose to SingCo in India; and the
expenses relating to the liaison offices were reimbursed by the Singapore office
of SingCo.

SingCo sought advance ruling on the question whether FBT
would be applicable in respect of its employees in its liaison offices in India.

Before the AAR, the tax authorities referred to AAR’s ruling
in Population Council Inc., In re (2006) 286 ITR 243 (AAR) and submitted
that while in that ruling, the applicant was a non-profit-making organisation,
in the present case, the applicant is a profit earning company though it is not
earning any income in India because RBI does not permit liaison offices of
foreign companies to do so. It further submitted that the applicant has incurred
expenses which would be subject to FBT and the earlier ruling should apply to
the applicant’s case.

Held :

The AAR referred to the observations in the earlier ruling
and ruled that :

(i) as per the scheme of Chapter XII-H and S. 115WA, FBT
liability is in addition to income-tax and is subject to separate provisions
with regard to return, assessment, payment of tax, etc.

(ii) FBT is a levy on certain types of expenditure rather
than tax on income. Taxability of income is not a prerequisite for liability
to FBT. S. 115WA(2) makes it clear that even when there is no liability to pay
income-tax, FBT liability may still be attracted.

(iii) a foreign entity not earning any income in India, but
having employees based in India, is liable to FBT if it pays fringe benefits
to those employees.

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Nirav Shah

(I) AO/TPO should establish that the taxpayer had manipulated prices to shift profits. (ii) After taxpayer discharges onus by conducting proper analysis, before determining ALP, AO/TPO should prove that one of four conditions in S. 92C(3) is satisfied. (

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Part C — International Tax Decisions

8 Philips Software Centre (P) Ltd. v.
ACIT (2008) 26 SOT 226 (Bang.)

A.Y. : 2003-2004

S. 92C, S. 92CA, Income-tax Act

Dated : 26-9-2008

Issues :

(i) AO/TPO should establish that the taxpayer had
manipulated prices to shift profits.

(ii) After the taxpayer discharges onus by conducting
proper analysis, before determining ALP, AO/TPO should prove that one of the
four conditions in S. 92C(3) is satisfied.

(iii) Data used for comparability and analysis should
relate to the relevant financial year and should also be available as on the
specified date (i.e., the due date of filing tax return).

(iv)
Margin of comparable companies
cannot be taken as a benchmark without a proper FAR analysis to eliminate
differences.

Facts :

IndCo was engaged in providing software development services
to its associated enterprises. The Company claimed tax holiday under the
Income-tax Act, 1961 relating to the A.Y. 2003-04. While preparing its transfer
pricing documentation under Indian transfer pricing Rules for the relevant tax
year (2002-03), the Taxpayer selected the Cost Plus Method (‘CPM’) as the most
appropriate method for determining the arm’s-length price and also undertook a
benchmarking analysis using Transaction Net Margin Method (‘TNMM’). Based on the
analysis, the Taxpayer conducted a search on the electronic database available
in public domain and used various qualitative and quantitative filters. Data
till October 2003 (i.e., available up to the date of filing return of
income) was used for comparable analysis. The Taxpayer had made adjustment on
account of depreciation for difference in the depreciation policy adopted by the
him vis-à-vis comparable companies.

The TPO rejected the transfer pricing analysis undertaken by
IndCo on several grounds and determined the arm’s-length margin at higher
amount. On the basis of the TPO’s order, the Assessing Officer (‘AO’) made
adjustment to the total income of the Taxpayer.

Before ITAT, the assessee claimed that the adjustment was not
warranted as :

(a) The AO/TPO did not establish that the Taxpayer had
manipulated prices to shift profits outside India.

(b) The AO/TPO did not satisfy and communicate to the
Taxpayer the relevant clause u/s.92C(3) of the Act which alone empowers the AO
to disregard the analysis conducted by the Taxpayer.

(c) The AO/TPO conducted the analysis using the data that
did not exist by the specified date of filing the return of income and thus
contravened statutory requirement of using contemporaneous method.

(d) The AO/TPO did not grant suitable adjustments to
account for differences in functions performed, assets employed and risks
assumed between the Taxpayer and the comparable companies to arrive at the
ALP.

(e) The TPO had not granted the benefit of ±5% of tolerance
adjustment as provided under the Act.

Held :

The ITAT accepted most of the contentions of the appellant
and held that :

(i) The intention of the transfer pricing provisions is to
curtail avoidance of taxes by shifting profits outside India. The AO/TPO is
duty bound to demonstrate that the Taxpayer has manipulated its prices to
shift profits outside India, before a transfer pricing adjustment can be made.
The Taxpayer had also highlighted that the average rate of tax was much lower
in India than the tax rate applicable to the associated enterprise (‘AE’) in
the Netherlands. Accordingly, there was no motive on the part of the taxpayer
to shift profits out of India.

(ii) The AO/TPO did not establish, either before initiating
the transfer pricing proceedings or even at the time of concluding the
proceedings that the taxpayer had manipulated prices to shift profits. Since
the Taxpayer was availing tax holiday benefit, it would be devoid of logic to
argue that the Taxpayer had manipulated prices and shifted profits to an
overseas jurisdiction for the purpose of avoiding tax in India.

(iii) At no stage of the assessment proceedings the AO/TPO
established that the transfer pricing analysis of the Taxpayer could have been
rejected in terms of provisions of S. 92C(3) of the Act. The Taxpayer had
discharged its onus by conducting proper analysis. The AO/TPO cannot reject
such analysis unless they find deficiency or insufficiency in the
documentation of the Taxpayer.

(iv) As per the transfer pricing rules, for the purpose of
conducting the comparability analysis, subject to certain exceptions, the data
to be used for the comparability analysis need to relate to the relevant
financial year in which the international transaction has been entered into
and should exist latest by the specified date (i.e., the due date of
filing tax return). The ITAT held that both the conditions are cumulative in
nature. If any one of the conditions is not satisfied, the relevant comparable
cannot to be included in the analysis.

(v) The ITAT held that for the purpose of the analysis, the
comparables should not have transactions with its associated enterprises. Any
company having even a single rupee of related-party transaction cannot be
considered for benchmarking purpose.

(vi) The ITAT held that the margin of the comparable
companies cannot be directly taken as a benchmark without doing a proper FAR
analysis to eliminate differences on account of functions performed, risk
assumed and assets employed. By relying on the earlier Tribunal decisions in
case of Mentor Graphics (Noida) Pvt. Ltd. v. CIT, [(2007) 109 ITD 101]
and E-gain Communication (P) Ltd. v ITO, [(2008) 23 SOT 385], the ITAT
emphasised that adjustment needs to be made to the margins of the comparables
to eliminate differences on account of functions, assets and risks.

levitra

Nirav Shah

S. 45 read with S. 10(38) — Profit from delivery-based transactions in shares treated as capital gains and not as business income.

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60. (2009) 29 SOT 117 (Mum.)

Gopal Purohit v. Jt. CIT

A.Y. : 2005-06. Dated : 10-2-2009

S. 45 read with S. 10(38) — Profit from delivery-based
transactions in shares treated as capital gains and not as business income.

During the relevant assessment year, the assessee entered
into transactions of sale and purchase of shares in two forms i.e.,
delivery-based transactions and non-delivery-based transactions. Non-delivery
based transactions had been treated by the assessee as business activity and
income earned by assessee from delivery-based transactions was treated as
capital gain. The assessee’s claim for exemption of long-term capital gain
u/s.10(38) was rejected by the Assessing Officer on the following grounds :

the frequency of the transactions carried on by the assessee was very high
with large volumes of shares.

the assessee had borrowed funds which were utilised for carrying out share
transactions.

transactions where no delivery was taken had been squared up on the same day
the profit/ loss resulting therefrom was shown as business income.

in respect of delivery-based transactions, as per the statement of capital
gains filed by the assessee, the period of holding was few days only.

The Assessing Officer, therefore, held that the entire
profit was to be assessed as income from business and profession.

Before the CIT(A) the assessee contended that in earlier
five assessment years on identical facts, the assessment had been completed
u/s.143(3) by accepting the assessee’s claim. Hence, on the basis of the
principle of consistency and in absence of any fresh material, the same
treatment should be given by the Revenue for this year also. The CIT(A) upheld
the Assessing Officer’s order.

The Tribunal, relying on the decision in the case of
Sarnath Infrastructure Pvt. Ltd. v. Asst. CIT, (2009) 120 TTJ 216 (Luck.),
held in favour of the assessee. The Tribunal noted as under :

1. The assessee had claimed himself both as a dealer as
well as an investor and offered income for taxation accordingly and he claimed
that such income had been accepted by the Revenue authorities in earlier
years. Hence, it becomes important to analyse the facts of earlier years. On
considering the facts of the earlier years, the following conclusions
emerged :

(i) The facts of the year under consideration with regard
to nature of income(s) earned by the assessee and the transactions were same
in all those years, except transactions in F & O segment in some of the
years, wherein this kind of activity was started by the stock exchange.

(ii) Interest on borrowed capital had been allowed as
business expenditure against the profit on jobbing activities shown by the
assessee as business profit.

(iii) The assessee had shown shares purchased on delivery
basis as investments at the end of the year and no stock-in-trade existed on
that date and the assessee had earned both long-term and short-term capital
gains which meant that the assessee had also held shares for the period of
more than 12 months.

Thus, the nature of activities, modus operandi of
the assessee, manner of keeping records and presentation of shares as
investments at the year end were the same in all the years and hence,
apparently, there appeared no reason as to why the claim made by the assessee
should not be accepted.

2. The Revenue authorities had taken a different view in
the year under consideration by holding that the principle of res judicata
was not applicable to the assessment proceedings. There could not be any
dispute on this aspect, but there is also another judicial thought that there
should be uniformity in treatment and consistency under the same facts and
circumstances and it was already found that facts and circumstances were
identical, even though a different stand had been taken by the Revenue
authorities.

3. On the facts and circumstances of the instant case, on
the basis of principle of consistency alone, the action of the Revenue
authorities was liable to be quashed.

4. On the basis of merits also, in view of the ratio of the
decision of Sarnath Infrastructure (P.) Ltd.’s case (supra), it was
held that the delivery-based transaction should be treated as of the nature of
investment transactions and profit therefrom should be treated as capital
gains.

5. The Revenue authorities had also held that borrowed
funds were utilised for making such investment. In earlier years, interest on
such loans had been allowed as business expenditure against profit on share
trading transaction shown as business income. In the year under consideration
also no nexus between the interest-bearing funds and investments had been
established and, hence, for this reason also, there was no merit in treating
the capital gains as business profit.

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Nirav Shah

Lease vis-à-vis License of Trade Mark

VAT

The State Governments are entitled to levy Sales Tax on the
transactions of ‘Transfer of right to use goods’ (also referred to as lease
transactions). This is possible as per provisions of Article 366 (29A) of the
Constitution of India. However, the nature of lease transaction is not defined
in the Constitution or in Sales Tax Laws. Therefore, whether lease transaction
has taken place or not has to be decided based on judicial interpretation
available so far. We can say that the interpretation about nature of taxable
lease transaction is still under development. However, some guidelines are
available from the recent judgment of the Supreme Court in the case of M/s.
Bharat Sanchar Nigam Ltd. (145 STC 91). Hon. Supreme Court has observed as under
for finding out taxable lease transaction :

“98. To constitute a transaction for the transfer of the
right to use the goods, the transaction must have the following attributes :

(a) There must be goods available for delivery;

(b) There must be a consensus ad idem as to the
identity of the goods;

(c) The transferee should have a legal right to use the
goods — consequently all legal consequences of such use including any
permissions or licences required therefor should be available to the
transferee;

(d) For the period during which the transferee has such
legal right, it has to be the exclusion to the transferor — this is the
necessary concomitant of the plain language of the statute — viz. a
‘transfer of the right to use’ and not merely a licence to use the goods;

Having transferred the right to use the goods during the
period for which it is to be transferred, the owner cannot again transfer the
same rights to others.”

Thus certain guidelines are available from the above
observations. However still a difficulty is experienced in relation to
intangible goods like trade mark, copy rights, etc. In relation to tangible
goods there cannot be difficulty in applying above guidelines. But in relation
to intangible goods the difficulty persists mainly due to nature of intangible
goods. Tangible goods, once delivered to lessee, cannot be further delivered to
any other person simultaneously and the above guidelines can be applied very
easily. However, intangible goods can be allowed to be used by number of persons
at a time, unless exclusive transfer of right to use is made to one lessee. In
respect of such type of transactions, i.e., where intangible goods are
involved, in Maharashtra, there is direct judgment of the Bombay High Court in
case of Dukes & Sons (112 STC 370).

In this case the issue before the Bombay High Court was about
tax on royalty amounts received for leasing of trade mark. The argument was that
since the trade mark is not given for exclusive use to one party, but is given
or is capable of being given for use to more than one party, there is no lease
transaction. The transaction was referred to as Franchise transaction. The
requirement of exclusive use or exclusive possession to transferee, for
considering transaction as lease, was given stress before the High Court.
However, the Bombay High Court held that since the nature of goods in this case
is intangible goods, the condition of exclusive use cannot apply. Accordingly,
the High Court held that even if the goods i.e., trade mark is leased to
more than one party, still the transaction is taxable as lease transaction.

Therefore, there was a situation that in relation to
intangible goods, the transactions were considered to be lease transactions in
spite of non-exclusive transfer of right. This judgment was delivered on 22nd
Sep. 1998. Therefore, after having the judgment of the Supreme Court in BSNL,
delivered on 02nd March, 2006, it was a feeling that the above judgment in case
of Dukes & Sons cannot be a good law.

A similar issue has now been decided by the Maharashtra Sales
Tax Tribunal. The reference is to the recent judgment of the Tribunal in case of
M/s. Smokin Joe’s Pizza Pvt. Ltd. (A.25 of 2004, dated 25-11-2008). In this case
the facts were that the appellant M/s. Smokin Joe’s was holding registered trade
mark for pizza i.e., “Smokin Joe’s”. The appellant has allowed this trade
mark to be used by others on franchise basis. In other words, due to franchise
agreement the franchisees were entitled to use the said trade name on their
premises as well as on the T shirts of the delivery boys, on packing materials,
etc. The appellant has entered into franchise agreement with such other parties
for above purpose. As per the franchise agreement, in addition to allowing above
use, the appellant has to provide number of other services, like helping in
layout of the premises, selection of raw materials, training to the staff,
instructions/know-how for method of manufacture of pizzas and delivery, etc. The
appellant was of the opinion that this is a licensing transaction and not a
lease transaction. In the alternative it was understood to be composite
transaction of lease and service and in absence of any authority to divide the
transaction into lease and service, it was considered as non-taxable transaction
under the then Maharashtra Lease Act. However for sake of legal order, an
application for determination was filed before the Commissioner of Sales Tax as
per the provisions of the Lease Act read with S. 52 of BST Act, 1959. In
determination order the Commissioner of Sales Tax held that the transaction is
covered by the Lease Act and hence liable to sales tax as leasing of trade mark.

In appeal before the Tribunal the appellant reiterated his
arguments. In addition, reliance was also placed on the judgment of the Supreme
Court in the case of Gujarat Bottling Co. Ltd. & Others (AIR 1995 Supreme Court
2372) where the nature of lease and licensing of trade mark has been discussed.
The appellant also relied upon judgment in the case of BSNL as referred to above
and also further fact that he is discharging liability under Service Tax
considering the transaction as of service. The clarification issued by the
Service Tax Authority, namely, vide Circular dated 28-6-2003, clarifying the
meaning of franchise was also relied upon.

The Tribunal made reference to the above position and came to the conclusion that in the given circumstances the transaction of franchise of trade mark is not lease transaction but amounts to licensing transaction. Therefore, the Tribunal held that no tax is payable on the above transaction under the Sales Tax Law.

The Tribunal in concluding Para observed as under:

“This Departmental clarification of the concerned authorities will be helpful to us to some extent to know the nature of the franchise agreement. It may be noted that in the franchise agreement as commonly understood the use of trade mark may not be involved. The basic equipment of franchisee agreement is that the franchisee has to follow the concept to business operation, managerial expertise, market techniques, etc. of the franchisor and to maintain standard and quality of such production as required by the franchisor. Thus only because the permission to use the trade mark has also been granted while entering into the franchise agreement, the said item of the agreement cannot be carved out from the main agreement of franchisee to hold that it as a transfer of right to use.

As such, after giving anxious consideration to all pros and cons of the matter, we are of the view that the impugned transaction does not involve the transfer of right to use the trade mark. It is a licence granted to use the trade mark simultaneously to various persons. It is a composite agreement of providing various services to ensure the standard and quality of the product in order to maintain the reputation of the franchisor and permission to use the trade mark is incidental. It is therefore, not covered under the Lease Act and the levy is not justified.”

In the light of above judgment of the Tribunal it can also be said that the judgment of Dukes & Sons is indirectly overruled by the judgment in the case of BSNL.The ratio of the above Tribunal judgment will also apply to many other intangible goods, like copyright, technical know-how, etc., if in relation to such transactions it can be shown that there is no exclusive right given to the lessee. It will not be a lease transaction, but it will be a licensing transaction not covered by Sales Tax Laws. In other words, the law explained by the Supreme Court in para 98 reproduced above will apply to all goods, whether tangible or intangible. The taxability as a lease transaction is to be decided in the light of above judgment of BSNL. This judgment will also clarify the position as to when a transaction will be other than lease, where Service Tax can be attracted.

Nirav Shah

S. 37(1) — Expenditure on new technology to replace existing one is revenue expenditure

New Page 2

Part B — Unreported Decisions

(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)

33 Unidyne Energy Env System Pvt. Ltd.

v. ITO

ITAT ‘G’ Bench, Mumbai

Before P. Madhavi Devi (JM) and

D. Karunakara Rao (AM)

ITA No. 4007/Mum./2005

A.Y. : 2001-02. Decided on : 10-9-2008

Counsel for assessee/revenue :

Prakash Jhunjhunwala/T. Diwakar Prasad

S. 37(1) of the Income-tax Act, 1961 — Capital or Revenue
expenditure — Expenditure incurred in acquiring new technology to replace the
existing technology — Whether allowable as expenditure — Held, Yes.

Per D. Karunakara Rao :

Facts :

The assessee was engaged in the business of manufacturing and
trading of boilers and installation of thermal engineering systems. During the
year the assessee had claimed expenditure of Rs.41.4 lacs incurred in improving
its existing technology. The expenditure incurred included payments made to IIT
for technology acquired. In its accounts, the as-sessee
had shown the expenditure so incurred as capital work in progress. According to
the assessee, it was done so in order to disclose to IDBI about its fund
involved for seeking grant/reimbursement from USAID. According to the AO as well
as the CIT(A), the expenditure incurred was to develop technology for new
product, which has an enduring benefit hence, they disallowed the assessee’s
claim.

Held :

The Tribunal found that the assessee had incurred expenditure
on development and design of the technology for substituting the existing
technology. According to it, the expenditure was undisputedly spent wholly and
exclusively for business purpose and the same was aimed at the development of
new variant product with enduring benefit. However, relying on the Mumbai High
Court decision in the case of Kirloskar Tractors Ltd., it noted that the
enduring advantage of the expenditure was not the final test and it has
exceptions. Further it also noted that the assessee did not acquire any
exclusive ‘right to use’ the said technology, nor did it acquire the ‘right to
transfer’. In the opinion of the Tribunal, in the absence of such rights, the
said expenditure was in the nature of revenue. Further, it noted that the object
of the expenditure was aimed at meeting the ever changing needs on the
technological frontiers. Therefore, relying on the Supreme Court decision in the
case of Alembic Chemical Works Co. Ltd., it held that the expenditure incurred
was revenue in nature.

Cases referred to :

(1) Kirloskar Tractors Ltd., 98 Taxman 112 (Mum);

(2) Alembic Chemical Works Co. Ltd., 177 ITR 377 (SC)

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Nirav Shah

S. 2(24) – Notional value of advance licences/DEPB credited to P&L account not income

New Page 2

Part B — Unreported Decisions

32 National Leather Mfg. Co. v. JCIT

ITAT ‘E’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

R. S. Padvekar (JM)

ITA No. 8294/Mum./2003

A.Y. : 2000-01. Decided on : 13-6-2008

Counsel for assessee/revenue : Mayur Shah/

Somogyan Pal

S. 2(24) of the Income-tax Act, 1961 — Income — Assessee
notionally computing the value of advance licences/DEPB and crediting the same
to Profit and Loss account — In its return of income filed, the said amount
excluded from its income — Whether the assessee justified in doing so — Held,
Yes.

Per R. S. Padvekar :

Facts :

The assessee, an exporter, was holding licences/ DEPB, which
were transferable. Hitherto, it was providing for the benefit under the said
licences/ DEPB only on the basis of its actual utilisation. However, during the
year under consideration, it changed its method of accounting, and made the
valuation of the benefit receivable in respect of the unutilised licences/DEPB,
and a sum of Rs.167.67 lacs was credited to Profit and Loss account. But while
filing return of income, the said amount was not considered as income of the
previous year and its loss was enhanced to that extent. However, the AO as well
as the CIT(A) did not agree with the said treatment, and the same was considered
as the income of the current year.

Held :

The Tribunal noted that the assessee had not transferred the
said licences, nor were the same utilised in paying import duty. The assessee
had merely calculated the notional value for the purpose of suppressing the huge
losses reflected in the books of account. According to it, merely because book
entries were passed and when there was no real income accrued to the assessee,
there was no justification to support the addition. Further, relying on the
Bombay Tribunal decision in the cases of Jamshi Ranjitsing Spg. & Wvg. Mills
Ltd. and of the Amritsar Tribunal in the case of Dera Singh Sham Singh, it
allowed the appeal of the assessee.

Cases referred to :

(1) Jamshi Ranjitsing Spg. & Wvg. Mills Ltd. v. IAC,
41 ITD 142 (Bom.);

(2) JCIT v. Dera Singh Sham Singh, 96 ITD 235 (Asr)

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Nirav Shah

S. 194J — Payments for network services cannot be Technical services’ liable to TDS

New Page 2

Part B — Unreported Decisions

31 Pacific Internet (India) Pvt. Ltd. v.

ITO — TDS

ITAT ‘D’ Bench, Mumbai

Before R. S. Padvekar (JM) and

Rajendra Singh (AM)

ITA Nos. 1607 to 1609/Mum./2006

A.Y. : 2003-04 to 2005-06

Counsel for assessee/revenue : Anil Sathe/

Sanjay Agrawal

S. 194J Income-tax Act, 1961 — TDS on Fees for Professional
or Technical services — Whether payments for bandwidth and network services
could be said to be ‘Technical services’ liable to TDS — Held, No.

Per R. S. Padvekar :

Facts :

The assessee was engaged in the business of providing
internet services to its clients. For the same it acquired bandwidth and network
operating infrastructure services from MTNL/VSNL. According to the AO, such
services availed were in the nature of technical services covered u/s.194J and
treated the assessee in default u/s.201(1). The CIT(A) on appeal, confirmed the
AO’s order. Before the Tribunal the Revenue submitted that the decision of the
Madras High Court in the case of Skycell Communications Ltd. was not applicable
to the facts of the assessee’s case, as bandwidth and network operating
infrastructure services were nothing but technical services and accordingly,
relied on the orders of the lower authorities.

Held :

The Tribunal did not agree with the contention of the Revenue
and held that since the services availed were standard facility, the case of the
assessee was not only covered by the decision in the case of Skycell
Communications Ltd., but also by the Delhi High Court decision in the case of
Estel Communication Pvt. Ltd. Accordingly, it was held that the payments made to
MTNL/VSNL for availing the services of bandwidth and network operating
infrastructure cannot be said to be technical services within the meaning of S.
195J read with Explanation 2 to S. 9(1)(vii) of the Act.

Cases referred to :

(1) Skycell Communications Ltd., 251 ITR 59 (Mad.)

(2) CIT v. Estel Communication Pvt. Ltd., 217 CTR
(Del.) 102

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Nirav Shah

Whether violations of Rules & Regulations of NSE by members could be offence or act prohibited by law — Held, No. Whether fine paid by member to NSE can be disallowed under Explanation to S. 37(1) — Held, No.

New Page 2

Part B — Unreported Decisions

30 Goldcrest Capital Markets Ltd. v. ITO

ITAT ‘B’ Bench, Mumbai

Before K. C. Singhal (VP) and

Abraham P. George (AM)

ITA Nos. 1240 & 1241/Mum./2006

A.Y. : 2003-04. Decided on : 21-1-2009

Counsel for assessee/revenue : Ajay Gosalia/

Pitamber Das

Explanation to S. 37(1) of the Income-tax Act, 1961 — A.Y.
2003-04 — Whether violations of the Rules & Regulations of National Stock
Exchange by its members could be termed as an offence or as an act prohibited by
law — Held, No. Whether amount paid as fine by a member of National Stock
Exchange to NSE can be disallowed under Explanation to S. 37(1) of the Act —
Held, No.

Per Abraham P. George :

Facts :

The assessee, a member of the National Stock Exchange (NSE),
debited its profit & loss account with a sum of Rs.3,85,511 on account of bad
delivery and other charges. In the course of assessment proceedings the assessee
explained that this amount represents payments to NSE (a) Rs.2,50,000 for
violation of Capital Market Segment Trading, (b) Rs.1,00,000 for change in
shareholding pattern, and (c) Rs.35,511 — for miscellaneous. According to the
AO, Stock Exchanges were regulated by SEBI which was a statutory body
constituted by an Act of the Parliament and such Rules & Regulations of SEBI
having been framed in public interest, fine for violation could be considered as
penalty. He disallowed Rs.3,85,511 on the ground that these fines were penal in
nature and could not be allowed as deduction in view of the Explanation to S.
37(1).

The CIT(A) upheld the disallowance of Rs.3,50,000 on the
ground that the fine of Rs.2,50,000 imposed for violation of Rules fell under
the heading ‘unfair trade practice’ and such violations being for breach of
public policy, fine imposed was in the nature of penalty and as regards the fine
of Rs.1,00,000 he was of the view that violation of clause 30 of Membership
undertaking for capital market segment of the Exchange was also a violation of
Rule 4(c) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that NSE is not a statutory body on par
with SEBI. Fines & penalties levied for violation on account of ‘unfair trading
practice’ as specified in 4.6 of NSE regulations and ‘un-business like conduct’
as specified in IV(4)(e) of the NSE Rules cannot be equated with violation of
statutory rule or law. Since there was no violation of law, the fine paid for
non-observance of internal regulations of Stock Exchange was held to be
allowable. The Tribunal stated that its reasoning gets support from the decision
of the co-ordinate Bench in the case of CFL Ltd.

Case referred to :

1. ACIT v. CFL Ltd., (ITA No. 2656/M/2006) order
dated 5th December 2008.

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Nirav Shah

Whether delay of more than 19 months in issuance of notice after completion of assessment order in case of person searched and satisfaction required u/s.158BD not recorded by AO of person searched, proceedings are vitiated and null and void — Held, Yes.

New Page 2

Part B — Unreported Decisions

29 Bharat Bhushan Jain v. ACIT

ITAT ‘A’ Bench, New Delhi

Before Rajpal Yadav (JM) and

K. G. Bansal (AM)

ITA No. IT(SS) A. No. 13/Del./2007

A.Ys. : 1991-92 to 2001-02. Decided on : 7-11-2008

Counsel for assessee/revenue : Rano Jain/

B. Koteshwara Rao

S. 158BD of the Income-tax Act, 1961 — Whether in view of the
fact that there was a delay of more than 19 months in issuance of notice
u/s.158BD of the Act after the completion of the assessment order in the case of
the person searched and also because the satisfaction required u/s.158BD of the
Act was not recorded by the Assessing Officer (‘AO’) of the person searched, the
proceedings are vitiated and need to be declared as null and void — Held, Yes.

Per Rajpal Yadav :

Facts :

On 30th August 2002 a search u/s.132 of the Act was conducted
at the business premises of M/s. Friends Portfolios (P) Ltd. and the residential
premises of its director Shri Manoj Aggarwal. Assessment u/s. 158BC of the Act,
in the case of Manoj Aggarwal was completed on 29th August 2002. On 15th July
2003, the DCIT, Central Circle 3, New Delhi, who assessed Shri Manoj Aggarwal
informed the AO of the assessee that during the course of search on Shri Manoj
Aggarwal, documentary evidence was found indicating the fact that Shri Manoj
Aggarwal was giving bogus accommodation entries to various persons. He also
informed that the present assessee is one of the mediators who has played a
crucial role in providing accommodation entries to various entities and
individuals from Shri Manoj Aggarwal and therefore he needs to be assessed
u/s.158BD of the Act. Accordingly, the AO of the present assessee issued a
notice u/s.158BD of the Act on 31-3-2004. In response to this notice, the
assessee filed return of income for the block period on 27-5-2004 declaring nil
income. The AO assessed undisclosed income of the assessee at Rs.3,52,25,105.
The CIT(A) observed that only commission income earned by the assessee in
helping Shri Manoj Aggarwal needs to be assessed in the hands of the assessee
and accordingly the commission income on the total transaction was computed at
Rs.5,20,568 which was confirmed by the CIT(A). Aggrieved, the assessee preferred
an appeal to the Tribunal challenging the proceedings on the ground that there
was a huge delay of 19 months in issue of notice from the time of
completion of block assessment u/s.158BC in the case of Shri Manoj Aggarwal and
also on the ground that no satisfaction was recorded by the AO who passed
assessment order u/s.158BC of the Act in the case of the person searched. The
satisfaction note was supplied to the assessee by the DCIT, Central Circle 37
under the signature of Shri Jatender Kumar, the AO of the present assessee.
Relying on the decision of the Supreme Court in the case of Mahinsh Maheshwar
(289 ITR 341) it was contended that in the absence of satisfaction recording
that incriminating material was found indicating the fact that the assessee has
undisclosed income, no proceedings u/s.158BD of the Act could be initiated.

Held :

The Tribunal found that the issue of delay in issuance of
notice u/s.158BD has been considered by the co-ordinate Bench of ITAT in the
case of Shri Radhey Shyam Bansal to which Accountant Member was a party. The
Tribunal after extracting lucid enunciation of the law from the decision in the
case of Radhey Shyam Bansal came to the conclusion that the Tribunal has in the
case of Radhey Shyam Bansal considered the fact that the provisions of S. 158BD
of the Act do not provide for a time limit for issue of a notice. The Tribunal
in that case came to the conclusion that the notice needs to be issued within a
reasonable time. The Tribunal noted that the principle of consistency demanded
it to follow the decision of the co-ordinate Bench in the case of Radhey Shyam
Bansal. As regards the second contention, the Tribunal went through the alleged
satisfaction and found it to be an office note, which very office note was
considered by the Tribunal in the case of Radhey Shyam Bansal, which did not
even have reference of any seized material relatable to the assessee. This
alleged satisfaction note spoke of the general modus operandi of various
persons in carrying out giving bogus accommodation entries. The Tribunal after
considering the facts and circumstances of the case, allowed the appeal of the
assessee and quashed the assessment order.

Cases referred to :

1. Shri Radhey Shyam Bansal v. ACIT, IT (SS) A No.
12/Del./07

2. Kandhubhai Vasanji Desai v. DCIT, 236 ITR 73 (Guj.)

3. Vikrant Tyres v. 1st ITO, 247 ITR 821 (SC)

4. Ambika Prasad Mishra v. State of UP, AIR 1980
(SC) 1762

5. Manoj Aggarwal and Ors., 113 ITD 377 (Del.) (SB)

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Nirav Shah

Whether order of reassessment u/s.147 r.w. S. 143(3) without valid notice u/s.143(2) is null & void — Held, Yes. Whether amendment to S. 148 saves reassessment done without notice u/s.143(2) — Held, No. Whether provisions of S. 292BB are retrospective — H

New Page 2

Part B — Unreported Decisions

28 Chandra R. Gandhi v. ITO

ITAT ‘K’ Bench, Mumbai

Before M. A. Bakshi (VP) and

Rajendra Singh (AM)

ITA No. 6006/Mum./2007

A.Y. : 2000-01. Decided on : 23-12-2008

Counsel for assessee/revenue : G. P. Mehta/

Ankur Garg

Income-tax Act, 1961 — S. 143(2), S. 147, S. 148 and S. 292BB
— A.Y. 2000-01 — Whether an order of reassessment passed u/s.147 r.w. S. 143(3)
of the Income-tax Act, 1961 without issue of a valid notice u/s.143(2) of the
Act is null and void — Held, Yes. Whether the amendment to S. 148 by the Finance
Act, 2006 saves the reassessment done without issue of notice u/s.143(2) — Held,
No. Whether provisions of S. 292BB of the Act are retrospective — Held, No.

Per M. A. Bakshi :

Facts :

The assessee filed his return of income on 18-12-2001.
Assessment u/s.143(3) r.w. S. 147 was made vide order dated 19-3-2004 at an
income of Rs.1,54,070 as against the returned income of Rs.43,970. The addition
made was on account of disallowance of interest of Rs.1,10,100.

The assessee challenged the validity of proceedings on the
ground that (a) no notice u/s.143(2) had been issued; and (b) that the assessee
having filed the return of income in respect of which no assessment was made,
notice u/s.148 could not be issued as the assessee’s return was to be considered
as pending on the date of issue of notice u/s.148.

The CIT(A) dismissed the appeal of the assessee. Aggrieved,
the assessee preferred an appeal to the Tribunal.

Held :

(a) In view of the ratio laid down by the Apex Court in the
case of Rajesh Jhaveri Stock Brokers Pvt. Ltd., the contention of the assessee
that since no regular assessment was made in this case, the AO was precluded
from issuing notice u/s.148 is not based on correct appreciation of law, as
amended w.e.f. 1-4-1998.

(b) In the case of Raj Kumar Chawla, the Special Bench of
the Tribunal has held that issue of notice u/s.143(2) within the prescribed
time is also mandatory in the proceedings initiated u/s.147 and in the absence
of the same, the reassessment made shall be null and void.

(c) The Tribunal followed the decision of the Special Bench
of the Tribunal in the case of Raj Kumar Chawla and held that reassessment
made in the absence of service of notice u/s. 143(2) is invalid. It was of the
view that the Division Bench of the Tribunal is bound by the decision of the
Special Bench of the Tribunal until it is superseded by any superior
authority. Since the decision of the Madras High Court in the case of Areva T
& D India Ltd. was not a decision of jurisdictional High Court, either of
Bombay (being jurisdictional High Court in the present case) or of Delhi
(Special Bench decision being of Delhi jurisdiction), the Tribunal followed
the decision of the Special Bench of Delhi Tribunal though this decision of
the Special Bench was contrary to the decision of Madras High Court in the
case of Areva T & D India Ltd.

(d) The Tribunal held that the amendment to S. 148 by
Finance Act, 2006 w.e.f. 1-10-1991 does not save the reassessment u/s.147 in
this case, since the amendment precludes the assessee from raising the issue
of validity on the ground of late service of notice u/s.143(2). It noted that
in the present case no notice has been issued.

(e) The Tribunal noted that S. 292BB has been incorporated
by the Finance Act, 2008 w.e.f. 1-4-2008. This provision is applicable w.e.f.
1-4-2008 and is not retrospective and hence the same has got to be ignored.

The Tribunal quashed the reassessment and allowed the appeal
of the assessee.

Cases referred to :

1. Raj Kumar Chawla v. ITO, 94 ITD 1 (Del.) (SB)

2. Areva T&D India Ltd. v. ACIT, 294 ITR 233 (Mad.)

3. ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd., 291
ITR 500 (SC)

4. CIT v. K. M. Pachayappan, 304 ITR 264 (Mad.)

5. CIT v. Jai Prakash Singh, 219 ITR 737 (SC)

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Nirav Shah

S. 40A(2)(b) — Discount on sales given to sister concern not covered.

New Page 1

Part B — Unreported Decisions

20 DCIT v. Orgo Chem Guj. Pvt.
Ltd.

ITAT ‘H’ Bench, Mumbai

Before K. C. Singhal (JM) and

A. K. Garodia (AM)

ITA No. 7872 /Mum./2004

A.Y. : 2001-02. Decided on : 17-8-2007

Counsel for revenue/assessee : D. K. Rao/

Mayur A. Shah

S. 40A(2)(b) of the Income-tax Act, 1961 — Payments to
relatives — Discount on sales given to sister concern — Whether covered under
the provisions — Held, No.

Per K. C. Singhal :

Facts :

The assessee had given sales discount of Rs. 19.3 lacs to its
sister concern. Since no such discount was given to other parties, the AO
treated the same as unreasonable and disallowed it u/s.40A(2)(b). On appeal, the
CIT(A) noted that the sales to other parties were only of meager amount, while
the sale to sister concern was in bulk. Accordingly, the assessee’s appeal was
alllowed.

Held :

According to the Tribunal, a bare reading of the provisions
reveals that such provision could be invoked only where an expenditure was
incurred in respect of which, payment was to be made to the sister concern. In
case of discount on sales, no payment was made by the assessee as it only
reduced the sale price. Therefore, relying on the Madhya Pradesh High Court
decision in the case of Udhaji Shrikrishanadas, it held that the assessee’s case
was not covered u/s.40A(2)(b).

Case referred to :

Udhaji Shrikrishanadas, 139 ITR 827 (M.P.)

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Nirav Shah

S. 14A — Whether any part of expenses claimed against remuneration from a partnership firm can be disallowed on account of exempt share of profit — Held, No.

New Page 1

Part B — Unreported Decisions

19 Hitesh D. Gajaria v. ACIT,
11(2)

ITAT ‘H’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavidevi (JM)

ITA No. 993/Mum./2007

A.Y. : 2003-04. Decided on : 14-11-2008

Counsel for assessee/revenue : Arvind Sonde/Mayank
Priyadarshi

S. 14A of the Income-tax Act, 1961 (‘the Act’) — Whether
expenditure can be disallowed out of expenses claimed against business income
being remuneration from a partnership firm in which assessee is a partner on the
ground that share of profit received from the firm is claimed as exempt u/s.
10(2A) of the Act — Held, No.

Per Sudhakar Reddy :

Facts :

The assessee while filing his return of income claimed a
deduction of Rs.3,90,268 against his business income being remuneration from a
partnership firm in which he was a partner. The assessee had claimed share of
income from partnership firm as being exempt u/s.10(2A). The Assessing Officer
(AO) apportioned the expenditure claimed and disallowed a sum of Rs.1,16,752 by
invoking provisions of S. 14A of the Act. The CIT(A) upheld the action of the
AO. On an appeal by the assessee to the Tribunal.

Held :

The Tribunal found that similar issue was considered and
decided in favor of the assessee by Mumbai Bench of the Tribunal in the case of
Sudhir Kapadia (ITA No. 7888/Mum./2003 and Bharat S. Raut (ITA No.
9212/Mum./2004). Following these two precedents the tribunal deleted the
disallowance.

Cases referred to :

1. Sudhir Kapadia v. ITO — Mum. ‘C’ Bench, ITA No.
7888/M/03 dated 26-2-2003

2. Bharat S. Raut — Mum ‘E’ Bench, ITA No.
9212/Mum./2004 and CO No. 212/Mum./2005

Note :

In the case of Sudhir Kapadia (ITA No. 7888/Mum./2003) the
Tribunal after considering various decisions concluded that it is not possible
to hold the view that share income in the hands of a partner of a partnership
firm is altogether tax free. It held that share of profit in the hands of a
partner is income which has suffered tax in the hands of the firm and found that
the share of profit from the firm is exempt from tax u/s.10(2A) not in absolute
sense but with a view to avoid double taxation. Accordingly, it concluded that
S. 14A is not applicable to the facts of the case.

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Nirav Shah

S. 139(5) read with S. 132(9) — Defects in Return filed cured during extended period requested for by assessee — AO not justified in treating Return as defective

New Page 1

Part B — Unreported Decisions

18 ITO v. PIC (Gujarat) Ltd.

ITAT Ahmedabad Bench ‘B’

Before I. S. Verma (JM) and

N. S. Saini (AM)

ITA No. 3058/Ahd./2002

A.Y. : 1990-91. Decided on : 4-1-2008

Counsel for revenue/assessee : R. I. Patel/

Jitendra Jain and Sachin Romani

S. 139(5) read with S. 132(9) of the Income-tax Act, 1961 —
Return of loss filed based on un-audited accounts considered as defective —
Assessee asked to file audited accounts within 15 days and rectify the defect —
Assessee requested for two months time and filed the accounts within the time
requested for — Without rejecting the assessee’s request, AO treated the
original return filed as defective and the revised return filed as belated
return — Whether AO justified — Held, No.

Per I. S. Verma :

Facts :

For the year under appeal the return of income, declaring
loss of Rs.12 lacs, was filed based on the basis of the un-audited accounts,
which according to the AO, was defective return. Hence, by notice u/s.139(a),
dated 22-1-1991 (served on 1-2-1991), the assessee was asked to file the audited
accounts within 15 days and rectify the defect. By its letter dated 15-2-1991,
the assessee requested the AO to extend the time for rectifying the defect by
two months. Thereafter, the audited accounts were filed on 15-3-1991 and the
revised (loss) return was also filed on 25-3-1991. The revised return was
processed u/s.143(1) and the refund due to the assessee was granted.

Later on, the return was processed u/s.143(3) and the loss
claimed by the assessee was rejected, on the ground that the original return
filed was defective, hence invalid. And the revised return filed was treated as
original and since it was filed late, the carry forward of loss was disallowed.
On appeal, the CIT(A) directed the AO to consider the assessee’s revised return
as valid.

Held :

The Tribunal noted that the assessee’s request for extension
of time was if rejected by the AO, the order of rejection was never intimated to
the assessee. Therefore, it held that the CIT(A) was quite justified in
accepting the assessee’s plea that the original return was a valid return and,
and therefore, revised return was also valid.

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Nirav Shah

S. 28(iv) & 145 —(i) Dividend on shares held in assessee’s name pending settlement of dispute cannot be taxed in the assessee’s hand u/s.28(iv). (ii) In the absence of trading during the year shares held as stock-in-trade can still be valued at lower of

New Page 1

Part B — Unreported Decisions

17 ACIT v. Pal Enterprises
Pvt. Ltd.

ITAT ‘H’ Bench, Mumbai

Before M. A. Bakshi (VP) and

V. K. Gupta (JM)

ITA No. 1994/Mum./2005

A.Y. : 2001-02. Decided on : 20-10-2008

Counsel for revenue/assessee : Anadi Nath Mishra/ Jayesh
Dadiya

(i) S. 28(iv) of the Income-tax Act, 1961 — Dividend
on shares held in assessee’s name pending settlement of dispute — Whether such
receipt could be taxed in the assessee’s hand u/s.28(iv) — Held, No.

(ii) S. 145 of the Income-tax Act, 1961 — Shares held
as stock-in-trade valued at lower of cost or market price — In the absence of
trading during the year whether loss on account of lower market price could be
disallowed — Held, No.

Per V. K. Gupta :

Facts :

(A) Re : Dividend received on shares :

In terms of the family settlement certain shares held by the
assessee were to be transferred to Walchand & Co. Pvt. Ltd. However, on account
of certain reasons, the same could not be transferred. However, the physical
possession of the share certificates was handed over to the solicitors. The
dividend received by the assessee during the intervening period was shown as
liability in its accounts. According to the AO, had there been a dispute, the
same would have been so disclosed in the accounts of the assessee. Therefore, in
the absence thereof, the AO treated the same as benefit or perquisite chargeable
to tax u/s.28(iv) of the Act.

On appeal the CIT(A) held that the provisions of S. 28(iv)
could be applied only in a case where benefit or perquisite was received in kind
or when the assessee had credited such amount in the profit and loss account.
Accordingly, the addition made was deleted.

(B) Re : Loss arising on account of valuation of shares held as
stock-in-trade at market value :

The assessee was holding shares of Premier Automobile Ltd. —
both as investment and as stock-in-trade. As per its method of valuation, the
stock was valued at lower of cost or market price. On account of fall in the
market price of the shares, the shares held as stock were valued at the lower
figure which was claimed as loss. According to the AO, the assessee who belonged
to the promoter group of Premier Automobiles, would be holding the shares with
the sole motive of retaining the control. Therefore, it cannot be recognised as
stock-in-trade.

On appeal the CIT(A) noted that the assessee was an
investment company and these shares were held as stock-in-trade which were
valued at lower of cost or market price in accordance with the method
consistently followed, hence there was no justification in making addition on
account of the same.

Before the Tribunal, the Revenue justified the order of the
AO, on the ground that the shares held as stock-in-trade, without any
transaction of sale and purchase, could not be a proper source of loss, hence
the same was not allowable.

Held :

(A) The Tribunal noted that the impugned sum represented
dividend which was received from the year starting from F.Y. 1995-96 and
secondly, in some of those years, dividend income was exempt. Further,
according to the Tribunal, the provisions of S. 28(iv) could be applied only
in a case where an actual income was received by the assessee in the garb of
some benefits or perquisites and which were not shown as chargeable to tax.
According to the Tribunal, that was not so in the case of the assessee.
Accordingly, the order of the CIT(A) was upheld and the addition made on this
account was deleted.

(B) The Tribunal noted the facts that the assessee was
having shares — both as investment as well as stock-in-trade. The method of
valuation of stock was one consistently followed and accepted. Further, it
noted that the assessee was having substantial brought forward loss. Hence,
the practice followed cannot be termed as tax saving device. In view thereof,
the order of the CIT(A) was upheld.

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Nirav Shah

New VAT Audit Form-704

S. 61 of The Maharashtra Value Added Tax Act, 2002 (MVAT Act) requires certain dealers to get their books of account audited and submit Audit Report so obtained from the Auditor i.e. either from a practising chartered accountant or a practising cost accountant. This report is required to be submitted within 10 months from the end of the financial year. Non-filing or late filing of Audit Report may attract penalty at the rate of 0.1% of the turnover of sales. The prescribed form of Audit Report (i.e. Form 704) has been replaced recently vide notification dated 26-8-2009 issued under Rule 17A(2) of MVAT Rules, 2005. The revised form of audit report is applicable for financial years commencing on or after 1st April 2008. Thus, from 26th August 2009 onwards, the VAT Audit Reports for F.Y. 2008-09 have to be given in this amended Form 704 only. Further, the Commissioner of Sales Tax, vide Notification dated 1st October 2009, has notified electronic format of Form 704 to facilitate the dealer to file the Audit Report electronically. From 1st October 2009 onwards all such dealers shall file the Audit Report in electronic format only.

Some of the important distinguishing features of this new form may be noted as under :

1. Emphasis shifted from returns to tax liability.

In the earlier report the main thrust was to certify the correctness and completeness of the returns filed by the dealer. In the new Form, the thrust is on certification of tax liability of the dealer based on his books and records.

2. In the earlier report for almost each column and row, remarks from the Auditor were asked for. This was creating confusion and every Auditor followed different way of giving such remarks. Some of the publications even gave suggested remarks for each such column. The new Audit Form is designed in such a way that all remarks will get reported at one or two specified places only viz. para-3 or para-5 of Part-1. This will be helpful to the Auditor as well as the user.

3. Most important distinguishing feature is that this new Audit Report is to be filed electronically. The earlier Report was to be filed physically. The Commissioner of Sales Tax has issued Circular bearing No. 27T of 2009 dated 1-10-2009 by which the procedure for e-filing of this Report has been clarified. Though, Auditor will give his Report to the dealer, the dealer will upload the same. Therefore, the Auditor may be required to give Report in Electronic Format along with physical copy to facilitate the dealer to file new Report Form. After uploading the Report the dealer is also required to submit ‘statement of submission’, as explained in the above Circular.

4. The new VAT Audit Form has three parts. Part-1 is about certification, whereas Part-2 is about general information of the dealer and Part-3 is about calculation of tax liability.

In Part-1, at the beginning, there are certain instructions to be followed by the auditor. There are about 19 instructions. The rule making authority has given weightage to these instructions, in as much as in the Certification Part the Auditor has to certify that he has read and understood the instructions and followed the same while preparing the Report. Thus, the Auditor is expected to follow the instructions and in any case, if not in position to follow the same, he will be required to report in para-3 of Part-1.

5. As stated above, Part-1 is about certification. Para-2(B) of Part-1 starts as under :

“Subject to *my/our remarks about non-compliance, short comings and deficiencies in the returns filed and tax liability computed and presented in respective schedules and Para-4 of this Part, I/We certify that,. . . . .”

Thus, an impression arises that this is not a Report as such but certification. Report is generally an opinion based on the overall verification of the records, certification means certifying correctness of the facts so certified. For example, if a ‘debtors list’ is certified as per any records, then such certification is expected to be correct as per actual amounts, leaving no difference even of Rupee or Paisa. Therefore, an issue may arise whether the VAT Auditor is giving certification, so that the amounts/tax liability mentioned in the Audit Report are verified fully in all its respects, including 100% accuracy of various claims. In certification in para-2(B), there are certain items, mentioning that the Auditor has fully verified the facts stated therein. For example, in clause (i) the Auditor certifies that ‘all such declarations and certificates are produced before me. I have verified the same and they are in conformity with the provisions related thereto’.

Due to these kind of certification, question arises whether the Auditor is supposed to check each and every declaration form (like ‘C’ form), physically and that also with correctness of the details mentioned therein. There are certain more items of similar nature. Therefore, it is necessary to understand the scope of VAT Audit.

To our understanding, though above is the mode of reporting, Audit Report is still an expression of opinion only and it is not a certification as understood in that manner. This aspect is clear from the overall reading of the Form, particularly from the reading of the responsibility statement after para-1C in Part-1. The said statement is as under :

“Maintenance of books of accounts, sales tax related records and preparation of financial statements are the responsibilities of the entity’s management. Our responsibility is to express an opinion on their sales tax related records based on our audit. We have conducted our audit in accordance with the standard auditing principles generally accepted in India. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the sales tax related records and financial statements are free from material mis-statement(s). The audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates by management as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.”

Based on above responsibility statement, it can be said that the report is in the form of opinion and not a certificate as such. Therefore, the Auditor can give the specified certificates in para-2(B) of Part-1, based on his satisfaction from the verification, which may include test verification of the relevant records. However, it is expected that the Auditor will maintain his working papers meticulously.

In Part-1 of new Form 704, the VAT Auditor has also to give a summary of total tax liability in a tabular format. Unlike the old Form, in new Form the Auditor is not to give any recommendation for revising the returns, etc. He has to only report about additional liability or refunds etc. The dealer will take his own decision to revise the returns accordingly or not. [There is amendment in S. 20(4) of MVAT Act, 2002 which is about revised returns. S. 20(4)(b) is about revising the returns pursuant to Audit Report. From reading of said section, it transpires that the dealer will be required to revise each individual return, as per the changes required in the same. In relation to old Form, the then Commissioner of Sales Tax had issued Circular 26T of 2006 dated 18-9-2006 by which the dealer was able to revise only last return, to take care of all the changes during the audit period. Thus, the responsibility of the dealer has increased.]

In Part-2, general information is called for. As compared to old Form, certain new requirements have been added. Like details about filing of returns and payment under Profession Tax Act/Luxury Tax Act etc. Though, strictly speaking, in the VAT Audit Report, details about other enactments can not be asked for, but, it appears that since the other enactments are also administered by the sales tax department, these details are asked for. The other distinguishing feature in Part-2 is that the Activity Code is also required to be reported. These Activity Codes are made available on government website and the Auditor, after selecting applicable codes has to give bifurcation of turnover qua such codes.

Part-3 is about computation of liability. It has six schedules and eleven Annexures. Schedules I to V are for reporting transactions under MVAT Act, 2002, whereas Schedule-VI is about reporting trans-actions under CST Act, 1956. As clarified in the Instructions, the Schedules are as per return format. Under MVAT Act, 2002, there are different type of returns viz. From Nos. 231, 232, 233, 234 & 235. Schedule-I relates to Form No. 231 and so on. It is also possible that more then one Schedule may apply, depending upon the type of returns applicable to the said dealer.

In addition to the Schedules, there are also Annexures from ‘A’ to ‘K’. These are supplementary to Schedules. In the Electronic Format, if the information is first filled up in the Annexures, related fields in the Schedules and Tables will be auto calculated. Though, there can be various minute details about each item of the Schedules/Annexure, for sake of brevity, the same are not discussed here. However, some of the additional items in this new Form, as compared to old Form, can be mentioned as under:

i) List of new suppliers on the purchase of which set off is claimed. (Annexure ‘G’. However, this Annexure is dropped in E-template).

ii) List of TIN wise suppliers showing total purchases and taxes. (Annexure ‘J’).

iii) List of TIN wise purchasers showing total sales and taxes. (Annexure ‘J’). At present, there is no requirement for noting the TIN of the purchasers and hence, probably the dealer may not have these details available. Depending upon the availability of such information and verification thereof to his satisfaction, the Auditor may have to give suitable disclosures.

iv) List of credit notes, party wise, showing amounts and taxes. (Annexure ‘J’).

v) List of debit notes, party wise, showing amounts and taxes. (Annexure ‘J’).

vi) Ratio analysis. (Annexure ‘F).

vii) Bank statement examination, for certification as per para-2(B)(m) of Part-I.

viii) Stock records requirement for reporting at – various places.

ix) Reconciliation with Excise/Custom records. (Instruction-19).

x) Interest working as per (Annexure ‘A’ & ‘B’).

The new Audit Form-704 is more elaborate. It also requires more details than the old one. In the first year, it seems, it may be little difficult for some of the dealers to generate certain information required to be furnished in some of the annexures and in certain cases it may involve additional work. However/ in subsequent years, one may have to take care to get their accounting software suitably amended and also the procedure for maintaining primary records so as to generate the required information in the manner so required. It appears that in long run, the new Form will be much more dealer friendly.

Nirav Shah

Some Important Judgments Priority of Government Dues

Central Bank of India vs. State of Kerala and Others (21 VST 505)(SC)

The facts before the Hon’ble Supreme Court were that the bank gave credit facilities to dealers against mortgage of moveable and immovable properties. When the bank sought to recover money by sale of properties through the Debts Recovery Tribunal (DRT) the Sales Tax Department intervened saying that by virtue of specific provisions in the State Sales Tax Acts (like Section 26B in the Kerala Act and Sec.38C in the BST Act, 1959) sales tax recovery has priority and first charge. The banks were insisting that since the properties are mortgaged to them and since recovery is under Central legislations viz., the DRT Act, 1993 they have priority. The respective High Courts of Kerala and Bombay held in favour of State Sales Tax Authorities. Hence matters were taken to the Supreme Court by respective banks. The Supreme Court confirmed the orders of the High Courts. Various constitutional challenges were raised. The Supreme Court, after dealing with same, rejected the said challenges.

Short gist of observations on constitutional issues is as under :

The Supreme Court held that Article 254 of the Constitution gets attracted only when both Central and State legislations have been enacted on any of the matters enumerated in List III in the Seventh Schedule to the Constitution and there is conflict between the two legislations. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 have been enacted by the Parliament under Entry 45 in List I in the Seventh Schedule, whereas the Bombay Sales Tax Act, 1959 and the Kerala General Sales Tax Act, 1963 have been enacted by the concerned State Legislatures under Entry 54 in List II in the Seventh Schedule. The two sets of legislations have been enacted with reference to entries in different Lists in the Seventh Schedule. Therefore, the Supreme Court held that Article 254 cannot be invoked for striking down the State legislations on the ground that they are in conflict with the Central legislations. The Supreme Court held that there is no ostensible overlapping between the two sets of legislations.

The Supreme Court observed that there is no provision in either of 1993 or 2002 enactments by which a first charge has been created in favour of banks, financial institutions or secured creditors qua the property of the borrower. Under Section 13(1) of the 2002 Act, limited primacy has been given to the right of a secured creditor to enforce his security interest vis-à-vis Section 69 or Section 69A of the Transfer of Property Act. In terms of that sub-Section, a secured creditor can enforce security interest without intervention of the Court or Tribunal and if the borrower has created any mortgage of the secured asset, the mortgagee or any person acting on his behalf cannot sell the mortgaged property or appoint a receiver of the income of the mortgaged property or any part thereof in a manner which may defeat the right of the secured creditor to enforce security interest. The Supreme Court held that this primacy has not been extended to other provisions like Section 38C of the Bombay Act and Section 26B of the Kerala Act by which a first charge has been created in favour of the State over the property of the dealer or any person liable to pay the dues of sales tax, etc. Sub-Section (7) of Section 13 of the 2002 Act which envisages application of the money received by the secured creditor by adopting any of the measures specified under sub-Section(4) merely regulates distribution of money received by the secured creditor. It does not create a first charge in favour of the secured creditor, observed the Supreme Court.

The Supreme Court also observed that the non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the 2002 Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the 1993 Act or the 2002 Act, the provisions contained in those Acts cannot override other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala Act also contain non obstante clauses and give statutory recognition to the priority of the State’s charge over other debts. These Sections and similar provisions contained in other State legislations not only create a first charge on the property of the dealer or any other person liable to pay sales tax, etc., but also give them overriding effect over other laws, held the Supreme Court.

The Supreme Court analysed the background of the above legislations and observed that while enacting the 1993 Act and the 2002 Act, the Parliament was aware of the law laid down by the Supreme Court, wherein priority of the State dues was recognised. If the Parliament intended to create a first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529A of the Companies Act, 1956 or Section 11(2) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and ensured that dues of banks, financial institutions and other secured creditors should have priority over the State’s statutory first charge in the matter of recovery of the dues of sales tax, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the 1993 Act and 2002 Act on the one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on the other. And the non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the 2002 Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be.

The Supreme Court also held that the State legislations creating first charge in favour of the State operate in respect of charges that are in force on the date of introduction of the provisions creating the charge.

Observing as above, in elaborate judgment, the Supreme Court confirmed the orders of the High Courts and held that the provisions creating first charge for recovery of sales tax dues will prevail upon the charge in favour of banks under the DRT Act, 1993 and Securitisation Act, 2002.

Certificate of Entitlement – Stretching back effective date in assessment proceedings! appeals against assessment orders

Whirlpool India Ltd. S.A.1212 of 2003 dt.18.3.2009 (Larger Bench of M.S.T. Tribunal)

The issue before the Larger Bench was from reference judgment passed by the 2nd Bench in S.A.1212 of 2003 dt.31.3.2008. The appellant has filed this S.A. against assessment order for 1997-98. He was granted Certificate of Entitlement (COE) under PSI 1993, effective from 16.9.98. The date of commencement of commercial production was 1.3.98 and the appellant was praying to stretch back the effective date of COE in the assessment proceedings from 16.9.98 to 1.3.98. The Referring Bench noted judgments in case of Prav Electro (S. A. 575 of 96, dated11.1.2002) and Hikal Ltd., wherein it is held that the effective date can be stretched back in second appeal against assessment order also. The Referring Bench held a different view that the effective date cannot be stretched back in appeal against assessment order. Therefore, the matter was referred to the Larger Bench.

The Larger Bench, on hearing both the parties, observed that stretching back in appeal against assessment order is not permissible. The Hon’ble Larger Bench gave its verdict on different points raised by the appellant as under:

In the assessment proceedings, the Assessing Officer has authority to change the effect of COE and grant benefits of exemption by doing so.

The Assessing Officer in assessment proceedings u/ s.33 has no authority to change the effect of COE. The benefits of exemption u/ s.41 are dependent upon Entitlement Certificate (EC) & COE. The benefits could only be claimed by the appellant in respect of goods manufactured and sold during the eligibility period mentioned in E.C. and COE.

The 1993 PSI, provides unconditionally for grant of COE from the date of commencement of commercial production.

On close reading of the provisions contained in 1993 PSI, such a proposition cannot be advanced. The said Scheme does not provide for the same.

Other COE, being a certificate under 1993 PSI, is administrative in nature. The Assessing Officer has authority to change its effect in assessment proceedings. As such by the Tribunal too.

No doubt COE is a part of 1993 PSI. However, for regulatory aspect, it has been accommodated in Notification entry E-3, 136 u/s.41 of the Act. The authority to grant exemption to a specified class of sales is delegated by law to the Government u/ s.41 of the Act. Thus the COE and its regulatory aspect for grant of exemption to a specified class of sale in the Act is well absorbed in Notification entry E-3/136 u/s.41 of the Act. By law the Assessing Officer has to strictly follow Notification entry E-3/136 while consid-ering exemption to a specified class of sales. He has no authority to change the effect of COE in assessment proceedings and hence the Tribunal.

The Bombay High Court in Great Eastern case lays the law that ‘the sales tax liability accrues when event of sale takes place. It cannot be extinguished by subsequent certification with retrospective effect.’

Thus the proposition, canvassed by the appellant, does not get any support of law.

The benefits of exemption could be claimed unconditionally by the appellant on possessing of COE without looking into the eligibility period mentioned in COE.

The sales tax benefits become available to Eligible Unit (EU) on the basis of EC and COE and not on the basis of COE alone. They are available in respect of goods manufactured and sold during the eligibility period mentioned in EC and COE. All the Package Schemes viz.,1979, 1983, 1988 and 1993 of the Government adopt the benefits during the eligibility period given in EC and COE, the 1993 PSI does not adopt a different period or a different terminology.

A liberal interpretation be made of Notification entry E-3/136, u/s.41 of the Act for allowing the benefits of exemption to the appellant in assessment.

The ratio of the Supreme Court judgment in Wood Papers case, warrants strict construction of Notification entry E-3/136 u/s.41 of the Act. A plain reading of the Notification and plain construction of the Entry do not advance the case of the appellant. There is no contingency for full play to be given to the appellant for exemption and more particularly in assessment when the Assessing Officer has no authority.

The judgment of the Tribunal in the case of Prav Electro Spark Ltd. does advance the case of the appellant,

The Tribunal’s judgment in the above matter does not advance the correct proposition of law declared by the Apex Court in Jeypore case for the explained reason.

The effect of COE could be changed in the assessment proceedings by the Assessing Officer and benefits of exemption could be made available to the appellant.

The ratio of the Bombay High Court’s judgment in the case of Great Eastern Spinning & Weaving Mills demolishes this proposition, so also the Wood Papers judgment of the Apex Court. Such a proposition of the appellant also goes against the Notification E-3/136 u/s.d lof the Act.

Substantial justice be done to the appellant since he was pursuing alternate remedy for change of effect of COE by representing to the Commissioner and the Government.

The appellant did not agitate on the effect given to EC & COE at any point of time u/ s.55 of this – Act. The alternative remedy claimed by the appellant being administrative in nature, it has no sanctity of law and it is not a matter concerning the lawful remedy. In the present case we are in appeal against assessment (and no appeal is before us against COE). The powers which we possess u/ s.55 of this Act pertain to a limited aspect of what the Assessing Officer can do in assessment, we can do it in appeal, or what the Assessing Officer was supposed to do in assessment but not done, can be done by the Appellate Authority. This is the authority explained by the Bombay High Court in the case of M/ s.Amar Dye Chem, we are in possession . of. There exists no case for substantial justice when a matter pertains to strict construction and strict compliance of exemption conditions, as held by the Supreme Court, and when exemption is dependent on EC and COE and not COE alone.

The Tribunal has an authority to change the effect of EC & COE to date of commencement of commercial production certified by IA in assessment proceedings.

The appeal proceedings before the Tribunal are against the assessment. The Tribunal could deal with the grounds of appeal in the manner and authority the Assessing Officer remains in possession of. The ratio of the Apex Court judgment in Wood Papers (cited supra) warrants a strict interpretation of exemption notification. It does not allow the Tribunal to act otherwise. Any attempt of granting exemption by amending COE and EC in assessment shall amount to violation of the position of law declared by the Apex Court. It would be in breach of Notification so also result in subsuming the Notification to the appellant’s proposition. It is not a proposition of law.

Thus the Hon’ble Larger Bench held that the issue of stretching back the date of COE cannot be entertained in the appeal proceedings against the assessment order.

Nirav Shah

‘Sale in transit’ vis-à-vis S.C. judgment in A & G Projects & Technologies

VAT

A very interesting but confusing situation has arisen in
relation to ‘sale-in-transit’. As per the provisions of Central Sales Tax Act,
1956, each inter-State sale is liable to tax. However, the intention of the
Government is not to levy tax on all such transactions when such transactions
are effected in the course of single movement. In other words, under the CST Act
an exempted sale category has been carved out so as to give exemption to
subsequent inter-State sale in the course of single movement. The reference is
to the provisions of S. 6(2) of the CST Act, 1956. The said Section is
reproduced below for ready reference :

“6 Liability to tax on inter-State sales

(2) Notwithstanding anything contained in Ss.(1) or
Ss.(1A), where a sale of any goods in the course of inter-State trade or
commerce has either occasioned the movement of such goods from one State to
another or has been effected by a transfer of documents of title to such goods
during their movement from one State to another, any subsequent sale during
such movement effected by a transfer of documents of title to such goods to a
registered dealer, if the goods are of the description referred to in Ss.(3)
of S. 8, shall be exempt from tax under this Act.

Provided that no such subsequent sale shall be exempt from
tax under this sub-section unless the dealer effecting the sale furnishes to
the prescribed authority in the prescribed manner and within the prescribed
time or within such further time as that authority may, for sufficient cause,
permit, :

(a) a certificate duly filled and signed by the
registered dealer from whom the goods were purchased containing the
prescribed particulars in a prescribed form obtained from the prescribed
authority, and

(b) if the subsequent sale is made to a registered
dealer, a declaration referred to in Ss.(4) of S. 8.

Provided further, that it shall not be necessary to furnish
the declaration referred to in clause (b) of the preceding proviso in respect
of a subsequent sale of goods if, :

(a) the sale or purchase of such goods is, under the
sales tax law of the appropriate State exempt from tax generally or is
subject to tax generally at a rate which is lower than three per cent or
such reduced rate as may be notified by the Central Government, by
notification in the Official Gazette, under Ss.(1) of S. 8 (whether called a
tax or fee or by any other name); and

(b) the dealer effecting such subsequent sale proves to
the satisfaction of the authority referred to in the preceding proviso that
such sale is of the nature referred to in this sub-section.”

The implication of above Section is that the first
inter-State sale transaction will fall u/s.3(a) of the CST Act and, therefore,
be liable to tax in the hands of first vendor in the moving State. However
subsequent sale effected by first purchaser, by transfer of documents of title
to goods, to his purchaser will be exempt. In fact any number of such sales
effected during the course of the said movement will remain exempt. As defined
u/s.3(b) of the CST Act, the movement of goods commences when the goods are
handed over to the common carrier and it ends when the delivery of the same is
taken from carrier. Thus during this course of movement, a number of
transactions can take place and they will be exempt. However for availing the
exemption the respective selling dealer will be liable to collect the pair of
forms as stated below.

When the first purchaser sells, he will be required to
collect E-I form from his vendor and C form from his purchaser.

When the subsequent purchaser sells, he will be required to
collect E-II form from his immediate vendor and C form from his buyer. This pair
of E-II and C forms will continue for all subsequent sales taking place in the
course of the same movement. Thus a very good facility has been provided by the
law to avoid cascading burden of tax. Except tax on the first transaction the
tax burden on subsequent sale transactions in the same movement can be avoided.
In popular terms this type of sales are referred to as ‘in-transit sales’.

The nature of ‘in-transit sale’ is now clear by number of
judgments. There can be different situations about the above exempted category
of sale. The simple is that the first purchaser buys the goods without reference
to any pre-existing order from his customer. However after the goods are in
transit he may receive the order from buyer and sell the goods by transfer of
documents. There cannot be any dispute about this transaction and it is
straightaway covered by S. 6(2).

However, dispute sometimes arises when the first purchaser
has pre-existing order. For example, A in Maharashtra has order for supply from
B in Gujarat. A purchases the said goods from C in Tamil Nadu and directs C to
dispatch the goods to B. In this case sale by C to A will be first inter-State
sale and sale by A to B will be subsequent inter-State sale and this will be
exempt subject to production of forms. However the sales tax authorities take
objection that since the goods were already earmarked for B, before putting the
goods in transport, the exempted sale as ‘sale-in-transit’ cannot take place.

However this cannot be a correct position. It is true that there was pre-existing order with A and accordingly the goods were purchased from C. However the sale to B by A is taking place only at the time of putting the goods in carrier. It is at that point of time, because of the instructions of A, the goods are booked in the name of B and hence this is transfer of documents and accordingly covered by S. 6(2). The pre-existing order with A can at the most be considered to be agreement to sale, but actual sale is taking place when the transport documents are made in his name, because of instructions of A. In this respect it can also be mentioned here that there is no need for physical endorsement of transport documents and the transfer can take place by instructions also, which can be referred to as contractive transfer. In other words when the transport documents are taken out in the name of B, the goods stood transferred to B and that is because of contractive transfer of documents, the transaction is duly covered by S. 6(2), hence exempt, subject to other conditions.

This is now a settled law in light of number of judgments on the said issue. Reference can be made to the following judgments:

State of Gujarat v. Haridas MuIji Thakker, (84 STC 317) (Guj.) :

In this case the facts are that the Gujarat dealer received order from another dealer in Gujarat. For supplying the said goods, the vendor dealer in Gujarat placed order on Maharashtra dealer and instructed to send the goods directly to the Gujarat purchasing party. Gujarat High Court held that the sale by Maharashtra dealer to Gujarat vendor dealer is first inter-State sale and the one by Gujarat vendor to Gujarat purchasing dealer is second inter-State sale. The Gujarat High Court also held that the second inter-State sale is exempt u/ s.6(2) being effected by transfer of documents of title to goods. In this case though there was no physical transfer of L.R., etc. The Gujarat High Court held that there is constructive transfer by instruction and hence duly covered by S. 6(2). This judgment duly covers both issues that there is no need for physical transfer and also that having predetermined parties does not affect the claim.

Fatechand Chaturbhujdas v. State of Maharashtra, (S.A. 894 of 1990, dated 12-8-1991) (M.s.T. Tribunal) :

In this case the local party purchased goods from another local party and directed the same to be despatched to outside State party. Even though local party was shown as consignor, taking the view that while placing order there is term for outside place dispatches, Maharashtra Sales Tax Tribunal held that the sale between two local parties is first inter-State sale and the sale by local party to outside party is subsequent inter-State sale, duly exempt ul s.6(2).

Duvent Fans P: Ltd. v. State of TamiI Nadu, (113 STC 431) (Mad.) :

A local dealer purchased goods from another local dealer and directed to send them to his purchaser’s place in another State. The Madras High Court held that the first transaction is first inter-State sale and the second sale is also subsequent inter-State sale exempt ul s.6(2) of the CST Act. This judgment also clarifies the nature of exempted sales ul s.6(2) of the CST Act.

In fact there are many judgments on this issue. However, since the legal position about transfer of documents is clear from the above judgments, for sake of brevity no further citations are given here.

In the light of the above legal position the nature of ‘in-transit sale’ is fairly settled and dealers are day in and day-out effecting such type of transactions.

However, recently the Supreme Court has delivered judgment in case of A & G Projects & Technologies v. State of Karnataka, (19 VST 239) (sq. The facts in the above case are very peculiar and the gist is as under:

The appellant, a registered dealer under the Karnataka Sales Tax Act, 1957, as well as the Central Sales Tax Act, 1956, was engaged in execution of electrical contracts. It was awarded three independent contracts towards: (i) supply of capacitor banks, (ii) execution of civil works, and (iii) creation and commissioning of capacitor banks at various sub-stations of the Karnataka Power Transmission Corporation. Pursuant to those contracts the appellant appointed Bay West as contractor located outside Karnataka for procuring capacitor banks because the latter had a prior arrangement with the manufacturers. The appellant filed its return showing turnover of inter-State sales under the Central Sales Tax Act, 1956, contending that the goods originated from the manufacturers and ultimately reached the Corporation though title to the goods vested in Bay West. According to the appellant there were three sales and it claimed exemption from tax u/s.6(2) of the Central Sales Tax Act, 1956, on the ground that the second and third sales were subsequent sales. The Assessing Officer held that the appellant was not entitled to the exemption. The Tribunal held that the movement of goods was not from the State of Karnataka, but into the State and therefore there was no inter-State sale in the State of Karnataka. On revision the High Court held that the sale of goods in favour of the Corporation was complete when the goods were appropriated to the Corporation before the commencement of goods from the place of manufacture in Tamil Nadu to the Corporation in Karnataka and, therefore the inter-State sales fellu/s.3(a), thus not entitled to exemption u/ s.6(2). The Supreme Court proceeded on the fact that all three transactions are held to be covered by S. 3(a) of the CST Act by lower authorities and accordingly interpreting S. 9(1) of the CST Act decided that the transactions are liable to tax in moving State and notin State of Karnataka.

In the above case the Supreme Court was concerned about appropriate State entitled to levy tax in relation to inter-State sale covered by S. 3(a) read with S. 9(1) of the CST Act. As can be inferred from the judgment more than one inter-State sale transactions can be liable in the same State if they are covered by S. 3(a). The Supreme Court was not analysing S. 6(2). However while dealing with the issue in relation to S. 9(1), the Supreme Court has observed about nature of ‘in-transit sale’ which can be covered by S. 6(2). Relevant portion is as under:

“Within S. 3(b) fall sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto whereas S. 3(a) covers sales, other than those included in clause (b), in which the movement of goods from one State to another is under the contract of sale and property in the goods passes in either States [SEE: Tata Iron & Steel Co. Ltd. v. S. R. Sarkar, (1960) 11STC 655 (sq at page 667]. The dividing line between sales or purchases u/s.3(a) and those falling u/s.3(b) is that in the former case the movement is under the contract whereas in the latter case the contract comes into existence only after the commencement and before termination of the inter-State movement of the goods.” (Italics ours)

In the light of the above observations an issue arises as to whether having pre-existing order with the buyer will affect the claim. In the light of the above observations, one may be tempted to say that the ‘in transit sale’ must take place only after commencement of the movement and if there is a pre-exiting order with the ‘intransit’ seller, then such sale cannot qualify for S. 6(2). However it appears that such conclusion is not at all intended nor warranted.

As stated above, the Supreme Court was not analysing S. 6(2) as such, but it has referred to S. 6(2) for correctly defining scope of S. 9(1). Secondly, the Supreme Court has not laid down anything contrary so as to nullify the understanding till today as well as the above-referred High Court judgments. Even if there is pre-existing order it cannot be equated with the contract of sale. The sale takes place only when the transport documents are transferred or stand transferred by implication like contractual transfer. When the Supreme Court says about con-tract coming into existence after movement commences, the reference or the meaning of the term ‘contract’ used therein is to actual sale. The pre-existing order is at the most an agreement to sale, but the actual transfer of documents is a contract of sale and obviously the said contract is taking place after the movement has commenced, as discussed above. Therefore, on merits also the said observations are not laying down any different position. It is possible that because of the above observations the department may again proceed with their theory of existence of pre-existing order for disallowing claims. However, in the light of the position discussed above, it is not warranted and the legal position as prevailing today should remain applicable even after the above judgment.

Nirav Shah

S. 37(1) — Provision for service warranty expenses on actuarial basis allowed as expense.

New Page 1

62. (2009) 29 SOT 167 (Delhi)

Dy. CIT v. LG Electronics (I) Ltd.

A.Y. : 2002-03. Dated : 30-1-2009

S. 37(1) — Provision for service warranty expenses on
actuarial basis allowed as expense.

The assessee-company, which was providing a one year
service warranty on sale of its electronics products, made a provision towards
services warranty expenses on actuarial basis and claimed deduction in respect
of the same u/s.37(1), which was disallowed by the Assessing Officer. On
appeal, the CIT(A) allowed the assessee’s claim.

The Tribunal, relying on the decisions of the following
cases, allowed the assessee’s claim :

(a) CIT v. Indian Transformers Ltd., (2004) 270
ITR 259; (2005) 142 Taxman 429 (Ker.)

(b) Bharat Earth Movers v. CIT, (2000) 245 ITR
428; 112 Taxman 61 (SC)

(c) Calcutta Co. Ltd. v. CIT, (1959) 37 ITR 1 (SC)

(d) IRC v. Mitsubishi Motors New Zealand Ltd.,
(1996) 222 ITR 697 (PC)

(e) CIT v. Vinitek Corpn. (P.) Ltd., (2005) 278
ITR 337; 146 Taxman 313 (Delhi )

The Tribunal noted as under :

1. In the light of plethora of judgments of both of the
Supreme Court as well as various High Courts it is well settled that once
the assessee is maintaining its accounts on the mercantile system, the
liability already accrued in a year though to be discharged at a future
date, would be a proper deduction while working out the profit and gains of
business, regard being had to the accepted principle of commercial practice
and accountancy. It is not as if such deduction is permissible only in the
case of amounts actually expended or paid.

2. The expression ‘the liability already accrued in the
year’ signifies that a business liability must have definitely arisen in
that accounting year. In other words, for allowing the deduction of a
liability while working out the profits and gains of business, a business
liability should have definitely arisen in that accounting year. What should
be certain is the incurring of the liability. The definite liability must be
in praesenti and not de futuro. The liability must have arisen under a
definite obligation. The obligation of the trader must not be of a purely
contingent nature for it to be a permissible outgoing or allowance or
deduction in the year of account.

3. The other condition to be satisfied is that the
definite liability in praesenti should also be capable of being estimated
with reasonable certainty though the actual quantification may not be
possible.

4. In the instant case, the issue related to the
assessee’s claim of deduction towards warranty liability under a condition
or stipulation made in the sale document imposing a liability upon the
assessee to discharge its obligation under warranty clause for the period of
warranty.

5. The assessee had made the provision of warranty
liability having regard to the past factor of actual expenses incurred by it
towards warranty liability. It had worked out the amount of liability by
applying a multiplying factor on the total sales made during the year on the
basis of past results. This method had been followed by the assessee
uniformly right from the first year of commencement of production.

levitra

Nirav Shah

S. 28(iv) — Revaluation of assets by firm before conversion into a Company — Value of shares received by partners in excess of their capital was not taxable.

New Page 1

61. (2009) 29 SOT 138 (Mum.)

Dy. CIT v. Mahesh M. Chheda

A.Y. : 1999. Dated : 29-1-2009

S. 28(iv) — Revaluation of assets by firm before conversion
into a Company — Value of shares received by partners in excess of their
capital was not taxable.

The assessee was a partner in a firm which revalued its
assets before conversion into a Company which allotted shares to the partners
of the firm against their revalued capitals. The Assessing Officer taxed the
value of shares received by the partners in excess of their capital before the
revaluation of assets by the firm as value of perquisite or benefit arising to
the partners in terms of S. 28(iv). The CIT(A) upheld the assessment order.

The Tribunal, relying on the decision of the Gujarat High
Court in CIT v. Smt. Chetanaben B. Sheth, (1993) 203 ITR 24, deleted
the addition. The Tribunal noted as under :

1. One of the conditions necessary for applicability of
S. 28(iv) is that the benefit or perquisite sought to be taxed must be
arising in the course of business carried on.

2. The Gujarat High Court has held in the above-mentioned
case that the amount received by an assessee-partner of a firm towards
valuation of goodwill and assets of the firm at the time of retirement from
the firm does not attract provisions of S. 28(iv), since the same cannot be
said to be a perquisite arising from the business and that even otherwise it
would not partake the character of income. Besides the above, increase in
capital of a partner as a result of revaluation of assets of the firm has no
nexus with the business of firm and, therefore, it cannot be brought within
the ambit of S. 28(iv). Therefore, the provisions of S. 28(iv) could not be
applied to bring the sum in question to tax in the hands of the partners of
the firm.

On the issue whether there was any capital gains as a
result of increase in capital of the partners consequent to revaluation of
assets of the firm, the Tribunal noted as under :

1. The stand taken by the Revenue in the grounds of
appeal was that partner’s interest in the firm was transferred to the
Company at a higher value and, hence, the benefit should be taxed in the
hands of the partners. It had been further contended in the grounds of
appeal that the definition of ‘transfer’ as given in S. 2(47) is an
inclusive definition and, therefore, de hors the provisions of S.
45(4) capital gains can be brought to tax in the hands of the partners.

2. There was no transfer whatsoever by the partners. It
was the firm which got converted into a Company. On such conversion, capital
gain on such transfer could be brought to tax only in the hands of firm and
not in the hands of the partner. This was clear from the provisions of S.
45(4). Consequently, no ‘capital gain’ arose in the hands of the partners by
reason of revaluation of assets of the firm and the consequent increase in
capital account of the partners of the firm.

3. Transfer by the firm or consequent succession of the
firm by a Company should not be brought to tax in view of the provisions of
S. 47(xiii). The fact that such transfer and the resultant capital gains
could not be brought to tax was no ground to explore the possibility of
taxing capital gain in the hands of partners on the ground that there was
capital gain consequent to revaluation of assets and increase in capital of
the partners.

levitra

Nirav Shah

Explanation (b) to S. 6(1)(c) : (i) Not applicable in case of permanent return (ii) period of visit to India to be excluded (iii) fraction of a day to be excluded.

Part C — Tribunal & International Tax Decisions

    Shri Manoj Kumar Reddy v. ITO

    ITA No. 1020/Bang./2008

    S. 6(1)(c) [Explanation (b)], Income-tax Act;

    Article 4, India-USA DTAA

    A.Y. : 2005-2006. Dated : 3-4-2009

    Explanation (b) to S. 6(1)(c) : (i) Not applicable in case of permanent return (ii) period of visit to India to be excluded (iii) fraction of a day to be excluded.

Facts :

The assessment pertains to previous year 2004-05 (A.Y. 2005-06). The appellant was an employee of an Indian company. On 23rd January 2004, the employer issued a deputation letter to the appellant relocating him to the USA and directed him to work on specified projects of the customers of its US parent company. However, the appellant continued to be an employee of the Indian company.

The appellant left India on 1st February 2004. He returned to India on 31st January 2005 at 4.00 a.m. The number of days of stay in India by the appellant during the preceding previous years 2000-01 to 2006-07 were as follows :

As the appellant was in India for more than 365 days or more during the four preceding previous years and during the previous year 2004-05 and he was in India for more than 60 days, the AO concluded that in terms of S. 6(1)(c) of the Act, the appellant was resident in India. The AO also referred to Article 4(1) of India-USA DTAA which defines ‘resident of a contracting state’ and held that the residential status of the appellant is to be decided in terms of the domestic law. As appellant is resident under the Act, he would also be resident in terms of DTAA.

The AO referred to Article 16 of India-USA DTAA which states that the salary derived by an Indian resident in respect of an employment shall be taxable only in India unless certain conditions are fulfilled. As AO held that the salary from rendering services in the USA was taxable in India as the appellant was resident in India.

Before CIT(A), the appellant contended that Clause (b)1 of Explanation to S. 6(1)(c) applies in case the appellant comes on a visit to India and the fact that appellant had come to India permanently was not relevant. Hence, the appellant should be considered as non-resident. In support of its contention, the appellant relied on the decision of AAR in British Gas India P. Ltd., (2006) 285 ITR 218, wherein the AAR held that the term ‘for the purposes of employment outside India’ would also cover a case where an assessee is deputed outside India by an Indian employer.

Before the Tribunal the appellant raised the following contentions :

(i) Clause (b) of Explanation to S. 6(1)(c) applies in case the appellant comes on a visit to India and the fact that the appellant had come to India permanently was not relevant. Hence, the appellant’s status should be taken as non-resident.

(ii) As he had arrived on 31st January 2005 at 4.00 a.m., the fraction of the day should not be counted while determining the period. He further contended that if 31st January 2005 is excluded, his stay in India was only 59 days. Hence, he would be non-resident. The appellant relied on Delhi High Court’s decision in Praveen Kumar and Another v. Sunder Singh Makkar.

Held :

(i) The Tribunal referred to the legislative history and the purpose of the amendment and relying on the Punjab & Haryana High Court’s decision in V. K. Ratti v. CIT, (2008) 299 ITR 295 (P& H), held that if the appellant has come to India permanently after leaving his employment outside India, Explanation (b) will not be applicable.

(ii) For computing the period of 60 days mentioned in S. 6(1)(c), the period of visit to India should be excluded.

(iii) Referring to the Delhi High Court’s decision in Praveen Kumar and Another v. Sunder Singh Makkar, Law Lexicon and S. 9 of the General Clauses Act, the Tribunal held that as per the General Clauses Act, the first in a series of a day is to be excluded if the word ‘from’ is used. Since for computation of the period, one has to necessarily import the word ‘from’, the first day should be excluded.

Clause (b) relaxes the rigour of S. 6(1)(c) by substituting 182 days in place of 60 days

Held:

i) The Tribunal referred to the legislative history and the purpose of the amendment and relying on the Punjab & Haryana High Court’s decision in V. K. Ratti v. CIT, (2008) 299 ITR 295 (P& H), held that if the appellant has come to India permanently after leaving his employment outside India, Explanation (b) will not be applicable.

ii) For computing the period of 60 days mentioned in S. 6(1)(c), the period of visit to India should be excluded.

iii) Referring to the Delhi High Court’s decision in Praveen Kumar and Another v. Sunder Singh Makkar, Law Lexicon and S. 9 of the General Clauses Act, the Tribunal held that as per the General Clauses Act, the first in a series of a day is to be excluded if the word ‘from’ is used. Since for computation of the period, one has to necessarily import the word ‘from’, the first day should be excluded.

Nirav Shah

No tax is required to be deducted from commission paid to agent outside India if no services performed in India or no fixed place of business in India.

New Page 1

Part C — Tribunal & International Tax Decisions

Spahi Projects Pvt. Ltd., in re

AAR No. 802 of 2009

S. 9(1), Income-tax Act; Article 7,

India-South Africa DTAA

Dated : 29-7-2009

No tax is required to be deducted from commission
paid to agent outside India if no services performed in India or no fixed
place of business in India.

Facts :

The applicant was an Indian company engaged in
the business of manufacture and sale of industrial pesticides. The applicant
appointed a South African company (‘SA Co’) to promote and market its products
in South Africa. In consideration of its services, SA Co was to receive
commission from the applicant in respect of completed transactions. SA Co was
to : (i) procure orders from different buyers; (ii) negotiate price and other
terms and intimate the same to the applicant; (ii) re-negotiate the
terms/price if necessary, based on the instructions of the applicant; (iv)
follow up in getting purchase orders from customers and forward the same to
the applicant; (v) follow up regarding LC opening, shipment and payment; (vi)
attend to queries in regard to shipment. The orders were to be directly
executed by the applicant. Sale consideration would also be directly received
by the applicant in India. After receipt of the sale consideration, the
applicant would remit commission to SA Co.

The applicant had raised the following issues for
ruling by AAR :

(i) Whether amount paid to SA Co was liable to
tax deduction u/s.195 of the Act read with India-South Africa DTAA.

(ii) As SA Co did not have permanent
establishment in India, whether amount paid to it was liable to tax
deduction.

(iii) Whether amount paid to SA Co could be
treated as ‘fees for technical services’ under the Act.

The applicant contended that : SA Co rendered all
its services outside India; it did not maintain any establishment in India;
the income received by SA Co was its business income; and hence, the income
cannot be taxed under the Act as SA Co did not have any business connection or
permanent establishment in India. The applicant also clarified that SA Co has
no authority to conclude contracts on its behalf or to take any decision
without referring to the applicant.

In support of its contention, the applicant
relied on CBDT’s Circular No. 23, dated 23rd July 1969, Circular No. 786 of
7th February 2000 and also on the decisions in CIT v. R. D. Aggarwal & Co.,
(1965) 56 ITR 20 and CIT v. T.I. and M. Sales Ltd., (1987) 166 ITR 93.

The AAR referred to Article 7 of India-South
Africa DTAA. The AAR also cited with approval certain observations of the
Supreme Court in CIT v. Toshoku Ltd., (1980) 125 ITR 525 (SC).

Held :

(i) As no business operations are carried out
in India by SA Co, no income can be attributed under Explanation (a) and
therefore no income can be deemed to accrue or arise in India.

(ii) SA Co has no fixed place of business in
India and hence, none of the sub-clauses of Article 5(2) are applicable.
Accordingly, the business profits of SA Co for services rendered as
commission agent in SA Co could not be brought to tax in India.

(iii) As SA Co will not be rendering services
of a managerial, technical or consultancy nature, provisions dealing with
fee for technical services cannot be invoked.

(iv) As commission paid by the applicant to SA
Co is not chargeable to tax in India by virtue of Art.7 of DTAA and S.
9(1)(i) read with the Explanation thereto, the applicant is not obliged to
deduct tax u/s.195 of the Act..

levitra

Nirav Shah

Liability to deduct tax — Payer not an assessee in default u/s.201 if payee has paid tax on income but payer liable to interest u/s.201(1A).

New Page 1

Part C — Tribunal & International Tax Decisions

ITO v. Intel Tech India Pvt. Ltd.

ITA No. 71/Bang./2009

S. 195, S. 197, S. 200, S. 201, S. 248,

Income-tax Act

A.Y. : 2004-2005. Dated : 9-4-2009

Liability to deduct tax — Payer not an assessee in default
u/s.201 if payee has paid tax on income but payer liable to interest
u/s.201(1A).

Facts :

US Co. is an American company. US Co. was carrying on
business in India through a branch (‘Indian branch’). The appellant is an
Indian company. On 15th March 2003, the appellant entered into an agreement
with US Co. for acquisition of the entire assets and liabilities of the Indian
branch. In terms of the agreement, on 1st April 2003, US Co. transferred all
the assets and the liabilities of the Indian branch to the appellant. The
consideration for the transfer was the difference between the WDV of the
assets and the liabilities. The appellant accounted for the purchase price by
debiting the assets and accounted for the consideration payable by crediting
US Co.

Being depreciable assets, in terms of S. 50 of the Act, the
sale proceeds were chargeable to tax as short-term capital gains. In terms of
S. 195 of the Act, the appellant was required to deduct tax from the purchase
consideration, which it failed to do. Hence, the AO issued the notice to the
appellant to show cause why u/s.201(1) it should not be treated as an assessee
in default, and further that why interest should not be levied u/s.201(1A).

In reply to the notice, the appellant submitted that :

à The
provisions of S. 195 are not applicable in a case where the non-resident or
foreign company has presence in India and is assessed to tax.

à The
transfer of the assets has resulted in a ‘loss’ in the hands of US Co.
Therefore there was no requirement to deduct tax at source u/s.195(1). In
its support, the appellant submitted valuation report dated 1st November
2003.

à Though
tax was not deducted, the Indian branch had deposited the tax. Therefore, in
terms of Explanation to S. 191, the appellant cannot be treated as an
assessee in default u/s.201(1).

The AO rebutted the submissions in the following manner and
concluded that the appellant was required to deduct tax from gross
consideration :

à S. 195
does not exempt a foreign company from the purview of S. 195 on the ground
that the foreign company is assessed to tax in India.

à The
appellant credited the consideration on April 1, 2003 and therefore,
liability to deduct tax arose on that date. As the valuation report was
subsequent to the date of credit, the appellant did not have any material to
reach the conclusion that the transaction will result in a loss.

à The
deductee paid tax on other income and not on the transactions on which tax
was to be deducted.

Before CIT(A), The appellant relied on the Supreme Court’s
decision in Hindustan Coca Cola Beverage P. Ltd. v. CIT, (2007) 293 ITR
226 (SC), wherein it was held that if the deductee/recipient had already paid
taxes on the amount received, tax cannot be recovered again from the
defaulting deductor. The appellant further relied on the following decisions :

à
Singapore Airlines Ltd. v. ITO, (2006) 7 SOT 84 (Chennai)

à AP
Power Generation Corporation Ltd. v. ACIT, (2007) 11 SOT 221 (Hyd.)

à
Golkonda Engineering Enterprises Ltd. v. ITO, (2008 TIOL 169 ITAT Hyd.)

The CIT(A) held that : deductee was a regular assessee
under the Act is not a relevant consideration u/s.195; as the appellant and US
Co were related, the appellant was aware that the transaction will result in a
loss; as the deductee has filed its return of income and has paid due tax,
deductor cannot be treated as assessee in default; and therefore, the
appellant was not liable to any interest u/s.201(1A) of the Act.

Before the Tribunal, the tax authorities argued that if the
deductee has not obtained certificate u/s.197, the deductor is required to
deduct tax. Alternatively, after deducting tax, the deductor could have filed
an appeal u/s.248 and could have claimed that tax was not deductible. The
appellant argued before the Tribunal that purpose of S. 195 was to prevent
remittance to a non-resident without payment of tax and where the non-resident
was assessed to tax in India, S. 195 was not intended to apply. IndCo. also
relied on Circular No. 7/2003, dated 5th September 2003 and stated that if the
deductee has duly discharged his tax liability, deductor would not be treated
as assessee in default due to non-deduction and as a corollary, he would not
be chargeable interest u/s.201(IA).

The Tribunal observed that S. 195 nowhere provides that a
foreign company assessed to tax in India is exempt from S. 195. It supported
this observation with its order dated July 11, 2008 in Madura Coats Pvt. Ltd.
[ITA No 1403/Bang/07]. US Co. had not applied u/s.197 for non-deduction of
tax. If the appellant denied its liability for tax deduction u/s.195 and 200,
it could have filed an appeal u/s.248, which it did not. The appellant had
also not made any application u/s.195(2). The appellant credited the amount on
1st April 2003, whereas valuation report was of 1st November 2003. Hence, on
the date of credit, the appellant did not know that the amount paid will
result in loss and that the deductor cannot make an assessment of income in
the hands of the deductee. Therefore, the appellant was obliged to deduct tax
@ 40%. The Tribunal also referred to the observations of the Supreme Court in
Transmission Corporation of AP Ltd. & Another v. CIT, (1999) 239 ITR
587 (SC) to the effect that the assessee has to file an application
u/s.195(2), u/s.195(3) and u/s.197 in case the sums being paid are not
chargeable to tax in the hands of the recipient.

The deductee had filed the return of its income on 1st
November 2004 and as per the return, no tax was payable on the consideration
from which the appellant was required to deduct tax. Hence, liability of the
appellant ended on the date when the Indian branch filed the return. The Tribunal referred to the Supreme Court’s decision in CfT v. Eli Lilly Company (India) Pvt. Ltd., (2009) 312 ITR 225 (sq, wherein it was held that the object underlying S. 201(1) is to recover the tax. As far as the period of default is concerned, it starts from the date when the tax should have been deducted and lasts up to the date of actual payment. As the appellant was required to deduct tax but had not deducted it, it was an assessee in default. Since the Indian branch had filed the return, disclosed the consideration and the return showed that no tax was payable on the consideration, the default ended on the day the Indian branch filed the return. Hence, there would be no deduction u/s.201, but the appellant will be liable to interest u/s.201(lA) up to the date of filing the return by the Indian branch.

Held:

i) S. 195 does not exempt a foreign company assessed to tax in India from its provisions.

(ii) In the absence of certificate issued u/ s.197 or determination u/s.195 or order u/s.248, the deductor is required to deduct tax u/s.195. If however, the deductor has not deducted tax but the deductee has paid tax on his returned income, the deductor cannot be considered an assessee in default.

(iii) Even if the deductee has paid tax, the deductor would be liable to charge of interest u/s. 201(lA) up to the date of filing the return by the deductee.

Nirav Shah

S. 14A — Disallowance u/s.14A can be made even in the year in which no exempt income has been earned or received — Disallowance u/s.14A in respect of interest expenditure is to be made with reference to gross interest expenditure and not with reference to

New Page 1

Cheminvest Ltd. v. ITO

ITAT Special Bench New Delhi — ‘B’ Bench

Before R. P. Garg (VP) and A. D. Jain (AM) and
Rajpal Yadav (JM)

ITA No. 87/Del./2008

A.Y. : 2004-05. Decided on : 5-8-2009

Counsel for assessee/revenue : Ajay Vohra, Rohit
Jain, Gaurav Jain & Rohit Garg/S. D. Srivastava, Rajesh Tuteja, & Manish Gupta

S. 14A — Disallowance u/s.14A can be made even in
the year in which no exempt income has been earned or received — Disallowance
u/s.14A in respect of interest expenditure is to be made with reference to
gross interest expenditure and not with reference to interest expenditure as
reduced by interest receipt.

Per R. P. Garg :

Facts :

The assessee had invested Rs.17,36,89,230 in
purchase of shares. Some of the shares were held by the assessee as its
capital assets, whereas the others were held as its stock-in-trade. The
assessee had taken unsecured loans of Rs.8,51,65,000. It had paid interest of
Rs.1,21,02,367 on unsecured loans borrowed by it. Of the borrowed funds a sum
of Rs.6,88,70,000 was invested in shares. During the previous year relevant to
the assessment year 2004-05, the assessee did not earn any dividend income.

In the course of assessment proceedings before
the Assessing Officer (AO), the assessee contended that since it had not
earned or received exempt income the question of disallowance of interest does
not arise. The AO did not accept the contention of the assessee and disallowed
interest on a proportionate basis i.e., a sum of Rs.97,87,570 was
disallowed out of total interest.

Aggrieved by the disallowance of interest the
assessee preferred an appeal to CIT(A) who confirmed the action of the AO in
disallowing proportionate interest pertaining to investment for earning
dividend, though exempt income was not earned during the year. The CIT(A),
however, agreed with the alternative contention of the assessee that the
disallowance be computed with reference to the net interest amount debited to
the Profit & Loss Account and not the gross interest expenditure. The CIT(A)
directed the AO to work out disallowable interest on pro rata basis of
the net interest i.e., interest payment as reduced by receipt of
interest.

The assessee preferred an appeal on the ground
that disallowance was not warranted since the assessee had neither earned nor
received any exempt income during the previous year relevant to the assessment
year under consideration. The Revenue preferred an appeal on the ground that
the proportionate gross interest expenditure ought to have been held to be
disallowable.

In view of the contrary decisions on the issue
under consideration, the President, ITAT constituted a Special Bench (SB) to
dispose of the appeal and decide the following question :

“Whether disallowance u/s.14A of the Act can be
made in a year in which no exempt income has been earned or received by the
assessee ?”

Held :

The Special Bench held that —

(a) when the expenditure of interest is
incurred in relation to income which does not form part of total income, it
has to suffer the disallowance, irrespective of the fact whether any income
is earned by the assessee or not. S. 14A does not envisage any such
exception;

(b) when prior to introduction of S. 14A, an
expenditure both u/s.36 and u/s.57 was allowable to an assessee without such
requirement of earning or receipt of income, such a condition cannot be
imported when it comes to disallowance of the same expenditure u/s.14A of
the Act;

(c) in the case of Rajendra Prasad Moody the SC
held that irrespective of dividend receipt, expenditure has to be allowed.
Applying the ratio of this decision in the reverse case since dividend is
exempt, expenditure has to be disallowed. The fact that during the year
dividend has neither been earned nor has it been received would be
irrelevant;

(d) the allowance of expenditure in relation to
dividend income would thus be not admissible in computing the income of an
assessee under this Act, irrespective of whether the shares are held as
investment or they are held on trading account as stock-in-trade;

(e) S. 57 allows the expenditure incurred for
making or earning the income, whereas S. 14A disallows the expenditure ‘in
relation to income which does not form part of total income’. The term
‘expenditure in relation to’ is wider in scope and provides for disallowance
if it is related to income not forming part of total income;

(f) the disallowance has to be of the entire amount of the
expenditure so related and cannot be reduced by the receipt of interest which
has no relation to such expenditure.

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Nirav Shah

S. 115JA, S. 244A — While computing tax liability u/s.115JA credit for tax paid in foreign country is allowable — Grant of interest u/s.244A can not be denied on the ground that the TDS certificate was filed in the course of assessment proceedings and not

New Page 1

ACIT v. L. & T. Ltd.

ITAT Mumbai ‘A’ Bench

Before R. S. Syal (AM) and

Asha Vijayaraghavan (JM)

ITA No. 4499/Mum/2008

A.Y. : 2000-01. Decided on : 22-7-2009

Counsel for revenue / assessee : Mayank Priyadarshi/Arvind Sonde

S. 115JA, S. 244A — While computing tax liability u/s.115JA
credit for tax paid in foreign country is allowable — Grant of interest
u/s.244A can not be denied on the ground that the TDS certificate was filed in
the course of assessment proceedings and not along with the return of income.

Per R. S. Syal :

Facts :

The assessment of total income of the assessee was
completed u/s.143(3) of the Act on 31-3-2003 assessing the total income at
Rs.97,09,81,536 u/s.115JA. Subsequently, the AO observed that the assessee was
allowed double tax relief while assessing the income u/s.115JA. Notice u/s.154
of the Act was issued and the credit for foreign tax given was denied on the
ground that intention behind S. 115JA is that assessee should pay minimum tax
in India on 30% of book profits and credit for taxes paid in foreign country
could not be allowed against tax liability in India when income was assessed
u/s.115JA of the Act.

In the rectification proceedings the AO did not allow
interest in respect of TDS certificates on the ground that such certificates
were not submitted along with the return of income, but were submitted in the
course of assessment proceedings.

The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the income on which tax has been
paid abroad was included in ‘book profit’ for the purpose of S. 115JA. The
Tribunal held that once taxable income is determined either under the normal
provisions or as per S. 115JA, subsequent portion relating to the computation
of tax has to be governed by the normal provisions of the Act. It also held
that there is no provision in the Act debarring granting of credit for tax
paid abroad in case income is computed u/s.115JA. It held the assessee cannot
be denied the set-off of tax relief of Rs.22,88,464 against the tax liability
determined u/s.115JA. It upheld the order of CIT(A) on this ground.

The Tribunal noted that tax was deducted at source at the
right time. It was also deposited into the exchequer in time. The Tribunal
noted that the AO had given credit for TDS, but had denied interest thereon
u/s.244A. The Tribunal held that interest u/s.244A cannot be denied only on
the ground that TDS certificates were not furnished along with the return of
income. It upheld the order of CIT(A) on this ground.

levitra

Nirav Shah

S. 80IB(10) — Amenities provided by the assessee at the time of construction itself, though by way of a separate agreement, are to be treated as part of the housing project undertaken by the assessee — Deduction u/s.80IB(10) is allowable in respect of rec

New Page 1

Dy. CIT. v. Vimal Builders and
Vimal Builders v. Dy. CIT

ITAT ‘F’ Bench, Mumbai

Before M. A. Bakshi (VP) and

R. K. Panda (AM)

ITA No. 3646/Mum./2007 & 2730/Mum./2007

A.Y. : 2003-04. Decided on : 28-7-2009

Counsel for revenue/assessee : J. V. D. Lanstich/

R. R. Vora and Manoj Anchalia

S. 80IB(10) — Amenities provided by the assessee at the
time of construction itself, though by way of a separate agreement, are to be
treated as part of the housing project undertaken by the assessee — Deduction
u/s.80IB(10) is allowable in respect of receipts for amenities — When there is
direct nexus between the funds borrowed and funds advanced to sister concerns
interest received on amounts advanced can be netted off against interest paid.

Per R. K. Panda :

Facts :

The assessee was engaged in the business of constructing
residential buildings. During the assessment year under consideration the
assessee had claimed deduction of Rs.3,15,40,268 u/s.80IB(10). The Assessing
Officer (AO) noted that the assessee had considered receipts for amenities as
part of total sales and had claimed deduction u/s.80IB on the profit element
contained in receipts for amenities. He observed that the amenities included
superior quality flooring, false ceiling, fans and tubes, superior quality
fittings in toilets, box grills and pipe gas from Mahanagar Gas Limited. The
AO did not consider profit derived from providing amenities as part of total
sales and accordingly denied benefit of deduction on an amount of Rs.22,12,360
being the profit on amenities receipts of Rs.55,34,797.

The CIT(A) held that provision of amenities should be
treated as part of the housing project undertaken by the assessee and since
these amenities are provided by the assessee at the time of construction
itself, though by way of a separate agreement, the profit element in receipts
for amenities qualifies for deduction u/s.80IB(10). He allowed the appeal of
the assessee.

The CIT(A), in the course of appeal proceedings before him,
noted that the assessee had advanced monies to its sister concerns and had
received interest of Rs.16,27,802 which interest was netted off against
interest paid. After giving an opportunity to the assessee, he held that
interest receipts should be excluded for the purpose of calculating deduction
u/s.80IB(10) of the Act. He directed AO to recompute the deduction
u/s.80IB(10) by excluding interest receipts.

Aggrieved, the Revenue and the assessee preferred appeals
to the Tribunal.

Held :

The Tribunal noted that the extra amenities are provided
only to purchasers of the flats at the time of purchase of flat itself and no
such activity has been undertaken for any other person; the agreement for sale
of flat and for provision of extra amenities were both entered on the same
date; work for extra amenities was carried out through the same contractor at
the time of construction of the flat itself. It found merit in the submission
that extra amenities given to the buyer cannot be provided in isolation as the
same are inextricably connected with the housing project and the decision of
providing such extra amenities to the buyer was a commercial decision and
within the conditions of S. 80IB(10) of the Act. Accordingly, this ground was
decided in favor of the assessee.

As regards the exclusion of interest receipts for computing
deduction u/s.80IB(10) the Tribunal after considering the submissions made on
behalf of the assessee (viz. that the funds were borrowed from banks
and private parties for the purpose of its housing project; the borrowings
from the banks were for a specified period and prepayment would have resulted
into levy of penalty interest and therefore funds were advanced to sister
concerns on a temporary basis so as to recoup part of the interest costs)
directed the AO to give an opportunity to the assessee to prove the nexus that
borrowed funds were used for giving advances on which interest has been earned
and if the assessee can prove such nexus then netting may be allowed.

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Nirav Shah

S. 80HHC — Entire amount received on sale of DEPB entitlements does not represent profit chargeable u/s.28(iiid). Computation of profit on sale of DEPB entitlements requires an artificial cost to be interpolated.

New Page 1

Topman Exports v. ITO

ITAT Special Bench, Mumbai

Before D. Manmohan (VP),

R. S. Syal (AM) and N. V. Vasudevan (JM)

ITA No. 5769/Mum./2006

A.Y. : 2002-03. Decided on : 11-8-2009

Counsel for assessee/revenue : Rajan Vora/

G. C. Srivastava and Anil Kumar

S. 80HHC — Entire amount received on sale of DEPB
entitlements does not represent profit chargeable u/s.28(iiid). Computation of
profit on sale of DEPB entitlements requires an artificial cost to be
interpolated.

Per R. S. Syal :

Facts :

The assessee, a manufacturer and exporter of
fabric/garments, filed its return of income declaring total income of
Rs.36,24,230. While computing its total income, the assessee had claimed
deduction of Rs.83,69,303 u/s.80HHC of the Act. The assessee had reduced a sum
of Rs.3,01,93,428 being sale proceeds of DEPB licence from its total purchases
of Rs.16,96,83,882 and had shown net purchases of Rs.13,94,90,454. The profit
on transfer of DEPB licence was only Rs.14,35,097 and profit on transfer of
DFRC licence was Rs.19,902. Before the Assessing Officer (AO) the assessee
justified its action by submitting that the profits on sale of DEPB licence
was an export incentive covered u/s.28(iiia) for the purpose of claiming
deduction u/s.80HHC. The AO held that the net profit after reduction of export
incentive of Rs.3.01 crores was a loss of Rs.1.82 crores. The AO denied the
deduction claimed u/s.80HHC of the Act.

The CIT(A) held that since the assessee did not satisfy the
two conditions mentioned in the third proviso to S. 80HHC(3), it is not
entitled to deduction in respect of amounts received under DEPB and DFRC
schemes. As regards the assessee’s contention that only the profit on transfer
of DEPB and DFRC licences was covered by the provisions of S. 28(iiid) and S.
28(iiie) and not the sale proceeds, the CIT(A) held that the cost of these
entitlements/certificates to the assessee was Rs.Nil and hence, the entire
sale consideration of the licences was profit on transfer. The CIT(A) directed
the AO to treat the entire amount of sale consideration of DEPB and DFRC
licences as profit on transfer for the purpose of working out deduction
u/s.80HHC as per the amended provisions. The CIT(A) did not give any finding
regarding the eligibility of duty drawback for deduction u/s.80HHC.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The President of the Tribunal constituted a Special Bench (SB) and
referred the following question to the SB for its consideration and decision :

“Whether the entire amount received on sale of DEPB
entitlements represents profit chargeable u/s.28(iiid) of the Income-tax Act
or the profit referred to therein requires any artificial cost to be
interpolated ?”

Briefly stated, Explanation (baa) to S. 80HHC defines the
term ‘profits of the business’ to mean the profits under the head ‘profits and
gains’ as reduced by 90% of the sum referred to in S. 28(iiid). The 2nd and
3rd provisos to S. 80HHC(3) provide that the profits computed thereunder shall
be increased by the said 90% amount computed in the proportion of export
turnover to total turnover. S. 28(iiid) refers to “any profit on the transfer
of Duty Entitlement Pass-book Scheme (‘DEPB’). The Special Bench had to
consider whether the entire amount received on sale of DEPB entitlement
represents ‘profits’ chargeable u/s.28(iiid) or the profit referred to therein
requires any artificial cost to be imputed.

Held :

The SB decided the appeal in favour of the assessee and
while so deciding it held that :

(i) the argument of the Revenue that DEPB is a
post-export event and has no relation with the purchase of goods cannot be
accepted. There is a direct relation between DEPB and the customs duty paid
on the purchases. For practical purposes, DEPB is a reimbursement of the
cost of purchase to the extent of customs duty;

(ii) the DEPB benefit (face value) accrues and becomes
assessable to tax when the application for DEPB is filed with the concerned
authority. Subsequent events such as sale of DEPB or making imports for
self-consumption, etc. are irrelevant for determining the accrual of income
on account of DEPB;

(iii) on a harmonious construction of clauses (iiia), (iiib)
and (iiic) of S. 28 it is evident that clauses (iiia) and (iiic) deal with
specific species of incentives, clause (iiib) is a residual clause which
brings within its sweep all forms of export incentives other than those
specifically set out in clauses (iiia) and (iiic);

(iv) the face value of DEPB benefit falls within the
ambit of S. 28(iiib);

(v) S. 28(iiid) which refers to the ‘profits on transfer
of the DEPB’, obviously refers only to the ‘profit’ element and not the
gross sale proceeds of the DEPB. If the Revenue’s argument that the sale
proceeds should be considered is accepted, there would be absurdity because
the face value of the DEPB will then get assessed in the year of the DEPB
and also in the year of its transfer;

(vi) profit on sale of DEPB representing the excess of
sale proceeds of DEPB over its face value is liable to be considered
u/s.28(iiid) at the time of sale;

(vii) only the ‘profit’ (i.e., the sale value less
the face value) is required to be considered for the purposes of S. 80HHC;

(viii) whatever has been said about DEPB also holds good
for DFRC, on both its components, viz. the face value of DFRC and
profit on its transfer, except for the fact that the profit on sale of DFRC
shall be charged to tax u/s.28(iiie);

(ix) Duty drawback shall be chargeable to tax at the time
of accrual of income u/s.28(iiie) when application is filed with the
competent authority after making exports.

levitra

Nirav Shah

S. 115JA — Stock borrowing charges not debited to P & L Account as required under Schedule VI of the Companies Act can be claimed as revenue expenditure even in the case of an assessee who is mandatorily bound to follow the accounting standards as prescri

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ITO v. Cyril Traders Pvt. Ltd.

ITAT ‘G’ Bench, Mumbai

Before A. L. Gehlot (AM) and

R. S. Padvekar (JM)

ITA No. 5297/Mum/2004

A.Y. : 1998-99. Decided on : 28-7-2009

Counsel for revenue/assessee : S. B. Prasad/

J. D. Mistry

S. 115JA — Stock borrowing charges not debited to P & L
Account as required under Schedule VI of the Companies Act can be claimed as
revenue expenditure even in the case of an assessee who is mandatorily bound
to follow the accounting standards as prescribed.

Per R. S. Padvekar :

Facts :

The total income of the assessee, assessed u/s.143(3) of
the Act, was a loss of Rs.55,37,760. Subsequently vide order passed u/s.143(3)
r.w. S. 147 the AO inter alia disallowed Rs.53,55,000 towards stock
borrowing charges incurred by the assessee and claimed in its computation of
total income but were not debited to its Profit & Loss Account. The AO held
that not debiting the expenditure to P & L Account was in violation of clause
(xii)(b) of Rule 3 of Part II of Schedule VI and hence the same was not
allowable.

The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the provisions of Minimum
Alternate Tax as contained in S. 115J were considered by the Apex Court in the
case of Apollo Tyres Ltd. It observed that the scheme of S. 115JA is identical
with that of S. 115J. It held that if the P & L Account prepared by the
assessee was not in accordance with the provisions of Part II and Part III of
Schedule VI to the Companies Act, 1956, then to that extent the AO can make
the corrections and adjustments, but the AO cannot make disallowance in
respect of expenses which are otherwise allowable but are not debited to P & L
Account. The Tribunal held that the stock borrowing charges were rightly
allowed as a deduction by the CIT(A).

The appeal filed by the Revenue was dismissed.

Cases referred to :

1. Kedarnath Jute Manufacturing Co. Ltd. v. CIT,
(82 ITR 363) (SC)

2. Tuticorin Alkali Chemcials and Fertilisers Ltd. v.
CIT, (227 ITR 172) (SC)

3. DCIT, Cir 3(1) Mumbai v. Adbhut Trading Co. Pvt
Ltd., (ITA No. 3597/Mum./2002), dated 25-7-2005

4. ITO v. Adbhut Trading Co. Pvt Ltd., (ITA No.
2869/Mum./2004), dated 25-4-2007

5. ITO v. Vicraze Investments & Trdg. Co. P. Ltd.,
(ITA No. 6276/M/2004), dated 24-4-2007.

6. Apollo Tyres Ltd. v. CIT, (255 ITR 273) (SC)

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Nirav Shah

S. 68 — Cash credit — Loan amount received in earlier year converted into gift — Valid gift.

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Haresh A. Dhanani v. ACIT

ITAT ‘SMC’ Bench, Mumbai

Before A. L. Gehlot (AM)

ITA No. 5850/M/2008

A.Y. : 2002-03. Decided on : 22-5-2009

Counsel for assessee/revenue : R. Ajay Singh/

Malati Sridharan

S. 68 — Cash credit — Loan amount received in earlier year
converted into gift — Valid gift.

Facts :

During the year under appeal the assessee had claimed to
have received gift of Rs.2.5 lacs from his uncle on the occasion of his
marriage anniversary. As per the facts noted, the said amount had been shown
by the assessee in his balance sheet as loan from his uncle up to 31-3-2001.
During the year under consideration, the said loan was converted into gift
vide gift deed dated 6-1-2002. The assessee passed necessary journal entry and
the amount was transferred to his capital account from the loan account.
According to the AO since the gift was not received by actual delivery of
cash/cheque, it cannot be considered as valid gift and he treated the said
amount as unexplained cash credit in the hands of the assessee u/s.68 of the
Act. The CIT(A) on appeal relied on the decision of the Apex Court in the case
of Dr. R. S. Gupta and upheld the order of the AO.

Held :

According to the Tribunal, the case relied on by the CIT(A)
was distinguishable on the facts. In the case of Dr. R. S. Gupta, the amount
was deposited with a third person while in the case of the assessee, the loan
amount was with him only which was converted as gift. Further, it observed
that even if the gift was not considered as genuine gift, the addition of
Rs.2.5 lacs was not warranted u/s.68 because the credit entry as loan was
there as on 31-3-2001 with the assessee himself and there was no fresh cash
credit during the year.

Case referred to :

CIT v. Dr. R. S. Gupta, 165 ITR 36 (SC)

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Nirav Shah

S. 37(1) — Capital or revenue expenditure — Expenditure incurred on launching of a new model of car — Held as revenue expenditure.

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Premier Ltd. v. DCIT

ITAT ‘C’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

Asha Vijayaraghvan (JM)

ITA No. 2091/Mum./2008

A.Y. : 2004-05. Decided on : 30-6-2009

Counsel for assessee/revenue : Jayesh Dadia/

Yeshwant V. Chavan

S. 37(1) — Capital or revenue expenditure — Expenditure
incurred on launching of a new model of car — Held as revenue expenditure.

Per S. V. Mehrotra :

Facts :

The assessee was carrying on the business of manufacture
and sale of automobiles and machine tools. During the year under appeal, it
had incurred expenditure of Rs.2.93 crore on van project. In its return of
income the same was claimed as revenue expenditure though in its books of
account, the same was capitalised and shown as ‘Capital work in progress’. The
AO rejected the claim of the assessee for reasons amongst others, as under :

The expense incurred was for development of a new car and hence cannot be
termed as revenue expenditure;

As per the Annual Report of the assessee — the project was under
implementation and ready to launch. Therefore, the expense incurred up to the end of the previous year
had rightly been capitalised by the assessee in its books of accounts.

The CIT(A) on appeal confirmed the action of the AO,
observing that the project was new business and not the expansion of an
existing business.

Before the Tribunal, the Revenue justified the orders of
the lower authorities and further contended that :

The assessee had enhanced the capacity by installing new assembly line; and

The expenditure was for manufacturing of altogether a different car.

Held :

According to the Tribunal the moot point for consideration
was whether the expenditure incurred in launching a new model could be treated
as expansion of same business or a new business. It referred to the CIT(A)’s
observation that if the assessee had incurred expenditure for expansion of the
production capacity of its Premier Padmini car or any of the cars which it was
already manufacturing, it would amount to a case of expansion. According to
the CIT(A), the product sought to be manufactured was a totally new product,
even if it was a car. The Tribunal did not agree to it. According to it, the
test to be applied for deciding whether a particular project was an expansion
of the existing line of business or a new business was to determine whether
there was unity of control and management and interlacing of funds or not. It
noted that those two aspects in the case of the assessee had not been disputed
by the Revenue. Therefore, it held that the expenditure incurred on the van
project was revenue in nature being for expansion of the business.
Accordingly, the appeal filed by the assessee on this ground was allowed.

levitra

Nirav Shah

Input Tax Credit — Applicability of Rule 53(6) —A Few controversies

Input Tax Credit — Applicability of Rule 53(6) —A Few controversies

Value Added Tax System (VAT) has been made applicable for levy of Sales Tax in India from 1.4.2005. Though one of the objects to introduce VAT was to have uniformity in the Taxation Provisions in all the States of India, it is a well known fact that this object has not been achieved and almost all the States have their own levy systems. In Maharashtra, the VAT is being levied under Maharashtra Value Added Tax Act, 2002 (MVAT Act).

Input Tax Credit (ITC, also referred to as set off) is the backbone of VAT system. Therefore the ITC mechanism should be as simple as possible. The VAT system is considered to be ideal for avoiding cascading effect. Therefore dealers should get set off on all the purchases connected with his business. However, as per the current provisions under the MVAT Act, there are many restrictions as well as negative list about set off. In other words, set off is not allowed on all the purchases. Several purchases relating to the business are outside the scope of set off, like: purchases used for erection of immovable properties, purchase of passenger motor car, etc. There are also provisions to restrict setoff under certain circumstances. The reference here is to Rule 53(6) of MVAT Rules, 2005.

Under MVAT Act, section 48 provides for grant of set off to dealers. It also authorises the State Government to draft necessary rules. The State Government, under its authority, made the Rules about grant of set off. The said rules are contained in Rules 52 to 55 of MVAT Rules, 2005. Rule 52 speaks about eligibility to set off, Rule 54 gives negative list on which set off is debarred and Rule 53 provides for reductions from set off. Sub-rule (6) of Rule 53 is one of the most complicated and frequently amended Sub-rules providing for reduction/restriction in set off. The said Sub-rule, which was on the statute book since 1.4.2005, was substituted on 8.9.2006. And it was substituted once again, on 23.10.2008. The second substitution has been made effective from 8.9.2006. Thus, Rule 53(6) is now to be seen in its new form with effect from 8.9.2006. The said rule is reproduced below for ready reference.

53. Reduction in set-off

(A) The set-off available under any rule shall be reduced and shall accordingly be disallowed in part or full in the event of any of the contingencies specified below and to the extent specified. (1) to (5) . . . .

(6) If out of the gross receipts of a dealer, in any year, receipts on account of sale are less than fifty per cent of the total receipts, —

(a) then to the extent that the dealer is a hotel or club, not being covered under composition scheme, the dealer shall be entitled to claim set-off only, —

(i) on the purchases corresponding to the food and drinks (whether alcoholic or not) which are served, supplied or, as the case may be, resold or sold, and

(ii) on the purchases of capital assets and consumables pertaining to the kitchens and sale, service or supply of the said food or drinks, and

(b) in so far as the dealer is not a hotel or restaurant, the dealer shall be entitled to claim set-off only on those purchases effected in that year where the corresponding goods are sold or resold within six months of the date of purchase or are consigned within the said period, not by way of sale to another State, to oneself or one’s agent or purchases of packing materials used for packing of such goods sold, resold or consigned :

Provided that for the purposes of clause (b), the dealer who is a manufacturer of goods, not being a dealer principally engaged in doing job work or labour work, shall be entitled to claim set-off on his purchases of plant and machinery which are treated as capital assets and purchases of parts, components and accessories of the said capital assets, and on purchases of consumables, stores and packing materials in respect of a period of three years starting from the end of the year containing the date of effect of the certificate of registration.

Some important implications of the above rule can be considered as under :

i) If out of the gross receipts, the receipts from the sale of goods are less than 50% of the gross receipts, then this rule will apply. Therefore finding out above ratio is important. The comparison is to be done on yearly basis. This concept of making yearly comparison itself is against the very system of ITC under VAT. The setoff system should have free flow. Normally on entering the purchase in the records, the dealer should be entitled to claim set off of the same. In other words, set off should be eligible as soon as the purchase is entered in the books of account. However, as per above rule, this is not so.

Though the dealer claims the set off on effecting the purchase, he will be required to find out the correctness of the said claim after the end of the year. If the receipts from the sales are less than 50% of gross receipts, then the set off will be restricted to the purchases, as indicated in above rule. Amongst others, in case of dealers other than hotels, the set off will get disallowed on the capital assets as well as expenditure items debited to P & L A/c. Thus the original claim of the dealer will be wrong and such a dealer will be required to recalculate and reduce the setoff already taken by him, after the end of the year. Thus the very purpose of allowing set off as per the date of purchase gets defeated.

An issue again arises that if the set off is to be reduced after the end of the year, due to above application of rule 53(6), then in which returns the reduction is to be made. As per set off Rules the dealer is entitled to claim set off as soon as the purchase is entered into the books of accounts. As per rule 53(8) the reduction in setoff, due to contingency contained in rule 53, is to be given effect in the return period in which such contingency arises. In relation to rule 53(6) the contingency arises after the end of the year. Therefore, at the most, the effect to reduction in light of rule 53(6) can be given in the last return only. Hence the last return of the year can be revised to give effect to the above rule 53(6).

ii) The other issue arises as to the meaning of gross receipts. In the earlier un-amended rule the meaning of gross receipts for the purpose of rule 53(6) was explained by way of Explanation under the Rule. However, the said Explanation is now not appearing in this substituted rule. Therefore, the meaning remains to be ascertained by the dealer. Several issues may arise in this respect.

a) Whether only the receipts of Maharashtra are to be considered or all the activities, including activities in other States, are also to be considered ?

It is an important issue as the receipts from sale will certainly be relating to Maharashtra. The word ‘sale’ is defined in the MYAT Act and as per the said definition ‘sale’ means sale within the state of Maharashtra. Therefore, so far as. the receipts from sales are concerned they will mean only receipts of sales effected in the State of Maharashtra. Though the meaning of ‘gross receipt’ is not given, it is an accepted principle that only comparables can be compared. Therefore, if in relation to sales, receipts from sales effected only in Maharashtra are to be considered, then for gross receipts also receipts only from Maharashtra should be considered. Though this can be a fair interpretation it is better that the law itself provides for the meaning to avoid litigation in future.

b) The other issue in this respect is, what is to be included in gross receipts. One view can be that items appearing on the credit side of Trading A/c. and P & L A/c. should be considered. The other view can be that all receipts, on whatever account, should be considered. As per this view receipts on account of dealing in assets like sale of assets etc. should also be considered for gross receipts. In this respect also a clarification from the department is most welcome to avoid un-necessary debate. Normally, gross receipts should be restricted to receipts appearing on credit side of Trading and P & L Accounts excluding dealings in assets, etc. Receipts from sale of assets forming part of turnover of sales may also be considered for gross receipts. However receipts from sale of assets not covered by MYAT Act like sale of immovable properties or sale of shares etc., cannot get covered in gross receipts. However clarification from the Department on above aspect is necessary.

iii) Another important issue is that if this rule applies then in relation to dealers, other than hotels, set off is eligible only on purchases which are sold within six months from the date of purchase. This will require identification of purchase and sale. This condition also is not as per the spirit of ITC under VAT. Although in case of reseller the issue may not bother much as identification in such a case will normally be available, but in case of manufacturers, this kind of identification may pose several difficulties. The dealer will be required to adopt the system as permissible on the facts and circumstances of the case.

iv) This sub-rule may hit hard, manufacturers. It provides that a manufacturer will be eligible to get set off on plant and machinery etc., even if the sales are less than 50% of the gross receipts. However, this concession is given only for three years from the end of the year in which the registration has been granted. It can be said that this exception is provided for new manufacturing dealers. However, in these initial years existing dealers can also avail the benefit. The MVAT Act has been brought into effect from 1.4.2005. The registration granted under the BST Act, 1959 is deemed to have come to an end on 31.3.2005 due to abolition of the said Act. The registration numbers granted under the BST Act, 1959 continued in the VAT period also because of specific provision to that effect in the MV ATAct, 2002. Reference can be made to section 96 (1) (b) of MVAT Act, 2002, which reads as under.

96. Savings

1) Notwithstanding the repeal by section 95 of any of the laws referred to therein, —

“(b) any registration certificate issued under the Bombay Sales Tax Act, 1959, being a registration certificate in force immediately before the appointed day shall, in so far as the liability to pay tax under sub-section (1) of section 3 of this Act exists, be deemed on the appointed day to be the certificate of registration issued under this Act, and accordingly the dealer holding such registration certificate immediately before the appointed day, shall, until the certificate is duly cancelled under this Act, be deemed to be a registered dealer liable to pay tax under
this Act and all the provisions of this Act shall apply to him as they apply to a dealer liable to pay tax under this Act.”

In light of above, it can be said that the continuation of registration granted under BST Act in the MVAT period is as good as grant of new registration under the MVAT Act, 2002. Therefore, in case of existing dealers the three years from the end of the year in which registration is granted, is to be considered from 2005-06. In other words, existing dealers will get the benefit of above exception for three years from 2005-06 i.e. upto 2008-09.

The real difficulty arises after the three years are over. In such cases, inspite of fact that there are purchases of machinery etc., the dealers will not be entitled for any set off of taxes paid on purchase of such machineries. This will certainly be against the very purpose and spirit of the MYAT Act and the scheme of ITC under VAT.

v) One more issue which arises in respect of this sub-rule, is due to retrospective effect to the amended rule. Though the rule is substituted in October 2008, the effect is given from 8.9.2006. For example, a dealer might have claimed set off for the year 2006-07/2007-08 etc. in light of earlier Rule and would have claimed the set off accordingly in the returns. A situation may arise for reducing set off for earlier years in light of substituted rule due to retrospective effect given to it. The issue is who is responsible to carry out such reduction. There can be different situations. If the returns were already filed before the amendment date and VAT Audit was also carried out, then is there a responsibility on the dealer to file revised returns etc. ? The statutory time limit for filing revised returns is only 9 months from the end of the year. Therefore the department cannot insist for revising returns to give effect to retrospective effect after the end of the period for revising returns. There is also no obligation on the dealer to revise the returns after the end of the period for revising the returns, to give effect to the adverse amendment. In the amended rules also, there is no obligation or direction to the dealer to file revised returns to give effect to the amended rule for prior period. Therefore, the dealer is not required to take any action. However, the department can take action and by making assessment, give the due effect.

In fact there are number of such ambiguities in relation to rule 53(6). All are not discussed here for sake of brevity. The above are a few important ones and readers may also come across further issues in relation to above rule. We expect that the Government will come out with proper clarification on various issues, in above rule, keeping into account the prime role of ITC in a successful VAT system.

Nirav Shah

InterState Sale — Judicial Interpretation vis-à-vis delivery of goods

InterState Sale — Judicial Interpretation vis-à-vis delivery of goods :

InterState sale transactions are covered by the Central Sales Tax Act, 1956 (CST Act). The nature of interState sale has been defined in Section 3 of the CST Act. In fact there are two sub-sections namely 3(a) and 3(b). Section 3(a) covers direct interState sale involving movement of goods from one State to another State. Section 3(b) covers interState sale transaction effected by transfer of documents of title to goods during the movement of goods from one State to another State. The discussion here is in respect of nature of sale covered by Section 3(a).

Section 3(a) is reproduced below for ready reference.

“S.3. When is a sale or purchase of goods said to take place in the course of interState trade of commerce — A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase occasions the movement of goods from one State to another; or …”

Thus a sale occasioning movement of goods from one State to another State is covered by above sub-Section. However whether there is movement of goods from one State to another State, so as to be covered by Section 3(a), is required to be ascertained from facts of the case. Where the vendor dispatches the goods to the buyer in other State there is not much difficulty. However when there is no direct dispatch proof the difficulty arises. For example, a buyer from another State has taken delivery from the vendor at his premises. Whether such transactions will be interState or intra State raises an issue. Such issue has to be decided based on relevant other documents/circumstances. There are certain decisions by various forums to ascertain the correct position. Reference can be made to following few judgments for looking further into the subject.

Nivea Time (108 STC 6) (Bom.) :

The observations of the Bombay High Court on nature of interState sale are as under :

“8. Section 3 of the Central Sales Tax Act, 1956 lays down when a sale or purchase of goods is said to take place in the course of interState trade or commerce. It says :

“A sale or purchase of goods shall be deemed to take place in the course of interState trade or commerce if the sale or purchase —

(a) occasions the movement of goods from one State to another; or

(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”

In this case, we are concerned with sale or purchase falling under clause (a).

9. It is well-settled by now by a catena of decisions of the Supreme Court that a sale can be said to have taken place in the course of interState trade under clause (a) of Section 3, if it can be shown that the sale has occasioned the movement of goods from one State to another. A sale in the course of interState trade has three essentials : (i) there must be a sale; (ii) the goods must actually be moved from one State to another; and (iii) the sale and movement of the goods must be part of the same transaction. The word ‘occasions’ is used as a verb and means to cause to be the immediate cause thereof. There has to be a direct nexus between the sale and the movement of the goods from one State to another. In other words, the movement should be an incident of and necessitated by the contract of sale and be interlinked with the sale of goods.”

In this case there was no direct dispatch proof. However the buyer was from other State and goods purchased were meant for factory in other State. The Hon’ble High Court held transaction as interState sale.

English Electric Company of India Ltd. vs. Deputy Commercial Tax Officer [1976] (38 STC 475) (SC)

In this case, the Supreme Court observed as under :

‘…. – If there is a conceivable link between the movement of the goods and the buyer’s contract, and if in the course of interState movement the goods move only to reach the buyer, in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific or ascertained goods ought to be deemed to have taken place in the course of interState trade or commerce as such a sale or purchase occasioned the movement of the goods from one State to another ….”

From the above judgments it becomes clear that unless a link between dispatch and pre-existing sale is established, no interState sale can take place. The movement is to be cause and effect of such sale. In light of the above judgments for practical purposes following aspects of a transaction are looked into;

(a) There must be pre existing sale from a buyer from other State.

(b) The goods should be ascertained qua such pre existing sale to fulfil the requirement of such sale.

(c) The said goods should be moved to other State. It is necessary that same goods in the same quality and the same quantity are moved to other State.

(d) The same goods should be delivered to buyer so as to complete the interState sale.

(e) Once the above criteria are fulfilled, then even if delivery is local, the transaction will be interState sale.

Who moves the goods ? It is not very much important. Link between sale and movement is relevant. Therefore, even if local delivery is given but if goods are to be taken to other State by buyer it will be interState sale. However to comply with the conditions of Section 3(a), following proof should be preserved :

a) Purchase order from the buyer stating that the goods are meant for his place in other State and he will move the goods to such place.

b) Confirmation from the buyer that the goods are taken to such place.

If the above evidence is available it will be interState sale. However, if such evidence is lacking, then the transaction will be a local sale transaction.

Saraswathi Agencies (21 VST 200) Mad.

In this case the link between the sale and movement was missing, though buyer was from other State. The transaction was held to be local sale. The gist of the said judgment is as under.

“In order to come under the category of interState sale, the sale should be to a purchaser outside the State and there should be movement of goods from one State to another. In case the movement of goods from one State to another was occasioned on account of the agreement entered into between the seller and the purchaser, the sale is a sale in the course of interState trade attracting the provisions of the Central Sales Tax Act, 1956. But when the actual movement of goods was at the instance of the purchaser and the part played by the dealer was: only delivery of the articles at the place of business of the dealer, it cannot be said that there was an interState sale warranting payment of Central sales tax. The dealer should have undertaken the task of supplying the articles in the business place of the purchaser in different States for the purpose of the, Central Sales Tax Act. Therefore the paramount consideration in the matter of interState sale is the contract as well as the movement of goods.

The petitioner, a dealer in electrical goods, wet grinders, pumpsets, etc., for the assessment year 1994 – 95 reported nil total and taxable turnover under the CST Act. The Assessing Officer fourtd that the sale in favour of purchasers from Kerala; Karnataka and Andhra Pradesh were not shown in the accounts. Accordingly, the assessing authority considered those sales as interState sales. The petitioner appealed before the Appellate Assistant Commissioner who confirmed the assessment. THe Appellate Tribunal was also of the opinion that the bills having been raised in the name of tli.”e consumers from other States, the transactions were interState sales liable for payment of tax under the Central Sales Tax Act. On writ petition, the Madras High Court held;

If purchasers from neighbouring States came to Chennai and made purchases from the dealer in Chennai and took articles to their home State on their own, it could not be said that there was an element of interState sale in the transaction. There was no evidence to show that the petitioner itself had dispatched the goods through lorry service to the Sta tes of Karna taka, Kerala and And hra Pradesh. No evidence was found in the assessment order to show such dispatch by the dealer. It was the consistent case of the dealer that the goods were delivered at Chennai only, though the purchasers were from the neighbouring States. There was no obligation on the part of the petitioner to transport those articles to the actual place of the purchasers. Unless and until it was proved that the products were actually delivered by the dealer in the respective States as shown in the bills, it could not be said that the transaction was an interState trade.

In the absence of any such positive material evidencing interState sale, the sales as found in the assessment order could not be termed to be sales in the course of interState trade warranting payment of tax under the Central Sales Tax Act.

Burden of Proof:

Commissioner of Sales Tax, V.P., Lucknow vs. Suresh Chand Jain (70 STC 45)(SC) :

In this case the Hon’ble Supreme Court dealing with the facts given below, also dealt with issue of burden of proof. The Honble Supreme Court observed as under:

“The respondent, a dealer carrying on business in tendu leaves in U.P., had claimed from the very beginning that he had effected only local sales of the tendu leaves, that he had not effected any sales of tendu leaves in the course of inter-State trade, that he had never applied to the Forest Department for issue of form T.P. IV and no such forms were issued to him, and that the tendu leaves were never booked by him through railway or trucks for places outside U.P. The Appellate Tribunal found nothing to discredit the version of the dealer. The Tribunal had also taken notice of T.P. form IV which did not relate to sale but was a permit or certificate regarding the validity of nikasi of tendu leaves from the forest. The Tribunal accepted the claim of the dealer and held that the sales in question were not inter-State sales. On revision, the High Court found no material to interfere. On a petition for special leave filed by the Department:

The Supreme Court dismissing the petition held that the Tribunal applied the correct principle of law, viz., that the condition precedent for imposing sales tax under the Central Sales Tax Act, 1956,was that the goods must move out of the State in pursuance of some contract entered into between the seller and the purchaser.

A sale can be said to be in the course of inter-State trade only if two conditions concur, uiz., (i) a sale of goods and (ii) a transport of those goods from one State to another. Unless both these conditions were satisfied, there could be no sale in the course of inter-State trade. There must be evidence that the transportation was occasioned by the contract and as a result goods moved out of the bargain between the parties, from one State to another.

The onus lies on the Revenue to disprove the contention of the dealer that a sale is a local sale and to show that it is an inter-State sale.”

Thus burden to prove a particular fact lies on the party who alleges otherwise. In fact there are number of rulings in relation to this issue. The above are indicative to look a little more into the subject.

Nirav Shah

Appeal against revision order under BST Act, 1959 — Maintainable — M.S.T. Tribunal

VAT

A big controversy had arisen about maintainability of appeal
against revision order u/s.55 of the Bombay Sales Tax Act, 1959.

S. 55 of the BST Act, which contains provisions about
appeals, reads as under :

“(1) An appeal, from every original order, not being an
order mentioned in S. 56 passed under this Act or the rules made thereunder,
shall lie :

(a) if the order is made by the Sales Tax Officer, or any
other officer subordinate thereto, to the Assistant Commissioner;

(b) if the order is made by an Assistant Commissioner, to
the Commissioner;”

The revision order is passed by a superior authority u/s.57
of the BST Act, 1959. The said revision power is in the nature of supervision
power and the superior authority is entitled to call for records of order passed
by his subordinate authority and then to pass revision order as he may think
just and proper. Since commencement of the BST Act, 1959, such revision orders
were considered to be original orders for the purposes of S. 55 and appeal was
used to be maintained against the same, without any dispute.

However on 6-6-2006, the Bombay High Court, Nagpur Bench,
passed judgment in the case of Shiv Shyam Sales Enterprise. The said judgment
was in writ petition filed by the petitioner against the revision order passed
in his case. The argument of the Department was that the writ petition is not
maintainable as there is alternative remedy by way of appeal against the
revision order as per S. 55 of the BST Act, 1959. The High Court rejected this
prayer by making observations in para 6 as under :

“6. Perusal of S. 55 of the Bombay Sales Tax Act reveals
that it provides remedy of appeal from every original order. The orders
impugned in the present petition by the petitioner are passed in exercise of
revisional jurisdiction u/s.57 of the said Act, and therefore are not the
Original orders. It is therefore apparent that remedy of filing an appeal
u/s.55 is not available to the present petitioner. In such circumstances the
argument of alternative remedy holds no water. In any case the point as sought
to be raised ought to have been taken at the time of initial hearing when the
writ petition was entertained in the year 1989. In view of the law settled on
the point, such an argument cannot be allowed to be raised at the stage of
final hearing after expiry of long period. We therefore, find no merits in the
preliminary objection raised by the respondents.”

Based on the above observations, the authorities at the Sales
Tax Department felt that no appeal is maintainable against the revision order.
Thus, all the appeals against revision orders are kept pending by the Department
appellate authorities as well as by the Tribunal. The dealer community expected
that the Government would amend the law suitably on its own to mitigate the
hardships to dealers due to the above judgment. However, finding that no such
amendment is forthcoming, the matter was argued on the point of maintainability
before the Tribunal. The M.S.T. Tribunal has now decided this issue vide its
judgment in the case of Schenectady Beck (India) Ltd. (A. No. 98 & 99 of 2007)
and Others, dated 6-11-2009.

The Tribunal considered the issue from various angles.
Tribunal referred to the background of appeal provisions. The Tribunal also
referred to various judicial pronouncements about the binding nature of judgment
of jurisdictional Court as well as cases of mere observations, without binding
nature.

In particular, the Tribunal referred to judgments of the
Bombay High Court in cases of Swastik Oil Mills v. Mr. H. B. Munshi, (21
STC 383) and Mr. H. B. Munshi v. The Oriental Rubber Industries Pvt. Ltd.
(34 STC 113), wherein it is observed that the revision is fresh proceedings and
this judgment is confirmed by the Hon. Supreme Court as reported in 21 STC 394.
The Department tried to counter the situation relying upon the above
observations by the Bombay High Court in para 6 (reproduce above) and further
emphasised that the judgment being of the Bombay High Court cannot be brushed
aside, but has to be followed.

The Tribunal, however, after elaborate discussion and giving
sound reasoning, held that the above judgment of the Bombay High Court in Shiv
Shyam Sales Enterprise does not decide anything contrary to settled scheme of
the BST Act. The Tribunal summed up its observations in para 32, as under :

“32. To sum up, the two-line observation in the case of
M/s. Shiv Shyam Sales Enterprises (supra), which has given rise to the
present dispute is made without being apprised of the well-settled legal
position as laid down by the past judicial authorities including the Hon’ble
Bombay High Court’s judgments in the cases like M/s. Swastik Oil Mills (supra).
In these circumstances, we respectfully prefer to be bound by these past
authorities rather than by the said two-line observation in the case of M/s.
Shiv Shyam Sales Enterprises (supra). We have also traced the origin of
the words ‘original orders’ in S. 55(1). The origin thereof is found in the
departure on 1-1-1960 from a ‘single appeal’ as obtaining in the 1953 Act to
‘two appeals’ as introduced in the Bombay Act. While providing the ‘two
appeals’ the Legislature has described all the orders other than the appeal
orders to be ‘original orders’ and has provided appeals thereagainst
u/s.55(1), if they are not specified as ‘non-appealable orders’ in S. 56. The
suo motu revision orders u/s.57 are neither specified in the list of
non-appealable order u/s.56, nor are they orders passed in appeals. In view of
this position, the revision orders are ‘original orders’ for the purposes of
S. 55 and hence appeals thereagainst lie u/s. 55(1).”

Accordingly, the Tribunal held that the revision in the
original order for S. 55 and appeal is maintainable against the same. The
judgment has given a much required relief to dealers/litigants in Maharashtra
and will go a long way to preserve one of the fundamental rights of dealer.

[Schenectady Beck (India) Ltd. (S.A. No. 98 & 99 of
2007) & Others, dated 6-11-2009]

Date of effect for registration in case of Amalgamation of Companies :

An interesting issue arose before the Bombay High Court in relation to the date of effect of registration. The facts are that transferor company amalgamated with transferee company vide an order of the Bombay High Court, dated 24-7-2003, under the Companies Act, 1956, in which the scheme of amalgamation was approved. As per the amalgamation scheme, the amalgamation was to be effective from 1-4-2002. The transferee company was not registered under BST Act, 1959, hence, applied for new registration on 19-8-2003. The transferee company requested to grant Registration Certificate effective from 1-4-2002. However, the registration authority considered the change in the Constitution from 1-4-2002 and finding that there is delay in making application (in case of change in the Constitution the application for new registration is required to be made within sixty days), granted R’C. effective from 19-8-2003 i.e., the date of application. The mean period from 1-4-2002 to 18-8-2003 became unregistered period. The prayer of the petitioner to grant administrative relief for giving retrospective effect to R. C. from 1-4-2002 was also rejected.

Hence the writ petition was filed in the Bombay High Court, The High Court analysed the situation and amongst others, observed that in case of retrspective effect to amalgamation, the party cannot be expected to apply within sixty days from such retrospective date. The 60 days’ time should be considered from the date of order of amalgamation by the High Court and if so applied within 60 days, then the registration should be granted from the effective date of amalgamation i.e., in this case from 1-4-2002. The High Court observed as under about this aspect :

“12. It is in these circumstances that this Court must consider the date for the purpose of moving an application and the starting point of limitation under Rule 7(1)(a-1). As earlier noted insofar as amalgamating company Floatglass India Limited, is concerned, considering the provisions, its certificate of registration was cancelled from 1-4-2002. In other words, M/s. Floatglass India Limited ceases to be company from that date and that must be the date to give effect to S. 19(6) and Rule 7(1)(a-1). There is therefore, an omission on account of the failure by the delegates to provide a corresponding rule to Rule 7(1)(a-1). In the absence of the Legislature providing and taking note of the fact that in such cases, the amalgamating company is not at fault, it will have to be construed that the time for making an application for registration will be 60 days from the date of the Court passing the order. On such application being made, the certificate of registration will have to be made effective from the anterior date given by the Company Court. This is only a procedural requirement. This would avoid hardship and give true effect to the mandate of the Legislature both under the BST and CST Act. No order of a Court should visit a party with liabilities and or undesirable conse-quences in the matter of tax. The rule must be so read to give effect to the legislative mandate. The date for applying for registration u/s.19(6) for a company, can only be the date of the Company Court’s order. If within 60 days of such order an application is made, then the expression succession to business in Rule 7(1)(1a)will also be so read. Under Rule 8(8)(a)(iii) then it will be the date the Company Court has ordered or the date provided in the scheme which will be the date of succession to business. This would obviate any difficulty to a party till such time the delegate makes a specific provision in Rule 8.”

[Asahi India Glass Ltd. v. State of Maharashtra, (25 VST 31)(Bom.)]

Nirav Shah

Recent amendments under MVAT Act and Rules

Nirav Shah

Transfer to job worker vis-à-vis requirement of F form

As per the provisions of the CST Act, 1956, inter-State sales covered by S. 3(a) are liable to CST in the moving State. Normally any movement outside the State is looked upon by the Sales Tax authorities as liable to tax. Therefore, even if the goods are moved to one’s own branch in other State or agent in other State, the sales tax authorities of the moving State may make presumption that the movement is because of sale and hence liable to tax. The movement of goods to own branch or agent cannot be considered to be sale, as there are no two separate entities to constitute such transfer as sale. However, it is possible that the dispatch to a branch may be in pursuance of pre-existing purchase order from any customer and in such case the transaction can be considered as inter-State sale. In fact such issues create lot of litigation. To overcome such disputes at the assessment stage itself, the CST Act has provided mechanism by way of S. 6A. The said Section is reproduced below for ready reference.

“S. 6A. Burden of proof, etc., in case of transfer of goods claimed otherwise than by way of sale :

(1) Where any dealer claims that he is not liable to pay tax under this Act, in respect of any goods, on the ground that the movement of such goods from one State to another was occasioned by reason of transfer of such goods by him to any other place of his business or to his agent or principal, as the case may be and not by reason of sale, the burden of proving that the movement of those goods was so occasioned shall be on that dealer and for this purpose he may furnish to the assessing authority, within the prescribed time or within such further time as that authority may, for sufficient cause, permit, a declaration, duly filled and signed by the principal officer of the other place of business, or his agent or principal, as the case may be, containing the prescribed particulars in the prescribed form obtained from the prescribed authority, along with the evidence of dispatch of such goods [1] and if the dealer fails to furnish such declaration, then, the movement of such goods shall be deemed for all purposes of this Act to have been occasioned as a result of sale.

(2) If the assessing authority is satisfied after making such inquiry as he may deem necessary that the particulars contained in the declaration furnished by a dealer U/ss.(1) are true, he may, at the time of, or at any time before, the assessment of the tax payable by the dealer under this Act, make an order to that effect and thereupon the movement of goods to which the declaration relates shall be deemed for the purpose of this Act to have been occasioned otherwise than as a result of sale.

Explanation : In this Section, ‘assessing authority’, in relation to a dealer, means the authority for the time being competent to assess the tax payable by the dealer under this Act.”

As seen from the Section, the burden is cast upon the moving dealer to prove that the movement to branch/agent or principal, as the case may be, is not in pursuance of any sale. Prior to 11-5-2002, the moving dealer can produce satisfactory evidence about dispatch, etc. It was also optional on his part to produce ‘F form’ to support his claim, but it was not mandatory. After amendment on 11-5-2002 in the CST Act the production of F form to establish the claim of branch transfer/transfer to agent, etc. has become compulsory. Therefore the production of F form has got importance and it is also sometime a cause of litigation. In this brief note the requirement of production of F form has been discussed in light of certain circulars/judgments.

As is clear from S. 6A of the CST Act, the F form is required when the goods are transferred to branch or agent. The concept of branch as well as agent is well known in the commercial world. Branch is a part of the transferor entity. Agent relationship will be created based on terms of the parties. As known, an agent is a separate entity than the transferor, but he represents the transferor and acts on his behalf. It is said that agent steps in the shoes of principal. There may be written agreement for the same or may be inferred from the relevant circumstances or documents. Generally agents work on commission basis. Thus the relationship created is of principal and agent and when the principal transfers the goods to agent he has to obtain F form from the agent.

The other situation is that the dealer may be sending goods to a party in other State for job work. Here the job worker will charge his job work charges to his customer i.e., the transferor. It can be seen that here the relationship is principal to principal. In other words the relationship between transferor and job worker is not of principal and agent or transfer to branch, etc. Therefore the provisions of S. 6A are not applicable in such cases and F forms are not required to be exchanged. However the situation was confusing and many dealers exchanged the F forms or asked for the said forms from respective parties. The Commissioner of Sales Tax, Maharashtra State realising the situation rightly issued circular bearing No. 16T of 2007, dated 20-22007. By this Circular the Commissioner of Sales Tax explained the nature of relationship as agent. In the circular it was further clarified that when the dealer sends the goods to job worker, the relationship is as principal to principal and F form is not required to be obtained from such job worker outside the State. The implication was also that the job worker in Maharashtra was not required to issue F form to his other State customer. Thus the situation became very clear and beyond doubt.

However, thereafter there came a judgment from the Allahabad High Court reported in the case of Mis. Ambica Steel Ltd. v. State of Uttar Pradesh, (12 VST 216). In this case the issue was out of a writ petition. The petitioner in that case had sent iron and steel ingots to various companies situated outside the State of Uttar Pradesh for the purpose of converting them into iron and steel rounds, bars and flats. The converted material was to be sent back to the petitioner in Uttar Pradesh. The petitioner company also received iron and scrap from various firms outside the State of Uttar Pradesh for the purpose of converting the same into iron and steel billets and ingots with a direction to return the converted goods to those firms. The issue before the Court was whether the petitioner is required to submit the declaration in Form F in respect of the transaction of job work performed by it or got done by others. The Department authorities were relying upon Cir-cular issued by Commissioner of Trade Tax, U.P. to insist on such forms.

In the Circular dated November 28, 2005 issued by the Commissioner of Trade Tax, Uttar Pradesh, it was mentioned that ul s.6A of the Central Sales Tax Act, 1956 form F is required to be filed in respect of all transfers of goods which are otherwise than by way of sale including goods sent or received for job work or goods returned.

Allahabad High Court observed that S. 6 of the Central Sales Tax Act, 1956 is the charging Section creating liability to tax on inter-State sales and by reason of S. 6A(2) a legal fiction has been created for the purpose of the Act that transaction has occasioned otherwise than as a result of sale. S. 6A puts the burden of proof on the person claiming transfer of goods otherwise than by way of sale and not liable to tax under the Central Act. The burden would be on dealer to show that movement of the goods had been occasioned not by reason of any transaction involving any sale of goods, but by reason of transfer of such goods to any other place of business or to the agent or principal, as the case may be, for which the dealer is required to furnish prescribed declaration form. If the dealer fails to furnish such declaration, by reason of legal fiction, such movement of goods would be deemed for all purposes of the Act to have been occasioned as a result of sale. The High Court held that if the petitioner claims that it is not liable to tax on transfer of goods from U.P. to a place outside State, then it would have to discharge the burden placed upon it ul s.6A by filing declaration in form F. It would be immaterial whether the person to whom the goods are sent for or received after job work is a bailee. The requirement to file declaration in form F is applicable in cases of goods returned also, held High Court. Thus Hon. High Court dismissed the Writ Petition.

Thus the Allahabad High Court held that F form is required even in case of job work transactions and goods return transaction. It can be respectfully said that the said judgment requires reconsideration in light of above-discussed facts and legal position about agent and principal. However it is also a law that till the binding judgment is not unsettled by proper higher forum, etc., it has to be followed. It is also required to be noted that the judgment of any High Court under the Central Act is binding on all the lower authorities in all the States of India unless the Jurisdictional High Court of the particular state has laid down anything different. This principle of law is clear from judgment in case of Maniklal Chunilal & Sons Ltd. v. CIT, (24 ITR 375).

Therefore the situation that now arises is that for transfer of goods to job worker, the sender will be required to obtain F form from him even if he is in other than D. P. State. Similarly when the job worker sends goods back to his customer, he will be required to obtain F form from his principal (customer).

The other implication created by this judgment is that the authorities may insist on furnishing of F form even for sales return. For example, a dealer in Maharashtra has sold the goods to a dealer in V.P., the dealer in V.P. may be returning back the goods to the vendor in Maharashtra as sales returns. In such circumstances also it cannot be said that the goods are sent back by the V.P. dealer to Maharashtra dealer as agent, etc. The transaction is as principal to principal and requirement of F form cannot arise. However in the light of the above judgment the F forms may be insisted upon.

Thus it can be said that some unwarranted burden about exchange of F forms has now arisen. Fortunately, in Maharashtra the Commissioner of Sales Tax has again understood the problems faced by the dealers. Therefore he has come out with a fresh Circular bearing No. ST of 2009, dated 29-1-2009. In this Circular the Commissioner of Sales Tax has reconfirmed the position spelt out by him in his earlier Circular 16T of 2007. Therefore it can be said that the dealers in Maharashtra will not be required to obtain the F forms in case of job work transfers or in case of sales return in spite of the above judgment of Allahabad High Court. However this Circular will not have any effect in other States and the dealers in other States will be governed by the above judgment and may insist on F forms for their transactions with Maharashtra dealers. As clarified in Circular No. ST of 2009, dated 29-1-2009 the Maharashtra dealers will be entitled to issue the same to facilitate their parties in other states. Thus an appreciable practical way has been found out by the Commissioner of Sales Tax, Maharashtra.

Let’s hope that the correct legal position will be clarified by competent authority like Larger Bench of Allahabad High Court or Supreme Court or High Court/s of other State/s by which the dealers will be saved from such unproductive work of issuing forms.

Nirav Shah

Consolidated return filed after due date in S. 139(1), held valid as in substance, a relevant provision complied with

New Page 1

Part C — Tribunal and International Tax Decisions

21 Nicholas Applegate South East Asia Fund
Ltd. v. ADIT

(2009 TIOL 74 ITAT Mum-TM]

S. 139, 292B, Income-tax Act

A.Y. : 2001-02. Dated : 9-1-2009

Issue :

On facts, consolidated return filed after the date prescribed
in S. 139(1), held valid as in substance and in effect the relevant provision
was complied with.

Facts :

The assessee was a company incorporated in Mauritius under
the Protected Cells Companies Act. It had four Cells. For A.Y. 2001-02, it filed
separate returns of income of four Cells. These returns were filed on 30th
October 2001, i.e., within the time prescribed u/s.139(1) of Income-tax
Act. The assessee subsequently realised that being a single entity (company), it
was required to file consolidated return at entity level i.e., for all
four Cells. Accordingly, on 29th October 2002 it filed a consolidated return for
all four Cells.

The assessee had derived income from dividend (which was
claimed exempt u/s.10(33) of the Income-tax Act) and short-term capital loss,
which the AO had found in order. However, the AO issued show-cause notice to the
assessee to explain why consolidated return filed on 29th October 2002 should
not be considered as original return and four separate returns filed on 30th
October 2001 should not be considered invalid.

The assessee explained that it filed separate returns for
four Cells as it was of the view that the Cells had separate legal existence.
Further, the original returns of four Cells did not suffer from any defect
mentioned in S. 139(9) of the Income-tax Act and hence the subsequent
consolidated return filed on 29th October 2002 was only a revised return. The
AO, however, held that the earlier returns were invalid and only the subsequent
return was valid. Therefore, he did not allow carry forward of loss. The CIT(A)
upheld the order of the AO.

On account of differences in the views of Tribunal members,
the case was referred to the Third Member. The assessee put forth the following
propositions :

(i) Provisions of S. 139(1), S. 139(3) and S. 139(4) must
be harmoniously construed.

(ii) S. 139 is a machinery provision as against a fiscal
provision, and must be interpreted in a liberal and equitable manner.

(iii) The original returns filed by the Cells have only
been consolidated in the subsequent returns dated October 29, 2002 and as
observed by this Tribunal, there is no mala fide intention on the part
of the appellant in doing so.

(iv) Benefit u/s.139(5) cannot be denied on technical
grounds.

(v) The information contained in the revised return dated
October 29, 2002 is congruent to the information provided in the four separate
returns filed by the Cells and there is no variance whatsoever, hence there is
no loss of revenue. Further, information contained in the belated return
cannot be held as invalid so as to be overlooked by the Assessing Officer.

(vi) It is provided u/s.292B of the Income-tax Act that no
return of income furnished or made shall be invalid or shall be deemed to be
invalid merely by reason of any mistake, defect or omission in such return of
income, if such return of income is in substance and effect in conformity with
or according to the intent and purpose of this Act.

(vii) The ‘purpose’ of the Income-tax Act, as is evident
from S. 292B of the Income-tax Act, is to achieve/determine the correct total
income and when correct total income was given in four returns filed
simultaneously and later in the return consolidating figures were given, the
original four returns filed were valid.

The tax authorities contended that there was difference,
though minor, between the earlier four returns and the subsequent consolidated
return. Further, u/s.139(3) of the Income-tax Act, only a valid return can be
revised.

Held :

The Tribunal referred to the decisions in CIT v. Kulu
Valley Transport Co. P. Ltd., (1970) 77 ITR 518 (SC) and State Bank of
Patiala v. S. K. Sharma, (1996) 3 SCC 364 and held that as all the relevant
and correct information was given in prescribed time, the four Cells filing four
separate returns had complied in substance and in effect with the intent and
purpose of the Income-tax Act and that the subsequent consolidated return was
not revised return but mere consolidation of the four earlier returns.

Compilers note :

The issue whether a Protected Cell Company should file a
consolidated return or different returns for each cell was neither raised before
the Tribunal, nor was it examined by the Tribunal.

levitra

Nirav Shah

Concept of economic employer — Reimbursement under Secondment Agreement to legal employer on actual cost basis represented salary paid to secondee — No tax was required to be deducted at source.

New Page 1

Part C — Tribunal and International Tax Decisions

20 IDS Software Solutions (India) Pvt Ltd
v. ITO

(2009 TIOL 82 ITAT Bang.)

S. 195, S. 9(1)(vii), Income-tax Act; Article 12(4),

India-USA DTAA

A.Y. : 2006-07. Dated : 21-1-2009

Issue :

Concept of economic employer and that reimbursement under
Secondment Agreement to legal employer on actual cost basis represented salary
paid to secondee, wherein no tax was required to be deducted at source.

Facts :

The assessee was wholly-owned subsidiary of an American
company. The assessee was engaged in software development business. To assist it
in its business, the assessee executed Secondment Agreement with its parent
company (which was an American company) for providing services of certain
personnel (‘secondee’). The secondee was to report to, and be responsible to,
the assessee and was to act in accordance with assessee’s instructions and
directions. Though the American company remained the legal employer of the
secondee as per the agreement, the secondee was appointed as per the articles of
association of the assessee and was to act in accordance with reasonable
requests, instructions and directions of the assessee. The assessee was obliged
to reimburse to the American company the entire remuneration (including bonus
and other incidental costs) of the secondee on actual cost basis without any
mark-up. The assessee was also obliged to indemnify the American company for all
claims that may arise as a consequence of any act or omission committed by the
secondee. The American company hired a qualified person and seconded him as
managing director to the assessee.

The assessee applied u/s.195 to the AO for reimbursement of
remuneration to the American company without deduction of tax, on the ground
that for all practical purposes, the secondee was assessee’s employee and salary
received by him from the American company was offered to tax in India in his
individual capacity. The AO held that payment by the assessee to the American
company cannot be considered as mere reimbursement exempt from tax and further
that in absence of employer-employee relationship, the proposed remuneration
cannot be considered as salary. Accordingly, remuneration would be considered as
Fees for Technical Services (‘FTS’) in terms of Explanation 2 to S. 9(1)(vii) of
the Income-tax Act. The assessee’s contention that no technical services were
made available was rejected by the AO who directed it to deduct tax @10%. The
CIT(A) upheld the order of the AO.

Before the Tribunal, the assessee contended that for all
practical purposes, the secondee was an employee of the assessee and
employer-employee relationship existed between the assessee and the secondee.
Accordingly, payment made by the assessee to the American company was only
reimbursement of ‘salary’ cost. The assessee relied on the decisions in CIT
v. Lady Navajbai R. J. Tata, (1947) 15 ITR 8 (Bom.), K. R. Kothanda-raman
v. CIT, (1966) 62 ITR 348 (Mad.), Lakshmi-narayan Ram Gopal and Son Ltd.
v. Government of Hyderabad, (1954) 25 ITR 449 (SC), Anderson v. James
Sutherland, (1941) SC 203 (Scottish Court of Sessions) and Ram Prashad v.
CIT, (1972) 86 ITR 122 (SC) and also certain extracts from Professor Klaus
Vogel’s Commentary to support its contention of employer-employee relationship.

On facts of the assessee’s case, the Tribunal observed that
the assessee was ‘economic employer’ of the secondee. The secondee was rendering
services to the assessee under the control and supervision of the assessee, the
salary costs were borne by the asseesse by way of cross charge, the asseesee
could have terminated the services of the secondee as per articles and the
assessee could regulate the powers and duties of the secondee.

The Tribunal then considered the issue whether the amount
paid to the American company could be considered as FTS. The Tribunal held that
certain terms in Secondment Agreement, like indemnification and duties of the
secondee being mentioned clearly indicated that the secondee was an employee and
— usually not found in an agreement for rendering technical services. These
facts went against the tax authorities’ contention that the payment was FTS.

Held :

Payment by the assessee to the American company under
Secondment Agreement was not FTS, but represented reimbursement of salary paid
by the American company to the secondee. The agreement represented an
independent contract of service in respect of employment of the secondee even
though the agreement was per se between the assessee and the American
company. Since tax was deducted at source from salary and was remitted to the
tax authorities in India, the assessee was not liable to deduct tax from the
amount reimbursed to the American company.

levitra

Nirav Shah

Although services under Secondment Agreement constituted provisions of services of technical personnel, as the essence of transaction was for mutual business development and not to derive income for service, no FTS can be said to have accrued to foreign

New Page 1

Part C — Tribunal and International Tax Decisions

19 Cholamandalam MS General Insurance Co.
Ltd. In re

(2009 TIOL 02 ARA IT)

S. 9(1)(vii), Income-tax Act; Article 13.4,

India-Korea DTAA

Dated : 29-1-2009

Issue :

Although services under Secondment Agreement constituted
provisions of services of technical personnel, as the essence or substance of
transaction was for mutual business development and not to derive income for
service and the parties never contemplated payment of FTS, no income in the
nature of FTS can be said to have been accrued to the foreign employer.

Facts :

The applicant is an Indian company, which is engaged in
non-life insurance business. It is interested in developing business
relationship with Indian affiliates of Korean and Japanese companies. For this
purpose, it requires persons who are well-versed with insurance business,
respective language, etc.

To this end, the applicant executed Secondment Agreement with
a Korean company for deputation of Korean company’s employee (‘secondee’) for a
period of two years. The terms of the arrangement for secondment were for mutual
interests. As far as the applicant was concerned, it would benefit from the
services of seconded employees, whereas from the perspective of Korean provider
company, the arrangement would not only promote its business in India but also
that wherever possible, the reinsurance business would be placed with the Korean
company.

In terms of the agreement, the applicant was to reimburse
Korean company for only a part of the salary and other benefits and no payment
was to be made by the applicant to the secondee. The Korean company continued to
remain legal employer of the secondee and pay salary to him. It also deducted
tax from his salary and the tax was deposited with the tax authorities.

The services to be performed by the secondee were defined to
mean : (a) introduce applicant to potential business contacts; (b) assist
applicant to develop insurance products for Indian market; (c) furnish applicant
with necessary expertise to establish and develop business; and (d) to provide
applicant with inputs on design of reinsurance programmes.

Secondment Agreement provided for consideration by way of
reimbursement of the secondee’s salary and benefits, which was not to exceed
those applicable to the applicant’s employees of the same or equivalent grade.
AAR noted that the secondee had no right or authority to conclude any contract
on behalf of the applicant and that the Korean company was not in the business
of supply of manpower.

The tax authorities had initially contended that the secondee
could be regarded as the Korean company’s agent and consequently, it had an
agency PE in India. However, this contention was not pursued. Factually, it was
noticed that reimbursement by the applicant constituted about 55% of salary,
house rent, etc. paid by the Korean company to the secondee.

The AAR referred to definition of Fees for Technical Services
(‘FTS’) in Explanation 2 to S. 9(1)(vii) and Article 13.4 of India-Korea DTAA
and observed that the definitions were substantially similar.

In this background, the issues before the AAR were :

(i) Whether amount payable by the applicant to the Korean
company was in the nature of income requiring deduction of tax at source under
Income-tax Act ?

(ii) If answer to (i) is in affirmative, what should be the
rate of tax to be deducted at source ?

(iii) Whether the Korean company could be considered to
have PE in India requiring attribution of income to that PE ?

The AAR admitted that it is debatable whether the term
‘including provision of services of technical or other personnel’ is independent
of, or integral part of, the term ‘managerial, technical or consultancy
services’. Applying the ratio of decisions in Intertek Testing Services India P
Ltd. In re (2008) 307 ITR 418 (AAR) and G V K Industries Ltd. v.
Income-tax Officer, (1997) 228 ITR 564 (AP), it held that the secondee’s
services were technical in nature involving specialised knowledge and expertise
in insurance business. Accordingly, the Korean company did provide services of
technical personnel.

The AAR then considered the question whether amount paid by
the applicant could be construed as ‘consideration’ for the provision of
services of technical personnel. It observed that the agreement represented a
mutually beneficial arrangement and its essence or substance was not to derive
income by way of fee for service, but only partial reimbursement of the cost.
Thus, no income in the nature of FTS was generated. Viewed in this light, the
parties never contemplated payment of FTS, either under Income-tax Act or under
DTAA.

The AAR examined the ratio of the decisions in CIT v.
Dunlop Rubber Co Ltd., (1983) 142 ITR 493 (Cal.) and CIT v. Industrial
Engineering Projects (P) Ltd., (1993) 202 ITR 1014 (Del.) wherein nature of
receipt of reimbursement of expenses were considered and the respective Courts
had, on facts, held that reimbursement of expenses did not constitute income.

The tax authorities had relied on AAR’s rulings in A T & S
India P Ltd., In re (2006) 287 ITR 421 (AAR) and Danfoss Industries P
Ltd., In re (2004) 268 ITR 1 (AAR), wherein similar payment for
deputation of technical personnel under secondment agreement and for rendering
services to group companies was considered as FTS. The AAR distinguished these
rulings on facts and particularly because in the present case the details
furnished showed that it was only partial reimbursement of cost incurred by the
Korean company.

Nirav Shah

Purpose of DTAA may be relevant also in cases involving discrimination. (ii) India-Germany DTAA, Indian subsidiary of German parent company listed on German Stock Exchange considered ‘company in which public are substantially interested’.

New Page 1

Part C — Tribunal and International Tax Decisions

18 Daimler Chrysler India (P) Ltd. v.
DCIT

(2009) 120 TTJ 803 (Pune)

S. 2(18), S. 79, S. 90(1)(a), Income-tax Act; Article 24(4),
India-Germany DTAA

A.Y. : 1999-2000. Dated : 21-1-2009

Issues :

(i) Purpose of tax treaty may be relevant not only in
case of double taxation and prevention of fiscal evasion, but also in cases
involving discrimination.

(ii) Due to ‘ownership non-discrimination’ protection
under Article 24(4) of India-Germany DTAA, Indian subsidiary of German parent
company listed on German Stock Exchange would be considered a ‘company in
which public are substantially interested’.

Facts :

The assessee is an Indian company (‘I Co’) in which Daimler
Benz AG (‘DBAG’), a German company held 81.33% equity share capital. DBAG was
listed on stock exchange in Germany.

During the relevant year, DBAG and Chrysler Corporation USA,
an American company decided to merge their respective businesses. Hence, a new
company, namely, Daimler Chrysler AG (‘DCAG’) was incorporated in Germany. DBAG
and Chrysler Corporation became wholly-owned subsidiaries of DCAG. Thereafter,
DBAG merged into DCAG. Thus, all the assets and liabilities of DBAG were
transferred to DCAG. Inter alia, these included DBAG’s shareholding in I
Co.

In terms of S. 2(18) of the Income-tax Act, I Co was not a
‘company in which public are substantially interested’.

S. 79 of Income-tax Act disentitles carry forward of losses
of a company in case shares having not less than 51% of the voting power are
transferred.

I Co had suffered loss in its business for several years and
had substantial carried-forward losses. Since DBAG’s shareholding in I Co was
transferred to DCAG, and since DBAG was not listed on stock exchange in India,
the AO proposed to apply provisions of S. 79 to I Co. In respect of the
immediately succeeding year, S. 79 was amended with a view to exempt all cases
similar to that of I Co from the rigours of S. 79. I Co contended that the
amendment was clarificatory and having retrospective effect and requested the AO
to hold that S. 79 was not attracted. The AO however did not accept the
contention and held that I Co was not entitled to carry forward and set off the
accumulated losses. The CIT(A) confirmed the decision of the AO.

Before the Tribunal, I Co also put forth the additional
ground for invoking of ‘ownership non-discrimination’ under Article 24(4) of
India-Germany DTAA.

The tax authorities contended that there was no question of
treaty override or treaty applicability since there was no double taxation of
any income. The Tribunal referred to S. 90(1)(a) of the Income-tax Act and noted
that Clause (a) of S. 90 was substituted with effect from 1st April 2004, to
grant relief even in respect of income only in one jurisdiction and the relief
could be with a view to ‘promote mutual economic relations, trade and
investment’.

The next issue before the Tribunal was whether a resident
assessee could qualify to access protection under DTAA. The Tribunal referred to
Article 24 of India-Germany DTAA and observed that excepting the case of
invoking of PE non-discrimination, it is not necessary that the assessee seeking
treaty protection in one country must belong to or be resident of or be national
of the other country.

To seek protection under Article 24(4) in India, it is
necessary that taxation or any requirement connected therewith in India should
not be other or more burdensome (for a company which is wholly or partly owned
or controlled by a German resident) than the taxation and connected requirements
to which similar Indian enterprises may be subjected. This requires examination
of a ‘similar Indian company’ and ‘taxation or any requirement connected
therewith’ applicable to such similar Indian company. The Tribunal noted that
the basis of differentiation was the stock exchange on which the shares of DBAG
were listed, since if they were listed on a stock exchange in India, S. 79 would
not be attracted. Further, considering that S. 21 of the Securities (Contract)
Regulation Act, 1956 and draft listing agreement indicate that listing agreement
is possible only with ‘a company duly formed and registered under the Indian
Companies Act’, it would not be possible for the German parent company to list
its shares on a stock exchange in India. The Tribunal thereafter observed that
while there were no judicial precedents in India, there were several judgments
by foreign judicial bodies. While such precedents cannot have binding values,
they do deserve due and careful consideration. The Tribunal did refer to these
decisions.

Held :

(i) Provisions of tax treaty may be relevant even when
income is not taxed in the hands of assessee. Substitution of Clause (a) of S.
90(1) reflects the ground realities and rightly indicates that in today’s
world, the role of treaties is not only confined to avoiding double taxation
or to give relief in respect of doubly taxed income. Tax treaties are seen as
instruments of fostering economic relations, trade and investment. Treaty
override, even before amendment in 2004, covered all the provisions of the tax
treaties, including the provisions relating to non-discrimination.

(ii) It is not necessary that the assessee seeking treaty
protection in one country must belong to or be resident of or be national of
the other country, and a resident assessee would qualify for protection under
DTAA. As per Article 24(4) of the treaty, it is not necessary that the
taxpayer, in whose cases non-discrimination is invoked, should be a resident
of the other contracting state. Since the capital of the taxpayer is
substantially owned by a resident of Germany, the coverage criteria under the
enterprise non-discrimination clause of the treaty is satisfied.

(iii) Having regard to the provisions of Article 24(4), the
disability [u/s.79 read with S. 2(18)], of carry forward and set off of
accumulated losses on account of change in shareholding pattern, cannot be
extended to Indian subsidiaries of German parent companies so long as German
parent companies are listed on a German stock exchange recognised under their
domestic laws. To this extent, the rigours of the domestic law relating to
carry forward of losses must stand relaxed due to treaty overriding domestic
tax.

Nirav Shah

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

2 JDIT v. M/s. Krupp Uhde Gmbh
(2009 TIOL 78 ITAT Mum.)
Article 5(2)(i) of India-German Double Tax Avoidance Agreement (treaty)
A.Y. : 1998-99. Dated : 7-1-2009

Issue :

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

The assessee, a German company (herein GermanCo), was engaged in the business of providing technical know-how/licence, basic engineering services, and supervisory services in connection with construction or installation of specified machineries/assembly projects. The assessee rendered services to various Indian companies. A large part of the services was rendered on offshore basis. In connection with on-shore supervisory activities involving various projects, personnel of the GermanCo were present in India in aggregate for more than 6 months duration — though, presence in respect of each project was of less than 6 months. The GermanCo offered the amount for taxation as fees for technical services chargeable @ 10% on gross basis in terms of Article 12 (2) of India-Germany DTAA.

The Assessing Officer (AO) rejected the contention of the assessee and held that the GermanCo had PE in India. In view of the AO, for determining whether or not Supervisory PE emerged, duration of all the projects in a particular year had to be aggregated. In view of the AO, since the German Co had PE in India, the benefit of concessional rate of 10% provided in the treaty was not available and the amount had to be assessed under domestic law @ 30% by applying provisions of S. 115A of the Act.

On further appeal, the CIT(A) accepted GermanCo’s contention that offshore services are not chargeable to tax in India. The Department did not object to this aspect in further appeal before the Tribunal. The controversy before the Tribunal was therefore confined to taxation of onshore services.

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

(ii) since none of the project sites involved presence of more than 6 months, no PE emerged for GermanCo; (iii) in absence of PE, the fees for Supervisory activities was chargeable @ 10% in terms of Article 12 of DTAA.

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

(a) The Tribunal referred to Construction and related PE provisions of India-Germany DTAA. It also referred to similar provisions of India’s treaties with China, USA, Canada and Italy. It concluded that unlike similar treaty provisions of India with China, USA, Canada and Italy, there is nothing in the language of India-Germany treaty to indicate that different sites on which work is carried on by the assessee can be considered together in determining whether or not the Construction/Supervisory PE has emerged for the German Co.

(b) Reference was made to commentary of Klaus Vogel and the book ‘Principles of International Taxation’ to conclude that each project site duration needs to be considered separately, particularly when different contracts have no effective interconnection with each other.

(c) The Tax Department contended that overall project duration needs to be considered for determining length of supervisory project of GermanCo. The Tribunal rejected the contention of the Revenue that the date of commencement or the duration of the project should be considered for determining trigger of supervision PE for the assessee. According to the Tribunal, such reckoning would lead to absurd results since there could be instances where contracts for construction of building, supply of plant and machinery, installation, commissiong in respect of a project may be awarded to independent parties and each party may have involvement of differing duration.

(d) After considering the language of the treaty, the Tribunal held that the intervening period caused on account of factors such as seasonal shortage of material, labour difficulties, time needed for material to dry, etc cannot be excluded.

(e) One of the contentions of the taxpayer was that since income-tax is linked to a given assessment year, the threshold of construction PE needs to be considered for each year separately. The assessee claimed that Supervisory PE was not triggered if work during a given tax year involved period of less than 6 months though the overall project duration exceeded 6 months. The Tribunal rejected the contention and held that the prescribed period of 6 months has to be computed, irrespective of the tax years involved. For instance, where an activity starts in January and ends in July, total period is 6 months – though period falling in each of the two financial years is less than 6 months.

Nirav Shah

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

2 JDIT v. M/s. Krupp Uhde Gmbh
(2009 TIOL 78 ITAT Mum.)
Article 5(2)(i) of India-German Double Tax Avoidance Agreement (treaty)
A.Y. : 1998-99. Dated : 7-1-2009

Issue :

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

Nirav Shah

Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

1 Lucent Technologies International Inc v. DCIT

(2009 TIOL 161 ITAT Del)/(28 SOT 98) Section/Article : Article 5 India — USA Double Tax Avoidance Agreement A.Ys. : 1997-98 to 2000-01. Dated : 19-12-2008

Issue :

Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.

Facts :

The assessee, US Company (USCO), is a leading supplier of hardware and software used for GSM cellular radio telephone system. The USCO supplied telecommunication hardware and software to its customers in India. USCO had an Indian subsidiary (herein WOS) which undertook the work of installation and providing after-sales services to the customers of USCO in India.

USCO had entered into a contract with one Indian telecom company by name Escotel Mobile Communications Ltd. (herein Escotel). In terms of the agreement between USCO and Escotel, USCO was to supply hardware and software to Escotel while the services of installation were to be provided by WOS. In terms of the contract with Escotel, USCO had the responsibility of designing, manufacturing, supplying and delivering all hardware and software. The contract also required USCO to undertake installation, testing, commissioning and achieve final acceptance of the system by the customer. A part of responsibility of the inspection, installation and supervising the testing and commissioning was that of the Indian WOS. To some extent there was an overlap of responsibilities of USCO vis-à-vis that of WOS. As part of the supply contract, the assessee also provided licence for use of computer software which was required for the purposes of functioning of GSM network.

For enabling the WOS to discharge its obligation, USCO made available to WOS personnel who were the employees of the affiliates of USCO. Such employees were under the control of USCO and the WOS was required to pay remuneration to USCO. USCO claimed that it incurred no tax liability in India as the hardware was supplied from outside India. The assessee also claimed that payment received for the licence agreement for use of computer software was business income and was not royalty chargeable in terms of Article 12 of DTAA. Reliance for this was placed on the decision of Special Bench in case of Motorola Inc v. DCIT, (96 TTJ 1) (Delhi SB). The AO claimed that the USCO attracted tax liability in India on the ground that, in the circumstances of the case, USCO had PE in India. The AO claimed that (i) USCO had PE in the form of WOS being its dependent agent; (ii) that premises of WOS were available at the disposal of the employees who were deputed by USCO; (iii) that negotiation and conclusion of the contract happened in India. In respect of software supply, the Department claimed that software licence fees was chargeable as royalty income.

Held :

The ITAT accepted the department’s contention and held that USCO had PE in India on account of the following features :

(1) Having regard to the terms of the contract with the customer, not only Indian WOS but also USCO was responsible for turnkey functioning of the project of the GSM network. The ITAT noticed that the agreements with customer in India made USCO and WOS responsible for the turnkey completion of the GSM project individually and severally. The responsibility to Escotel was such that USCO had to complete installation should WOS fail in any manner. Conversely, WOS had responsibility of arranging for hardware and software should USCO fail in its responsibility. Having noted this, the ITAT concluded that the arrangement was ‘in short a consortium or partnership’ between USCO and WOS.

(2) The ITAT noted that the terms of agreement between Escotel and USCO and WOS also required of WOS to provide warranty in respect of the hardware supply made by USCO. This, according to the Tribunal, supported that the WOS was acting on behalf of USCO.

(3) The ITAT noted that USCO made available the personnel (though employees of the affiliates of USCO) to WOS for the purpose of enabling the WOS to discharge the responsibility of installation, commissioning, etc. of the GSM equipments. Such personnel were made available for remuneration. The ITAT concluded that in terms of the treaty, the service PE was triggered when the USCO provided services to its affiliate WOS even for a day. Since USCO provided services to ICO with the help of personnel who were under USCO’s control, the ITAT concluded that the USCO had service PE in terms of Article 5(2)(l)(ii) of the treaty.

(4) On the aspect of taxation of consideration received for software licence agreement, the ITAT noted that the facts of the case of USCO were at par with the facts which operated in the case of Motorola (supra). Relying on the Special Bench decision, the ITAT accepted the assessee’s contention that the licence fee was business income and was not royalty.

Compilers’ remarks :

The ITAT was not concerned with nor has dealt with the aspect of determination of income which is attributable to USCO’s activities in India to the extent the ITAT concluded that USCO had PE in India.

Nirav Shah

Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.

1 Lucent Technologies International Inc v. DCIT

(2009 TIOL 161 ITAT Del)/(28 SOT 98) Section/Article : Article 5 India — USA Double Tax Avoidance Agreement A.Ys. : 1997-98 to 2000-01. Dated : 19-12-2008

Issue :

Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.

Facts :

Held :

The ITAT accepted the department’s contention and held that USCO had PE in India on account of the following features :

Compilers’ remarks :

Nirav Shah

ITO vs. M/s. Kirtilal Kalidas Diamond Exports (Mumbai) (Unreported). [ITA No 1868/Mum/2005].

New Page 1

Part C — International Tax Decisions

ITO vs. M/s. Kirtilal Kalidas Diamond Exports
(Mumbai) (Unreported). [ITA No 1868/Mum/2005].

A.Y. : 2001-2002

Sections
40(a)(i), 195, I T Act; India-UK DTAA

Dtd. : 30th
September 2008

Issue

Commission paid to non-resident agent for purchase of raw materials is not
taxable in India, either under I T Act or under India-UK DTAA.

Facts

The
assessee was engaged in the business of export of cut and polished diamonds.
For its business, it was importing rough diamonds. During the relevant year,
it imported rough diamonds through a non-resident agent and paid commission to
that agent. While making payment of commission to the non-resident agent, the
assessee did not deduct any tax at source.

Before the AO, the assessee contended that: the non-resident had rendered the
services outside India; the assessee had paid commission outside India; the
non-resident did not have any establishment in India; and hence, the income of
the non-resident was not chargeable to tax in India.

The
AO held that the assessee was required to deduct tax at source under Section
195 of the Act and since it failed to deduct such tax, provisions of Section
40(a)(i) of the Act were attracted. Accordingly, the AO disallowed the
commission while computing the income of the assessee.

On
appeal the CIT(A) deleted the disallowance.

Held

The
Tribunal observed that the Department had not countered the facts, namely :

(i)
the services were rendered outside India;

(ii) the assessee had paid commission outside India;

(iii) the non-resident did not have any establishment in India. On these
facts, it held that no income accrued to the non-resident in India.

Even under India-UK
DTAA, business profits, cannot be charged to tax in India in absence of
permanent establishment in India.

levitra

Nirav Shah

Worley Parsons Services Pty. Ltd. 312 ITR 317 (AAR)

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Part C — International Tax Decisions

Worley Parsons Services Pty. Ltd. 312 ITR 317 (AAR)

Article 5 (3) and Article 12 of
India-Australia DTAA

Dtd. : 23rd April, 2009

Issue

In the facts of the applicant’s case, for the
purpose of determining threshold under the service PE, presence in respect of
all the contracts is to be taken into account.

The services involving preparation of technical plan amounts to royalties
within the meaning of Article XII of India-Australia treaty.

The services involving review of the designs prepared by the third party,
assisting in the bid process, making suggestion on optimisation of resources,
etc., do not meet the test of ‘make available’, etc., and is therefore not
royalty within the meaning of Article XII of India Australia treaty.

Facts

Worley Parson, a company registered in Australia,
(AUSCO) is engaged in the business of providing professional services
including engineering, procurement and project management services to various
players engaged in the business of energy and resource industry.

AUSCO entered into six separate service contracts
with ONGC. The contracts were entered into in respect of two offshore projects
of ONGC. One of the six contracts (contract no.5) involved the work of
preparing design, provide lay out and cost optimisation scheme along with the
process designs for the new process platform of ONGC. The consideration paid
pursuant to contract no.5 was admitted to be the payment in the nature of
royalty as it involved consideration for development and transfer of technical
plan.

In respect of the balance 5 contracts, the
applicant provided the following services :

1. Reviewing the design and engineering
documents prepared by the third party consultants engaged directly by ONGC.

2. Reviewing technical and commercial bid
document floated by ONGC for the purpose of inviting tender from the
interested parties.

3. Reviewing the proposals of optimisation and
cost savings presented by ONGC.

4. Reviewing the existing facilities and making
recommendations.

5. Assisting ONGC in procurement phase of one
of the offshore projects.

Services in respect of these contracts were
rendered partly in India and partly in Australia. The aggregate presence of
employees pursuant to various contracts (other than contract no. 5) exceeded
period of 90 days in 12-month period reckoned for two financial years.

Before the AAR, the applicant claimed that :

The services rendered under the various contracts except contract no. 5
cannot be regarded as royalties as defined in the treaty.

For the purpose of determining the service PE trigger threshold, each
contract should be viewed separately;

There was no service PE trigger except under contract 6 since in each of the
contracts seen individually the time spent by the employees of the applicant
did not exceed the threshold of 90 days in 12-month period provided in the
treaty.

Relying on SC decision in the case of Ishikawajima-Harima Heavy
Industries Ltd. vs. DIT, (288 ITR 408), it was submitted that offshore
services cannot be taxed in India even in respect of contract no. 5.

The Department contended that the entire amount was taxable as royalty and
hence no distinction is required for onshore & offshore services. Further all
the contracts should be seen together in order to ascertain whether service PE
has emerged or not.

Held :

The AAR held :

Consideration for contract no. 5 was taxable as royalty income. For the
purpose of determining number of days of presence for service PE, the
presence of employees pursuant to contract no.5 is to be excluded in view of
specific provisions of Article V(3)(c) of the treaty.

Services rendered pursuant to other contracts were not royalty within the
meaning of Article XII of the treaty. The services rendered pursuant to the
contracts had a technical content and recommendation for use by ONGC.
However, the services and the input did not result in the recipient of
service getting equipped with the knowledge and expertise of the applicant.
The services were project specific and ONGC could not make use of such
services for unrelated project to the exclusion of the applicant. The
services therefore did not make available technology to ONGC so as to be
regarded as royalty within the meaning of Article XII(3)(g) of the treaty.

The AAR also rejected the contention of the Department that the services of
reviewing designs of third party and suggesting recommendations thereon
resulted in development of technical plan or design for transfer by the
applicant. The AAR observed that the payment was not royalty as the
applicant did not evolve and transfer plan or design to ONGC.

Nirav Shah

Mahindra and Mahindra Limited (M&M) vs. DCIT [ITA Nos. 2606, 2607, 2613 and 2614/Mum/2000] (Mumbai SB).

New Page 1

Part C — International Tax Decisions

Mahindra and Mahindra Limited (M&M) vs.
DCIT [ITA Nos. 2606, 2607, 2613 and 2614/Mum/2000] (Mumbai SB).

A.Y. : 1998-99

Section 9(1)(vii), 191, 195,
200, 201 of the Income- tax Act and Article 13 of India-UK DTAA

Dtd. : 9th April, 2009

Issue

(1) Proceedings under Section
201 are akin to assessment/reassessment and time limit available for
initiating and completing assessment/reassessment proceedings are as equally
applicable to it.

(2) In terms of Section 195, a
payer is required to withhold taxes only where the payment includes a sum
chargeable to tax in India.

(3) No order treating a person
as an assessee in default can be passed if the Department has not taken any
action against the recipient to treat the income as taxable.

Facts

M&M had come out with 2 Euro issues in November
1993 and July 1996. In this connection, M&M had availed services of Lead
Managers (LM) of UK. M&M was obliged to pay management, underwriting and
selling commission to LM. In addition, certain expenses of LM were also
reimbursed by M&M. LM had retained their commission from out of proceeds of
the issue. No taxes were withheld in respect of payments retained by LM.

The Department had initiated action against the
payer (M&M) for failure to withhold taxes and treated M &M to be assessee in
default.

The primary contention of M&M was that there was
no obligation to withhold tax as the payment was not towards technical
services but was for subscription of capital. In any case, the fees were
retained by the service provider and there was no separate remittance so as to
attract obligation of TDS.

By way of an additional ground, M&M raised the
aspect of applicability of time limit to S.201 proceedings; it also challenged
the validity of proceedings by contending that :

.
Section 201 (1)/ 201 (1A) proceedings apply only where taxes are withheld
but have not been remitted to the Government. The proceedings had no
application where the payer had not withheld taxes.

.
The payer cannot be treated as an assessee in default unless the Department
has assessed or initiated action for assessment of income in the hands of
the recipient.

.
As no time limit has been prescribed for initiating action, the proceedings
need to be exercised within a reasonable time. As judicial precedents have
held that 4 years is a reasonable time for initiating and completion of the
proceedings under Section 201(1)/(1A), the same needs to be adhered to. In
the present case, since this limitation period was crossed, no action can be
taken against the payer for not withholding taxes.

As
against the above, the Department contended :

–
Services offered by LM were in the nature of FTS and hence taxable in India.
Retention of amount by LM in effect amounted to making of payment.

–
M&M did not file any application to the Department for determination of the
amount to be withheld on its payments to LM. In absence of lower/nil tax
deduction certificate, taxes were necessarily required to be withheld by
M&M.

–
Section 201(1)/201(1A) proceedings apply to both the categories of
defaulters, i.e., one who has withheld taxes but not remitted it to
the Government and also to those who have not withheld taxes from the
payment.

–
Assessment of recipient is not a pre-condition for enforcing a withholding
tax liability on the payer. The withholding tax provisions are separate and
operate independent of the assessment proceedings of the recipients. For
this, the Tax Department relied on provisions of Sections like 115A , 115AC,
115BBA, 115G, etc. to support the proposition that under certain situations,
the recipients have no obligation of filing the return if there is suitable
tax withholding.

–
Where no provision for limitation is present in a statute, the Courts cannot
artificially introduce a limitation.

Held

The Special Bench admitted the additional ground on the question of limitation
which was raised for the first time before it. It held that the issue involved
a question of law and needed no fresh investigation of facts.

Nirav Shah

Canora Resources Ltd. In re 313 ITR 2 (AAR) Section 45(3), 10(2A), 92, 184, 245R of the Income-tax Act and Article 24 of India-Canada DTAA.

New Page 1

Part C — International Tax Decisions

Canora Resources Ltd. In re 313 ITR 2 (AAR)
Section 45(3), 10(2A), 92, 184, 245R of the Income-tax Act and Article 24 of
India-Canada DTAA.

Dtd. : 23rd
April, 2009

Issue

^ A foreign
partnership can be assessed as a partnership firm under the Indian Income-tax
Law.

^ Provisions
of Transfer Pricing Regulations override provisions of Section 45(3) of the
Act. Capital gains in respect of contribution of asset to a partnership firm,
if in the nature of international transaction, attracts tax liability w.r.t.
fair market value.

^
Nationality non-discrimination provision cannot be invoked for claiming non
applicability of transfer pricing provisions which are based on residential
status of the parties.

Facts

Applicant, a
company registered in Canada, is engaged in the business of exploration and
production of petroleum and natural gas. In India, applicant held
participating interest (PI) in three oil blocks. Amongst others, it held 60%
PI in Amguri development block (Amguri block). The Amguri block had good
commercial prospects and had known commercial discovery while the other two
blocks were at nascent stage.

The
applicant proposed to restructure its business in India with a view to
attracting investments in Amguri block and with a view to holding Amguri block
in a separate entity. It proposed to transfer its PI in Amguri block to a
partnership firm (Firm) to be formed in Canada. The Firm was proposed between
the Applicant and its wholly-owned Canadian subsidiary as partners.

Before the
AAR, the applicant raised the following contention.

a) The
Canadian firm should be assessed to tax as a ‘firm’. The applicant furnished
copy of the partnership Act of Alberta, Canada to show that the provisions
of that Partnership Act were almost at par with the provisions of the Indian
Partnership Act. It was explained that the Act of Alberta recognised the
principle of agency between partners; the liability of partners was joint
and several; properties of the firm belonged to the partners collectively;
the firm had no separate legal personality of its own, etc.

b) It is
enough that the mechanism of sharing is described or defined on a certain
basis; it is not necessary to express or set out the fractional or other
shares, so as to enable the entity to be assessed as firm in compliance with
Section 184 of the Act.

c) The
capital gains income, if any, arising from transfer of PI to the proposed
firm should be computed as per provisions of Section 45(3) of the Act by
adopting contribution value. In view of the special provisions of charging
Section of Section 45(3), the transfer pricing provisions cannot be applied.

As against
that, the Tax Department contended :

a) The
application deserved to be rejected having regard to the provisions of
Section 245R(2) of the Act as the transaction was for avoidance of
Income-tax. The proposed restructuring was merely a ruse for avoidance of
tax and the applicant had failed to substantiate how its object of
attracting investments was sub-served. The proposal was prone to tax
avoidance since the proposed restructuring would facilitate the applicant to
exit from Amguri block by transferring its stake in the firm without payment
of tax in India.

b) A
partnership firm can be assessed as a firm under the Act only if it is a
partnership firm as understood under the Indian Law. The proposed
partnership firm would have characteristic of a company or a corporation and
should be taxed in India as a foreign company. For this purpose, the Tax
Department sought to place reliance on features like managing partner of the
firm having power akin to that of a managing director, likely feature of
payment of dividend, etc.

c) The
proposed partnership deed was so worded that it failed to specify the
individual shares of the partners in the instrument of partnership and hence
also the firm cannot be assessed as a partnership firm under the Act in view
of provisions of Section 184 of the Act.

d) The
transaction between the applicant and the firm is in the nature of
international transaction between two associated persons. Therefore, the
transfer pricing regulations would require that the capital gains income is
computed with reference to the arm’s-length price.

The AAR Held

(1) In the case of Azadi Bachao Andolan (263 ITR 706),
the Supreme Court has approved the principle that a taxpayer is entitled to
resort to a legal method available to him to plan his tax liability. The AAR
noted that it may reject the application, provided it relates to a
transaction which is designed prima facie for avoidance of tax. The
expression ‘prima facie’ can be understood as ‘at first sight’; ‘on
first appearance’; ‘on the face of it’; etc. The future possibility of the
applicant’s exit from Amguri block by transferring PI to someone cannot by
itself be a ground to conclude that the arrangement was, on the face of it
to avoid tax.

Nirav Shah

Section 254 — Ex-parte order passed for non-appearance as the assessee’s representative went to attend phone call when the matter came up for hearing – Whether reasonable and sufficient ground for non-appearance — Held : Yes.

New Page 1

Ajanta Offset & Packaging Ltd. vs. DCIT

ITAT
Delhi Bench ‘Friday’ New Delhi

Before I. P. Bansal (J.M.) and R. C. Sharma (A.M.)

MA No.459/D/08 in ITA No.1510/Del./2007

A. Y.
2001-02. Decided on 27.03.2009

Counsel for Revenue/Assessee : V. P. Gupta and Basant Kumar/B. K. Gupta

Section 254 — Ex-parte order passed for non-appearance as
the assessee’s representative went to attend phone call when the matter came
up for hearing – Whether reasonable and sufficient ground for non-appearance —
Held : Yes.

Per I. P. Bansal

Facts :

Vide
miscellaneous application the assessee has sought recall of the ex-parte
order passed by the Tribunal. According to the assessee, its director was
present in the Court for taking adjournment, as the counsel of the assessee
was busy in the High Court waiting for his turn. When the case of the assessee
was to come for hearing, the director had gone out of the Courtroom to attend
to the phone call and when he came back, the case was already decided as
ex-parte.

Held :

The
Tribunal was satisfied with the explanation and held that the assessee was
prevented by reasonable and sufficient cause for non-appearance before the
Tribunal. Accordingly, as per Rule 24 of the Appellate Tribunal Rules, 1983,
the ex-parte order passed was set aside.

Note :

All the decisions
reported above are selected from the website www.itatindia.com.

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Nirav Shah

Section 36 (i)(iii) — Allowance of interest paid — Where interest-free fund was more than the alleged investment in non-business assets, whether the interest paid could be disallowed —Held : No.

New Page 1

Almona Investment & Marketing Pvt. Ltd. vs.
ITO

ITAT Mumbai
Bench ‘A’ Mumbai.

Before R. S. Syal (A.M.) and Asha Vijayaraghavan (J.M.)

ITA No. 4908/Mum/2006

A. Y.
2003-2004. Decided on : 30.03.2009

Counsel for
Assessee/Revenue : Hiro Rai/Sanjeev Jain.

Section 36 (i)(iii)
— Allowance of interest paid — Where interest-free fund was more than the
alleged investment in non-business assets, whether the interest paid could be
disallowed —Held : No.

Per R. S. Syal

Facts :

The assessee was a non-banking finance company.
As per its accounts, the accumulated loss was of Rs.52.2 lacs. It had claimed
deduction of Rs.4.37 lacs towards interest. The AO noted that the assessee had
invested Rs.40 lacs in shares, which according to it, was not for the purpose
of the business activity of the assessee company. Therefore, the entire amount
of interest of Rs.4.37 lacs was disallowed. On appeal the CIT(A) upheld the
order of the AO.

Held :

From the accounts of the assessee the Tribunal
noted that the assessee had interest-free loan and share capital aggregating
to Rs.1.26 lacs and after adjusting the debit balance in the Profit and Loss
account, the net interest free funds available at the disposal of the assessee
was of around Rs.53 lacs. As against this, the investment in the shares was
only to the tune of Rs.40 lacs. The Tribunal referred to the decision of the
Mumbai High Court in the case of Reliance Utilities & Power Ltd. where it was
held that if there were funds, both interest-free and interest bearing, then a
presumption would be that the investment would be out of the interest-free
fund generated or available with the company, if the interest-free funds were
sufficient to meet the investments. Relying on the same, it held that since in
the case of the assessee, the interest-free funds were more than the
investment made in shares, the sustenance of disallowance of interest by the
CIT(A) was not justified.

Case referred to :

CIT vs. Reliance Utilities & Power Ltd.,
(2009) 18 DTR (Bom) 1.

Editor’s Note :

During the relevant
assessment year, dividend income was taxable.

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Nirav Shah

Section 32 — Depreciation — Income assessed applying the net profit rate of 8% to the turnover — Whether the assessee’s claim for allowance of depreciation from the income so determined tenable — Held : Yes.

New Page 1ACIT vs. Keshav Kumar Tiwari

ITAT Delhi
Bench ‘H’ New Delhi

Before G. C. Gupta (J.M.) and K. G. Bansal (A.M.)

ITA No.1386/Del/2005

A. Y.
1999-2000. Decided on : 13.03.2009

Counsel for
Revenue/Assessee : Jagdeep Goel/O. P. Sapra

Section 32 —
Depreciation — Income assessed applying the net profit rate of 8% to the
turnover — Whether the assessee’s claim for allowance of depreciation from the
income so determined tenable — Held : Yes.

Per G. C. Gupta

Facts :

The assessee
failed to produce books of account and supporting vouchers before the AO. He
applied the provisions of Section 44AD and assessed the income. He rejected
the assessee’s claim to allow depreciation out of the income estimated. Before
the CIT(A) the assessee contended that since his turnover was more than Rs.40
lacs, the provisions of Section 44AD were not applicable, hence its claim for
depreciation was justifiable. The CIT(A) accepted the assessee’s contention
and allowed the appeal of the assessee.

Before the
Tribunal the Revenue accepted the fact that the turnover was above Rs.40 lacs.
However, it justified the action of the AO in applying the provisions of
Section 44AD, as according to it, the correctness of the accounts statement
filed by the assessee was not verifiable and all the conditions for
application of the said provisions were present and satisfied. For the same,
it relied on the Board Circular no. 684, dt. 10.06.1994.

Held :

The Tribunal
accepted the contention of the assessee and held that since the turnover of
the assessee was more than Rs. 40 lacs, the provisions of Section 44AD were
not applicable. It also held that the Revenue was justified in rejecting the
book result and in applying a flat rate of 8%, though the issue admittedly was
not before it. However, as regards the allowance of depreciation, it held in
favour of the assessee by relying on the decision of the Allahabad high court
in the case of Bishambhar Dayal & Co. and upheld the order of the CIT(A).

Cases referred to :

CIT vs.
Bishambhar Dayal & Co., 210 ITR 118 (All.)

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Nirav Shah

Section 41(1) — Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the assessee as on 31.3.1996 and thereafter carried forward in all subsequent balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys. 1995-96 and 1996

New Page 1ACIT vs. Amit Anil Biswas

ITAT ‘F’ Bench, Mumbai.

Before Sunil Kumar Yadav (JM) and D. Karunakara
Rao (AM)

ITA No. 1019/Mum/2006 and ITA No. 5762/Mum/2006

A.Ys. : 1997-98 and
2003-04. Decided on : 30.3.2009.

Counsel for Revenue/Assessee : None/Arvind
Sonde

Section 41(1) —
Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the
assessee as on 31.3.1996 and thereafter carried forward in all subsequent
balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys.
1995-96 and 1996-97, could be taxed in AY 2003-04 on the ground that upon
transfer to capital account during the financial year 2002-03 it has assumed
the character of income, as it was no more payable and did not represent
liability as falsely disclosed in the accounts by the assessee — Held : No.

Per Sunil Kumar Yadav :

Facts :

The assessee had received professional fees for
executing off-shore project during the financial years 1994-95 and 1995-96.
The gross bills raised in relation to the work were to the tune of
Rs.2,46,95,375 and after setting off various expenses and amounts written off,
the net professional fees were to the tune of Rs.1,77,27,681. This sum was
grouped under ‘current liabilities’ as off-shore project advances in the
balance sheet as on 31.3.1996 and then carried forward to subsequent years
till 31.3.2002. During the financial year 2002-03, this amount of
Rs.1,77,27,681 was transferred by the assessee to his capital account.

The Assessing Officer (AO) added this sum on a
protective basis to the income of the assessee for the AY 1997-98, after
reopening the assessment on the ground that the assessee had earned this
income in that assessment year and also made an addition on substantive basis
in AY 2003-04 on the ground that this amount had assumed the character of
taxable income, as it was no more payable and did not represent any liability
as falsely disclosed in the accounts by the assessee. The AO invoked the
provisions of S. 41(1) of the Act. He also held that the opening balance was a
Revenue receipt which was transferred to capital account in financial year
2002-03 and therefore this amount was taxed by him on a substantive basis as
income of AY 2003-04.

The CIT(A) decided the issue in favour of the
assessee and held that the income had accrued during the financial year
relevant to A.Y.s 1995-96 and 1996-97 and only because of transfer of receipt
to the capital account in the year relevant to AY 2003-04, it cannot be held
to be taxable in AY 2003-04.

Aggrieved, the Revenue preferred an appeal to the
Tribunal.

Held :

On perusal of the documents filed, the Tribunal
noted the following facts :

The agreement for rendering particular services
was executed on 23rd Feb., 1995 between the assessee and Mazgaon Docks Ltd.
and according to the work schedule, the required work was to be completed
pre-monsoon 1995. The invoices were raised between 23rd March, 1995 to 26th
April, 1995. The work was completed before start of the monsoon. The payments
were received by the assessee between 6.4.1995 to 1.6.1995. While making
payments, the payer had deducted TDS. Accounts were finally settled within
financial year 1996-97.

Based on the above facts, the Tribunal held that
as per mercantile system of accounting the income was earned by the assessee
in AY 1996-97, though the assessee had grouped this receipt as current
liability. The Tribunal observed that any nomenclature given to a Revenue
receipt would not change its character. It observed that it is unfortunate
that this income generated by the assessee was not noticed by the Revenue and
the treatment given by the assessee to this receipt was accepted by them. In
AY 2003-04 when the assessee transferred the amount to capital account, the
Revenue realised its mistake and tried to tax this as income in AY 2003-04 or
in AY 1997-98 by reopening the assessment. The Tribunal held that since the
income was not generated in those assessment years it cannot be taxed by
applying any method of accounting. The Tribunal observed that the Revenue
should be more vigilant to keep a check and make necessary verification if
they have any doubt, but they have no power to tax the income of a different
assessment year in a year in which they notice the mischief committed by the
assessee. The Tribunal held that the law in this regard is very clear that the
Revenue can make the assessment of any undisclosed income within the
permissible limit, but they cannot tax the income of different assessment
years in a year in which they notice it.

The Tribunal confirmed the order of the CIT(A).

Case referred :

1 CIT vs.
T. V. Sundaram Iyengar & Sons Ltd., 222 ITR 344 (SC).

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Nirav Shah

Section 36(1)(vii) r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit given for taking godown on rent is allowable as a business loss — Held : Yes.

New Page 1

ACIT vs. Foseco India Ltd.

ITAT ‘F’ Bench, Mumbai

Before R. S. Syal (AM) and V. Durga Rao (JM)

ITA No. 7307/Mum/2007 and CO No. 63/Mum/2008

A.Y. : 2003-04. Decided
on : 25.3.2009.

Counsel for Revenue/Assessee : J.
V. D. Langstich/H. P. Mahajani.

Section 36(1)(vii)
r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit
given for taking godown on rent is allowable as a business loss — Held : Yes.

Per R. S. Syal :

Facts :

The assessee had given a security deposit of
Rs.5,00,000 to one Mr. Agrawal for taking his godown on rent. The assessee
stated that the owner had not returned the money and accordingly claimed the
same as ‘bad debt’. This amount was written off by the assessee. The Assessing
Officer (AO) held that since the provisions of S. 36(2) were not fulfilled the
claim for bad debt could not be allowed. No relief was allowed in the first
appeal. On an appeal to the Tribunal,

Held :

Sub-Section (2) of Section 36 provides that no
deduction for bad debt shall be allowed unless such debt or part thereof has
been taken into account in computing the income of the assessee of the
previous year in which the amount of such debt or part thereof is written off
or of an earlier previous year, or represents money lent in the ordinary
course of business of banking or money lending which is carried on by the
assessee.

The Tribunal noted that this amount was not taken
into account in computing the income of the assessee of an earlier or current
year.

Satisfaction of the provisions of S. 36(2) is a
pre-condition for claiming deduction u/s. 36(1)(vii). Since the assessee had
not satisfied the provisions of S. 36(2), it was not entitled to claim
deduction u/s 36(1)(vii).

However, the Tribunal noted that the amount was
given as security for acquiring godown for carrying on the business. The
Tribunal noted that the Apex Court has in the case of Mysore Sugar Co. held
that loss due to irrecoverable advance/security given for the purpose of trade
is allowable. The Tribunal also noted that the Bombay High Court had in the
case of IBM World Trade Corporation held that the money advanced by the
assessee to the landlord for the purposes of and in connection with the
acquisition of the premises on lease was not recoverable, such loss of advance
was a business loss.

The Tribunal found the facts of the present case
to be on all fours with the facts of the case before the Bombay High Court. It
accordingly allowed this ground of the cross-objection.

Cases referred :

1 CIT vs. Mysore Sugar Co. Ltd., 46 ITR
649 (SC)

2 IBM World Trade Corporation Ltd. vs. CIT,
186 ITR 412 (Bom).

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Nirav Shah

Inter-State works contract vis-à-vis application of composition scheme provided under local act :

VAT

Inter-State works contract vis-à-vis application of
composition scheme provided under local act :

After 11-5-2002 inter-State works contracts are also liable
to tax under the CST Act. A question arises about deciding the value of goods
for levy of tax. Since works contract is a composite contract, involving supply
of goods as well as rendering of services, it becomes necessary to determine the
value of goods from the composite value for levy of tax under the CST Act.
Normally the said value is to be decided as per the guidelines given by the
Supreme Court in case of M/s. Gannon Dunkerly and Co. (88 STC 204) (SC). For
ready reference the relevant portion of the judgment is reproduced below :

“The value of the goods involved in the execution of a
works contract will, therefore, have to be determined by taking into account
the value of the entire works contract and deducting there-from the charges
towards labour and services which would cover :

(a) labour charges for execution of the works;

(b) amount paid to a sub-contractor for labour and
services;

(d) charges for obtaining on hire or otherwise machinery
and tools used for execution of the works contract;

(e) cost of consumables such as water, electricity, fuel,
etc., used in execution of the works contract the property in which is not
transferred in the course of execution of a works contract; and

(f) cost of establishment of the contractor to the extent
it is relatable to supply of labour and services;

(g) other similar expenses relatable to supply of labour
and services;

(h) profit earned by the contractor to the extent it is
relatable to supply of labour and services.

The amounts deductible under these heads will have to be
determined in the light of the facts of a particular case on the basis of the
material produced by the contractor.”

However to decide the value of goods, as per above
guidelines, is sometimes very difficult depending upon complexity of the
contract. Under Local Sales Tax Laws, a standard deduction method (i.e.,
abatement at fixed percentage) is provided for giving deduction for labour
portion and the balance is considered as value of the goods. Under the CST Act,
enabling provision for prescribing standard deduction rates is made by way of
proviso to S. 2(h) (definition of ‘sale price’) of the CST Act. However, till
today no such standard deduction rates are prescribed. Therefore, a question
arises as to whether a dealer can opt for such deduction rates provided under
the Local Act, for deciding the value of goods under the CST Act. Though the
issue was debatable, but, after the judgment of the Supreme Court in the case of
Mahim Patram (6 VST 248)(SC) it has became fairly clear. In light of the
observations made by the Supreme Court, it is felt that determination of value
of goods in a works contract is a part of assessment procedure and since by S.
9(2) of the CST Act the provisions of the Local Act for assessment are made
applicable to the CST Act also, the provisions about standard deduction can also
apply for determination of taxable value of works contracts under the CST Act,
1956. However after taking deduction of labour charges on standard deduction
basis, the further issue is about dividing the turnover in relation to
particular slab rates, like liable to 4%/12.5%, etc.

The determination of tax rate for a particular turnover under
the CST Act is provided u/s.8 of the CST Act, 1956. There is no other provision
under the CST Act for deciding the rate of tax. Therefore, though one can
determine the value of the goods, the division of the same in different slab
rates is again a complex issue. Under the Local Act, to avoid the difficulties
of reducing contract value by labour charges as well as deciding taxable value
into different slab rates, etc., the composition schemes are provided. Under
such composition schemes the dealer can pay the tax on total contract value
(lump sum) at prescribed percentage. Thus, such composition schemes make
taxation of works contracts easier and simpler. For example, under the MVAT Act,
2002, two composition schemes for works contracts are provided. Under one of the
schemes, on notified construction contract, a dealer can pay at the rate of 5%
of the total contract value, whereas under the other general scheme, a dealer
can pay at the rate of 8% of the total contract value. Such schemes are normally
optional and they are in lieu of tax payable as per normal rates under the Local
Act. As under such schemes there is no determination of rate of tax as per S. 8
of the CST Act, it was felt that such optional composition schemes cannot apply
to inter-State works contracts. S. 8 provides for deciding rate of taxes as per
legal provisions and there is also no alternative composition scheme under the
CST Act for paying tax on lump sum contract value.

However, it appears that the said issue is also now resolved
by the Central Sales Tax Appellate Authority (CSTAA). This authority, which is
set up to determine inter-State tax disputes under the CST Act, when two or more
states are involved, is constituted under the provisions of the CST Act, 1956.
The said authority has recently decided the above issue in the case of
Commissioner of VAT v. State of Haryana, (23 VST 10). In this case the issue
was about the nature of contract as well as determining assessable value of the
contract. The facts were that the contractor had received a contract from the
Government of New Delhi for improvement of roads, etc. For completing the said
work the contractor transported bituminous mixture (known as dense asphalt
concrete) from Haryana to New Delhi. The New Delhi authorities wanted to tax the
transaction as local sale. The Haryana Government protested the same on the
ground that it is inter-State sale from Haryana liable to tax in Haryana under
the CST Act, 1956. CSTAA agreed to this proposition of the Haryana Government.

The next issue under the said judgment was about discharging
of the CST liability on the said contract in Haryana. In Haryana, there was
composition scheme and a contractor could opt for the same. The CSTAA observed
as under :

“Just as in the Ll.P, Trade Tax Act, in the Haryana Value Added Tax Act, 2003 too, there are provisions dealing with the manner of determination of sale price of goods involved in a works contract. The relevant provisions are the following:

The definition of ‘sale’ includes consideration for the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract [vide (ze) of clause (ii)]. Clause (zg) defines ‘sale price’. Explanation thereto which is relevant for our purpose reads thus:

“Explanation (i): In relation to the transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract, sale price shall mean such amount as is arrived at by deducting from the amount of valuable consideration paid or payable toa person for the execution of such works contract, the amount representing labour and other service charges incurred for such execution, and where such labour and other service charges are not quantifiable, the sale price shall be the cost of acquisition of the goods and the margin of profit on them prevalent in the trade plus the cost of transferring the property in the goods and all other expenses in relation thereof till the property in them, whether as such or in any other form, passes to the contractee and where the property passes in a different form shall include the cost of conversion.”

Thus the manner of ascertainment of sale price has been specified in Explanation (i). Then, Rule 49 of the Haryana Value Added Tax Rules, 2003 provides for a lump sum scheme of tax payment in respect of works contract. The framing of such rule is in accordance with S. 9 of the HVAT Act. It reads thus:

“A contractor liable to pay tax under the Act may, in respect of a works contract awarded to him for execution in the State, pay in lieu of tax payable by him under the Act on the transfer of property (whether as goods or in some other form) involved in the execution of the contract, a lump sum calculated at four percent of the total making an application to the appropriate assessing authority within thirty days of the award of the contract to him, containing the following particulars ….

and appending therewith a copy of the contract or such part thereof as relates to total cost and payments.”

Thus, the procedure for arriving at the sale price in relation to works contract has been put in place in the HVAT Act which was enacted in 2003 by repealing the Haryana General Sales Tax Act, 1973. It is, therefore clear that the ratio of the decision of the Supreme Court in Mahim Patram case (2007) 6 VST 248 applies with equal force to the present case.”

In light of above observations it appears that the CSTAA has considered both, deduction method as well as composition scheme, as applicable to the CST Act, 1956. Therefore, a dealer can now safely opt for composition scheme under the CST Act also for discharging tax liability on inter-State works contracts. This may be useful to dealers in discharging liability on inter-State works contract by opting for a simple method.

Nirav Shah

Provisions of Section 195 are not attracted where the payment represents reimbursement of expenses having no element of income.

New Page 1

Part C — International Tax Decisions

Cairn Energy India Pty Ltd. vs. ACIT
[2009-TIOL-220-ITAT-MAD] (Chennai)

A.Ys. : 1996-97 to 1999-2000

Date : 20.02.2009

Sections 40(a)(i), 42 and 195.

Issue :

@ Provisions of Section 195 are not attracted where the
payment represents reimbursement of expenses having no element of income.

@ Where income is computed under the special provisions of Section 42, no
disallowance can be made under Section 40(a)(i).

Facts :

Ø The assessee, an Australian company, was engaged in the
business of prospecting for and production of mineral oils in India. Since
the exploration and production activities carried out by the assessee were
covered by Production Sharing Contract (PSC) approved by the Parliament, the
assessee was admittedly covered by provisions of Section 42 of the Act.

Ø The assessee made certain reimbursements to its parent
company outside India in connection with business activity carried on by the
assessee in India. These reimbursements were claimed as expenditure under
Section 42. The AO disallowed the claim on the ground that assessee had
failed to deduct tax at source.

Ø The assessee submitted before the Tribunal that the
expenditure was in connection with petroleum operations and were charged to
the assessee on cost-to-cost basis in terms of the PSC. Since the charge was
at cost without any mark-up, withholding in terms of 195 was not required.
The assessee also argued that Section 42 had an overriding effect and is a
separate code by itself and accordingly the general computational provisions
of the Act cannot be applied. Reliance in this behalf was made to Supreme
Court decision in the case of Enron Oil and Gas India Ltd. [305 ITR 75].
Alternatively, based on judicial precedents it was submitted that there
cannot be any withholding on reimbursement where there was no element of
income.

Held :

Ø The Supreme Court in Enron (referred above) has
analysed the scope of Section 42 and held that the Section is a special
provision, is a code by itself for computing the income in respect of the
business of prospecting, extraction or production of mineral oils.

Ø In terms of Section 42, any expenditure which is
referred to in PSC, whether revenue or capital in nature is allowed as a
deduction. The scheme of Section 42 overrides all general computational
provisions including Section 40(a)(i). Hence, no disallowance can be made in
terms of Section 40(a)(i).

Ø As regards withholding on the payment, the Tribunal
held that the auditors of the parent company had certified that such payment
represented actual expenses and there was no reason to disbelieve such
certificate. Even, PSC provided and regulated that charges shall be equal to
the actual cost of providing services and shall not include any element of
profit. The Tribunal relied on decisions of CIT vs. Industrial Engg.,
[202 ITR 1014] (Delhi) and CIT vs. Dunlop Rubber Company, [142 ITR
493] (Calcutta) and held that no income accrued to the parent company from
payments representing reimbursement of expenses and hence provisions of
Section 195 did not apply.

levitra

Nirav Shah

Whether income earned from transportation of cargo in international traffic by aircraft owned, chartered or leased by other airlines is covered by Article 8 of India-USA Treaty.

New Page 1

Part C — International Tax Decisions

ADIT vs. Federal Express Corporation, USA
[2009-TIOL-179-ITAT-Mumbai]

A.Y. : 1998-99 to 2000-01

Date : 29.01.2009

Article 8 of India-USA Treaty

Issue :

Whether income earned from transportation of cargo in
international traffic by aircraft owned, chartered or leased by other airlines
is covered by Article 8 of India-USA Treaty.

Facts :

Ø The assessee, a US company was engaged in integrated
air and ground transportation of time sensitive and time definite shipments
to various destinations worldwide (airport to airport services). It also
provided door-to-door delivery service for international shipment
(door-to-door delivery).

Ø The assessee had its own fleet of aircrafts, however,
in case of shipments which required express custom clearance it had entered
into interline arrangement with other airlines.

Ø In India, it was granted approval by the Director
General of Civil Aviation (DGCA) to operate air cargo services to and from
India. During the relevant year, in absence of approval from DGCA, the
assessee entered into interlines arrangement with other airlines for
carrying its cargo to India. In respect of monitoring of movement of cargo
within India, it entered into collaboration with Blue Dart Express which
performed actual pick-up and delivery of cargo. It established branches in
India and operated air cargo services to and from India.

Ø The Assessing Officer held that the assessee was
engaged in courier activities and not in the business of operation of
aircrafts in international traffic. Accordingly he denied benefit of
exemption of Article 8 of India-USA Treaty as claimed by the assessee. The
claim was however accepted by the CIT(A).

Ø The Department preferred appeal on the ground that
unless assessee establishes linkage between transportation of cargo carried
by other airlines with the carriage from the hub by the assessee, it cannot
be allowed the benefit of Article 8. Reliance was placed on Mumbai Tribunal
decision in the case of Cia de Navegacao Norsul [27 SOT 316]. The Department
argued that the term ‘profits from operation of ship or aircraft in
international traffic’ is defined in Article 8(2) of the Treaty and hence no
reference can be made to the commentaries and other support/guidance to
interpret. Article 8(2)(b) includes activities directly connected with
transportation of goods by the owners or lessees or charterers but would not
include cargo carried in international traffic by other airlines or inland
transportation of cargo.

Ø Before the Tribunal, the assessee submitted it had
entered into interline arrangements for transportation of cargo to a hub
from where aircrafts of the assessee were used for transportation of the
same in international traffic under slot arrangement. Reliance was also
placed on Mumbai Tribunal decision in the case of Balaji Shipping (UK) Ltd.
[25 SOT 325], where it was held that the expression ‘Profits from operation
of ships’ in UK Treaty would include not only profits from operation of
ships owned, chartered or leased, but also transportation through other
ships under slot arrangement. It further submitted that services of other
airlines were merely incidental to the main activity and hence covered by
Article 8. Alternatively it was submitted that the arrangements were pool
arrangement providing reciprocal services covered by Article 8(4) of the
Treaty.

Ø As regards inland transportation, assessee contended
that these activities were directly connected to the main activity of
transportation of cargo in international traffic covered by Article 8(2)(b).

Held :

Ø The assessee could be said to be engaged in the
business of transportation of cargo in the international traffic (and not in
courier services) as it is engaged in the business of transporting cargo
through a large fleet of globally-owned aircraft and it was recognised as
such by the authorities in India and in the USA. It was a registered member
of the International Air Transport Association.

Ø In the decision of Balaji, the Mumbai Tribunal referred
to OECD commentary since the term ‘profits from operation of ship’ is not
defined in UK Treaty. However, since the term ‘profits from operation’ has
been defined in Article 8 of US Treaty, relying on its decision in Delta
Airlines, where no reference was made to the commentary, the Tribunal held
that the benefit of Article 8 would be available only to the extent the
activity falls under the definition of Article 8(2).

Ø The transportation by aircraft, which is neither owned
nor leased by assessee would be outside the scope of the term ‘profits from
operation of ships or aircraft’ as defined in Article 8(2) of the US Treaty.
Accordingly, the Tribunal held that the income from operation involving
interline arrangement would not be exempt in India.

Ø The term ‘other activity directly connected with such
transportation’ would only mean transportation as referred in Article 8(2)
and as already concluded, the assessee is not covered by Article 8(2).
Accordingly, relying on decisions of the Mumbai Tribunal in Safamarine
Containers Lines [24 SOT 211] and Delhi Tribunal in KLM Royal Dutch Airlines
[307 ITR 142] (AT), the Tribunal held that inland transportation was also
not connected with the main activity and would be outside the scope of
Article 8.

Ø Where the income is not covered by the provisions of
Article 8, it would be treated as business profits under Article 7 of the
treaty and accordingly, the claim of the assessee would be examined under
Article 7.

Ø In respect of the alternative, claim of exemption under
Article 8(4) as pool arrangement, the Tribunal held that the same could be
examined by ascertaining whether the profits were derived from participation
in a pool, joint business or an international operating agency. Also, as the
claim of the assessee of having chartered the aircraft by booking some space
therein was made for the first time, it would have to be examined by the AO.
Further, as the meaning of the word ‘chartered’ as appearing in the Article
is not clear from the definition itself.

Nirav Shah

Whether royalty income earned by the taxpayer can be said to be ‘effectively connected’ with its permanent establishment (PE) in India, so as to be taxable as per the ‘business income’ article of the India-Australia Tax Treaty (Treaty).

New Page 1

Part C — International Tax Decisions

Worley Parsons Services Pty. Ltd.

[2009-TIOL-06-ARA-IT] (AAR)

Date : 30.03.2009

Article 12 of India-Australia DTAA

Issues :

Whether royalty income earned by the taxpayer can be said
to be ‘effectively connected’ with its permanent establishment (PE) in India,
so as to be taxable as per the ‘business income’ article of the
India-Australia Tax Treaty (Treaty).

Facts :

Ø A company incorporated in Australia (Ausco), is in the
business of providing professional services to the energy and resources
industry. Ausco entered into a contract with Reliance Petroleum Limited, an
Indian Company (ICo) for providing certain services in connection with the
ICo’s project of laying cross-country pipelines for the transportation of
hydro-carbons.

Ø Ausco entered into the following separate contracts
with the ICo :

G Basic Engineering and Procurement Services Contract
(BE&P), which was divided into two phases. Phase I was further divided
into 2 parts, viz., Basic Engineering and Procurement Services. In
respect of Basic Engineering services, 80% of the work was performed in
Australia and the balance was performed in India. In respect of the work
which was performed in India, Ausco’s employee had made short duration
visits to India for inspection, topography study, preparation of route
map, etc.).

G Ausco was entitled to a lump sum consideration for
all components under the BE&P.

G Project Management Services Contract (PMS). For this
Ausco’s employees were present in India for a significant period. The
employees were provided office space by the local engineering contractor,
for the performance of services under PMS.

G In terms of India-Australia Treaty, it was admitted
by the applicant that the amount was chargeable to tax in India under
Article XII of the Treaty as royalty income. The applicant also submitted
that it had PE in India.

Ø In its application, Ausco submitted before the AAR that
both (a) the contract BE&P and PMS were integral part of single contract and
hence entirety of royalty income was ‘effectively connected’ with the PE in
India; (b) In terms Article XII (4) (herein referred to as ‘the PE exclusion
rule’) of the Treaty, the amount was chargeable to tax as business income in
terms of Article VII of the Treaty; and (c) In terms of Article VII, only
that part of the profits, which was attributable to the PE, can be charged
to tax in India. For this, the applicant relied on the SC decision in
Ishikawajima Harima Heavy Industries [288 ITR 408], to contend that where
income is in respect of services rendered outside India, it is not liable to
be taxed in India in terms of the domestic law provisions.

Ø The Tax Department however contended that services
performed outside India in terms of Phase I of the BE&P were not
‘effectively connected’ with the PE of the Taxpayer in India and hence the
PE exclusion rule did not apply. Consequently, the royalty receipts were
taxable in terms of Article XII of the Treaty. The department obtained that
the SC decision in Ishikawajima’s case was distinguishable.

Held :

The AAR considered the taxability of the applicant under
Article XII and Article VII of the Tax Treaty. The AAR held :

1. Article VII (7), which paves way for the operation of
other specific articles of the Treaty, does not dilute the impact of the PE
exclusion Rule contemplated in terms of other Articles of the Treaty. If the
specific Articles provide for taxation of income under Article 7, the
receipt will be taxable as business income in terms of other provisions of
the treaty.

2. In case of royalty, the PE exclusion rule applies
where there is an ‘effective connection’ between the royalty generating
services and the PE. Mere presence of a PE for carrying out some other
activities is not sufficient for establishing an effective connection. For
royalty to be ‘effectively connected’ to the PE, the PE in India should be
engaged in the performance of royalty generating services and should
facilitate performance of such services.

3. ‘Effectively connected’ means ‘really connected’ and
the connection should not only be in ‘form’, but also in ‘substance’. A
pragmatic and purposive approach needs to be adopted for construing whether
or not an ‘effective connection’ exists between the PE and the royalty
income. The set-up, the functions, the purpose and duration of the PE, etc.
are relevant factors for determining this aspect.

4. The words ‘effectively connected with the PE’ are not
words of redundancy and should be given their due meaning. A real and
perceptible connection should exist to fulfil the condition before the
receipt can be treated as effectively connected with PE.

5. For the PE exclusion rule to get triggered, the PE
must have substantial activities and such securities must be carried out
over a period of time. A nominal establishment with skeletal staff,
attending to minimal or negligible work may not be sufficient to trigger the
PE exclusion rule on the ground of ‘effective connection’.

6. In the case of the applicant, BE&P and PMS contracts
are separate contracts covering different phases of the projects having
different rights and obligations. The nature of services and consideration
in respect of each one are separate and distinct. As a result, each
contract, although relating to the same project, needs to be seen
independently for determining the effective connection with the PE.

7. The SC ruling in the case of Ishikawajima cannot be
read to mean that the mere existence of a PE is enough to trigger the PE
exclusion rule and cause royalty income to be assessed as business income.
It does, however, imply that there may be situations where, though the
royalty may be ‘effectively connected’ with the PE, it may still not be
‘attributable’ to the PE.

8. The AAR observed that the SC decision is
distinguishable and not applicable to the facts of the present case. The AAR
held that the SC was concerned with the PE exclusion rule in respect of the
India-Japan Tax Treaty, which gets triggered when ‘right, property or
contract’ is ‘effectively connected.

Nirav Shah

Section 50C the Income-tax Act, 1961 —Substitution of full value of consideration in case of transfer of capital assets — Transfer of factory building by exchange of letter sans execution of agreement —Whether the AO justified in applying the provisions o

New Page 1

Shingar India Pvt. Ltd. vs. ITO

ITAT ‘E’ Bench, Mumbai.

Before D. K. Agarwal (J.M.) and D. Karunakara Rao (A.M.)

ITA No. 1785/Mum/2007

A. Ys. 2004-05. Decided on 6.5.2009

Counsel for assessee/Revenue : A. R. Shah/L. K. Agrawal

Per D. Karunakara Rao

Section 50C the Income-tax Act, 1961 —Substitution of full
value of consideration in case of transfer of capital assets — Transfer of
factory building by exchange of letter sans execution of agreement —Whether
the AO justified in applying the provisions of Section 50C — Held : No.

Facts :

The assessee was engaged in the business of cosmetics. In
view of huge debts payable to one of its suppliers amounting to Rs. 69.63 lacs,
the assessee transferred its factory building along with other assets like
plant and machinery, receivables, investments, etc. to the said supplier in
full and final settlement of its dues. The book value of the factory building
which was transferred, was Rs. 1.10 lacs. During the assessment proceedings,
the AO invoked the provisions of Section 50C and also made a reference to DVO
u/s. 50C(2) for valuing the said factory building. Based on the valuation made
by DVO, the AO made an addition of Rs. 14.95 lacs and taxed it as short-term
capital gains. The CIT(A) on appeal refused to accept the contention of the
assessee that the provisions of Section 50C are not applicable and upheld the
order of the AO.

Before the Tribunal the assessee highlighted the fact that
the said factory building was transferred by ‘exchange of letters’ and there
was no formal agreement executed between the assessee and the transferee. The
Revenue on the other hand contended that since the provisions of Sections 50
and 50C contain a reference to Section 48, the same were applicable to a case
of transfer of depreciable assets such as factory building. It was also
contended that the transfer of immovable properties require registration.

Held :

According to the Tribunal, for invoking the provisions of
Section 50C there must exist :

/ The
adoption or assessment by any authority of a State Government i.e.,
stamp valuation authority, for the purpose of payment of stamp duty in
respect of such transfer; and

/ The
consideration received or accruing as a result of the transfer by an
assessee of a capital asset, being land or building or both, was less than
the value so adopted or assessed.

The Tribunal noted that in the case of the assessee the
transfer of the factory building was by way of book entries. There was neither
a sale deed not there was any adoption or assessment by any authority viz.,
stamp valuation authority for the purpose of payment of stamp duty. Under
these circumstances, it held that there was no case for application of the
provisions of Section 50C. For the same reason, it held that the provisions of
Section 50C(2) also does not apply. According to the Tribunal, the decision of
the Jodhpur Bench in the case of Navneet Kumar Thakkar supports the case of
the assessee.

Case referred to :

Navneet Kumar Thakkar (2007) 110 ITD 525 (Jodhpur).

Note :

All the decisions reported above are selected from the website
www.itatindia.com

levitra

Nirav Shah

Section 10A of the Income tax Act, 1961 —Exemption to new undertaking in FTZ — (i) Whether receipt by way of reimbursement of expense eligible for exemption — Held : Yes

New Page 1

Shangold India Ltd. vs. ITO

ITAT ‘E’ Bench, Mumbai.

Before D. K. Agarwal (J.M.) and D. Karunakara Rao (A.M.)

ITA Nos. 6041 & 6568/Mum./2002

A. Ys. 2003-04 & 2004-05. Decided on 6.5.2009

Counsel for assessee/Revenue : A. R. Shah/L. K. Agrawal

Section 10A of the Income tax Act, 1961 —Exemption to new
undertaking in FTZ —

(i) Whether receipt by way of reimbursement of expense
eligible for exemption — Held : Yes

(ii) Whether AO justified in denying the exemption in a
case where export proceeds received after 6 months but within the period of
one year — Held : No.
Section 2(24) r.w. Section 36 of the Income-tax Act, 1961 — Taxability of
delayed payment of employees’ contribution to ESIC — Held it is taxable as
business income and not under the head ‘Income from other sources’.

Per Karunakara Rao

Facts :

The issues before the Tribunal were as under :

1. The assessee was denied exemption u/s. 10A in respect
of Rs. 0.35 lac received from Export Promotion Council by way of
reimbursement of exhibition participation costs. The corresponding expense
was incurred by the assessee in the earlier year. According to the AO, the
receipt cannot be said to have been derived from export activity, hence the
claim for exemption u/s. 10A qua the said receipt was denied by him.
On appeal, the CIT(A) confirmed the AO’s order holding that the proximate
source of the receipt was the grant and was not the export proceeds.

2. Whether the delayed payments towards the employees’
contribution to ESIC u/s. 2(24) r.w. Section 36 were chargeable under the
head ‘Income from other sources’ as held by the AO or as business income as
claimed by the assessee.

3. The assessee was denied exemption u/s. 10A in respect
of the sum of Rs. 21.16 lacs since, the same was received beyond the
specified period of 6 months.

Held :

1. The Tribunal relied on the Delhi Tribunal decision in
the case of Perot System TSI Ltd. It noted that the said decision was in the
context of reimbursement by the EXIM bank. According to the Tribunal, the
decision had generated the legal principle viz., where the expenses
which were reimbursed had direct link with the business of the assessee’s
undertaking, the same were eligible for exemption u/s. 10A. Applying the
said proposition, the Tribunal held that the reimbursed amount received from
Export Promotion Council was directly linked to the business of the
assssee’s undertaking and therefore, entitled to deduction u/s. 10A.

2. The Tribunal agreed with the assessee’s reasoning that
when the contribution was made in time, such payments were allowed as
business expenditure, accordingly, the disallowance if any made in this
regard could only give rise to business income. Accordingly, it was held
that the delayed payments towards the employees’ contribution to ESIC was
taxable as business income.

3. The Tribunal noted that as per Section 10A(3) below
Explanation 1, the RBI was authorised to grant extension to the said period
of 6 months. Accordingly, relying on the Circular No. 28 of 30.3.2001 and
Circular No. 91 of 1.4.2003, the Tribunal agreed with the assessee that for
the unit in the SEZ, the RBI has granted extension period of one year.
Hence, it was held that the export proceeds realised within the extended
period were eligible for exemption u/s. 10A.

Case referred to :

Perot System TSI Ltd. (2007) (16 SOT 350) (Delhi).

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Nirav Shah

Income-tax Act, 1961 — Section 254 — Whether an order of the Tribunal can be recalled on the ground that it has been passed without considering decision cited in the course of hearing — Held : Yes.

New Page 1

Jayendra P. Jhaveri vs. ITO

ITAT ‘B’ Bench, Mumbai.

Before M. A. Bakshi (VP) and Abraham P. George (AM)

MA No. 814/M/08 arising out of ITA No. 68/Mum/2004 and CO
166/Mum/07

A.Y. : Block Period 1.4.1989 to 14.9.1998.

Decided on : 2.4.2009.

Counsel for assessee/Revenue : Dharmesh Shah/R. S.
Srivastava

Income-tax Act, 1961 — Section 254 — Whether an order of
the Tribunal can be recalled on the ground that it has been passed without
considering decision cited in the course of hearing — Held : Yes.

Per Abraham P. George :

Facts :

The assessee had filed an appeal to the Tribunal against
the block assessment order passed in his case. The two issues raised by the
assessee and the direction of the Tribunal thereon were as under :

The first issue was that the notice issued u/s. 158BD gave
the assessee less than 15 days time to file the return and therefore was
invalid. For this proposition the assessee had relied on the decision of
Special Bench (SB) in the case of Manoj Aggarwal. The Tribunal decided this
issue against the assessee by relying on the decision of the Bombay High Court
in the case of Shirish Madhukar Dalvi, where it was held that technical
defects mentioned in a notice u/s. 158BC would stand cured by S. 292B. The
second issue was that a notice u/s. 143(2) was not issued and therefore the
assessment was invalid. For this proposition reliance was placed on twelve
decisions. The Tribunal in its order dealt with only one of the decisions
viz. decision of the Gauhati High Court in the case of Bandana Gogoi and
found it to be contrary to the decision of the Special Bench in Navalkishore &
Sons. It set aside the assessment and remitted it back to the AO for
completing it after observance of procedural law relating to issue of various
notices under the Act.

The assessee filed a miscellaneous application requesting
the Tribunal to recall its order on both the issues. On the first issue the
assessee submitted that the decision of SB in the case of Manoj Aggarwal had
made a distinction between the provisions of S. 158BC and S. 158BD and also
that the decision of the Bombay High Court in Shirish Madhukar Dalvi dealt
with S. 158BC. On the second issue the assessee submitted that the Tribunal
had not considered the other decisions relied upon by the assessee. According
to the assessee, non-consideration of the decisions cited constituted an error
apparent from record. For this proposition reliance was placed on the decision
of the Bombay High Court in the case of Stanlek Engineering Pvt. Ltd. The
assessee vide this miscellaneous application requested that the order passed
by the Tribunal be recalled.

Held :

On the first issue the Tribunal, after noting that there
was an amendment to the provisions of S. 158BD and that the present case was
for a period before amendment of S. 158BD, held that there was a mistake
apparent on record in not considering the correct position of law and the
decision of SB in Manoj Aggarwal’s case in the correct perspective. On the
second issue the Tribunal noted that it had considered only one of the
decisions relied on by the assessee. Following the ratio of the decision of
the Bombay High Court in the case of Stanlek Engineering it held there was an
apparent mistake in the order of the Tribunal. The Tribunal recalled its order
and directed hearing the appeal afresh.

Cases referred :

1 Stanlek Engineering Pvt. Ltd vs. CCE 229 ELT 61
(Bom)(2008).

2 Manoj Aggarwal vs. DCIT 113TTJ 377 (Del)(SB).

3 Shirish Madhukar Dalvi vs. DCIT 287 ITR 242 (Bom).

4 Bandana Gogoi vs. CIT 289 ITR 28 (Gau.)

5 Navalkishore & Sons Jeweller vs. DCIT 87 ITD 407
(Lucknow)(SB).

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Nirav Shah

Income-tax Act, 1961 — Section 2(22)(e) — Whether in a case where a shareholder holding more than 10% of the shareholding in a company in which public are not substantially interested is a debenture holder of such a company and also has current account wi

New Page 1

Anil Kumar Agrawal vs. ITO, 14(2)(1)

ITAT ‘A-1’ Bench, Mumbai

Before R. K. Gupta (JM) and Abraham P. George (AM)

ITA No. 6481/Mum/2007

A.Y. : 2003-04. Decided on : April, 2009.

Counsel for assessee/Revenue : Madhusudhan Saraf & Rajiv
Khandelwal/R. S. Srivastava

Income-tax Act, 1961 — Section 2(22)(e) — Whether in a
case where a shareholder holding more than 10% of the shareholding in a
company in which public are not substantially interested is a debenture holder
of such a company and also has current account with such a company, while
considering whether such a shareholder has taken a loan or advance from the
said company aggregate of balance in debenture account and also current
account needs to be considered —Held : Yes. Whether share premium account
forms part of accumulated profits for the purpose of S. 2(22)(e) — Held : No.

Per Abraham P. George :

Facts :

The assessee was a shareholder of Star Synthetics Pvt. Ltd.
(SSPL) having more than 10% of its shareholding. The assessee had also
subscribed to 4% non-secured convertible debentures issued by SSPL of
Rs.50,00,000. The Board resolution which approved the issue of debentures
provided that a debenture holder could have a current account with the
company, provided that the debit balance in current account could not exceed
the amount of debentures subscribed by the debenture holder. The Assessing
Officer (AO) noted that the assessee had two accounts with SSPL — one in his
individual name and another in the name of his proprietory concern. The
aggregate amount of loans taken by the assessee and his proprietary concern
from SSPL was Rs.23,65,000. SSPL had reserves of Rs.64,28,793. The AO regarded
the aggregate of amounts borrowed by assessee and his proprietary concern as
deemed dividend u/s. 2(22)(e).

Aggrieved, the assessee preferred an appeal to the CIT(A)
where he submitted that the AO ought to have considered the balance in
debenture account alongwith the balance in the current account of the assessee
and his proprietary concern, and if so considered the assessee did not owe any
amount to SSPL. He also submitted that while considering the amount of
accumulated profits of SSPL, the balance of share premium should not be
considered as forming part of accumulated profits. The CIT(A) was of the
opinion that since debentures are for a fixed period and bear a fixed rate of
interest, their nature is different from that of an unsecured loan. He
confirmed the addition made by the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal after considering the meaning of the term
‘debenture’ as per various dictionaries and judicial precedents held that
debenture account is only a loan account and that while considering the amount
of loan taken by the assessee from SSPL the AO ought to have considered all
the three accounts viz. the debenture account, the assessee’s personal
account and the account of his proprietary concern and then concluded whether
the assessee has received any loan from SSPL.

Since upon consideration of the balance in all the three
accounts in aggregate the assessee did not owe any money to SSPL, the addition
made by AO and confirmed by CIT(A) was deleted by the Tribunal.

As regards inclusion of share premium in computation of
accumulated profits, the Tribunal found the issue to be covered in favour of
the assessee by the decision of the Delhi Tribunal in the case of Maipo India.

Cases referred :

1 DCIT vs. Maipo India Ltd., (116 TTJ 791)(Del.)

2 Narendra Kumar vs. UOI, (1960)(47 AIR 0430)(SC).

levitra

Nirav Shah

(i) Service charges received by company engaged in operation of aircraft from third-party airline companies are not entitled to benefit of Article 8 of India-USA treaty. (ii) Interest on deposit placed to meet possible tax liabilities is not income from o

New Page 2

Part C — International Tax Decisions

17 ADIT v.
Delta Airlines Inc.

(2008) TIOL 646 ITAT (Mum.)

Article 8 of India-USA DTAA

A.Ys. : 1992-93 to 1999-2000. Dated : 29-9-2008

Issues :

(i) Service charges received by company engaged in
operation of aircraft from third-party airline companies are not entitled to
benefit of Article 8 of India-USA treaty.

(ii) Interest on deposit placed to meet possible tax
liabilities is not income from operations and is not entitled to benefit of
Article 8 of India-USA treaty.

Facts :

The assessee, an airline company of the USA, is engaged in
the business of international air transport. In addition to main activity of
operation of aircraft, the assessee earned certain service charges in respect of
the following services :

(1) Security screening services provided to the third-party
airline companies with the help of X-Ray machines. The machines were basically
installed for screening of baggage of the cargo of Delta’s own passengers —
but, were also used for rendering services to other foreign airlines for a
charge.

(2) Third-party charter handling services provided to other
charter companies at the airports in India.

The assessee claimed that the entire income from the above
services was exempt from tax in India on the ground that the same represented
income incidental to operation of aircraft in international traffic and the
right of such taxation exclusively vested in the USA in terms of Article 8 of
India-USA treaty.

The assessee had also earned interest income on certain bank
deposits. As per the advice of the Tax Department, the assessee had held back
certain amount to meet probable tax liability. Interest earned on such deposit
was claimed exempt on the ground that the interest was incidental to the
activity of airline operation.

The Tax Department denied benefit of Article 8 in respect of
the above-mentioned incomes on the ground that the service fees for baggage
screening or third-party charter handling service were not covered by Article 8.
Likewise, the Department held that interest income was covered by Article 11 of
the treaty. The Department supported its view on the basis that Article 8 of
India-USA treaty specifically restricted treaty benefit only to income from
activities which relate to the actual transportation.

Held :

(a) The ITAT noted that : (i) Article 8(2) of the treaty
defines scope of expression ‘profits from operation of aircraft’; (ii) the
scope of India-US treaty is restrictive as compared to the scope of similar
Article of OECD model or that of US model; (iii) Since India-US treaty has
deviated from the model text and has specifically defined the scope of
expression ‘profits from operation of aircraft’, the same needs to be
understood as defined in the treaty; and hence, Commentary on OECD model or
technical explanation on US model cannot be relied upon to understand the
scope of the term defined differently in the treaty.

(b) In terms of Article 8(2) of India-US treaty, the
benefit is available only if income is earned from activity directly connected
with the transportation of passengers, cargo, etc. by the assessee as an
owner/lessee/charterer of the aircraft. The services of baggage screening or
third-party charter handling provided to the third-party airline company or
charterers is not connected with transportation of passengers, goods, etc. by
the assessee. Income is therefore not eligible for treaty benefit.

(c) Interest income earned on deposit made to meet possible
tax demand was not income which was connected with business of operation of
the aircraft and hence was not covered by Article 8 of the treaty.

levitra

Nirav Shah

Transportation of goods in international traffic by ships operated by other enterprises under slot-chartering arrangement is not entitled to the benefit of Article 8 of India-Brazil treaty

New Page 2

Part C — International Tax Decisions

16 DDIT
v. M/s. Cia De Navegacao
Norsul

(2008) TIOL 621 ITAT (Mum.)

Article 8 of India-Brazil treaty

A.Y. : 2001-02. Dated : 25-11-2008

Issue :

Transportation of goods in international traffic by ships
operated by other enterprises under slot- chartering arrangement is not entitled
to the benefit of Article 8 of India-Brazil treaty.

Facts :

In this case, the assessee, a Brazil shipping company, earned
freight income in respect of cargo transported from Indian port to the ultimate
destination in the subcontinent of America.

The assessee was a member of a consortium between various
shipping companies. The members of the consortium owned/leased/chartered various
ships and agreed to a pool arrangement. The assessee had about 2 vessels which
were part of such pool arrangement. The vessels of the consortium members were
operated from hub port to final destination — say, in South Africa to the
subcontinent of America.

The assessee entered into freight arrangement with various
consignors in India and provided bill of lading for transportation from India to
the final destination (say, subcontinent of America). However, for
transportation from India to the hub port, it entered into slot arrangement with
third parties.

The third parties carried the cargo from Indian ports to the
hub port in feeder vessels. The mother vessel operated by the consortium members
carried the cargo onwards to the final destination. The following presents the
information in a schematic manner.

The assessee claimed benefit of India-Brazil treaty on the
ground that the entire income was earned from operation of ship.

The AO asked the assessee to file ship registration
certificate/charter party arrangement of ships operated by it and also to
substantiate that the cargo lifted by the feeder vessel, was on one-to-one
basis, transported further by the mother vessel. Since this requirement of the
AO was not met, the benefit of Article 8 was denied to the assessee. The amount
was taxed as business income in view of presence of agency PE. The amount of
income was calculated @ 10% of the freight under Rule 10.

The CIT(A) granted the benefit on the basis that the assessee
was engaged in the business of operation of ship in international traffic.

Before the Tribunal, the DR contended that the assessee
merely owned/chartered two ships and therefore all the voyages from Indian port
by feeder vessels were not continued by the mother vessel owned or chartered by
the assessee and therefore benefit of Article 8 was not available.

Held :

The Tribunal noted that the profit from operation of ship
would qualify for exemption in terms of India-Brazil treaty which grants
exclusive right of taxation to country of residence.

The Tribunal noted that unlike OECD Model, India-Brazil
treaty defined the term ‘operation of ships’ as under :

“The term ‘operation of ships or aircraft’ shall mean
business of transportation of persons, mail, livestock or goods carried on by
the owners or lessees/charterers of the ships or aircraft, including the sale
of tickets for such transportation on behalf of other enterprises”.

Having noted the above and having referred to the decision of
DDIT v. Balaji Shipping (UK) Ltd., (12 DTR 93) (Mum.), the Tribunal
concluded :

(1) Since the term operation of ship is specifically
defined in India-Brazil treaty, the same will need to be given the meaning as
defined and the scope of expression cannot be extended beyond the definition.
The OECD or other commentaries dealing with undefined terms are of no
assistance on interpretation of defined term.

(2) The expression ‘operation of ship’ as defined in
India-Brazil DTAA is restrictive to include business of transportation only by
the owner, lessee or charterer of the ship. The definition requires both the
conditions viz. (i) the business of transportation by ship, and (ii)
the assessee has to be a person who owns/leases/charters the ship.

(3) The transportation from Indian port to the hub port
pursuant to the slot arrangement is not covered by Article 8, as the feeder
vessel is not owned/leased/chartered by the assessee. The benefit was denied
in respect of feeder activity.

(4) The benefit of the treaty was restricted to the profit
attributable to transportation by mother vessel. The Tribunal noted that
Article 8(3) of India-Brazil treaty specifically made the Article applicable
to profits from the participation in a pool, a joint business or an
international operating agency. Accordingly, the consortium arrangement
pursuant to which the mother vessels were available at the disposal of the
assessee pursuant to pool arrangement were accepted to be the ships which
could be regarded as owned/leased/chartered by the assessee.

(5) Since the evidence about the ships owned/
leased/chartered were not available, the matter was restored to the file of
the CIT(A) with the direction that the benefit of Article 8 was to be
restricted only to the extent of transportation by the ships which were
owned/leased/chartered by the consortium members.

levitra

Nirav Shah

Operations of Hong Kong company in India through its liaison office confined to purchase of goods for export from India is not taxable in terms of provisions of clause (b) of Explanation 1 to S. 9(1)(i) of the Income-tax Act.

New Page 2

Part C — International Tax Decisions

15 Ikea Trading Hong Kong Ltd. In Re

(2008) TIOL 23 ARA IT (AAR)

S. 9(1)(i) of Income-tax Act

Dated : 19-12-2008

Issue :

Operations of Hong Kong company in India through its liaison
office confined to purchase of goods for export from India is not taxable in
terms of provisions of clause (b) of Explanation 1 to S. 9(1)(i) of the
Income-tax Act.

Facts :

The Ikea Group, a multi-national retailer of furniture and
home furnishing products, marketed goods under the brand name of Ikea. It
purchased products from suppliers worldwide including India. The applicant, the
Ikea Group Company, was a tax resident of Hong Kong. The applicant had
established a liaison office in India.

Certain functions of the Group were performed in a
centralised manner from outside India. For example, the group entity at Sweden
undertook research and development, designing, determination of range of
products, quality, etc. One of the group entities at Switzerland performed the
function of acting as central treasury and made payments to various vendors on
behalf of the group concerns.

After verifying diverse details, the AAR proceeded on the
basis of the following fact pattern :

(1) The applicant company purchased goods from India.

(2) The liaison office in India provided support in the
form of identifying potential suppliers, collecting information and samples,
quality check, acting as communication channel between applicant and Indian
exporters, etc.

(3) The goods were exported by the vendors from India
directly in the name of the applicant – though, the goods were delivered
outside India for and on behalf of the group entity which purchased goods from
the applicant.

(4) The applicant received sale price of such goods outside
India. The applicant therefore did not have tax liability in India in terms of
S. 5(2) of the Act on the basis of receipt of money in India.

(5) The tax liability of the applicant was, if at all,
attracted u/s.9 of the Act.

Before the AAR, the applicant claimed that entirety of its
operations in India were confined to purchase of goods for the purposes of
export and hence in terms of clause (b) of Explanation 1 to S. 9(1)(i), no part
of the income was chargeable to tax in India.

The Tax Department contended before the AAR that the
purchases from India were not for the purpose of export by the applicant, but
were really the transactions of purchase by the associates of the applicant in
respect of which the applicant earned service fee and that the applicant merely
acted as a procurement agent. The Department therefore contended that such
income was not covered by the exception carved out in clause (b) of Explanation
1 to S. 9(1) and was accordingly chargeable to tax in India.

Held :

The AAR accepted the contention of the applicant and held
that based on the representation and the facts submitted before it, the
applicant cannot be subjected to tax in India. Since the activities of the
applicant in India were confined to purchase of goods for export from India, the
AAR held that there cannot be any income attributable or apportioned towards
such operations by virtue of exception provided in terms of clause (b) of the
Explanation to S. 9(1)(i) of the Act.

levitra

Nirav Shah

Transportation of goods in international traffic by ships operated by other enterprises under slot-chartering arrangement is entitled to benefit of Article 9 of India-UK treaty where treaty provision matches with that of OECD Model.

New Page 2

Part C — International Tax Decisions

14 DDIT v. Balaji Shipping (UK
Ltd.)

(12 DTR 93) (Mum.)

Article 9 of India-UK treaty

A.Ys. : 2001-02, 2002-03. Dated : 13-8-2008

Issue :

Transportation of goods in international traffic by ships
operated by other enterprises under slot-chartering arrangement is entitled to
the benefit of Article 9 of India-UK treaty where the treaty provision matches
with that of the OECD Model.

Facts :

The assessee, UK Company, is a shipping company engaged in
transportation of goods in international traffic. The appeal relates to two
assessment years viz. A.Y. 2001-02 and A.Y. 2002-03. For both the years,
the assessee computed income on presumptive basis @ 7.5% of the total freight
receipt. Relying on Article 9 of India-UK treaty, it claimed that no part of the
income was taxable in India as Article 9 granted exclusive right of taxation to
UK.

For A.Y. 2001-02 (Year 1), the Assessing Officer found that
from out of the total freight receipts of about Rs.40 Cr.,1
only a small amount of freight receipt of Rs.1.7 Cr. was on account of the
freight carried in the vessels chartered by the assessee. The AO noted that
major part of the freight was in respect of cargo lifted from Indian ports
pursuant to the carrier agreement which the assessee had signed with a shipping
company at Mauritius (Mauco or Carrier). The carrier offered service of
container slot space to the assessee for transportation of cargo from Indian
port to the hub port at Dubai, Singapore, etc. (hub port).

The assessee collected cargo from Indian ports from the
consignors at its own risk and issued bill of lading for the entire
transportation from the port of loading to the port of destination. The Mauco
provided service bill of lading in respect of the containers carried in the
feeder vessel. The AO denied benefit of treaty in respect of freight earned
pursuant to carrier arrangement, but accepted computation of income @7.5% of the
total freight.

In year 2, the AO observed that the assessee did not furnish
evidence about the ships operated by it pursuant to the charter or similar
arrangement. The AO noted that the assessee had containers which were used in
transportation of cargo pursuant to the carrier arrangement. The benefit of
Article was denied in respect of the entire income on the ground that the
assessee did not operate any ship and did not bear risk of operating ship. The
AO denied benefit of the treaty and computed income @10% of the total freight
receipt. For both the years, the AO held that the assessee had PE in India in
view of Agent’s presence and hence the amount of income so determined was
chargeable under Article 7.

The CIT(A) admitted the benefit of treaty in respect of
entire freight receipts for both the years. The CIT(A) concluded that to qualify
for the treaty benefit, it was not necessary to examine whether every operation
was performed through the ship owned or chartered by the appellant. If the
assessee was engaged in operation of ship, the benefit of the treaty was
available in respect of all the ancillary and auxiliary activities connected
with the business even though they were performed through the ship belonging to
and operated by others.

Before the ITAT, the DR assailed the order of the CIT(A) by
raising following contentions :

(a) The assessee can be said to be engaged in the operation
of ship only if the ship is placed at the disposal of the assessee and the
assessee performed all the functions necessary for the purpose of running and
operating the ship in the business of transportation and earning the profit.

(b) OECD Commentary as also Klaus Vogel Commentary grants
benefit of the Article only in respect of profit obtained from ‘operation of
ship’ i.e., the ship should be in possession and at the disposal of the
assessee either on account of ownership, lease or charter arrangement and risk
of operation should be on the assessee.

(c) The activity of the assessee pursuant to the carrier
arrangement is in the nature of trading activity viz. that of purchase
of slot space and resell thereof and therefore the activity conducted pursuant
to slot arrangement does not amount to operation of ship.

(d) In the case of the assessee, almost entire income was
from purchase of space on slot basis and hence not from operation of ship. The
activity was thus not incidental or auxiliary to overall shipping operations.
In the circumstances, the activity was an independent activity and the main
business of the assessee. Since the slot charter arrangement constituted main
source of income, the activity was not eligible on the ground of it being
ancillary to the business of operation of the ship.

On the other hand, the AR supported the order of the CIT(A)
and supported eligibility to the treaty benefit by contending :

(a) The slot arrangement is an integral part of business of
operation of the ship in the international traffic.

(b) Since the term operation of ship is not defined in the
India-UK treaty, reference can be made to the OECD and other commentaries.
OECD Commentary and Klaus Vogel Commentary was relied to contend that the term
operation of ship needs to be understood in a broader sense to include even
slot arrangement.

Held :

ITAT held :

(1) Any expression defined in the treaty needs to be
understood in the sense as given in the treaty definition. If the term is not
defined in the treaty, it needs to be understood as per definition, if any, in
the local law of the contracting state as of the date the treaty is signed. If
the term is undefined, the same needs to be understood in accordance with the
rule of contemporaneous thinking. For the purpose of ascertaining
contemporaneous thinking, guidance can be taken from provisions of domestic
law or from the various commentaries available at the time of signing of DTAA.

(2) India-UK treaty does not define scope of expression
‘operation of ship’. The definition provided in Chapter XII-G introduced in
2005 in domestic law is not of relevance for interpretation of India-UK treaty
signed in year 1993.

Nirav Shah

Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether reduction in the liability availed by the assessee on the basis of One Time Settlement Scheme in respect of its outstanding term loans is to be treated as taxable u/s.28(iv) or u/s.41(1) — Held, No.

New Page 1

Part B — Unreported Decisions

(Full texts of the following Tribunal decisions are available at the
Society’s office on written request. For members desiring that the Society mails
a copy to them, Rs.30 per decision will be charged for photocopying and
postage.)

17. Accelerated Freez & Drying Co. Ltd. v. Dy.
CIT

ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 971/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

C. Karthikeyan Nair

Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether
reduction in the liability availed by the assessee on the basis of One Time
Settlement Scheme in respect of its outstanding term loans is to be treated as
taxable u/s.28(iv) or u/s.41(1) — Held, No.

Per Dr. O. K. Narayanan :

Facts :

The assessee company, engaged in the business of sea food
exports, had availed term loans from three banks, viz. ICICI Bank Ltd.,
Standard Chartered Bank Ltd., and Sumitomo Mitsui Banking Corporation,
Hongkong. These term loans were availed by the assessee for the purpose of
acquiring capital assets to be deployed in the manufacturing system of the
assessee company. Due to bad financial position the assessee defaulted on
payment of installments and interest. The total amount of loans that remained
payable to the banks amounted to Rs.3486.03 lakhs.

During the previous year relevant to the assessment year
under appeal, the assessee reached an agreement with the three bankers for One
Time Settlement (OTS) of its loan liability whereby the loan liability of
Rs.3486.03 lakhs was settled on payment of Rs.2450 lakhs resulting in a waiver
of loan amount of Rs.1036.03 lakhs. This principal amount of loan waived by
the banks was credited by the assessee to General Reserve Account and was not
offered for tax.

The AO held that waiver resulted in earning gain for the
assessee company in the course of carrying on of its business. He further held
that u/s.2(24)(i) both ‘profits’ and also ‘gains’ are income; it is a mandate
of S. 28 to levy income-tax not only on the profits of the business but even
on the gains of a business. He, therefore, held that In the light of the
definitions attributed to the expressions ‘income’ and ‘gains’, the waiver
benefit enjoyed by the assessee company should be treated as income of the
assessee from business. The AO relied on a decision of the Supreme Court (SC)
in the case of T. V. Sundaram Iyengar & Sons. He, accordingly, included the
amount of Rs.1036.03 lakhs in computation of assessable income under the head
‘Income from Business’.

The CIT(A) held that waiver amount was rightly charged
u/s.28(iv) of the Act. She also observed that the decision of the SC in the
case of T. V. Sundaram Iyengar & Sons is analogous in facts and the ratio of
the said decision was applicable to the assessee’s case. She dismissed the
appeal.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal stated that the facts of the assessee’s case
are quite different from the facts considered by the SC in the case of T. V.
Sundaram Iyengar and Sons Ltd. and therefore the said decision does not become
applicable to the present case of the assessee.

The Tribunal noted that the Bombay High Court while
delivering its judgment in the case of Solid Containers Ltd. has not dissented
in any way from the earlier decision in the case of Mahindra and Mahindra Ltd.
It observed that in the case of Solid Containers Ltd. the Court has reiterated
the ratio laid down in the judgment of the High Court of Bombay in the case of
Mahindra and Mahindra Ltd., that the loan availed for acquiring capital
assets, when waived, cannot be treated as assessable income. Therefore, it
held that it is not possible to hold that as far as the loan waiver of capital
account is concerned, the decision of the Bombay High Court in the case of
Solid Containers Ltd. clashes with the judgment of the same court in the case
of Mahindra and Mahindra Ltd.

The Tribunal held that since the loan waiver amount
credited by the assessee in its general reserve account is covered by the
judgment of the Bombay High Court in the case of Mahindra and Mahindra Ltd.,
the said waiver amount cannot be held as taxable.

The Tribunal noted that the SC has in the case of Polyflex
(India) Pvt. Ltd. examined the constitution of S. 41(1) and categorically
ruled that the words ‘remission or cessation thereof’ apply only to a trading
liability. Since the term loans availed by the assessee from the three banks
were not in the nature of trading liability but were in the nature of capital
liability, it held that the waiver thereof would not become income u/s.41(1)
on the ground of remission or cessation thereof. It also noted that the
assessee never had the benefit of deduction of the term loan availed by it
from the banks on capital account. Also, the term loans availed were not in
the nature of any loss or expenditure. Therefore, it held that S. 41(1) had no
application to the present case.

The Tribunal found the issue raised to be squarely covered
by the judgment of SC in the case of Polyflex (India) Pvt. Ltd., the decision
of the Bombay High Court in the case of Mahindra and Mahindra Ltd., decision
of the Delhi High Court in the case of Phool Chand Jiwan Ram and the decision
of the jurisdictional High Court in the case of Cochin Co. Ltd.

Nirav Shah

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether trade discount allowed to a customer constitutes commission liable for deduction of tax u/s.194H — Held, No

New Page 1

Part B — Unreported Decisions

(Full texts of the following Tribunal decisions are available at the
Society’s office on written request. For members desiring that the Society mails
a copy to them, Rs.30 per decision will be charged for photocopying and
postage.)

16. S. D. Pharmacy Pvt. Ltd.

v. Dy. CIT

ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 948/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

V. M. Thyagarajan

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether
trade discount allowed to a customer constitutes commission liable for
deduction of tax u/s.194H — Held, No.

Per Dr. O. K. Narayanan :

Facts :

The assessee company was engaged in the business of
manufacture and sale of ayurvedic products. In the course of assessment
proceedings the AO noticed that the total sales of the assessee were
Rs.4,82,12,960 and corresponding trade discount amounted to Rs.1,42,43,565.
This trade discount was given to four concerns of which one was a sister
concern of the assessee. The amount of trade discount to the sister concern
was Rs.1,34,24,839 since the major sales of the assessee were to its sister
concern.

The AO disallowed the amount of trade discount of
Rs.1,42,43,565 u/s.40(a)(ia) since he held that the discount fell within the
ambit of S. 194H of the Act and since the assessee had not deducted tax at
source the same was not allowable.

The CIT(A) confirmed the action of the AO.

On an appeal by the assessee to the Tribunal it was pointed
out to the Tribunal that the products sold were billed at gross amount and
trade discount was given at the rate of 50% or 30% or 17.20%, as the case may
be. Trade discount allowed was reduced from the gross invoice value and net
amount was shown as net price payable by the parties. Sales tax was collected
on the net amount so payable by the parties. In the accounts, the customer’s
account was debited with the net amount and the amount of trade discount was
debited to Trade Discount A/c which was transferred to the debit of Trading
Account. Sales turnover was a gross amount. The property in the goods passed
to the customer on delivery of the goods. It is only the net amount which was
receivable from the customer for the goods sold. Reliance, on behalf of the
assessee, was placed on the decision of Delhi Bench of the Tribunal in the
case of Mother Dairy India Ltd.

Held :

The Tribunal found this to be a case of outright sale on a
principal to principal basis at the net amount. The trade discount was held to
be margin that the dealers could enjoy in retail trade. The Tribunal noted
that there was nothing on record to show that dealers and buyers were not
acting on their own behalf and since the sales were made on principal to
principal basis there was no question of assessee paying any commission or
brokerage or similar amounts to parties for the services rendered by them. The
Tribunal also took note of the fact that the assessee was not crediting the
discount to the account of the customer/dealer but was directly debiting it to
Trade Discount A/c.

The Tribunal following the ratio of the decision of the
Kerala High Court in the case of M. S. Hameed and Ors. held that since the
assessee was not making any payment of commission or brokerage to the parties
nor was it crediting the accounts of the parties for similar amounts there was
no occasion to deduct the tax as contemplated u/s.194H.

The Tribunal also noted that the Kerala High Court has in
the case of Kerala Stamp Vendors Association held that discount given on price
by the seller to the purchaser cannot be termed as ‘commission’ or ‘brokerage’
for services rendered in the course of buying and selling of goods as the act
of buying does not constitute rendering of any service.

Considering the facts and following the ratio of the two
decisions of Kerala High Court the Tribunal held that trade discount debited
by the assessee in its accounts is not covered by the provisions of S. 194H of
the Act. Since there was no liability on the part of the assessee to deduct
any tax on the amount of trade discount given to its dealers the disallowance
of Rs.1,42,43,565 was deleted.

Cases referred :

(1) Mother Dairy India Ltd. v. ITO, ITA No.
2975/Del./2008 dated 12-12-2008

(2) M. S. Hameed and Ors. v. Director of State
Lotteries and Ors., 249 ITR 186 (Ker.)

(3) Kerala Stamp Vendors Association v. Office of the
Accountant-General and Ors., (282 ITR 7) (Ker.)

levitra

Nirav Shah

What constitutes ‘teaching in or by educational institutions’ under Article 12(5)(c) of India-USA DTAA ?

New Page 2

Part C — Tribunal & International Tax Decisions

Sri Ramachandra Educational and Health Trust

(2009 TIOL 13 ARA IT) (AAR)

Article 12(5)(c) read with MOU, India-USA DTAA; S. 9, S.
195, Income-tax Act

Dated : 29-5-2009

Issue :

What constitutes ‘teaching in or by educational
institutions’ under Article 12(5)(c) of India-USA DTAA ?

Facts :

The applicant was registered u/s.12AA of Income-tax Act. It
had two institutions — a medical college (which was a deemed university) and a
hospital (which was a university hospital). The applicant had executed an
agreement with an American medical institution (‘US Med’) for transfer of
knowledge and experience in the field of medical sciences. US Med was a
tax-exempt entity in USA. The applicant applied to AAR for determination of
the issue whether, having regard to Article 12(5) of India-USA DTAA, the
applicant would be required to deduct tax at source u/s.195 on the annual fee
payable to US Med, especially when both the payer and the payee are not liable
to tax in their respective countries.

The applicant stated that :

US Med
would be rendering the services from USA. Being non-resident, it was not
liable to tax u/s.9 of the Act in respect of services rendered in USA.

As the
payments were for teaching in or by educational institution, they would be
excluded from Article 12(5)(c) of India-USA DTAA. The applicant supported
this proposition with examples 10 & 11 in the MOU appended to India-USA DTAA
in respect of fees for included services in Article 12 (‘the MOU’).

As US Med
was not liable to tax in India, the applicant had no obligation to deduct
tax at source.

The tax authorities stated that :

Though
the applicant was exempt u/s.12AA, US Med was not so exempt under the Act.

Fees
payable by the applicant to US Med fall within the purview of S. 9(1)(vii)
of the Act, read with the explanation below S. 9(2).

The fee
paid was described as ‘annual alliance development
administrative/maintenance fee’, which showed that it was not wholly for
teaching in or by educational institution. Hence, the payment was outside
the purview of Article 12(5)(c) of India-USA DTAA.

Correspondence from US Med showed that tuition fee paid was to be covered
under ‘program deliverables’, which showed that the consideration was paid
for making available technical knowledge, experience, skill, know-how or
processes. As such, it was covered under Article 12(4) and example 10 of the
MOU explaining the scope of exemption for teaching in educational
institutions.

The AAR noted that, US revenue authorities had granted
exemption to US Med under US Revenue Code. It was also noted that US Med was
an incorporated entity which was exempt from tax in USA and as such, it could
invoke provisions of DTAA. The tax authorities did not dispute this position1.

The AAR observed that, as the question of tax deduction
would arise only if income is chargeable to tax, it was necessary to ascertain
the taxability of the fees paid. For this purpose, the AAR reviewed the
agreement. It observed that :

US Med
was to provide educational and teaching services.

Specific
services were to be agreed and decided in annual plan. These services were
termed ‘deliverables’ for which fixed annual fee was to be paid.

Additional services were termed ‘additional deliverables’ for which
additional payment was to be made.

US Med
had granted non-exclusive, non-transferable licence to the applicant for use
of copyright, trade mark, trade secrets, patent, etc. (‘intellectual
property’) owned by it. The AAR observed that though the agreement clarified
that no royalty was to be paid for use of Intellectual Property, the
substances of the arrangement was to the contrary.

Based on
information provided by the applicant, the AAR noted that following actual
activities were conducted during the years 2004 to 2006.

Various
programmes and workshops called ‘CME Programmes (comprising medical
education).

Faculty
student exchanges where the applicant’s representatives were deputed to US
Med for doing clerkship.

Tele-medicine, which was a continuing program of monthly tele-medical
education, e-learning and providing help in applicant’s institution-building
through programmes in education, clinical care and research.

The AAR then referred to Article 12 of DTAA and examples 10
and 11 of the MOU appended to DTAA. It also referred to the legal definitions
of the terms ‘technical’ and ‘teaching’. It observed that the terms were
defined in their widest sense. The AAR then discussed examples 10 and 11 of
the MOU as also the connotations of the terms ‘technical’ and ‘teaching’.

Held :

The AAR stated that as clear picture of the activity and
payments did not emerge from the facts, it would lay down broad guidelines. In
respect of each of the activities, the AAR held that :

Workshops and seminars are conducted from time to time. Generally, the speakers are from US Med. Medical teachers and professional from different places participated in these events. However, it was not known whether the workshops and seminars had any connection to a particular course conducted by the medical college of the applicant and whether it was meant for the benefit of students. These activities could be covered in Article 12(S)(c) : only if faculty from US Med participated in them; some of the participants benefiting from the activities were pursuing medical courses in the applicant’s institution; and seminar/workshop has substantial connection with the course of studies in the college.

Tuition fees paid in respect of scholars deputed to complete course in USA were covered by example 10 of the MOU and consequently, were covered under Article 12(S)(c). Accordingly, they were excluded from the purview of fees for included services.

Tele-conferencing and e-Iearning were part of teaching methodology. Hence, payments made for them would qualify for exclusion under Article 12(S)(c).

Payment to faculty for teaching through tele-conferencing and e-learning would be covered under Article 12(S)(c).

Consideration for use of intellectual property would not be covered under Article 12(5)(c)2.

The AAR held that as the applicant made lump sum payment for various services, it was not possible for AAR to relate the payment to individual services which are exempt and those which relate to consideration for use of IPR. In the light of the above observations, AAR declined to give a ruling to the effect that the applicant was not at all liable to deduct tax at source in respect of payments to US Med and hence directed applicant to make an application before the tax authorities for determination of appropriate portion chargeable to tax in India.

Nirav Shah

On facts, the assessee is an employer responsible for tax deduction u/s.192.

New Page 2

Part C — Tribunal & International Tax Decisions

Dolphin Drilling Ltd. v.
ACIT

[2009] 121 TTJ (Del.) 433

S. 10(6)(viii), S. 40(a)(i), S. 40(a)(iii), S. 192, S. 195,
Income-tax Act

A.Y. : 2004-2005. Dated : 30-1-2009

Issue :

On facts,
the assessee is an employer responsible for tax deduction u/s.192.

Amount paid to non-resident
towards reimbursement of employees’ salaries disbursed as an agent is not
subject to tax withholding u/s.195.

Facts :

The assessee was a UK company (‘UKCo’). UKCo had entered
into a contract with ONGC to charter duly manned deep water drilling rig
together. UKCo entered into contract with another group company in Norway for
procuring crew to operate the drillship. As per the agreement with the
Norwegian company, the Norwegian company was to procure/supply crew. Norwegian
company was to disburse the salary of the crew. UKCo was to, reimburse the
salary of the crew and also pay 5% of the reimbursed amount as handling fee to
the Norwegian company.

Additionally, UKCo also paid fixed fees to Norway Company
towards meeting personnel, office, administration and other costs. The crew
were employees of UKCo. UKCo had issued appointment letters to the crew and
UKCo was responsible to secure work permits and security passes for crew as
well as to provide housing and transportation to crew. UKCo also deducted tax
at source u/s.192 of the Act from the income of the crew after considering
exemption u/s.10(6)(viii) of the Act and deposited the same with the
Government.

UKCo deducted tax u/s.195 on the fixed fee and the handling
fee paid to Norwegian company.

The AO held that the amount reimbursed by UKCo to Norwegian
company for disbursement of crew salaries was ‘fees for technical services’
and hence, tax should have been deducted u/s.195 on the entire amount. Since
the tax was not deducted, the AO disallowed the payment u/s.40(a)(i) of the
Act.

On appeal, CIT(A) confirmed the order of the AO.

Held :

The Tribunal held that the obligation for payment of
salaries to the crew was of UKCo and Norwegian company disbursed the salaries
only for the convenience of the parties.

The reimbursement of crew salaries was chargeable under the
head ‘Salaries’ and hence, the payments would not be covered u/s.40(a)(i) but
would be covered by S. 40(a)(iii). Since S. 10(6)(viii) exempts remuneration
for employment on a foreign ship if total stay in India does not exceed 90
days, tax would not be deductible in case of employees whose stay did not
exceed 90 days.

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Nirav Shah

Whether a liaison office in India involved in collecting and transmitting of information for a Korean company would, by virtue of Article 5(4) of India-Korea DTAA, not constitute a PE ?

New Page 2

Part C — Tribunal & International Tax Decisions

M/s. K. T. Corporation

(2009 TIOL 12 ARA IT) (AAR)

Articles 5(1), 5(2), 5(4), 13,

India-Korea DTAA;

S. 9(1)(vi)/(vii), Income-tax Act

Dated : 29-5-2009

Issue :

Whether a liaison office in India involved in collecting
and transmitting of information for a Korean company would, by virtue of
Article 5(4) of India-Korea DTAA, not constitute a PE ?

Facts :

The applicant was a Korean company (‘KorCo’). KorCo had
obtained RBI’s permission for opening a liaison office (‘the LO’) in India for
the sole purpose of acting as a communication channel between the head office
and companies in India. While granting its permission, RBI had stipulated
various conditions and parameters subject to which the LO was to function.

The issue before the AAR was whether the LO of KorCo would
constitute its PE in India. Together with its application, KorCo had furnished
copy a Reciprocal Carrier Service Agreement (‘RCSA’), which it had executed
with an Indian company (‘IndCo’) after opening of its LO. Both KorCo and IndCo
were telecom carriers/resellers and had agreed to provide inter-connection
services to each other. IndCo was to provide and maintain connecting
facilities in India and KorCo was to do the same outside India. Each party was
to raise invoice on the other party in respect of the traffic terminated on
its side during each calendar month.

On the merits of the application, the tax authorities had
commented that the applicant had not sought ruling on the question of
taxability of payment made by IndCo to KorCo but had sought ruling only on the
limited issue whether the LO would constitute a PE. The tax authorities
mentioned that unless the applicant furnishes its reply on the following four
specific questions, it was not possible to conclude the issue :

(i) What was the role of LO in pre-bid survey carried out
before entering into the Agreement ?

(ii) How was the feasibility report prepared, did the LO
play any role in it ?

(iii) Were the employees of the LO involved in the
technical analysis of the project ?

(iv) Is the LO involved in the technical analysis of the
project or the execution of any part of the contract ?

Further, the tax authorities contended that independent of
the issue under consideration, the payments received by KorCo from IndCo were
taxable u/s. 9(1)(vi)/(vii) of the Act and Article 13 of India-Korea DTAA3.

By a supplementary statement of facts, KorCo furnished
information on the questions raised by the tax authorities. It submitted that
the LO was to act only as a communication channel within the restrictions
imposed by RBI. While it was a fixed place of business, its purpose was only
to collect information and to carry out preparatory and auxiliary activities
such as :

(i) Holding of seminars/conferences.

(ii) Receiving trade inquires from customers.

(iii) Advertising about the technology used by the
applicant in its wired/wireless services and replying to queries of
customers.

(iv) Collecting feedback from perspective customers.

The LO had not played any role in the pre-bid survey nor
had it involved itself in the technical analysis of any project before KorCo
executed agreement with IndCo. The applicant also furnished affidavit of the
general manager of the LO to this effect. The affidavit also stated that the
LO did not have permission/authority to conclude, nor had it executed, any
trade contract. Similarly, LO did not procure any order nor did it conclude
any negotiation. The counsel for the applicant emphasised that the LO was only
a representative office acting within the restrictions imposed by RBI and had
not undertaken any trading activity, nor had it executed any business
contract, nor had it rendered consultancy or any other services. Thus, the LO
was not a fixed place of business through which the business of KorCo was
wholly or partly carried on but it was a fixed place which had undertaken only
preparatory or auxiliary work. Hence, it could not be regarded as a PE under
Article 5(1), 5(2) read with clauses (d), (e) and (f) of Article 5(4) of
India-Korea DTAA.

Held :

The AAR referred to : paragraphs 1, 2 and 4 of Article 5 of
India-Korea DTAA; definition of ‘liaison office’ as per FEMA; the permitted
activities for a liaison office as per FEMA; and legal definition of the term
‘auxiliary’.

The AAR expressed its view that collecting information for
an enterprise by a liaison office can be considered to be an auxiliary
activity unless collection of information is primary purpose of the
enterprise. In case of KorCo, collection of information was not its primary
purpose and hence, collecting and transmitting of information by the LO to the
Head office was auxiliary activity particularly when the LO had no connection
with telecom services and network and the contracts related thereto. Hence, LO
could not be considered as PE in terms of Article 5(4)(d), (e) of India-Korea
DTAA. The AAR supported its view with certain extracts from the commentary on
OECD Model Convention, which inter alia, stated that the decisive criterion is
whether the activity of fixed place of business in itself was an essential and
significant part of the activity of the enterprise as a whole.

The AAR held that, as per the facts available, the LO had not performed ‘core business activity’ but had confined itself only to preparatory and auxiliary activity and as such the LO was covered within the exclusion in Clauses (e) and (f) of Article 5(4) of India-Korea DTAA. Hence, it could not be regarded as a PE in terms of Article 5(1). Reliance in this regard was made by the AAR on the Supreme Court’s decision in DIT (International Taxation) v. Morgan Stanley and Co Inc, (2007) 292 ITR 416 (SC) and Delhi High Court’s decision in UAE Exchange Centre v. UOI, (2009) 223 CTR 250 (Del.).

Nirav Shah

S. 275 read with S. 271B — Bar of limitation for imposition of penalty also applies to penalty imposed u/s.271B

New Page 1

Part B — Unreported Decisions

21 Motilal Vishwakarma HUF v.
ITO

ITAT ‘B’ Bench, Mumbai

Before M. A. Bakshi (VP) and

R. K. Panda (AM)

ITA No. 7055/Mum./2007

A.Y. : 2003-04. Decided on : 27-8-2007

Counsel for assessee/revenue : Ajay C. Gosalia/

Garima Jain

S. 275 read with S. 271B of the Income-tax Act, 1961 — Bar of
limitation for imposition of penalty — Whether limitation period applicable to
penalty imposed u/s.271B — Held, Yes.

Per M. A. Bakshi :

Facts :

The issue before the Tribunal was whether the penalty of
Rs.23,520 imposed on the assessee u/s.271B was barred by limitation. The
show-cause notice was issued and served in June 05 and the order imposing
penalty was passed on 27-2-2006. The contention of the assessee was that the
order has to be passed within six months from the date of initiation of the
proceeding.

Held :

The Tribunal agreed with the assessee that since the penalty
order has been passed after the expiry of six months from the end of June 2005,
it was barred by the period of limitation. Relying on the Special Bench decision
of the Chandigarh Tribunal in the case of Dewan Chand Amrit Lal & Ors., the
Tribunal allowed the appeal of the assessee.

Case referred to :

Dewan Chand Amrit Lal & Ors. v. DCIT, 283 ITR (AT) 203 (Chandigarh) (SB)

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Nirav Shah

Subscription fees for database access which contains repository of information otherwise available in public domain is not royalty within the means of S. 9(1)(vi) or Article 12 of India-USA DTAA.

New Page 3

Part C — Tribunal & International Tax Decisions

FactSet Research System Inc

Authority for Advance Ruling

Before Justice P. V. Reddi (Chairman),

Mr. A. Sinha (Member) and

Mr. Rao Ranvijay Singh (Member)

A.A.R. No. 787 of 2008, Dated : 30-6-2009

S. 9(1)(vi) of the Income-tax Act and Article 12 of
India-USA DTAA

Counsel for assessee/revenue : A. V. Sonde/

Sanjeev Sharma

Facts of the case :

FactSet
Research System Inc, (herein applicant) is a company incorporated in the
USA. It maintains databases outside India, which contains the financial and
economic information (like shareholding by global holders of global
equities, takeover defence strategies adopted by various US public
companies, etc.) of a large number of companies worldwide.

The
information contained in the database is available in the public domain.
However, the applicant collates, stores and displays this information in an
organised manner which enables the customers to retrieve the required
information within a short span of time in a focussed manner. The customers
are required to download client interface software (similar to an internet
browser) to access and view the database. The customers of the applicant are
mostly financial intermediaries and investment banks. The databases,
software and tools are hosted on the applicant’s main frames/data libraries
maintained at its data centres in the US.

The
applicant enters into a Master Client Licence Agreement (MCLA), with its
customers, which inter alia provides that :

The
applicant grants limited, non-exclusive, non-transferable rights to use
its database, software tools, etc. and receive subscription fees from its
customers.

All
proprietary rights including intellectual property rights in the software,
databases and related documentations remain the property of the applicant.

The
customer agrees that it will not copy, transfer, distribute, reproduce,
etc. any works from or make any part of the data available to others.

The
customer will cease to use all licensed material and software and destroy
all documentation except such copies as are required to be maintained by
law.

The
applicant does not carry out any business operations in India and there is
no agent in India acting on behalf of the applicant with the authority to
conclude contracts.

In the
above background, the applicant raised following issues before AAR :

Whether
the subscription fees received from customers in India shall be taxable in
India under the domestic law and under the treaty ?

If the
applicant is not liable to be taxed in India, whether its subscribers will
be required to withhold taxes u/s.195 of the Act ?

Assuming the applicant has no other taxable income in India, whether the
applicant will be absolved from filing a tax return in India u/s.139 ?

Ruling of AAR :

Based on
features of the Licence Agreement noted by AAR, it was held that the
subscription fess received by the applicant do not amount to ‘royalty’ in
terms of S. 9(1)(vi) of the Act and Article 12 of the treaty. AAR held :

The
subscription fees are paid by customers for facilitating the customer’s
access to the database and not for any rights in the copyright of the
database. No proprietary right or exclusive rights possessed by the
applicant in the database are transferred to the customers. The customers
merely get a right to view and use the data for internal business purpose.

The
subscription fee is not fees for use of “information concerning
industrial, commercial or scientific knowledge, experience or skill” as
the information which the subscriber gets through the database is already
available in public domain and it does not relate to the underlying
experience or skills. The applicant does not share its experiences,
techniques or methodology employed in evolving the database with the
subscribers. The OECD Commentary and Commentary by Prof. Klaus Vogel was referred to conclude that royalty taxation covers transfer of know-how which may cover unprotected, non-secret knowledge derived from experience.

The subscription fee cannot be considered as payment towards the use of ‘scientific equipment’ as the fees paid are for availing of the facility of accessing the data/information collected and collated by the applicant in the database.

There is no use of or right to use any copy-right of a literary or scientific work involved in the event of subscriber getting access to the database for his own internal purpose. It is like offering a facility of viewing and taking copies of books for its own use without conferring any other rights available to a copyright holder.

Nirav Shah

Waiver of interest : S. 234A, S. 234B and S. 234C of Income-tax Act, 1961 and CBDT Circular No. 400/234/95-IT(B), dated 23-5-1996 : A.Ys. 1991-92 and 1992-93 : Death of father who was looking after business : Entire tax paid voluntarily and extra amount a

New Page 1

Reported :

Waiver of interest : S. 234A, S. 234B and S. 234C of
Income-tax Act, 1961 and CBDT Circular No. 400/234/95-IT(B), dated 23-5-1996 :
A.Ys. 1991-92 and 1992-93 : Death of father who was looking after business :
Entire tax paid voluntarily and extra amount also paid : Sufficient reason for
non-payment of advance tax on time : Levy of interest set aside.

[V. Akilandeswari v. CCIT, 318 ITR 1 (Mad.)]

The petitioner was a minor during the A.Ys. 1991-92 and
1992-93. For these two years the returns were filed voluntarily and taxes were
paid. Assessment was completed and interest was levied u/s.234A, u/s.234B and
u/s.234C of the Income-tax Act, 1961. The petitioner’s application for waiver
of interest was rejected by the Chief Commissioner.

The Madras High Court allowed the writ petition filed by
the petitioner and held as under :

“(i) The fact of the death of the petitioner’s father who
was looking after the business and as well as that the petitioner’s mother
and guardian was a housewife unfamiliar with such transactions was not
denied by the Chief Commissioner. The petitioner had paid the entire tax
voluntarily and had also paid some extra amount. The claim made by the
petitioner was bona fide and genuine and the Chief Commissioner had
not exercised his discretion in terms of law.

(ii) Thus the levy if interest u/s.234A, u/s.234B and u/s.234C was set
aside and the petitioner did not need to pay any interest for the two
assessment years. The petitioner was not entitled to seek refund of the excess
amount if any paid.”

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Nirav Shah

TDS : S. 194A and S. 201 of Income-tax Act, 1961 : A.Y. 2003-04 : Discount allotted to subscribers of chit : Discount is not interest : No liability to deduct tax u/s.194A : Order u/s.201 not valid.

New Page 1

Reported :

TDS : S. 194A and S. 201 of Income-tax Act, 1961 : A.Y.
2003-04 : Discount allotted to subscribers of chit : Discount is not
interest : No liability to deduct tax u/s.194A : Order u/s.201 not valid.

[CIT v. Sahib Chits (Delhi) (P) Ltd., 226 CTR 119
(Del.)]

The assessee is a chit fund company. The assessee had not
deducted tax at source on the amounts paid to its members on the chits
contributed by them. The AO held that there was default on the part of the
assessee company for not deducting tax u/s.194A of the Income-tax Act, 1961.
Therefore, the AO passed order u/s.201 and quantified the default amount at
Rs.8,17,683. CIT(A) and the Tribunal quashed the order.

On appeal by the Revenue, the following two questions were
raised :

“(a) Whether the Tribunal was correct in law in holding
that the assessee had not paid any interest to the subscribers of the chit
and such payment does not fall within the meaning of interest as defined
u/s.2(28A) of the Act ?

(b) Whether the Tribunal was correct in law in holding
that the assessee was not required to deduct the tax at source within the
meaning of S. 194A of the Act and as such the assessee was not in default
u/s.201 of the Act ?”

The Delhi High Court upheld the decision of the Tribunal
and held as under :

“Distribution of bid amount or discount allotted to the
subscriber of the chit is not interest as there is no money borrowed or debt
incurred and therefore there is no question of deducting tax at source
u/s.194A.”

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Nirav Shah

TDS : S. 194I of Income-tax Act, 1961 : A.Ys. 2001-02 and 2002-03 : Premises owned by co-owners : Limit of Rs.1,20,000 is applicable to each co-owner.

New Page 1

Reported :

TDS : S. 194I of Income-tax Act, 1961 : A.Ys. 2001-02 and
2002-03 : Premises owned by co-owners : Limit of Rs.1,20,000 is applicable to
each co-owner.

[CIT v. Manager, SBI; 226 CTR 310 (Raj.)]

In an appeal filed by the Revenue u/s.260A of the
Income-tax Act, 1961 the following question was raised :

“Whether on the facts and in the circumstances of the
case, the learned Tribunal was legally justified in holding with regard to
TDS u/s.194-I of the Income-tax Act, 1961 that when there are a number of
owners of a property, the limit or ceiling will apply to each and every
owner separately, notwithstanding the fact that the amount has been paid by
crediting the aggregate sum in the joint account of the owners ?”

The Rajasthan High Court held as under :

“(i) The property was of late Smt. Tej Roop Kumari, who
created registered trust in her lifetime on 10th October 1990, according to
which, her three sons and one grandson became absolute owners of the
property in definite shares.

(ii) Learned counsel for the appellant has placed
reliance on Smt. Bishaka Sarkar v. UOI; 219 ITR 327 (Cal.), in which
it was held that rent paid to co-owners cannot be split up and co-owners
would come within the expression ‘other cases’, so deduction of tax at the
rate of 20% was justified.

(iii) It appears that the learned Judge of Calcutta High
Court did not take note of law laid down by the Apex Court in CIT v.
Bijoy Kumar Almal; 215 ITR 22 (SC), in which it was held that where
property is owned by two or more persons and their respective shares are
definite and ascertainable, they shall not, in respect of such property, be
assed as an AOP and that the share of each such person in the income from
that property shall be included in his total income, meaning thereby,
liability to deduct on the rental income received by each co-owner was to be
judged.

(iv) Thus, limit of Rs.1,20,000 was applicable to each
co-owner, and thus, no tax was to be deducted at source, and the learned
Tribunal has not committed any error in accepting the appeals of the
assessee.”

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Nirav Shah

Return of income : Doctrine of relation back : S. 140 of Income-tax Act, 1961 : A.Y. 2004-05 : Return signed by company secretary : Defect curable : Subsequent valid return though filed late relates back to original return.

New Page 1

Reported :

Return of income : Doctrine of relation back : S. 140 of
Income-tax Act, 1961 : A.Y. 2004-05 : Return signed by company secretary :
Defect curable : Subsequent valid return though filed late relates back to
original return.

[CIT v. Haryana Sheet Glass Ltd., 318 ITR 173
(Del.)]

For the A.Y. 2004-05, the assessee-company had filed its
return of income on 1-11-2004 declaring a loss of Rs.10,38,98,405, which was
signed by the company secretary. Thereafter a revised return was filed on
5-10-2005 declaring loss of Rs.7,20,50,041, which was signed by the managing
director. The AO ignored the original return on the ground that the return was
not signed and verified in accordance with the provisions of S. 140 of the
Income-tax Act, 1961. He further found that the revised return was filed
belatedly and therefore he did not take the said return into consideration.
The Tribunal held that signing of the return by the secretary was a curable
irregularity. Therefore, when the managing director signed and filed the
return, it should relate back to the date when the original return was filed
under the signature of the company secretary. Since that original/revised
return was within time, it could have been taken into consideration.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) If the irregularity in the original return is
curable, then the doctrine of relation back would apply, but if there is a
fundamental defect in the original return, which cannot be cured, then such
a doctrine cannot be applied.

(ii) It is clear that the secretary has signed the
return, who is otherwise, as per the provisions of the Companies Act,
competent to sign. The provision of S. 140 of the Income-tax Act mandates
that the managing director or some other responsible officers can sign.
Because of this reason, we are of the opinion that in a case like this, the
irregularity was curable and the doctrine of relation back was rightly
applied.”

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Nirav Shah

Return of income : Defective/invalid return : S. 140 of Income-tax Act, 1961 : A.Y. 1994-95 : Return signed by company secretary : Defect curable : Opportunity to rectify defect should be given.

New Page 1

Reported :

Return of income : Defective/invalid return : S. 140 of
Income-tax Act, 1961 : A.Y. 1994-95 : Return signed by company secretary :
Defect curable : Opportunity to rectify defect should be given.

[CIT v. Bhiwani Synthetics Ltd., 318 ITR 177 (Del.)]

For the A.Y. 1994-95, the assessee company had filed its
return of income on 30-11-1994 declaring a loss. The return was signed by the
general manager (finance) and the company secretary of the assessee. The
Assessing Officer came to the conclusion that since the return was not signed
by the managing director or a director as provided in S. 140(c) of the
Income-tax Act, 1961, it was non est. The CIT(A) held that the defect
was a curable defect and an opportunity ought to have been given to the
assessee to rectify it. He, accordingly, directed the Assessing Officer to
give such an opportunity to the assessee. The Tribunal upheld the decision of
the CIT(A).

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) We are of the view that on the facts of this case,
since there is nothing on record to suggest that the assessee has disowned
the return that was signed by the general manager (finance) of the assessee
and on the contrary, a power of attorney was given by the assessee to its
general manager (finance) for signing the return, it would have been
appropriate if an opportunity had been granted to the assessee to have the
return signed by the managing director or its director in accordance with
the directions given by the CIT(A).

(ii) There is nothing to suggest that any prejudice will
be caused to the Revenue if this direction is complied with.”

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Nirav Shah

Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Exemption cannot be denied on the ground that it is not a trust: Filing of Form No. 10 : Revised form can be filed before completing assessment.

New Page 1

Reported :

Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 :
Exemption cannot be denied on the ground that it is not a trust: Filing of
Form No. 10 : Revised form can be filed before completing assessment.

[CIT v. Simla Chandigarh Diocese Society, 318 ITR 96
(P&H)]

The assessee, a charitable society, claimed exemption
u/s.11 r.w. S. 12(1) of the Income-tax Act, 1961. The Assessing Officer
declined the claim on the ground that the assessee was a society and not a
trust. The Assessing Officer also raised objection that revised Form No. 10
was not furnished with the return. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :

“(i) The assessee could not be denied exemption u/s.11 of
the Act on the ground that it was not a trust but a society.

(ii) The Commissioner (Appeals) had observed that the
assessee modified Form No. 10 in the course of assessment proceedings. The
modified Form No. 10 has been rejected by the Assessing Officer on the
ground that there was no provision in the Act for revising Form No. 10. It
was held that there was no specific bar prohibiting the assessee from
modifying the figure of accumulation. Form No. 10 could be furnished before
the assessing authority completes the concerned assessment.”

levitra

Nirav Shah

Depreciation : S. 32 of Income-tax Act, 1961 : A.Ys. 2000-01 and 2001-02 : User of asset : Asset discarded and written off : Depreciation is allowable on WDV after reducing scrap value of asset discarded and written off.

New Page 1

Reported :

Depreciation : S. 32 of Income-tax Act, 1961 : A.Ys.
2000-01 and 2001-02 : User of asset : Asset discarded and written off :
Depreciation is allowable on WDV after reducing scrap value of asset discarded
and written off.

[CIT v. Yamaha Motor India (P) Ltd., 226 CTR 304
(Del.)]

In an appeal filed by the Revenue u/s.260A of the
Income-tax Act, 1961, the following two questions were raised before the High
Court :

“(a) Whether the Income-tax Appellate Tribunal
(hereinafter ‘Tribunal’) was correct in law in directing the AO to recompute
the depreciation after reducing scrap value of the assets, which have been
discarded and written off in the books of account for the year under
consideration from the WDV of the block of assets ?

(b) Whether provisions of sub-clause (iii) to S. 32(1)
r/w. S. 43(6)(c)(B) are applicable to the present case when the assessee had
not complied with the primary conditions for eligibility of depreciation ?”

The Delhi High Court held as under :

“(i) The crux of the matter is : what is the meaning to
be ascribed to the expression ‘used for the purposes of the business’ as
found in S. 32 of the Income-tax Act, 1961. The provisions of S. 32 pertain
to depreciation. The contention of the Revenue is that with respect to any
machinery for which depreciation is claimed u/s.32, the same cannot be
allowed unless such machinery is used in the business and since
discarded machinery is not used in the business, therefore, with respect to
the discarded machinery no depreciation can be allowed.

(ii) As long as the machinery is available for use,
though not actually used, it falls within the expression ‘used for the
purposes of the business’ and the assessee can claim the benefit of
depreciation.

(iii) No doubt, the expression used in S. 32 is ‘used for
the purposes of the business’. However, this expression has to be read
harmoniously with the expression ‘discarded’ as found in clause (iii) of
Ss.(1). Obviously, when a thing is discarded it is not used. Thus ‘use’ and
‘discarding’ are not in the same field and cannot stand together. However,
if a harmonious reading of the expressions ‘used for the purposes of the
business’ and ‘discarded’ is adopted, then it would show that ‘used for the
purposes of the business’ only means that the assessee has used the
machinery for the purposes of the business in earlier years. It is not
disputed that in the facts of the present case, the machinery in question
was in fact used in the previous year and depreciation was allowed on the
block of assets in the previous years. Taking therefore a realistic approach
and adopting a harmonious construction, the expression ‘used for the
purposes of the business’ as found in S. 32 when used with respect to
discarded machinery would mean that the user in the business is not in the
relevant financial year/previous year, but in the earlier financial years.
Any other interpretation would lead to an incongruous situation.

(iv) Therefore, the Tribunal was correct in law in
directing the AO to recompute depreciation after reducing the scrap value of
the assets which have been discarded and written off in the books of account
for the year under consideration from the WDV of the block of assets.”

levitra

Nirav Shah

Educational institution : Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : Society running various educational institutions : Object of society also to serve church and nation : Not a ground for rejection of approval for exemption.

New Page 1

Reported :

Educational institution : Exemption u/s. 10(23C)(vi) of
Income-tax Act, 1961 : Society running various educational institutions :
Object of society also to serve church and nation : Not a ground for rejection
of approval for exemption.

[Ewing Christian College Society v. CCIT, 318 ITR
160 (All.)]

The petitioner-society ran various educational institutions
in the State of UP and it was not for the purpose of making profit. Its
application for approval for exemption was rejected by the Chief Commissioner
on the ground that the purposes for which the society has been established
were religious in nature and consequently the society could not be said to
exist solely for the purpose of education.

On a writ petition filed by the petitioner, the Allahabad
High Court held as under :

“(i) Merely because the object of the petitioner-society
was also to serve the church and the nation, that would not mean that the
educational institution was not existing solely for educational purposes.

(ii) Thus the order passed by the Chief Commissioner
could not be sustained and was set aside. The Chief Commissioner was
directed to pass a fresh order.”

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Nirav Shah

Charitable purpose : Exemption u/s. 10(23C)(iv) of Income-tax Act, 1961 : Petitioner-foundation created for imparting, spreading and promoting knowledge, learning, education, etc. in fields related to profession of accountancy : Clearly falls in category

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Reported :

Charitable purpose : Exemption u/s. 10(23C)(iv) of
Income-tax Act, 1961 : Petitioner-foundation created for imparting, spreading
and promoting knowledge, learning, education, etc. in fields related to
profession of accountancy : Clearly falls in category of institutions which
are devoted to research and are of charitable nature : Petitioner entitled to
exemption u/s.10(23C)(iv).

[ICAI Accounting Research Foundation v. DGIT
(Exemption), 226 CTR 27 (Del.)]

The petitioner-foundation was set up by the Institute of
Chartered Accountants of India (ICAI), the main object of the petitioner being
to make it an academy for imparting, spreading and promoting knowledge,
learning, education and understanding in the various fields relating to
profession of accountancy, like accounting, auditing, fiscal laws and policy,
corporate and economic laws and policies, economics, financial management,
financial services, capital and money markets, management information and
capital systems, management consultancy services and allied disciplines. The
petitioner’s application for exemption u/s.10(23C)(iv) of the Income-tax Act,
1961 was rejected stating that the petitioner-foundation did not qualify for
exemption.

On a writ petition filed by the foundation the Delhi High
Court directed the Director General of I.T. (Exemption) to grant exemption to
the petitioner-foundation and held as under :

“(i) The objective of the petitioner-foundation would
fall within the expression ‘education’, as appearing in the definition
u/s.2(15).

(ii) On the basis of the activities of the foundation,
there is not even an iota of doubt that the petitioner-foundation is
involved in education and, thus, meets the description of ‘charitable
institution’.

(iii) Services provided to various Government bodies were
the research projects which were given to the petitioner-foundation having
regard to its expertise in this field. Therefore, these activities per se
would not bring out the petitioner-foundation out of the ambit of S. 2(15).
It can be said that the activities amounted to ‘advancement of an object of
general public utility’, which also appears in the definition of charitable
purpose in S. 2(15).

(iv) The only aspect, in this backdrop, which needs to be
considered is as to whether charging of amount from the MCD, KMC, etc. for
undertaking these research projects would make the activity commercial.
Merely because some remuneration was taken by the petitioner-foundation for
undertaking these projects would not alter the character of these objects,
which remained research and consultancy work. The important test is the
application of the amount received from those projects. It is nowhere
disputed that the receipts are utilised by the petitioner-foundation for the
advancement of its objectives. It is clear that most of the amount received
qua these projects was spent on the project and surplus, if any, is used for
advancement of the objectives for which the petitioner-foundation is
established.

(v) The amended definition of ’charitable purpose’ would
not alter this position. No doubt, proviso to this definition clarifies that
advancement of any other object of general public utility will not be
treated as charitable purpose if it involves the carrying on of any activity
in the nature of trade, commerce or business. However, what is not
appreciated by the respondent No. 1 is that merely on undertaking those
research projects at the instance of the Government/local bodies, the
essential character of the petitioner-foundation cannot be converted into
the one which carries on trade, commerce or business or activity of
rendering any service in relation to trade, commerce or business.

(vi) The impugned order of the respondent No. 1 is,
accordingly, set aside. Direction/mandamus is given to the respondent No. 1
to accord requisite exemption to the petitioner-foundation u/s.10(23C)(iv).”

levitra

Nirav Shah

Bad debts : Deduction u/s.36(1)(vii) of Income-tax Act, 1961 : A.Y. 2005-06 : Disallowance u/s.14A : Exemption u/s.80HHC allowed : Deduction of bad debts cannot be disallowed u/s.14A.

New Page 1

Reported :

Bad debts : Deduction u/s.36(1)(vii) of Income-tax Act,
1961 : A.Y. 2005-06 : Disallowance u/s.14A : Exemption u/s.80HHC allowed :
Deduction of bad debts cannot be disallowed u/s.14A.

[CIT v. Kings Exports, 318 ITR 100 (P&H)]

The assesse was engaged in manufacture and export of
engineering goods. The assessee’s claim for deduction of bad debts
u/s.36(1)(vii) of the Income-tax Act, 1961 was disallowed by the AO on the
ground that the assessee had claimed deduction u/s.80HHC and the claim for bad
debts would be hit by S. 14A of the Act. The Tribunal allowed the assessee’s
claim.

On appeal by the Revenue the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :

“U/s.80HHC and u/s.14A, the expenditure incurred from
export income could not be held to be for earning income which did not form
part of total income, which concept was dealt with u/s.10 of the Act. S.
80HHC deals with deduction of the element of profit from export from taxable
income. Therefore, the claim of bad debt could not be disallowed.”

levitra

Nirav Shah

Business expenditure : Disallowance u/s. 14A of Income-tax Act, 1961 : In the absence of nexus between exempt income and expenditure in question established by Revenue, the provisions of S. 14A cannot be applied.

New Page 1

Unreported :

Business expenditure : Disallowance u/s. 14A of Income-tax
Act, 1961 : In the absence of nexus between exempt income and expenditure in
question established by Revenue, the provisions of S. 14A cannot be applied.

[CIT v. M/s. Hero Cycles Ltd. (P&H), ITA No. 331 of
2009 dated 4-11-2009]

The assesse is engaged in manufacturing of cycles and parts
of two-wheelers in multiple units. It earned dividend income, which is
exempted u/s. 10(34) and u/s.(35) of the Income-tax Act, 1961. The AO made an
inquiry whether any expenditure was incurred for earning this income and as a
result of the said inquiry, addition of Rs.3,48,04,375 was made by way of
disallowance u/s.14A(3) of the Act. The Tribunal deleted the addition and
observed as under :

“(i) We find that the plea of the assessee that the
entire investments have been made out of the dividend proceeds, sale
proceeds, debenture redemption, etc., is borne out of record. One aspect
which is evident is that the interest income earned by the main unit exceeds
the expenditure by way of interest incurred by it, thus obviating the
application of S. 14A of the Act. Even with regard to the funds of the main
unit, the fund flow position explained shows that only the non-interest
bearing funds have been utilised for making the investment.

(ii) Thus, on facts we do not find any evidence to show
that the assessee has incurred interest expenditure in relation to earning
the tax exempt income in question. Therefore, merely because the assessee
has incurred interest expenditure on funds borrowed in the main unit, it
would not ipso-facto invite the disallowance u/s.14A, unless there is
evidence to show that such interest-bearing funds have been invested in the
investments which have generated the ‘tax exempt dividend income’.

(iii) As noted earlier, there is no nexus established by
the Revenue in this regard and therefore, on a mere presumption, the
provisions of S. 14A cannot be applied. In fact, in the absence of such
nexus, the entire addition made is required to be deleted. We accordingly
hold so.”

On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :

“(i) Learned counsel for the appellant relies upon S.
14A(2) and Rule 8D(1)(b) to submit that even where the assessee claimed that
no expenditure had been incurred, the correctness of such claim could be
gone into by the AO and in the present case, the claim of the assessee that
no expenditure was incurred was found to be not acceptable by the AO and
thus disallowance was justified. We are unable to accept the submission.

(ii) In view of the finding reproduced above, it is clear
that the expenditure on interest was set off against the income from
interest and the investment in shares and funds were out of the dividend
proceeds. In view of this finding of fact, disallowance u/s.14A was not
sustainable.

(iii) Whether, in a given situation, any expenditure was
incurred which was to be disallowed, is a question of fact. The contention
of the Revenue that directly or indirectly some expenditure is always
incurred which must be disallowed u/s.14A and the impact of expenditure so
incurred cannot be allowed to be set off against the business income which
may nullify the mandate of S. 14A, cannot be accepted.

(iv) Disallowance u/s.14A requires finding of incurring
of expenditure. Where it is found that for earning exempt income, no
expenditure has been incurred, disallowance u/s.14A cannot stand. In the
present case finding on this aspect, against the Revenue, is not shown to be
perverse. Consequently, disallowance is not permissible.”

levitra

Nirav Shah

KVSS : A.Y. 1993-94 : On 29-12-1998, the assessee AOP filed KVSS application in respect of appeal pending before Tribunal on basis of tax dues of Rs.24,04,600 : Rejection of application on ground that tax dues have been adjusted on 30-11-1998 against refu

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Unreported :

KVSS : A.Y. 1993-94 : On 29-12-1998, the assessee AOP filed
KVSS application in respect of appeal pending before Tribunal on basis of tax
dues of Rs.24,04,600 : Rejection of application on ground that tax dues have
been adjusted on 30-11-1998 against refund in case of a member of AOP :
Adjustment of tax dues and rejection of KVSS application invalid.

[M/s. Asia Corporation and Ors. v. CIT and Ors. (Bom.),
W.P. Nos. 782 and 783 of 1999, dated 14-9-2009]

Pending an appeal before the Tribunal for the A.Y. 1993-94,
on the basis of the tax dues of Rs.24,04,600, the assessee AOP had filed an
application under KVSS on 29-12-1998. The application was rejected by the
Commissioner on 24-2-1999 on the ground that there are no tax dues as on
30-11-1998, since in respect of one of the members of the AOP, namely,
Petitioner No. 1, refund had been ordered by the Assessing Officer for the A.Y.
1997-98 and that refund had been adjusted on 30-11-1998 against the dues of
the AOP.

The members of the AOP filed two writ petitions, one
challenging the adjustment of refund and the other challenging the rejection
of the KVSS application. The Bombay High Court allowed both the petitions and
held as under :

“(i) The grievance of the petitioner is that the order of
adjustment was passed without complying with the mandatory requirements of
S. 245 of the Income-tax Act. Our attention is invited to the provisions
which mandate that the refund can be adjusted against the dues of the
persons to whom the refund is due after giving intimation in writing to such
persons of the action proposed to be taken under the Section. It is
submitted that no notice as required u/s. 245 was served on the petitioner
proposing to make adjustment. This it is submitted would render adjustment
illegal, and consequently the order making adjustment has to be set aside.
Reliance for that purpose is placed on the judgment of this Court in
Suresh Jain v. A. N. Shaikh, 165 ITR 151 (Bom.) which was confirmed by
the Division Bench in A. N. Shaikh v. S. B. Jain, 165 ITR 86 (Bom.).

(ii) After considering the language of the Section and
the judgment of the Co-ordinate Bench of this Court, we find no reason to
take a different view than the view taken by the Co-ordinate Bench of this
Court, namely, failure to comply with the mandatory requirement of S. 245,
would result in the adjustment made becoming illegal.

(iii) As the application under KVSS was rejected solely
on the ground that there were no dues pending, and once in W.P. No. 783 of
1999 the order of adjustment passed on 30-11-1998 has been set aside,
consequently we will have to set aside the order under KVSS dated 24-2-1999
and consequently this petition will have to be allowed.”

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Nirav Shah

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