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Year: 2010

The art of managing bosses

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25. The art of managing bosses


This communication touches upon many different aspects,
including communicating with your boss, peers, staff and people from other
cultures.

So often when we talk about management we automatically think
of those who report to us. But what about managing upwards ? After all, the boss
can make your life so much sweeter. There are some real skills needed here — and
you have to carefully think through your approach.

  •   Get to know your boss’ goals and challenges. Your boss has goals just like
    you. Find out and remember them. It’s easier to win more resources if they
    can deliver targets for your boss.


  •   Get to know the boss personally. How does he or she like to work ? What
    are his or her interests, likes or dislikes ?


  •   Set goals together. You need to make sure that you’re working on the right
    things. Don’t just update your boss with your achievements. Let him or her
    know where you’ll next be prioritising your attention.



  • Avoid surprises. No one wants to hear bad news. If you’ve got a suspicion
    that some-thing’s not going as planned, then let the boss know — fast !


  •   Talk their language. Every boss has a way of processing information. Some
    like headlines. Others like bottom lines. Find out and learn their language.


  •   Deliver on your commitments. It’s a rare boss who complains about a high
    achiever in their team. Deliver against your objectives and your boss’
    respect for you will rocket.


  •   Go to your boss with solutions — not just problems. Isn’t that what you
    want from your staff ? Show the boss that you’ve thought things through,
    even if you both come up with a different answer.


Always be tactful :

What is tact ? It’s choosing the right thing to say without
offending. ‘Choosing’ is the important word here. Tactless people don’t exercise
that choice. They instantly say what’s on their mind —and wish they hadn’t.
Managers have to filter what they say.

When you find yourself in a difficult conversation follow the
TACT approach.

T = Think — don’t speak. Any first rush of emotion soon
subsides. Get your brain under control and show interest. Do this and you’re 75%
of the way there.

A = Ask questions. There are two reasons for doing this.
First, questioning allows you crucial time to think. Second, you’re showing
respect by encouraging the person to give their view.

C = Clarify your understanding. Use clarification questions
to check that you fully understand the other person’s point of view. “So what
you’re upset about is . . . .”

T = Talk with care. Give yourself time and make sure that
what you say is neutral. Later on you may give your opinion because you’ve
thought it through. But do you need to do so now ?

(Source : The Mint Newspaper, dated 25-10-2010)

 

Internal Audit Planning – A Case Study

Background

An external audit firm is conducting internal audit in an engineering company since the last two years. The audit committee chairman had a one to one meeting with the partner–in-charge for a review of the present internal audit reports and the internal audit process. During the discussions, the chairman asked the internal auditor to present an annual internal audit plan that takes into account the bigger picture rather than smaller issues and really adds value to the business. Based on recent corporate events and the Board’s responsibilities in the matter of Transparency and Control, the Audit Committee Chairperson enquired with the – Chief Audit Executive – CAE, the status of implementation of Standards of Internal Audit of ICAI.

The CAE highlighted that a Risk Based Audit Planning process is being currently followed. However, the process has not been benchmarked against the Standards. The CAE affirmed that the entire activity will be aligned with Indian Standards and a report presented in the next Audit Committee.

Methodology

The internal audit function has a five member team. The internal auditor therefore has to select projects (areas) with high risk to the organisation and direct the limited resources towards such projects. Frequency of high risk areas needs to be high – maybe twice a year whereas in cases of low risk or almost zero risk areas, the frequency may be once in three years and so on.

A benchmark against the standard was carried out by the team to identify further areas for improvement.

Opportunities for Improvement

Overall, the Standard sought to address Audit Planning from 2 dimensions –

1. Overall Annual Audit Plan

2. Audit engagement or each specific audit project

For the Overall Annual Audit Plan, the areas identified were –

1. The existing Audit Charter adequately explained the ‘purpose, authority and responsibility’ of the Internal Audit function. The Audit Charter designed earlier had not been reviewed and revised for the last two years. During the last two years, the auditee had implemented an ERP and adopted a Balanced Scorecard strategy for evaluating performance. Efforts of Cost Reduction have rationalised middle level management.

a. The CAE and the team felt that the focus of audit needed to be revised through use of Audit Tools and the possibility of taking on a leading role in implementing Continuous Auditing.

b. One of the overall objectives that the standard expects the Internal Audit to achieve is to “strengthen overall governance, particularly strategic risk management”. The Audit Charter had not mentioned any specific responsibility for this objective. The audit team appreciated the following fact however with this objective that:

i. When strategic risks are taken, there is no audit involvement.

ii. The operating management does not perceive any specific role of the internal auditors in strategic risk management.

iii. The Internal Auditor is expected not to be a part of the decision. In this way, he/she retains their independence. If he is a part of this process, it may be a barrier to his independence at a later date, when the decision might not achieve the desired objectives. The Internal Auditor’s role as an assurance provider may get compromised if the internal auditor is involved in decision making.

One of the internal audit team members pointed out however that if he gets additional information at a later date, should he not then advise review of the decision rather than wait for issuance of the report?

This change was therefore sought to be introduced and highlighted specifically for discussion. The CAE took a stand that while the Internal Auditor could be a part of the Strategic Risk Management process, it should be seen as a ‘facilitator role’ and not as member of the decision making team.

2. While the Audit Plan was provided to the Audit Committee for approval, there was hardly any debate on the same and it was approved. The CAE thought that in the current practice, they were not really benefiting from the experience and knowledge of the Audit Committee Members. He therefore thought it fit to arrange for meetings with each of the Audit Committee Members to gain individual input prior to the next Audit Committee Meeting, where his first report would be presented. These meetings helped the CAE improve the audit plan.

3. The Risk Based Audit Planning process as currently implemented ( Refer article of BCAJ IAS article in March/April, 2003) was generally found to be robust. The process included the following –

    a. Identify the Audit Universe (comprehensive list of Audit Areas),

    b.     Established weights and ranks for criteria which will form the basis of ranking the audit areas and cut off score

      c.  Applying criteria to the various audit areas

       d. Arrive at scores for each area

       e.  Applying the Cut off criteria and shortlisting the areas of audit for the year. This forms a part of the Annual Audit Plan.

        4. The revised Annual Audit Plan was also reviewed alongwith the first report. In order to ensure continuing relevance of the audit plan, a process of a half yearly review of the audit plan with the Audit Committee was suggested and approved.

    For the Audit Engagement or Each Specific Audit Project –

    A brainstorming on the issues and difficulties faced by the Audit Team Members in Audit Engagements was undertaken. A few of the difficulties that came up from all members was –

  •             the general appreciation of raising the right business issues in the audit reports,

  •             the adequacy of time for performance of the audit – at times, key areas of audit were left out given the demands of completing the report.

  •             the team members voiced their concern that the response that the CAE gets from officials was not the same as that received by them. They felt that the auditees employees did not give the required seriousness, which resulted in avoidable delays.

    The team thought of the options that the Standard provided towards overcoming these difficulties. The following were the guidelines that they felt could overcome the difficulties –

        1. Preliminary Review – A visit by the CAE along with the audit team members of the audit area was planned to be conducted 15 days prior to the actual start date. This audit visit was to understand the business process area and operational realities within which the team performs, the expectations of the auditee and the auditor are discussed and firmed up, the data and time requirements from the auditees are discussed and the JOINT objectives of the audit process are laid down. The auditee’s person-in-charge is made aware of the audit objectives, methodology and the ways that risk and control needs to be looked at within the Risk Management Framework implemented. Apprehensions of the Auditee team are laid to rest in these interactions. This meeting is also sought to be used as a means to improve auditee’s person-in-charge responses.

        2. Audit Engagement Planning – The Prelimi-nary Review meeting was also to be used to study past reports . The larger participa-tion of all team members in identification of potential risk and control focus in each area was scheduled for at least once a fortnight in such a way that no area is taken up without the inputs received from all team members.

    These measures would also ensure that the issues that are relevant to the organisation and the auditee team are addressed. This will also ensure that there is an ongoing value addition out of the audit process.

        3. The CAE decided to improve the following areas –

        a. Resource allocation in line with the scope

    The knowledge and skills required for each audit was sought to be formally identified and matched with the ability of the team members. In case there was a mismatch, the CAE considered the option of training a team member in the area in advance and also involving an outside professional for the specific aspect of audit as part of the on the job training for the team. The option of including a guest auditor from within the organisation also was considered.

        b. Detailed Audit Programme with specific priority for audit checks

    Normally the Audit Programmes were packed with all possible tests to be con-ducted during an audit for all identified risks and controls. The team decided to identify which controls significantly mitigate the risk (Key Control). Single control mitigating multiple risks were also sought to be specifically identified in a list of controls. The audit priority was focused on key controls. This focus improved audit effectiveness.

    Conclusions

    These measures were implemented in the quarter and some significant improvements were observed. The gaps identified vis a vis the standard and the measures already taken and thus impact were shared with the Audit Committee. The initia-tives taken were highly appreciated by the Audit Committee members.
     

    All the action of CAE were based on Internal audit standard issued by the Institute of Chartered Accountant of India.

    EXHIBIT 1 – Standards of Internal Audit – 1 of The Institute of Chartered Accountants of India The internal auditor should, in consultation with those charged with governance, including the audit commit-tee, develop and document a plan for each internal audit engagement to help him conduct the engagement in an efficient and timely manner.

    The internal audit plan should be comprehensive enough to ensure that it helps in achieving of the above overall objectives of an internal audit. The internal audit plan should, generally, also be consistent with the goals and objectives of the internal audit function as listed out in the internal audit charter as well as the goals and objectives of the organisation. An internal audit charter is an important document defining the position of the internal audit vis a vis the organisation. The internal audit charter also outlines the scope of internal audit as well as the duties, responsibilities and powers of the internal auditor(s). In case the entire internal audit or the particular internal audit engagement has been out-sourced, the internal auditor should also ensure that the plan is consistent with the terms of engagement.

    A plan once prepared should be continuously reviewed by the internal auditor to identify any modifications required to bring the same in line with the changes, if any, in the audit environment. However, any major modification to the internal audit plan should be done in consultation with those charged with governance. Further, the internal auditor should also document the changes to the internal audit plan.

    Internal audit plan should cover areas such as:

  •             Obtaining the knowledge of the legal and regulatory framework within which the entity operates.

  •             Obtaining the knowledge of the entity’s accounting and internal control systems and policies.
  •             Determining the effectiveness of the internal control procedures adopted by the entity.

  •             Determining the nature, timing and extent of procedures to be performed.
  •             Identifying the activities warranting special focus based on the materiality and criticality of such activities, and their overall effect on operations of the entity.
  •             Identifying and allocating staff to the different activities to be undertaken.

  •         Setting the time budget for each of the activities.

  •             Identifying the reporting responsibilities.

    The internal audit plan should also identify the benchmarks against which the actual results of the activities, the actual time spent, the cost incurred would be measured.

    The internal auditor should obtain a level of knowledge of the entity sufficient to enable him to identify events, transactions, policies and practices that may have a significant effect on the financial information.

    The audit universe and the related audit plan should also reflect changes in the management’s course of action, corporate objectives, etc. The internal auditor should periodically, say half yearly, review the audit universe to identify any changes therein and make necessary amendments, to make the audit plan responsive to those changes.

    The establishment of such objectives should be based on the auditor’s knowledge of the client’s business, especially a preliminary understanding and review of the risks and controls associated with the activities forming the subject matter of the internal audit engagement.

    The internal auditor should also document the results of his preliminary review so conducted.

    For this purpose, the internal auditor should prepare an audit work schedule, detailing aspects such as:

  •             activities/ procedures to be performed;
  •             engagement team responsible for performing these activities/ procedures and
  •         time allocated to each of these activities/ procedures.

        18. While preparing the work schedule, the internal auditor should have regard to aspects such as:

  •             any significant changes to the entity’s missions and objectives, business processes, and management’s strategies to counter these changes, for example, changes in the entity’s controls structure or changes in the risk assessment and management structures
  •             any changes or proposed changes to the governance structure of the entity. The engagement work schedule should, however, be flexible enough to accommodate any unanticipated changes as well as professional judgment of the engagement team in the components of the audit universe as discussed above. The work schedule should also reflect the internal auditor’s assessment of risks associated with various areas covered by the particular internal audit engagement and the priority attached thereto.

        19. The internal auditor should also prepare a formal internal audit programme listing the procedures essential for meeting the objective of the internal audit plan. Though the form and content of the audit programme and the extent of its details would vary with the circumstances of each case, yet the internal audit programme should be so designed as to achieve the objectives of the engagement and also provide assurance that the internal audit is carried out in accordance with the Standards on Internal Audit.

China is now world’s 2nd largest economy

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79 China is now
world’s 2nd largest economy

China has overtaken Japan to become the world’s
second largest economy, the fruit of three decades of rapid growth that has
lifted hundreds of millions of people out of poverty. Depending on how fast its
exchange rate rises, China is on course to overtake the United States and vault
into the No. 1 spot sometime around 2025, according to projections by the World
Bank, Goldman and others.

(Source : The Economic Times, dated 31-7-2010)

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S. 195 would not apply to payments made to a resident holding power of attorney from non-residents.

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Tribunal News

Geeta Jani, Dhishat B. Mehta


Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions

3. Rakesh Chauhan v. DDIT

(2010) 128 TTJ (Chd.) 116

S. 195, Income-tax Act

A.Y. : 2005-06. Dated : 27-11-2009

S. 195 would not apply to payments made to a
resident holding power of attorney from non-residents.

Facts :

Five individuals based in the UK owned land in
India as co-owners. The non-resident co-owners had issued a power of attorney in
respect of the land in favour of one PS who was a resident in terms of the
Income-tax Act. PS was vested with the rights to sell the land as well as
receive the payment. The appellant purchased the land and paid the consideration
to PS.

In his order, the AO noted that the appellant had
not furnished any explanation for non-deduction of tax from payment made to PS,
who acted as representative of non-residents. The AO also noted that the
appellant had not applied u/s.195(2) of the Income-tax Act and hence, relying on
the Supreme Court’s decision in Transmission Corporation of AP Ltd. v. CIT,
(1999) 239 ITR 587 (SC), he concluded that the appellant had made payment to
non-resident without deducting tax, which he was required to deduct u/s.195 of
the Income-tax Act. As the appellant had not so deducted the tax, he was an
assessee in default u/s.201 and u/s.201(1A) of the Income-tax Act. The AO, thus,
raised demand of tax and interest on the appellant. In appeal, the CIT(A)
concluded that as the sale deeds were executed by PS on behalf of non-residents,
and as PS was acting on behalf of non-residents, he received the money on their
behalf. Hence, the
payment was to be considered as payment to non-residents.

The Tribunal observed that though the payment was
made for purchase of land which belonged to non-residents, rights therein were
assigned unequivocally to PS. PS was not merely acting as an agent of the
non-residents to receive money, but as a person who had the right to alienate
the land by the virtue of rights vested in him by the power of attorneys signed
by the co-owners. The payment was not made to PS as a representative nominated
by non-residents. The Tribunal noted the decision of the Bombay High Court in
Narsee Nagsee & Co. v. CIT, (1959) 35 ITR 134 (Bom.) to the effect that if the
non-resident nominates a particular agent to whom
payment is to be made and pursuant to that direction, a taxpayer makes payment
to that nominee-agent, S. 195 would apply. However, the facts in case of the
appellant were materially different as the rights in the land were assigned to
PS and thus, PS was not merely acting as agent of non-residents to receive money
by virtue of rights vested in him by co-owners. The Tribunal further observed
that in Tecumesh Products (I) Ltd. v. DCIT, (2007) 13 SOT 489 (Hyd.), it was
held that when a payment is made to resident even on behalf of non-residents, S.
195 does not apply.

Held :

The Tribunal held that S. 195 would not apply when
the appellant made the payment to the power of attorney holder, but it would
apply when payment is made to non-residents. Hence, it will come into play only
when PS makes the payment to the actual owners of the land.

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If India-specific accounts are furnished to the tax authorities, normative attribution of profits cannot be made.

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Tribunal News




Part C : Tribunal & AAR International Tax Decisions

4. BBC Worldwide Ltd. v. DDIT, New
Delhi

(2010) TIOL 59 ITAT (Del.)

S. 92, Circular No. 742, Article 5 of India UK DTAA

A.Y. : 2000-01. Dated : 15-1-2010

If the commission paid to dependant agenfor
rendering agency services in India is on an arm’s-length basis, no further
attribution of profits is required in the hands of the assessee.

If India-specific accounts are furnished to the tax
authorities, normative attribution of profits cannot be made.



Facts :




The assessee, a British company, was operating
as an international consumer media company in the areas of television,
publishing, programme licensing, etc. The assessee had appointed BBC
Worldwide (India) Pvt. Ltd. (ICO), its indirect subsidiary, as its
authorised agent in India under the Airtime Sales Agreement (ASA) to market
and procure orders for the sale of airtime on its news channel.

ICO was paid marketing commission at 15% of the
advertisement revenue received by the assessee from Indian customers.

The assessee claimed that it did not attract
tax liability in India in the absence of permanent establishment (PE) in
India and in any case there was no tax attribution possible as its agent was
remunerated at fair price.

The Assessing Officer rejected the contention
of the assessee and estimated 20% of the advertisement revenue as income
attributable to Dependant Agent PE of the taxpayer in India.

The CIT(A) upheld the order of the Assessing
Officer, but reduced the estimated attributable profits to 10%, based on the
CBDT Circular 742, dated 2nd May 19961.

Before the ITAT, the assessee contended
that :

(a) It did not have a business connection or PE
in India.

(b) In any case ICO was remunerated on fair
transfer price. In support of this, reliance was placed on own transfer
pricing order of the ICO for the subsequent year. Reliance was also placed
by the assessee on the decisions in the case of Set Satellite Singapore Pte
Limited (2008 TIOL 414 HC Mum.) and Galileo International Inc, (2007 TIOL
447 ITAT DEL) to support that payment of commission exhausted charge of
taxation in respect of dependant agent PE.

(c) The assessee also placed reliance on the
CBDT Circular No. 23 of 1969, which states that if the commission paid fully
represents the value of profit attributable to the services, it would prima
facie extinguish the assessment of the foreign principal.

(d) The assessee also contended that since
audited accounts were filed indicating the allocation of revenue and
expenses of the Indian activity, the CBDT’s Circular No. 742, which was
relied on by the Department, was not applicable.



ITAT held :






(a) The ITAT proceeded on the basis that the
issue of PE or absence of business connection was not challenged before it.
Having admitted that, the ITAT confirmed that upon payment of arm’s-length
remuneration, the agent would extinguish the charge arising on account of
presence of dependant agent. For this purpose it relied on the following :

Set Satellite Singapore Pte Limited (2008
TIOL 414 HC Mum.);

Galileo International Inc, (2007 TIOL 447 ITAT
DEL); and

Circular No. 23 of 1969




(b) The CBDT Circular permitting normative taxation @ 10% of
receipts net of commission is not applicable to the facts of the case as the
applicant made available India-specific accounts to the tax officer which
revealed that the taxpayer had incurred loss in the Indian segment.

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On facts, where technical knowledge, etc. was ‘made available’, fees paid held taxable in terms of Article 13(4)(c) of India-UK DTAA.

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Tribunal News

Geeta Jani, Dhishat B. Mehta

Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions


 

1. TVS Motor Co. Ltd. v. ITO

(2010) 35 SOT 230 (Chennai)

Articles 7, 13, India-UK DTAA

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

Dated : 18-9-2009

On facts, where technical knowledge, etc. was ‘made
available’, fees paid held taxable in terms of Article 13(4)(c) of India-UK DTAA.

Facts :

The appellant is an Indian company manufacturing
motorcycles. The appellant engaged a UK company (UK Co) for two projects.

Under first project, UK Co was to :



à
fully document and make available future design solutions to the appellant;

à encourage
active participation of engineers of the appellant and share relevant
information with them; and

à provide
specific training to engineers of the appellant in test techniques and
procedures.


Under the second project, UK Co was to carry out
appraisal of motorcycles manufactured by the appellant. UK Co had extensive
experience of product development, including use of experimental and analytical
techniques, to improve the dynamic behavior (ride, handling, vibration, etc.) of
vehicle system.

The appellant filed returns of income for UK Co as
a representative assessee and claimed that the fees for technical services
received by UK Co were exempt particularly in terms of provisions of India- UK
treaty. The AO rejected the claim and concluded that the income was taxable in
India. On appeal, the CIT(A) confirmed the AO’s order.

Before the Tribunal, the appellant contended that :



à UK Co did not
provide any technical know-how, plan or design;

à UK Co was in
business of testing vehicles and it did not have PE in India;

à the appellant
had sent the prototype machines to UK Co in UK;

à UK Co merely
carried out the tests and no technical knowledge, experience, skill,
know-how or processes were ‘made available’ (in terms of Article 13(4)(c) of
India-UK DTAA) by UK Co to the appellant;

à no ‘development
and transfer of a technical plan or design’ had occurred;

à the payments
were towards business income covered by Article 7 and not royalties or fees
for included services in terms of Article 13; and

à
in terms of Article 7, business profits cannot be taxed in India, if UK Co
does not have PE in India as the entire services were rendered only in UK.


The tax authorities contended that from perusal of
the contract between the appellant and UK Co, particularly ‘Objectives’ and
‘Project Scope and Technical Content’, UK Co had ‘made available’ technical
knowledge, experience, skill, know-how or processes to the appellant and hence,
the payments were covered by Article 13(4)(c) of India-UK DTAA.

As regards the first project, the Tribunal referred
to ‘Objectives’ and ‘Project Scope and Technical Content’ and observed that UK
Co was to provide training in test techniques and procedures to the appellant’s
staff. UK Co was also to undertake data collection, measurement of dynamic
properties of machineries and to fully document and make available the model to
enable the appellant to investigate future design solutions.

As regards the second project, the Tribunal
observed that UK Co was merely to provide an independent pre-launch evaluation
of the motorcycle.

Held :

On facts, the Tribunal held that in respect of the
first project where UK Co ‘made available’ technical knowledge, experience,
skill, know-how and processes, the payments were fees for technical services
within the meaning of Article 13(4)(c) and were taxable accordingly. As regards
the second project where UK Co merely provided pre-launch independent evaluation
of the motorcycle, no technical knowledge, experience, skill, know-how or
processes was ‘made available’ and hence, it was not taxable.


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Payments made to American company for supply of personnel are not ‘fees for included services’ under Article 12(4)(b) of India-USA DTAA.

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New Page 1


Tribunal News

Geeta Jani, Dhishat B. Mehta

Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions


2. ACIT v. IIC Systems (P) Ltd.

(2010) 127 TTJ 435 (Hyderabad)

S. 9(1)(vii), S. 90, S. 195 & S. 201(1)

Income-tax Act; Article 12(4),

India-USA DTAA

A.Ys. : 2005-06 and 2006-07. Dated : 9-10-2009

Payments made to American company for supply of
personnel are not ‘fees for included services’ under Article 12(4)(b) of
India-USA DTAA.

Facts :

The appellant is an Indian company. It is
subsidiary of an American company. The appellant entered into a contract with
another Indian company (which was an affiliate of IBM) in Bangalore for
providing software personnel by the appellant for global (including the USA)
projects of IBM. The appellant, in turn, entered into contract with another US
company by name ACSC. In terms of the contract between the appellant and ACSC,
ACSC was to supply software personnel in the USA for projects of IBM (which were
awarded to the appellant) in the USA. Thus, whenever IBM Bangalore required
personnel for a project in the USA, it instructed the appellant. The appellant,
in turn, would instruct ACSC and procure the personnel from ACSC and would
deploy them for IBM projects in the USA. ACSC raised invoice on the appellant on
monthly basis and the appellant, in turn, raised its invoice on IBM. The
appellant remitted the payments to ACSC in US $, but had not deducted tax at
source on the same.

The AO was of the view that (i) the payments made
by the appellant to ACSC were for supply of software professionals for executing
on site work in the USA in connection with the appellant’s contract with IBM
Bangalore; (ii) they were ‘fees for technical services’ and chargeable in terms
of S. 9(1)(vii)(b) of the Income-tax Act; and (iii) as the appellant had not
deducted the tax on such payments, the appellant should be treated as an
‘assessee in default’. While admitting that the recipient (namely, ACSC) is
entitled to be taxed either under the Income-tax Act or the India-USA DTAA,
whichever is beneficial, the AO did not accept the appellant’s contention that
the payment made by it was not covered under Article 12(4)(a) or (b) of the
India-USA DTAA. Finally, the AO concluded that the payments made by the
appellant to ACSC were covered u/s.9(1)(vii)(b) of the Income-tax Act as well as
under Article 12(4)(b) of the India-USA DTAA and accordingly, the appellant was
required to deduct u/s.195 of the Income-tax Act. As the appellant had not so
deducted the tax, he was an assessee in default u/s.201 and u/s.201(1A) of the
Income-tax Act. The AO, thus, raised demand of tax on the appellant.

In appeal, the CIT(A) annulled the order of the AO
and deleted the demand.

The Tribunal observed that the questions were:
firstly, whether the payments were towards ‘fees for technical services’ or
merely for supply of personnel; secondly, whether the payments could be
considered ‘fees for included services’; and thirdly, whether the payments would
be ‘business profits’ in the hands of ACSC. Also, under the India-USA DTAA,
non-technical consultancy services cannot be treated as ‘fees for included
services’.

The Tribunal noted that what was ordered was
certain amount of manpower at a specified unit price per hour and no detail as
to the work to be done was stipulated by the appellant, which showed that the
payments were made only for supply of manpower. It observed that the India-USA
DTAA also clarified that provision of technical input by the person providing
the services does not per se mean that technical knowledge or skill is ‘made
available’. Similarly, use of the product embodying the technology also does not
per se mean that the technology is ‘made available’. Even if there is a transfer
of developed work, software, etc. it is not ACSC, but the appellant who
transfers the same. Also, neither the appellant nor ACSC appear to be engaged in
computer programming and the developed work never belonged to the appellant or
ACSC.

Held :

Since no technology, skill, experience, technical
plan, design, etc. was made available either by the appellant or by ACSC,
provisions of Article 12(4)(b) could not be invoked.

Even if payments were to constitute ‘fees for
technical services’ u/s.9(1)(vii), in view of S. 90(2) the appellant has option
to be governed by the provisions of the DTAA.


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S. 48 — When interest-bearing borrowed funds are utilised for making an application for allotment of shares and the number of shares allotted is less than the number of shares applied for, the entire interest (including interest on funds borrowed for shar

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New Page 1Part 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.)



10 Smt. Neera Jain v. ACIT
ITAT ‘B’ Bench, Mumbai
Before R. S. Syal (AM) and R. S. Padvekar (JM)
ITA No. 1861/Mum./2009

A.Y. : 2005-06. Decided on : 22-2-2010

Counsel for assessee/revenue : Dharmesh Shah/S. S. Rana and
Peeyush Jain

S. 48 — When interest-bearing borrowed funds are utilised for
making an application for allotment of shares and the number of shares allotted
is less than the number of shares applied for, the entire interest (including
interest on funds borrowed for shares applied for but not allotted) is to be
treated as cost of acquisition of shares allotted.

Per R. S. Padvekar :

Facts :

The assessee applied for 1,26,000 shares of Punjab National
Bank. For this purpose she borrowed Rs.4 crores @ 15% p.a. for 15 days and paid
interest of Rs.2,63,015. She was allotted 4,635 shares. The entire amount of
interest of Rs.2,63,015 was capitalised as cost of shares allotted. Similarly,
the assessee applied for 8,76,000 shares of NTPC Ltd. For this purpose she
borrowed Rs.4.88 crores @ 17% p.a. for 17 days and paid interest of Rs.3,87,317.
She was allotted 73,403 shares. The entire amount of interest of Rs.3,87,317 was
capitalised as cost of shares allotted.

The assessee sold the shares allotted. While computing
capital gains on sale of shares allotted the entire amount of interest
capitalised was regarded as cost of acquisition and claimed as deduction.

The Assessing Officer (AO) disallowed the entire interest of
Rs.6,50,330 (Rs.2,63,015 + Rs.3,87,317).

The CIT(A) allowed the claim of deduction for interest to the
extent of borrowed amount utilised for the purpose of payments of shares
allotted by Punjab National Bank and NTPC. The assessee preferred an appeal to
the Tribunal.

Held :

The Tribunal noted that there was no dispute that the entire
loan was borrowed for the purpose of acquiring the shares of Punjab National
Bank and NTPC and also that immediately after allotment of shares, money
refunded by both the companies was refunded to the financiers. The Tribunal held
that the fact that applied shares were not allotted in full will not deprive the
assessee from claiming the entire interest paid as part of the cost of
acquisition of the shares allotted, as money borrowed has direct nexus with
acquisition of shares. The Tribunal directed the AO to treat the interest paid
by the assessee to both the financiers as part of cost of acquisition of shares
and allow the same as a deduction.

This appeal of the assessee was allowed.


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Provisions of S. 115JB (MAT) are not applicable to foreign companies that do not have physical presence in India, in the form of an office, branch or a permanent establishment (PE).

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New Page 1Part C : Tribunal & AAR International Tax Decisions

22 The Timken Company &

Praxair Pacific Limited

2010 TII 25 & 26 ARA-Intl.

S. 115JB of the Act, Article 5 of India-USA DTAA and

Article 13 of India-Mauritius Treaty

Dated : 23-7-2010

 

Provisions of S. 115JB (MAT) are not applicable to foreign
companies that do not have physical presence in India, in the form of an office,
branch or a permanent establishment (PE).

Facts :

  • As part of its global
    restructuring exercise, Timken, a US company (USCO) proposed to transfer
    shares of in an Indian listed company. The proposed transfer was to be through
    stock exchange, and hence, was expected to qualify for exemption from capital
    gains tax in terms of S. 10(38) of the Act.

  • The issue raised
    before AAR was whether in absence of any presence in India, USCO was liable to
    pay tax under MAT provisions on capital gains arising from transfer of shares.



Ruling of AAR :

On the following grounds, AAR held that MAT provisions did
not apply to foreign companies that had no business presence in India :

  • A foreign company
    that has not established a place of business in India is not required to
    prepare its financial statements in accordance with S. 591 r.w. S. 594 of the
    Companies Act.

  • The context of the
    MAT regime, the Finance Minister’s speech and the administrative circulars
    indicate that the MAT is not designed to be applicable to a foreign company
    which does not have presence in India.

  • The earlier AAR
    ruling holding that MAT is applicable to foreign companies was in the context
    of an entity that was doing business in India and had a PE in India. Such
    foreign company had obligation to comply with the provisions of the Companies
    Act and maintain books of accounts in India and therefore, was liable to MAT.



Note : This ratio was also applied when a foreign transferor
company earned capital gains, which was exempt from tax in terms of the
India-Mauritius Treaty. (Praxair Pacific Limited)

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Partnership firms, though assessed as fiscally transparent entities1 in the country of residence, are eligible to claim treaty benefits under the India-UK DTAA.

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Part C : Tribunal & AAR International Tax Decisions

21 Linklaters LLP v. ITO

2010 TII 80 ITAT Mum.-Intl.

Article 5 & 7, India-UK DTAA

 

  • Partnership firms,
    though assessed as fiscally transparent entities1 in the country of residence,
    are eligible to claim treaty benefits under the India-UK DTAA.

  • A Service PE is a
    deemed PE and, therefore, does not need to satisfy requirement of Basic PE
    rule. The presence of personnel in excess of the specified time-threshold,
    triggers service PE in India.

  • By providing for
    coverage ‘profits indirectly attributable to permanent establishment’ Article
    7 of India-UK DTAA incorporates Force of Attraction (FOA) rule. Profits
    relating to services rendered outside India in respect of Indian projects are
    also taxable in India.



Facts :

  • The taxpayer, was a
    UK-based limited liability partnership, engaged in law practice. It did not
    have a branch or any other similar form of presence in India, but rendered
    legal services to certain clients whose operations extended to India. These
    services were rendered partly from the UK and at times, by partners and staff
    visiting India. During the financial year under consideration, the taxpayer’s
    partners/staff were present in India for more than 90 days.

  • The taxpayer
    disclosed ‘nil’ taxable income in Indian tax return by claiming treaty benefit
    and by contending that it has no PE presence (including service PE) in India.

  • Without prejudice,
    the taxpayer also claimed that as per DTAA, profits of PE were to be computed
    having regard to the market conditions in India. Arm’s-length income of PE is
    based on fiction of independence and is required to be calculated having
    regard to the rates that would have been charged by Indian
    lawyers/professionals for similar services.

  • The Tax Department
    rejected the taxpayer’s arguments and concluded that the taxpayer had a
    service PE in India. Entire income in relation to Indian projects (including
    services rendered from the UK office) was taxed on the ground that no details
    about overseas work was furnished.

  • On appeal, the CIT(A)
    agreed with the AO on the applicability of service PE Rule, but restricted
    taxation only to the extent of services rendered in India.



Held :

Treaty eligibility to the overseas firm assessed as flow
through entity in home country :

The ITAT raised the issue about eligibility of the UK firm to
claim treaty benefit. The issue was raised on account of ‘reverse hybrid
situation’ and ‘asymmetrical taxation’ scenario arising from the UK firm being
taxed in India at an entity level, whereas in the UK, the assessment is as a
pass through/transparent entity in the name of the members of the firm. The ITAT
rejected primary contention of the taxpayer challenging right of the tribunal to
consider the issue for the first time. The ITAT was convinced that the legal
issue could be examined by it after providing reasonable opportunity of hearing
to the parties if the tribunal finding did not enlarge the quantum of income as
assessed by the lower authorities.

Having proceeded to answer the issue, the ITAT held :

  • The UK legal firm is
    a person under the treaty definition of the term.

  • The difference in
    taxation system applicable to the partnership firm in the source jurisdiction
    [(India) and residence country (UK)] results in economic double taxation
    though not juridical double taxation. The philosophy of DTAA which supports
    merits of avoiding juridical double taxation should equally be applicable to a
    situation of economic double taxation.

  • The decision of
    Canadian Court in the case of TD securities (USA) LLC v. Her Majesty the
    Queen, (2010 TCC 186) supports that the treaty benefit can be given even in a
    situation involving asymmetrical taxation. In this case, single-member LLC of
    the USA was given the benefit of USA-Canada treaty despite the fact that in
    Canada, assessment was in the names of LLC whereas in the USA, due to the
    option exercised, the assessment was in the name of the member of the LLC. The
    decision also supports that the treaties need to be interpreted on a
    contextual basis rather than based on strict principles of interpretation as
    applicable to tax laws. The treaty interpretation is not subjected to literal
    interpretation in isolation with the objects and the purpose for which the
    treaty provisions are made.

  • The treaty benefit is
    available to a person who is a treaty resident of the other country. In terms
    of the treaty, an entity is resident of the UK if it attracts tax liability in
    the UK on account of criteria such as domicile, residence, place of
    management. Though the modalities or mechanism of taxation may vary, facts of
    taxation need to be decided in an objective and uniform manner.

  •     In a situation where the entire income of a partnership firm is taxed in its own hands or in the hands of a partner, the definition of residence should be regarded as fulfilled. The Canadian decision in TD Security’s case supports that the term ‘liable to taxation’ needs to be interpreted in a pragmatic manner so as to extend the treaty benefits to fiscally transparent entities. The test of fiscal domicile relevant for treaty residence purpose is fulfilled so long as the country of residence has right to tax income of the firm, irrespective of whether such right is actually exercised by the resident state or not.


  •     As a result, the taxability of entire income in the country of residence is more relevant rather than the mode of taxability i.e., whether the tax is levied in the hands of the firm or in the hands of the partners. The treaty benefit therefore cannot be denied to the firm so long as entire income of the firm is taxed in the residence country, not in its own right but in the hands of the partners.


  •     Incongruent result arising on account of asymmetrical result needs to be avoided and the benefit of the treaties is to be given so long as income of the enterprise is subjected to taxation in the other jurisdiction either directly or indirectly.


  •     The OECD report dealing with applicability of DTAA to partnership has indicated that in case of asymmetrical taxation, benefit should be available to the partners and not to the partnership firm. The ITAT consciously took the decision of adopting a view different from that by the OECD report which suggested grant of treaty benefit to the members of the firm. Reference was made by the ITAT to the reservation of India on the OECD commentary to conclude that the Government had rejected the stand of the OECD.


Other issues :

  •     The firm had a fictional service PE in view of presence of its partners/personnel in excess of the specified threshold.


  •     Actual revenues earned by taxpayer needs to be considered in respect of third-party dealings. It is not correct to apply hypothetical rates of earnings based on what could be the earnings of other Indian legal firms.


  •     The UK treaty provides for taxation of profits in the state to the extent they are directly or ‘indirectly attributable’ to that PE. The inclusion of profits indirectly attributable to the PE incorporates a force of attraction principle in the UK treaty.


  •     This permits taxability of overseas income in respect of services rendered for an Indian project if it is similar or relatable to the services rendered by the PE.


Income from hiring of equipments under global usage Bareboat Charter Agreements (BCA) arises at the place where the equipment is delivered. Subsequent use by lessee as per his discretion is not relevant for determination of place of accrual.

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New Page 1Part C : Tribunal & AAR International Tax Decisions

20 Seabird Exploration FZ LLC

AAR No. 829 of 2009

S. 9(1)(vi) & S. 44BB, Income-tax Act

Dated : 25-6-2010

 

Income from hiring of equipments under global usage Bareboat
Charter Agreements (BCA) arises at the place where the equipment is delivered.
Subsequent use by lessee as per his discretion is not relevant for determination
of place of accrual.

Facts :

The taxpayer, UAE Company (UAECO) provides geophysical
services to the oil and gas industry in India. For this purpose, the taxpayer
entered into agreements for hiring the vessels (equipment) pursuant to BCA on
global-usage basis. Under the agreements, the lessor (owner) provided the
vessels to the taxpayer on hire without providing any crew or other services.
The terms of the agreement had the following features :

  • Agreements for hiring
    of vessels were entered into outside India;

  • In terms of the
    agreement, hire charges were payable outside India;

  • Delivery and
    redelivery of vessels was to take place outside India;

  • The taxpayer was
    obliged to pay period-linked hire charges irrespective of usage of vessel
    i.e., even during idle period fixed hire charges were payable;

  • Vessels were under
    complete control and dominion of the hirer;

  • It was the discretion
    of the hirers to use equipment in or outside India;

  • The owner had limited
    responsibility of maintenance of equipments and consequential right of
    inspecting the vessels during the term of the agreement.


The charges paid pursuant to the agreement were not covered
by royalty definition u/s.9(1)(vi) of the Act in view of provisions of S. 44BB
of the Act. The taxpayer contended that the hire charges were not taxable in
India as it represented income earned by non-resident owners outside India.

The Tax Department sought to assess the amount on gross basis
u/s.44BB of the Act by contending that the income accrued/arose in India due to
use of vessels in India.

Held :

The AAR accepted contentions of the taxpayer and held :

  • The income can be
    taxed in the hands of the non-resident owner only if income accrues or arises
    in India or is deemed to be accruing or arising in India, given the fact that
    the hire charges were payable outside India.

  • The income can be
    deemed to accrue or arise in India if it was income earned through or from any
    asset or source of income in India. The source of income for owner of the
    equipment lies in delivering and transferring control of the vessel to the
    hirer outside India and not its subsequent utilisation which may or may not be
    in India.

  • The expression
    ‘source of income’ is not a legal concept, but needs to be understood the way
    a practical man would regard it to be a real source of income. It is required
    to be understood in a broad and practical sense and not in a technical manner.

  • Reliance was placed
    on the following extract of Privy Council decision in the case of Commissioner
    of Inland Revenue v. Hang Seng Bank Ltd. [1991 (1) AC 306]

    “. . . . . , if the profit was earned by the exploitation of property assets
    as by letting property, lending money or dealing in commodities or securities
    by buying and reselling at a profit, the profit will have arisen in or derived
    from the place where the property was let, the money was lent or the contracts
    of purchase and sale were effected.”

  • Having regard to the
    above, it was concluded that in case of hire of moveable property, the source
    of income is the place where property is let out and delivered and subsequent
    utilisation of such equipment as per the discretion of the hirer does not
    impact the determination of source.

  • Consequentially,
    income from hire charges does not accrue or arise in India if the asset is
    delivered outside India. It can be charged to tax only if the delivery of the
    asset is in India either at the time of entering into original agreement or at
    the time of renewal of the agreement.



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S. 12AA — Registration of Charitable Trust — Whether rejection of registration on grounds of (a) genuineness of appellant; and (ii) alleged violation of S. 13(1)(b) sustainable — Held, No.

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New Page 1Part 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.)




12 JITO Administrative Training Foundation v. DIT
(Exemption)
ITAT ‘J’ Bench, Mumbai
Before Pramod Kumar (AM) and P. Madhavi Devi (JM)
ITA No. 4126/Mum./2009
Decided on : 18-3-2010

Counsel for assessee/revenue : A. H. Dalal/L. K. Agarwal

S. 12AA — Registration of Charitable Trust — Whether
rejection of registration on grounds of (a) genuineness of appellant; and (ii)
alleged violation of S. 13(1)(b) sustainable — Held, No.

The assessee was a company registered u/s.25 of the Companies
Act, 1956. It was set up for the purpose of rendering certain services in the
field of inter alia, education. Its application for registration made u/s.12A of
the Act was rejected. The reasons for the rejection given amongst others, were
as under :

  • The genuineness of the
    appellant was not proved; and


  • Alleged violation of S.
    13(1)(b) of the Act.


The DIT relied on the decisions in the cases of Zenith Tin
Works Charitable Trust 103ITR119 (Mum) and Yogiraj Charitable Trust
[103ITR777(SC)].

Held :

The Tribunal relying on the decision in the case of Agarwal
Mitra Mandal Trust 106ITD531(Mum)held that the rejection of registration by the
DIT was not sustainable. According to it, at the time of considering the
application for registration, the DIT is only required to examine whether the
activities of the applicant were bona fide or not. The compliance with the
provisions of S. 13(1)(b) were not relevant at the time of considering the
application for registration.

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S. 148 — Reassessment completed by an AO on the basis of a notice u/s 148 issued by another AO who had no jurisdiction over the assessee is not valid.

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New Page 1Part 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.)



11 Dr. (Mrs.) K. B. Kumar v. ITO
ITAT ‘D’ Bench, Delhi
Before D. R. Singh (JM) and R. C. Sharma (AM)
ITA No. 4436/Del./2009


A.Y. : 2001-02. Decided on : 20-1-2010

Counsel for assessee/revenue : Ved Jain & Rano Jain/B. K.
Gupta

S. 148 — Reassessment completed by an AO on the basis of a
notice u/s 148 issued by another AO who had no jurisdiction over the assessee is
not valid.

Per D. R. Singh :

Facts :

The ITO Ward 21(3), Ghaziabad, based on information received
by him from Additional Commissioner, Range 1, Ghaziabad, regarding receipt of
Rs.5 lakhs on 19-2-2000 from Sanjay Mohan Agarwal recorded reasons of income
escaping assessment on 25-3-2008 and issued notice u/s.148 on 27-3-2008. In
response thereto, the assessee submitted to ITO, Ghaziabad that she has filed
her return of income with ITO, Range-48, New Delhi on 3-9-2001 and hence his
notice was without jurisdiction. Subsequently, the assessee, at request of ITO,
Ghaziabad, vide her letter dated 6-12-2008, submitted a copy of income-tax
return for A.Y. 2007-08 along with acknowledgment of receipt of AO, Ward, 34(2),
New Delhi.

The ITO, Ghaziabad transferred the case to the office of AO,
Ward 34(2), New Delhi who issued a notice dated 16-12-2008 to the assessee u/s.
143(2) of the Act. In response thereto, the assessee submitted her reply
mentioning that the proceedings had become time-barred and were illegal and the
proceedings need to be filed. The assessee received a letter dated 2-12-2008
from the AO, New Delhi assessing the income at Rs.9,6,380 by adding the gifted
amount of Rs.5,00,000.

The CIT(A) confirmed the order passed by the AO.

The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal following decisions in the cases of ITO v.
Krishan Kumar Gupta, (2008) 16 DTR 1 (Del.) (Trib.) 1; Ranjeet Singh v. ACIT,
(2009) 120 TTJ 517 (Del.) and CIT v. Smt. Anjali Dua, (2008) 174 Taxman 72
(Del.) held that the notice u/s.148 issued by ITO, Ghaziabad was without
jurisdiction and consequently the reassessment framed by the AO, Delhi is
invalid. The Tribunal quashed the order passed by the AO, Delhi.

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A Netherlands resident company received payments for grant of licence for off-the-shelf software to an Indian customer. No right in the copyright was transferred. The AAR held that payments were not royalty or FTS under DTAA and since the company did not

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Part C : Tribunal & AAR International Tax Decisions


2 GeoQuest Systems B.V., In re

AAR No. 774 of 2008 (AAR)

Article 7, 12 of India-Netherlands DTAA;

S. 9(1)(vi) (vii) of Income-tax Act

Dated : 6-8-2010

A Netherlands resident company received payments for grant of
licence for off-the-shelf software to an Indian customer. No right in the
copyright was transferred. The AAR held that payments were not royalty or FTS
under DTAA and since the company did not have PE in India, payments were not
taxable in India.

Facts :

The applicant was a company incorporated in the Netherlands
(‘DutchCo’). It was engaged in the business of supplying special-purpose
computer software for use in exploration and production of mineral oils. The
software was not prepared to suit the special requirements of any particular
customer and hence DutchCo described it as off-the-shelf. Under an agreement
DutchCo granted an exclusive non-transferable licence for the software to an
Indian company. DutchCo was to retain all IPRs in the software as well as in
modifications and updates. DutchCo was to supply the software package to the
customer outside India and the customer was to pay the consideration also
outside India. On termination of the agreement the customer was to discontinue
the use of the software and return the same. The agreement also contained
certain other restrictions on use of the software by the customer.

The issue before the AAR was, whether the income from supply
of the software would be taxable as royalty under the Income-tax Act or DTAA ?

Drawing distinction between transfer of copyright in a
product and transfer of a copyrighted product, DutchCo contended before the AAR
that the transfer was of a copyrighted product and hence, the consideration
should not be taxed as royalty.

The tax authority initially contended that the payment was
royalty but later on contended that as per the AAR ruling in Airports Authority
of India, In re (323 ITR 211) (AAR), it was FTS.

Held :

The AAR observed that the core question was whether the
payment conferred any rights in the copyright or right to use the copyright. The
AAR relied on its earlier rulings in Factset Research Systems Inc., In re (317
ITR 169) (AAR) and Dassault Systems K K, In re (322 ITR 125) (AAR) wherein it
was held that what was transferred to the end-user was copyrighted software but
not copyright therein and mere transfer of computer software de-hors any
copyright does not amount to royalty.

The AAR distinguished its earlier ruling in Airports
Authority of India, In re (323 ITR 211) (AAR) and observed that in that case,
apart from the licence of the software, the contract also envisaged imparting of
technical knowledge and hence, that ruling was not applicable to this case.

The AAR relied on the OECD commentary and held that Article
12.4 of DTAA contemplates conferring of right of use of copyright. As transfer
of such right was not evident from the agreement, the payments were not in the
nature of royalty or FTS under DTAA. As DutchCo did not have a PE in India, the
payments were not taxable in India.

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A Singapore resident company had a PE in India, which provided information available in public domain to subscribers. The AO held that the income was FTS under the Income-tax Act and taxable on gross basis and not on net basis as claimed by the taxpayer u

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1 2010 TII 72 ITAT-Mum.-Intl.

JCIT v. Telerate

Article 7(3), 12 of India-Singapore DTAA;

S. 9(1)(vii) of Income-tax Act

A.Y. : 1997-98. Dated : 18-2-2010

 

A Singapore resident company had a PE in India, which
provided information available in public domain to subscribers. The AO held that
the income was FTS under the Income-tax Act and taxable on gross basis and not
on net basis as claimed by the taxpayer under DTAA. The Tribunal held that the
assessee can choose between DTAA and the Income-tax Act and tax authority cannot
thrust provisions of the Income-tax Act unless they are more beneficial.

Facts :

The taxpayer was a company resident in Singapore (‘SingCo’).
SingCo had established a branch in India which was a PE in terms of Article
5(2)(b) of India-Singapore DTAA. SingCo was engaged in collecting and
disseminating information on financial, derivatives and commodities market,
which was available in public domain. The information was transmitted to
subscribers of Indian branch office on continuous basis through telephone lines
or V-Sat.

The AO held that SingCo was rendering technical services and
therefore, its income was ‘fees for technical services’ u/s.9(1)(vii) of the
Income-tax Act. The AO further held that notwithstanding provisions of Article
12(6) of DTAA, which envisages taxing FIS of PE as business profits under
Article 7(3), income should be computed in terms of S. 44D of the Income-tax Act
and consequently, income should be taxed on gross basis @ 24% in terms of S.
115A of the Income-tax Act.

Held :

The Tribunal observed that the facts were similar to those in
DCIT v. Boston Consulting Group Pte. Ltd., (2005) 94 ITD 31 (Mum.) and relying
on that decision held that :




? If the assessee chooses to be covered by provisions of DTAA, the Revenue
cannot thrust provisions of the Income-tax Act on him;



? Provisions of the Income-tax Act cannot come in to play unless they are
more beneficial;



? Article 12(4)(b) of DTAA does not cover non-technical ‘consultancy
services’.




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Fees received for assistance/services provided to Indian companies to whom loans, etc. are provided by the financial organisation from UK is business income — In absence of PE, is not chargeable to tax in India.

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Part C : Tribunal & AAR International Tax Decisions




JDIT v. M/s. Commonwealth Development Corporation

(2010) TII 102 ITAT-Mum.-Intl.

Article 7, 12(5) & 13 of India-UK DTAA

S. 2(28A) of Income-tax Act

Dated : 25-2-2010

11. Fees received for assistance/services provided
to Indian companies to whom loans, etc. are provided by the financial
organisation from UK is business income — In absence of PE, is not chargeable to
tax in India.

Upfront appraisal fee received by the UK financial
organisation constitutes ‘interest’ in terms of S. 2(28A) of the Income-tax Act
— However, such appraisal fee is not ‘interest’ in terms of India-UK DTAA.

Front-end fee recovered from the investee to whom
debt support is provided, is, ‘interest’, under the Income-tax Act as also DTAA.

Capital gain from transfer of shares in Indian
company is chargeable to tax in India.

Facts :

The assessee, a statutory corporation established
in the UK (CDC) was engaged in the business of providing loans to, and making
investment in shares of, Indian companies. The issue pertained to taxation of
the following four receipts :

(i) Director’s fees received from the Indian
companies for assistance/services rendered by CDC to Indian companies.

(ii) Appraisal fees received by CDC for
determining future profitability and worthiness for projects of Indian company
before CDC disbursed loans by way of convertible bonds, shares or debts to the
Indian Investees.

(iii) Front-end fee claimed to have been charged
for recovering cost of post-appraisal, other than cost of legal documents
which was the obligation of the investee.

(iv) CDC had sold certain shares of an Indian
company which were admittedly held as capital asset. It was the claim of CDC
that shares were held outside India and were sold outside India and hence not
taxable in India.

Held :

The ITAT held that :

  • Having regard to
    the earlier decision of the ITAT in appellant’s own case, assistance provided
    to the investee companies was not in the nature of fees for included services.
    In terms of DTAA, such income would not be taxable in India.



  • Upfront appraisal
    fee was ‘interest’ within the scope of S. 2(28A) of the Income-tax Act. In
    view of ITAT :



  • Upfront appraisal fee
    was charged before advancing loan or making investment of any kind.



  • S. 2(28A) covered
    service fee or other charges for debt incurred. Additionally, it also included
    service fee or other charges in respect of any credit facility which has not
    been utilised.



  • The first limb of
    S. 2(28A) which covered service fee/charge for debt incurred was not attracted
    in the present case as the appraisal fee was recovered even before any debt
    was incurred. However, being service fee for credit facility not utilised,
    such fee was ‘interest’.



  • Though such amount
    was ‘interest’ in term of the Income-tax Act, it was not ‘interest’ under DTAA
    as definition of interest under DTAA is restrictive and covered only income
    from debt claim.



  • Taxpayer’s
    contention that front-end fee is not related to debt investment is not
    acceptable. Front-end fee was charged by the taxpayer only if the investment
    was made in the form of debt and not for investment in the form of equity. No
    information was provided about the services for which front-end fee was
    charged. In the circumstances, the income was regarded as having direct nexus
    with the debt claim. Hence, it was ‘interest’ both in terms of the Income-tax
    Act as also DTAA.



  • Capital gain earned
    by CDC on transfer of shares of an Indian company was chargeable to tax in
    India. The ITAT rejected contention of the taxpayer that such income can be
    regarded as income arising from sale of asset outside India.



  • Share of a company
    represents bundle of rights. Though the shares are freely transferable, a
    contract between transferer and transferee regarding sale of shares is not
    complete till it is approved by the company and change of name in the register
    of a shareholder. The share in a company gives right to the shareholders to
    participate in profits as also in liquidation proceeds. Transfer of shares of
    an Indian company results in transfer of right to property/capital assets
    situated in India, irrespective of where the transfer is effected. In lieu
    thereof, charge to capital gain is attracted in terms of S. 9(1)(i) of
    Income-tax Act, which is not relieved by DTAA.

 

levitra

Compensation received by UK buyer pursuant to arbitration award, on account of failure of Indian entity to meet its export obligation — Business income — In absence of PE, not chargeable to tax in India.

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Part C : Tribunal & AAR International Tax Decisions



Goldcrest Exports v. ITO

(2010) TII 124 ITAT-Mum.-Intl.

Article 5, 7(1) of India-UK DTAA;

S. 9(1) of Income-tax Act

A.Y. : 2005-06. Dated : 7-9-2010

10. Compensation received by UK buyer pursuant to
arbitration award, on account of failure of Indian entity to meet its export
obligation — Business income — In absence of PE, not chargeable to tax in India.

Interest on arbitration award has the same
character as the underlying compensation.

The Indian payer has no obligation to deduct tax at
source.

Facts :

The taxpayer (GCE) was engaged in the business of
export/import and trading in various commodities. Through the involvement of an
Indian broker, GCE entered into contract with the UK buyer (UKCO) for supply of
certain commodities. GCE cancelled the contract. Pursuant to arbitration
proceedings initiated by UKCO, the arbitrators awarded compensation to UKCO. The
compensation was based on the difference between market price of the commodities
agreed to be supplied and the contracted price. GCE was also asked to pay
interest from the date of arbitration award till the date of payment.

GCE made provision in respect of the compensation
and the interest payable and claimed that as business expenditure.

The tax authorities denied the deduction primarily
on the ground that no tax was deducted at source in respect of the provision.

Held :

The ITAT held that :

(i) The compensation was in the nature of
business income as it was arising out of the trading contract between GCE and
UKCO. Hence, it was covered under Article 7 of the DTAA.

(ii) In absence of PE of UKCO in India, there was
no tax liability. Consequently, there was no tax withholding obligation on GCE.
Involvement of an independent agent in India does not alter the position.

(iii) Compensation payable pursuant to
arbitration award loses its original character and assumes the character of a
judgment debt. Interest payable also partakes the character of compensation.

levitra

Interest paid directly to shareholders by taxpayer’s PE is allowable as a deduction while computing taxable profits of PE in India.

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Part C : Tribunal & AAR International Tax Decisions



Besix Kier Dabhol, SA v. DDIT

ITA No. 4249/Mum./07

Article 7(3)(b), of India-Belgium DTAA

S. 36(1)(iii) of Income-tax Act

A.Y. : 2002-03. Datede : 10-11-2010

9. Interest paid directly to shareholders by
taxpayer’s PE is allowable as a deduction while computing taxable profits of PE
in India.

Currently, ITA or DTAA does not contain any
anti-abuse provisions on thin capitalisation. In absence of specific
restriction, deduction of interest on loan paid by taxpayer’s PE to its
shareholders is allowable.

Facts :

The taxpayer, a Belgian company, was constituted as
a joint venture (between Belgium and UK shareholder contributing to equity
capital in 60 : 40 ratio). It was set up for construction of a fuel jetty in
India. The operations were intended to be carried out through the taxpayer’s
project office (PE in terms of Article 5 of DTAA) situated in India. To fund the
project, taxpayer raised debt funds from its two shareholders, in the same ratio
as their equity stake in the JV i.e., 60 : 40. The loan resulted in
significantly high debt-equity ratio of 248 : 1 for the taxpayer.

The taxpayer claimed interest payments on such
borrowed funds as deductible expense in computing profits of PE.

Relying on Article 7(3)(b) of the DTAA, the Tax
Authority, disallowed the interest payments by equating the same to payments
made by a branch to its HO.

Held :

On the following grounds, the ITAT held that
interest paid directly to shareholders would be allowable as a deduction :

(i) The taxable entity is the Belgian company
(i.e., taxpayer) and not the Indian PE, even though tax liability of the
taxpayer is confined to profits attributed to its PE in India.

(ii) The profits attributable to the Indian PE
are required to be computed under normal accounting principles and in terms of
general provisions of the ITA. This accounting approach has been approved by
the Supreme Court in Hyundai Heavy Ind Ltd.2

(iii) Since the only business carried out by the
assessee is the project in India, its entire profits are taxable in India and
all expenses incurred to earn such income are deductible in computing its
taxable income.

(iv) A company and its shareholders have a
separate existence as well as identity and contracts between a company and its
shareholders are just as enforceable as contracts with any independent person.
The limitation contained under Article 7(3)(b) restricts deduction for
interest paid to HO (except for banking companies), unless it is for
reimbursement of actual expenses. In the current case, interest has been paid
to an outside party i.e., shareholders. Hence, the limitation in Article
7(3)(b) cannot apply.

(v) Thin capitalisation rules have been resorted
to by various jurisdictions in order to protect themselves against erosion in
their legitimate tax base by financing a disproportionate ratio of debts.
Belgium also has thin capitalisation rules which restrict interest deduction
if the debt-equity ratio exceeds 1 : 7. In India, the proposed DTC 2010 seeks
to provide for remedial legislative framework to counter erosion of tax base
under General Anti-Avoidance Rules (GAAR) by permitting re-characterisation of
debt into equity. Currently however, India does not have any thin
capitalisation rules and there cannot be adverse implications on that count.

(vi) Merely because a suitable limitation
provision is considered desirable and attempts are being made to legislate
anti-abuse provisions, it would not render the effort to take advantage of
exiting provision of the DTAA illegal.

 

levitra

The Delhi Tribunal in the case of Microsoft Corporation, US & its affiliates (2010 TII 141 ITAT-Del.-Intl.), recently adjudicated on the issue whether the use of or the right to use (including the granting of licence), in respect of computer program, amou

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Part C : Tribunal & AAR International Tax Decisions


 

8. Microsoft Corporation v. ADIT

ITA No 1331 to 1336 of 2008

Article 12(3) of India-US DTAA

S. 9(1)(vi) of Income-tax Act

A.Ys. : 1999-00 to 2004-05. Dated : 26-10-2010

Reliance Industries Ltd.

(2010) TII 154 ITAT-Mum.-Intl.

Article 12(3) of India-US DTAA

S. 9(1)(vi) of Income-tax Act

Dated : 29-10-2010

The Delhi Tribunal in the case of Microsoft
Corporation, US & its affiliates (2010 TII 141 ITAT-Del.-Intl.), recently
adjudicated on the issue whether the use of or the right to use (including the
granting of licence), in respect of computer program, amounts to royalty or
business profits (sale of copyrighted articles). In this case, the software
copies were sold/delivered to Indian distributors, who in turn, sold these
products to re-sellers/end users in India. Microsoft Corporation, being the
registered owner of Intellectual Property Rights (IPRs) in Microsoft software,
entered into an end-user licence agreement, directly with end-users. The
Tribunal, having regard to various agreements, observed that a copyrighted
article cannot be treated as a product, and the payments made are for the
licence granted in the copyright and other IPRs in the product, and will amount
to ‘royalty’ under the Income-tax Act, 1961 and the India-US tax treaty.

However, in the case of Reliance Industries Ltd, on
the issue of whether consideration paid to a US resident for licensing of
computer software would be in the nature of ‘royalty’, the Mumbai Tribunal held
that the payment was for the purchase of a copyrighted article and not the
copyright itself. Furthermore, the Mumbai Tribunal stated that it is incorrect
to hold that computer software on a media continues to be an intellectual
property right. Therefore, the payment made for the purchase of software cannot
be termed as ‘royalty’.

levitra

Sale of goods to non-AEs cannot be taken as comparable under CUP, if there are significant differences in quantity sold, geography and customer profiles.

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Part C : Tribunal & AAR International Tax Decisions


 

ACIT v. Dufon Laboratories

(2010) TII 26 ITAT-Mum.-TP

S. 92C of Income-tax Act

A.Y. : 2004-05. Dated : 26-3-2010

7. Sale of goods to non-AEs cannot be taken as
comparable under CUP, if there are significant differences in quantity sold,
geography and customer profiles.

Facts :

An Indian company (ICO) was engaged in the business
of processing and export of chemicals. ICO sold majority of its products to its
AE in the USA. A small quantity (constituting about 2.5% of overall sale) was
sold to small enterprises in Asia. The independent parties were small-time
buyers who bought in small quantities for resale to other laboratories. However,
AE in USA purchased large quantities and resold to big corporate houses. Resale
by AE was in the competitive markets of USA and Europe.

The average price charged by ICO to AE worked out
to Rs. 440 per kg. as against the average price of Rs. 617 per kg. charged to
non-AE.

Rejecting the taxpayer’s contention that the sale
price to non-AEs was not the right basis for comparable price, the tax officer
made adjustment by adopting the transfer price based on average realisation from
non-AEs.

Incidentally, the assessee had a profit margin of
about 49% even without taking into account the adjustment, whereas the AE in the
USA had incurred losses.

Held :

Considering the following factors, the ITAT held
that the transaction with AEs was on ALP :

  •   The turnover
    quantity to AEs was more than 50 times that of the non-AEs. Such difference in
    magnitude would have major bearing on the price.


  • In Ranbaxy
    Laboratories Ltd. v. ACIT1, ITAT had held that a particular entity in a
    particular country should be compared with a similar entity in the same
    country as geographical situations would, in several ways, influence transfer
    pricing.


  •   Transactions with
    high-profile clients with which AE dealt were different when compared to small
    sales to non-AEs, who were small players in South East Asian business. Also,
    AEs dealt in competitive market.


  •   The adjustment was
    not justified also on the ground that it resulted in transfer price being
    higher compared to the price recovered by AEs from the independent customers.



levitra

Reimbursement received by non-resident in respect of payment made on behalf of resident was not liable to tax in India.

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  1. DDIT v. M/s. Chubb Pacific Underwriting
    Management Services Pte. Ltd. (Mumbai) (2009 TIOL 730 ITAT Mum.)



S. 195, Income-tax Act

A.Y. : 2003-04. Dated : 15-10-2009

Issue :

Reimbursement received by non-resident in respect of
payment made on behalf of resident was not liable to tax in India.

Facts :

The assessee, a tax resident of Singapore is engaged in the
business of providing technical services and rendering of network facilities.

The parent company of the assessee was an American company
which held shares in both the assessee as well as HDFC Chubb (JVCO) in India.
The JVCO was incorporated in February 2002 and it commenced operations in
October 2002.

Pending commencement of business by JVCO, for
administrative convenience and on request of JVCO, the assessee made payments
(including certain expenses) for purchase of software licence to Apex Systems
Pte. Ltd. (Apex).

While payments were made by the assessee, JVCO complied
with tax, withholding provisions with respect to such payments. The amount was
reimbursed by HDFC Chubb to the assessee during A.Y. 2003-04.

The Assessing Officer (AO) held that the amount received by
the assessee from JVCO was income of the assessee liable to tax, in India.

The assessee contended that the amount received from JVCO
was only reimbursement of expenses that were paid on behalf of JVCO as a
matter of administrative convenience and no income had arisen on account of
such transaction. The assessee also submitted that TDS was duly deducted by
JVCO from payment to Apex and therefore Apex had already been taxed in respect
of the transaction.

The CIT(A) accepted the contention of the assessee and
deleted the addition made by AO.

Held :

Confirming the order of the CIT(A), the ITAT held :

(a) The assesee was not a party to the contract for the
supply of software licences between Apex and JVCO. It was clear that the
payments were made only on behalf of JVCO due to JVCO’s inability to pay the
same before commencement of business.

(b) The amount received by the assessee was in the nature
of reimbursement of actual payment made by the assessee on behalf of JVCO to
Apex. There was no element of profit or income involved in such payment.

(c) Adequate taxes were deducted while making payment to
the supplier Apex, evidencing the fact that the true recipient of income had
been already subjected to tax.

(d) Such receipt, which was pure reimbursement of earlier
disbursement made on behalf of JVCO, was not taxable in the hands of the
assessee under the provisions of the Act.

levitra

Lump sum consideration towards technology transfer amounts to royalty. Sale of technical documentation which is incidental to grant of right to use the know-how does not affect taxability.

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  1. M/s. International Tire Engineering

Resources LLC

(2009 TIOL 25 AAR IT)

Article 12(3)(a), India-USA DTAA

S. 115A(1), S. 195, Income-tax Act;

Part II, First Schedule, Finance Act, 2009

Dated : 28-10-2009

Issues :

  • Lump sum
    consideration towards technology transfer amounts to royalty. Sale of
    technical documentation which is incidental to grant of right to use the
    know-how does not affect taxability.


  • Consideration for designs transferred on outright basis is not taxable as
    royalty.

  • Tax rate
    applicable for withholding is the lower rate as prescribed by S. 115A, while
    the scope of chargeable amount is determined having regard to the provisions
    of the treaty.


Facts :

The applicant, an American company (‘USCO’), was engaged in
the business of supplying advanced technology for the manufacture of radial
tyres. The applicant entered into an agreement with an Indian company (‘ICO’)
for grant of perpetual irrevocable right to use know-how as also transfer
ownership in respect of certain designs. The agreement specified separate
consideration for right to use know-how and for transfer of designs. The
applicant had formulated the following questions for ruling of AAR :

(i) Whether consideration paid by ICO to USCO for
transfer of documentation was taxable under the Act ?

(ii) Whether the consideration paid by ICO to USCO for
consultancy and assistance was taxable under the Act ?

(iii) If answers to (i) and (ii) were wholly or partly
against USCO, how much consideration would be taxable and at what rate ?

The applicant claimed that the agreement involved transfer
of technical documents in the form of transfer of ‘chattel’ or a ‘plant’ which
was completed outside India. The amount was therefore not taxable in India.

The AAR noted the following to be the features applicable
to the grant of right of use of know-how :

(i) USCO had expertise and know-how for enabling ICO to
set up the plant. USCO agreed to transfer perpetual, irrevocable right to
use know-how. For this purpose, know-how was defined to include all
technical information, data, specifications, methodology, methods, material
and process specifications, etc. which would enable ICO to install, operate
and maintain its plants. It also included start-up, commissioning
assistance, training, etc.

(ii) ICO was required to pay lump sum consideration to
USCO. ICO was granted non-exclusive, irrevocable, perpetual, royalty-free
right to use know-how at its factory in India and to market the products
anywhere in the world.

(iii) The term of the agreement was for 8 years which
could be mutually extended by the parties. During the term of the agreement,
USCO had to provide updates of know-how to ICO.

(iv) Know-how so transferred could be used by ICO only in
its plants including future plants but could not be sold to third parties.

(v) The agreement clarified that ownership of know-how
continued with USCO.

(vi) For a separate consideration, USCO also agreed to
provide technical assistance by sending its personnel for rendering training
and supervision services.

The Tax Department contented that the amount was
chargeable as royalty. Alternatively, the Tax Department contended that
having regard to the activities undertaken in India in excess of 100 days,
USCO was liable to tax under service PE Article of DTAA.

Held :

In respect of taxability of know-how agreement, the AAR
held :

  • The essence
    of the transactions was to provide right of use of know-how. To say that the
    transaction is nothing more than sale of technical documents containing
    know-how is to oversimplify the issue and to ignore the plain realities. In
    reality and in substance, sale of technical documentation was not the end in
    itself but was mere incident of the grant of right to use know-how.

  • USCO also
    agreed to provide technical assistance and advice to ensure that such
    know-how is put to effective and proper use. Payment was also made
    conditional upon successful completion of certain tests. It is therefore
    incorrect to say that the consideration was for transfer of technical
    documents sold in the USA.

  • The grant
    of use of know-how is completed only after USCO provides technical
    assistance and trained the personnel of ICO about use of underlying
    technology. The crux and predominant features of the arrangement was that it
    equipped ICO with all that was necessary to effectively put know-how to use.
    Know-how which was within the exclusive use of domain was parted in favour
    of ICO by grant of non-exclusive, perpetual right and by putting in place
    the requisite measure to enable ICO to use and absorb know-how.

  • The payment
    was ‘royalty’ within the meaning of S. 9 as also in terms of Article 12 of
    the treaty as it was for making available right of use of know-how belonging
    to USCO.

  • Also, the
    transaction of sale was not completed in the USA. The agreement provided
    that the transaction was concluded only against delivery of know-how
    documents against invoices and related documents. In terms of the agreement
    between the parties, delivery was to be completed at the location of ICO and
    courier of documents by USCO outside India did not amount to completion of
    sale.

  • The
    decision of the Supreme Court in Ishikawajima Harima Heavy Industries Ltd.
    (288 ITR 408) is not relevant as the contract involving transfer of
    technology and know-how cannot be treated as the transaction completed
    outside India. In any case, there is a sufficient territorial nexus as
    technical know-how embodied in various documents is received by ICO and is
    put to use in India with the assistance and advice offered by technical
    personnel of USCO deputed to India.

In relation to outright transfer of designs, AAR held :

  • The transaction of tread and sidewall design/ patterns (TSD) involved designs prepared and approved by ICO which USCO transferred exclusively to ICO. ICO can use such designs for self use or for selling it to third party. The agreement also confirmed that the proprietary intellectual property in design was to vest exclusively in ICO. Having regard to these features, AAR accepted the contention that the transaction involved outright transfer which was not taxable in India in absence of PE of USCO.

In relation to rate of TDS, AAR held :

  • For determining tax withholding obligation of ICO, ICO can take into account favourable rate available in terms of S. 115A of the ITA. ICO therefore can deduct tax at 10% + applicable surcharge after taking into account scope of chargeable income determined having regard to the provisions of the treaty.

University of Texas (UT) is a tax resident of the USA and entitled to treaty benefit even if certain income of UT is not liable to tax in the USA on account of exemption under the provisions of US tax laws.

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  1. Federation of Indian Chambers of Commerce and Industry

(2009 TIOL 30 AAR)

Articles 4, 12(4)(b), India-USA DTAA;

S. 9(1)(vii), S. 195, Income-tax Act

Dated : 30-11-2009

 

Issues :

University of Texas (UT) is a tax resident of the USA and
entitled to treaty benefit even if certain income of UT is not liable to tax
in the USA on account of exemption under the provisions of US tax laws.

Payment made by Indian entity to UT for training,
technology assessment, business development and project management as part of
commercialisation project is not ‘fees for included services’.

Facts :

FICCI, a non-profit company, registered under the Companies
Act, 1956 entered into MOU with Defense Research Development Organisation (DRDO).
Under the MOU, FICCI were to assist the DRDO laboratories in identifying
competitive global technologies from inventory of existing defense-related
inventions of DRDO so as to enable DRDO to decide upon commercialisation
policy. For this, FICCI and DRDO initiated joint programme for technology
assessment and commercialisation. While FICCI was responsible for providing
assistance to DRDO, FICCI entered into an agreement with UT for the purpose of
taking support for research in the area of market economics and other related
aspects involving commercialisation of technological innovations.

The services to be rendered by UT to FICCI were broadly
categorised under the following heads :

  • Training;

  • Technology
    Assessment;

  • Business
    Development; and

  • Program
    Management

The scope of services under each of the above four segments
included the following.

  • Training :
    Under this, UT was to conduct a workshop for DRDO officers and scientists at
    management level to provide them with broad understanding of the key
    principles involved in the technology commercialisation process. For this
    purpose, two training programmes of 5 days each were conducted in India for
    which facilities were made available by FICCI. The training materials were
    stated to be customised modules which gave broad overview of factors which
    the participant had to consider for the purposes of shortlisting the
    innovations for taking them to the second phase of the programme.


  • Technology assessment     : Under this, UT was expected to undertake
    screening and assessment for evaluating the technologies and to shortlist
    what UT perceived to be the unique and globally competitive technologies
    which DRDO can market. This phase involved process of screening
    technologies, eliminating those which did not score well from the point of
    view of commercialisation, doing validation check for determining commercial
    potential and submitting the report of such assessment for consideration by
    the board of DRDO.

  • Business
    Development     : The third phase of the programme was commercialisation
    process. In this phase, UT assisted in identifying about 20 global partners
    with which DRDO can enter into licensing or other engagements in respect of
    technologies identified under phase three. UT also was required to monitor
    and support negotiations between DRDO and the potential partner.


  • Programme Management     : Under this phase, UT agreed to provide programme
    manager for administrative assistance and actual implementation.

For the above services, FICCI was required to provide lump
sum consideration to UT. In this background, the applicant sought ruling on
the following questions :

(i) Whether UT was covered by India-USA DTAA ?

(ii) Whether UT was not liable to pay tax in India on
payments received for the services ?

(iii) Whether FICCI was not required to deduct tax
u/s.195 in respect of payments to UT ?

(iv) If answers to (ii) and (iii) are in negative, which
amounts were liable to tax and at what rate ?

The Tax Department contended that the tax treaty covered
only those persons who are taxable in one of the countries and since income of
UT was exempt from tax in the USA, UT was not eligible for benefit of the
treaty. As a result, UT was liable to pay tax as payment to UT was in the
nature of fees for technical services. Alternatively, the services rendered by
UT were fees for included services as defined in Article 12 of the treaty and
hence liable for taxation in India.

Ruling :

The AAR held :

  • The fact
    that UT is required to file tax return in the USA for certain unrelated
    business income and is also having obligation of filing the tax return on an
    annual basis supports that UT would qualify as ‘resident’ of the USA as
    envisaged in the tax treaty between India and the USA. The fact that part of
    its income is exempt from tax does not take it out of the category of tax
    resident.

  • Under the
    treaty, services can be taxed only if they are in the nature of fees for
    included services (FIS). In order to be taxable as FIS under the tax treaty,
    a mere provision of technical and other services would not suffice. It,
    additionally, requires that the service provider should also make its
    technical knowledge, experience, skill, know-how, etc. known to the
    recipient of the service so as to equip him to independently perform the
    technical function in future without the help of the service provider.

  • Although
    most of the services falling within the scope of business development and
    programme management, may answer the description of technical and
    consultancy services, they do not really ‘make available’ the technical
    knowledge or know-how, except perhaps in an incidental/indirect manner.
    Therefore, it would not come within the purview of FIS.

  • In the circumstances, though the services involved certain attributes of teaching, they were only incidental to the primary objective of business promotion of technologies. The services would not constitute FIS and will also not fall in the exclusionary clause of the treaty which exempts teaching in or by educational institution.

    The AAR confirmed that FICCI did not have obligation of withholding tax as the payments were not chargeable in the hands of the recipient.

S. 37(1) of the Income-tax Act, 1961 — Business expenditure — Payment of severance pay on closure of manufacturing business and expenditure incurred on market research — Whether allowable — Held, Yes.

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part B: unreported decisions


2 KJS India Pvt. Ltd. v.
DCIT

ITAT ‘D’ Bench, Delhi

Before G. E. Veerabhadrappa
(VP) and

Rajpal Yadav (JM)

ITA No. 2422/Del./2007 and
2168/Del./2009

Decided on : 30-7-2010

Counsel for assessee/revenue
: Salil Kapoor & Pankuj Rawat/

Kavita Bhatnagar & H. K. Lal

S. 37(1) of the Income-tax
Act, 1961 — Business expenditure — Payment of severance pay on closure of
manufacturing business and expenditure incurred on market research — Whether
allowable — Held, Yes.

Per Rajpal Yadav :

Facts :

The assessee was in the
business of manufacturing of powdered soft drink in the name and style of TANG.
During the year under appeal it closed down its manufacturing business and paid
the sum of
`93.92 lacs by way of
severance pay to its employees. Its claim to allow such payment as business
expenditure was disallowed by the AO on the following grounds :

(1) As per its Form 3CD
the Board of Directors decided to discontinue the business of production of
powdered soft drink due to non-viability of operations and accordingly, the
assessee had ceased its business operations;

(2) As per its Notes on
Accounts, the assessee had decided to sell its business and hence, its
accounts were not prepared on going-concern basis;

(3) Severance cost was
incurred for closure of the business;

(4) U/s.37 only those
expenditure which are incurred for the running of business was allowable.

Another issue before the
Tribunal was about the allowability of expenditure of
`24.52 lacs incurred on
market research. According to the AO the assessee had incurred the expenses for
developing and designing a new product. Therefore, he disallowed the said
expenditure by treating the same as capital in nature as according to him, the
expenditure had resulted in providing benefit of enduring nature to the assessee.

On appeal the CIT(A) upheld
the order of the AO.

Before the Tribunal the
Revenue supported the orders of the lower authorities and pointed out that even
the directors in their Board meeting had specifically observed that the business
of manufacturing was closed.

Held :

The Tribunal noted that the
assessee besides manufacturing, was also engaged in the business of trading. It
had not closed down the business, but it had only suspended one of the business
activities viz. that of manufacturing of powdered soft drink. It had continued
to carry on its trading business. According to the Tribunal the business cannot
be construed to mean one single activity. Further, relying on the decisions of
the Supreme Court in the cases of Ravindranathan Nair, Sasoon J. David Co. Pvt.
Ltd., Narayan Swadesh, of the Delhi High Court in the cases of DCM Ltd. and
Anita Jain, of the Calcutta High Court in the case of Assam Oil Co. Ltd. and of
the Madras High Court in the case of Simpson & Co. Ltd., it held that the
expenses incurred towards severance cost was an allowable expenditure.

The Tribunal went through
the reports of the market agency and noted that the study was to upgrade sale of
its existing product with the help of market survey. It was not for the
development and design of a new product. Accordingly, relying on the decisions
of the Calcutta High Court in the case of Ananda Bazar Patrika and of the Bombay
High Court in the case of J. K. Chemicals Ltd. it held that the expenditure was
allowable as business expenditre.

Cases referred to :

 

4.

CIT v. Assam Oil Co. Ltd., 154 ITR 647
(Cal.);

 

1.

Ravindranathan Nair
v. CIT, 247 ITR 178

 

5.

CIT v. Simpson &
Co. Ltd., (Mad.);

 

(SC);

 

6.

CIT v. Ananda Bazar
Patrika, 184 ITR 542

2.

Sasoon J. David Co.
Pvt. Ltd. v. CIT, 118 ITR

 

 

(Cal.);

 

261;

 

7.

CIT v. J. K.
Chemicals Ltd., 207 ITR 985

3.

Narayan Swadesh v.
CIT, 26 ITR 765 (SC);

 

 

(Bom.)





S. 55A of the Income-tax Act, 1961 — Valuation report of Departmental Valuation Officer — To determine fair market value as on 1st April, 1981 whether reference to DVO can be made — Held, No.

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part B: unreported decisions


1 ITO v. Surendra V. Shah

ITAT ‘E’ Bench, Mumbai

Before D. Manmohan (VP) and

Pramod Kumar (AM)

ITA No. 5667/Mum./2008

Decided on : 23-7-2010

Counsel for revenue/assessee
:

Naveen Gupta/Dr. Rashmi J.
Zaveri

Per Pramod Kumar :

Facts :

S. 55A of the Income-tax
Act, 1961 — Valuation report of Departmental Valuation Officer — To determine
fair market value as on 1st April, 1981 whether reference to DVO can be made —
Held, No.

The issue before the
Tribunal was whether the AO can resort to Departmental Valuation Officer’s (DVO)
report for ascertaining fair market value of an asset as on 1st April, 1981 and
for the purpose of computing cost of acquisition u/s.55(2)(b)(i).

Held :

According to the Tribunal a
reference to DVO can only be made u/s.55A. Further relying on the decision of
the Mumbai Bench of Tribunal in the case of Daulai Mohta (HUF) which decision
was subsequently approved by the Bombay High Court, the Tribunal upheld the
order of the CIT(A) to the effect that the reference to the DVO was invalid.

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The scope of ‘services’ in the context of Section 44BB is not restricted and they need not be only those which are other than ‘technical services’ under Section 9(1)(vii).

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17 Geofizyka Torun Sp Zo O, In
re [2009] 32 DTR (AAR) 139

Sections 9(1)(vii), 44BB, 44DA,
I T Act

7th December, 2009

Issue

The scope of ‘services’ in the context of Section 44BB is not
restricted and they need not be only those which are other than ‘technical
services’ under Section 9(1)(vii).

Facts

The applicant was a tax resident of Poland (“PolCo”). It was
in the business of providing geophysical services to the international oil and
gas industry. It conducted seismic surveys and provided onshore seismic data
acquisition and other associated services such as processing and interpretation
of such data to global and oil companies. Seismic surveys are used to identify
hydrocarbons, increase exploration success, maximise production, better target
the oil and gas reserves and to reduce the overall exploratory drilling risks.
The short question before AAR was whether income derived by PolCo in India was
covered under section 44BB of the Act.

Before the AAR, the tax authorities contested the
applicability of Section 44BB on the ground that the services contemplated in
Section 44BB were other than those coming within the purview of Explanation 2 to
Section 9(1)(vii) of the Act, whereas the services provided by PolCo were
covered under the said provision. Further, ‘fees for technical services’ under
Section 9(1)(vii) should be computed under Section 44DA where the service
provider has a PE in India. It was also contended that PolCo itself was not
undertaking any mining or like project (which was being undertaken by someone
else), and that Section 44BB would come into play only if the services were out
of the purview of Section 9(1)(vii).

The AAR observed that it was an undisputed and undeniable
fact that PolCo was engaged in business in India. The AAR then referred to
Sections 44BB, 44DA and 115A and proceeded to consider the meaning of the
expression ‘in connection with’.

Held

Having regard to the meaning of the expression ‘in connection
with’, it is clear that the services provided by PolCo were in connection with
the prospecting for or extraction of mineral oils and there was real, intimate
and proximate nexus between the services performed by PolCo in India and
prospecting for or extraction of mineral oils.

The expression ‘services’ should be understood in its plain
and ordinary sense and in the absence of any limitation or exclusion in the
statute. There was no reason to assign narrow and restricted meaning and confine
it to ‘services other than technical, consultancy or managerial services’.
Section 44BB and Section 44DA being competing provisions, and Section 44BB being
a more specific provision, it should prevail.

 

End notes:

1. In its decision, the Supreme Court did not
examine this issue. It reversed Gujarat High Court’s decision merely because of
retrospective amendment to section 10(15)(iv)(c) whereby usance interest was
exempted but, only in case of an undertaking engaged in the business of ship
breaking. Hence, it is doubtful whether the Supreme Court could be said to have
reversed the ratio of Gujarat High Court’s decision.

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s. 10(38), 70(3), 74 — Non-exempt long-term capital loss cannot be set-off against exempt long-term capital gains.

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29 G. K. Ramamurthy vs JCIT

ITAT Mumbai `G’ Bench

Before N. V. Vasudevan (JM) and
A. L. Gehlot (AM)

ITA No. 1367/Mum/2009

A.Y.: 2005-06. Decided on: 9.2.2010

Counsel for assessee / revenue: K. Shivram & Paras Savla / K.
R. Das

s. 10(38), 70(3), 74 — Non-exempt long-term capital loss
cannot be set-off against exempt long-term capital gains.

Per A. L. Gehlot:

Facts:

The assessee had made a long-term capital gain of Rs.
33,01,57,200 on sale of certain shares between the period 1.10.2004 and
31.3.2005, in respect of which, security transaction tax (STT) was paid by him
and the same was exempted u/s 10(38) of the Act. The assessee was also having a
long-term capital loss in respect of redemption of units and other loss
pertaining to the period prior to 1.10.2004, amounting to Rs. 9,23,55,945. The
assessee claimed carry forward of long-term capital losses of Rs. 9,23,55,945 to
subsequent years.

The Assessing Officer (AO) held that there was a loss and
also a gain under the same head of income, i.e., Long Term Capital Gain, and
consequently the loss of Rs. 9,23,55,945 had to be set-off against exempt income
of Rs. 33,01,57,200.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
confirmed the order of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:



(i) It is clear from the scheme of the Act that incomes
which do not form a part of the total income as laid down in Chapter III of
the Act, do not enter the computation of total income at all.

(ii) The case of the revenue that long-term capital gain is
income notwithstanding the fact that it is exempt u/s 10(38) of the Act, is
based on a reasoning which is fallacious.

(iii) Since income which is exempt from tax does not enter
the computation of total income at all, the question of aggregating them under
Chapter VI at all does not arise. Therefore, the question of set-off of the
same u/s 70(3) of the Act also does not arise for consideration. Therefore,
the right of carry forward u/s 74(1) of the Act, in respect of the long-term
capital loss suffered by the assessee, remains unaffected by the provisions of
s. 70(3) of the Act.

(iv) Section 10(38) has been inserted with a particular
object: to grant exemption to such income, as tax has already been levied on
some different footings. If we accept the contention of the revenue to adjust
long-term capital loss against exempt income (long-term capital gain), it will
be contrary to the law and contrary to the intention, object and purpose of
the legislature in introducing clause (38) to s. 10 of the Act. Further,
acceptance of the revenue’s view on the issue, gives rise to an absurd outcome
of interpretation. If the facts are reversed, then, long-term capital loss
from taxable assets will have to be adjusted against the long-term capital
gains exempt u/s 10(38) of the Act.


The Tribunal allowed the appeal filed by the assessee.

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Nature of Lease Transaction – Update in Light of Recent Judgments

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VAT

Nature of Lease Transaction – Update in Light of Recent
Judgments


The issue whether a transaction is taxable lease transaction
under Sales Tax Law or not, is a very debatable one. It is a judgment based
issue as the term ‘Lease Transaction’ (transfer of right to use goods) is not
defined in sales tax laws. From judgments delivered so far, it can be seen that
if there is delivery of possession to client, then taxable lease transaction
takes place. On the other hand, if there is no delivery of possession, i.e., if
effective control is not transferred to client, then there is no lease
transaction. Landmark judgments on the issue are as hereunder:

Rashtriya Ispat Nigam Ltd. 126 STC 114 (SC)

In this case amongst others, the Supreme Court has held that
in order to be a lease transaction, there should be delivery of possession to
the lessee. Unless effective control is given to the party, no lease transaction
takes place. The facts in this case were that Rashtriya Ispat Nigam Limited
allowed its contractor to use its machinery for the contract being executed for
it. One of the conditions of the contract was that the contractor was not free
to use the said machinery for any other work except for the contract executed
for Rashtriya Ispat Nigam Limited. The contractor was not allowed to move the
machinery outside the project area. Under above circumstances, the Supreme Court
held that there was no delivery of possession to amount as ‘transfer of right to
use goods’. Therefore, if the use is allowed under specified circumstances,
without freedom to the user, it cannot amount to taxable lease transaction.

Bharat Sanchar Nigam Ltd. 145 STC 91 (SC)

This is the latest case from the Supreme Court in the given
series. The issue in this case was about levy of lease tax on services provided
by telephone companies. The Supreme Court held that no sales tax was applicable
as the transaction pertained to service. While holding so, one of the learned
judges on the Bench observed the following (Para 98 below) about 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:

  1. There must be
    goods available for delivery;

  2. There must be a
    consensus ad idem as to the identity of the goods;

  3. The transferee
    should have a legal right to use the goods – consequently all legal
    consequences of such use including any permissions or licenses required
    therefore should be available to the transferee;

  4. 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;

  5. 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.”

At present, reliance is placed on above paragraph to decide
on the nature of the lease transaction. Subsequent judgments, relying and
analyzing on above judgments, are also now available. Reference can be made as
hereunder:

Alpha Clays 135 STC 107 (Ker)

In this judgment, the Hon. Kerala High Court has considered
the above judgment in case of Rashtirya Ispat Nigam Ltd. (Supra).

The Kerala High Court, amongst others, observed the
hereunder:

“From all the aforesaid decisions, it is clear that in order
to attract the provisions of section 5(1)(iii) of the Act, particularly the
expressions “transfer of the right to use goods”, there must be a parting with
the possession of the goods for the limited period of its use by the assessee in
favour of the lessees. In other words, so long as effective control of the goods
is with the assessee, the rent received from the customers for use of the goods
will not attract the provisions of section 5(1)(iii) of the Act. It is in those
circumstances, it has been held by this Court in Bahulayan’s case (1992) 1 KTR
137, that the hire charges received for use of the lorry is not exigible to tax
under section 5(1)(iii) of the Act, the effective control of the lorry was
always with its owner. It is on this principle, it was held in Rohini Panicker’s
case [1997] 104 STC 498 (Ker), that lending of video cassette for use by the
customers is exigible to tax under the Act, for the possession of the video
cassette is given to the customers for their use according to their will. It is
in view of this legal position, the Supreme Court in Aggarwal Brother’s case
[1999] 113 STC 317, has held that shuttering material is exigible to tax under
law.”

Similarly, based on
BSNL, now there
are a few more judgments. Reference can be made to the following recent
judgments:


Commissioner of Sales Tax v. Rolta Computers & Industries Pvt.
Ltd. 25 VST 322 (BHC)

In this case, the transaction was that the party allotted its
computer time to certain parties on exclusive basis. The Sales Tax Department
wanted to consider the said transaction as lease transaction relating to
computers. However, the Bombay High Court rejected the above plea. The Hon.
Bombay High Court, amongst others, observed the following:

“75.In our opinion, the essence of the right under article
366(29A)(d) is that it relates to user of goods. It may be that the actual
delivery of the goods is not necessary for effecting the transfer of the right
to use the goods but the goods must be available at the time of transfer, must
be deliverable and delivered at some stage. It is assumed, at the time of
execution of any agreement to transfer the right to use, that the goods are
available and deliverable. If the goods, or what is claimed to be goods by the
respondents, are not deliverable at all by the service providers to the
subscribers, the question of the right to use those goods, would not arise.”

In light of above, the Hon. Bombay High Court has held that allowing computer time does not fall in the category of lease transaction as no delivery of computer is made to the customer at any time.

Commissioner, VAT, Trade and Taxes Department v. International Travel House Ltd. 25 VST 653 (Delhi)

In this one more recent judgment, the Hon’ble Delhi High Court has observed the following:
 

“13.Sub-paras (b) and (c) of para 97 are important with reference to the facts of the case to determine as to whether or not there is a sale by virtue of transfer of right to use goods as envisaged in article 366(29A)(d). The admitted position which emerges is that the transferee, namely, NDPL, has not been made available the legal right to use the goods, viz., the permissions and licences with respect to the goods. In the present case, the permissions and licences with respect of the cabs are not available to the transferee and remained in control and possession of the respondent. It is the driver of the vehicle, who keeps in his custody and control the permissions and licences with respect to the Maruti Omni Cabs or the said permissions and licenses remained in possession of the respondent. These are never transferred to M/s NDPL. It, therefore, cannot be said that there is a sale of goods by transfer of right to use the goods. It is absent, namely, the ingredient as stated in para 97(c) of the Bharat Sanchar Nigam Ltd.’s case (2006) 3 VST 95 (SC); (2006) 145 STC 91 (SC); (2006) 3 SCC 1.”

A further observation is as follows:

“We may note that it has been held in the Division Bench judgment of the Allahabad High Court in Ahuja Goods Agency v. State of Uttar Pradesh (1997) 106 STC 540, that unless specified vehicles are transferred pursuant to the contract, there is no sale of the goods. It was also held that when it is the duty of the transporter to abide by all the laws relating to motor vehicles and excise, the custody remains with the owners of the vehicles and not the persons who have hired the vehicles, and, which again shows that there is no sale. We respectfully agree with the reasoning in Ahuja Goods Agency’s case (1997) 106 STC 540 (All). In the case before us also there are no identified goods as intended in para 97(b) of the Bharat Sanchar Nigam Ltd.’s case (2006) 3 VST 95(SC); (2006) 145 STC 91 (SC); (2006) 3 SCC 1 and hence no sale of goods. We also agree with the reasoning of the judgment in Lakshmi Audio Visual Inc. v. Assistant Commissioner of Commercial Taxes (2001) 124 STC 426 (karn) wherein R. V. Raveendran, J. (as he then was) held that when there is only hiring of audio visual and multimedia equipment, which equipment is at the risk of the owner and possession and effective control remain with the owners then, in such circumstances, it cannot be said that the customer had got the right to use the equipment and there was, therefore, no deemed sale. We may note that there are other single Bench judgments of the Allahabad High Court which follow the view of the Division Bench in the Ahuja Goods Agency’s case (1997) 106 STC 540 and we need refer to only on such judgments reported as Mohd. Wasim Khan v. Commissioner of Trade Tax, U.P., Lucknow (2009) 20 VST 196(All); (2006) 30 NTN 233, in which the contracts were those to providing buses for transportation of the employees of the companies from one place to another and which transaction was held to be not a sale because the driver and other employees of the vehicles were employees of the owners, the road permit was in the names of the owners who had to take insurance for the vehicles and the workmen and consequently it was held that there was no case of transfer of the right to use the goods because the effective control of the vehicle remained with the owners of the buses.”

Thus, the concept of the nature of lease transaction gets clear from the above judgments. Whether effective control is with the client, so as to make the transaction a taxable lease transaction has to be decided in light of such judgments .

S 50C and 69B– Provisions of S. 50C do not apply to the purchaser of property. S 69B requires collection of independent evidence to show that any undisclosed investment was made by the assessee in purchase of property failing which the buyer could not be

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26 ITO v Smt. Kusum Gilani

ITAT Delhi `D’ Bench

Before A. D. Jain (JM) and K. G. Bansal (AM)

ITA No. 1576/Del/2008

Assessment Year: 2004-05. Decided on : 11th December, 2009.

Counsel for revenue / assessee: B. K. Gupta / Kapil Goel

S 50C and 69B– Provisions of S. 50C do not apply to the
purchaser of property. S 69B requires collection of independent evidence to show
that any undisclosed investment was made by the assessee in purchase of property
failing which the buyer could not be saddled with the liability on account of
undisclosed investment.

Per K. G. Bansal:

Facts:

While assessing the total income of the assessee, the
Assessing Officer made an addition of Rs 9,49,400 on account of investment made
by the assessee in the purchase of property. The amount of addition represented
the difference between the value of the property as determined by the stamp
valuation authorities and the purchase consideration paid by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A),
who deleted the addition.

Aggrieved by the order of CIT(A) the Revenue preferred an
appeal to the Tribunal where it was contended that the addition was made u/s 69B
though the assessment order did not mention the section. The Revenue also
contended that the tribunal direct the AO to make a reference to the valuation
officer u/s 142A for determining the value of investment in the property during
the year.

Held:

The Tribunal following the order in the case of Smt. Chandni
Bhuchar held that, in the case of the purchaser of the property, –

(i) the provisions of S. 50C do not apply,



(ii) the AO ought to
collect evidence indicating that the assessee paid money over and above the
amount disclosed in the purchase deed.


The Tribunal noted that there was no such evidence on record.

Following the order in the case of Smt. Chandni Bhuchar, it
also held that it cannot issue directions to the Revenue in second appeal to
make a reference to the Valuation Officer.


The
Tribunal dismissed the appeal filed by the Revenue.


Cases referred to:

1 Smt. Suman Kapoor ITA No. 2193 (Del)/ 2009 dated
05.08.2009

2 Smt. Chandni Bhuchar ITA No. 1580 (Del)/2008 dated
27.02.2009

3 Shri Sharad Gilani (ITA No. 1577/ Del/ 2009dated
15.04.2009


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s. 74(1)(b) — The amendment to s. 74(1)(b) does not apply to long- term capital loss incurred prior to AY 2003-04—Long-term capital loss of an assessment year prior to AY 2003-04 can be set-off even against short-term capital gain of AY 2003-04 or thereaf

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25 Geetanjali Trading Ltd. vs ITO

ITAT Mumbai `G’ Bench

Before R. K. Gupta (JM) and
J. Sudhakar Reddy (AM)

ITA No. 5428/Mum/2007

A.Y.: 2004-05. Decided on : 24.12. 2009.

Counsel for assessee / revenue: Hariram Gilda / A. K. Singh

s. 74(1)(b) — The amendment to s. 74(1)(b) does not apply to
long- term capital loss incurred prior to AY 2003-04—Long-term capital loss of
an assessment year prior to AY 2003-04 can be set-off even against short-term
capital gain of AY 2003-04 or thereafter.

Per J. Sudhakar Reddy:

Facts :

The assessee had brought forward its long-term capital loss
of AY 2002-03, which was set-off against the short-term capital gain of Rs.
4,34,330 of AY 2004-05. In view of the amendment to s. 74(1)(b) w.e.f. AY
2003-04, the AO held that long-term capital loss can be set-off only against
long-term capital gain.

Aggrieved, the assessee preferred an appeal to the CIT(A),
who dismissed the appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

Prior to amendment of s. 74(1)(b), w.e.f. AY 2003-04, if the
net result of the computation was a loss under the head `Capital Gains’, the
law, as it stood then, gave a right of set-off to the assessee against future
capital gains income. This right to set-off vested in the assessee in the year
in which the loss was incurred. There is nothing in the amendment which withdrew
this vested right of the assessee. The Tribunal, after considering the ratio of
the decision of the Apex Court in the case of Govinddas and Others, and also the
ratio of the decision of the Bombay High Court in the case of Central Bank of
India, held that the amendment to s. 74(1)(b) is prospective and not
retrospective; and that the assessee is entitled to set-off long-term capital
loss incurred in AY 2002-03 against any income assessable under the head
`Capital Gains’ for any subsequent assessment year.

Cases referred to:

1 Govinddas and Others vs ITO 103 ITR 123 (SC)

2 CIT vs Farida Shoes Ltd. 235 ITR 560

3 CIT vs Devang Bahadur Ram Gopal Mills Ltd. 41 ITR 280
(SC)

4 CIT vs Ganga Dayal Sarju Prasad 155 ITR 618 (Pat)

5 ACIT vs Central Bank of India 159 ITR 756 (Bom)


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Proviso to s. 254(2A) — Tribunal can stay the proceedings before the AO in exercise of its incidental powers as well as in view of the proviso to S. 254(2A)—The Tribunal disposed the stay application by directing the AO to pass the assessment order by 31.

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24 Pancard Clubs Ltd. vs DCIT

ITAT Mumbai `C’ Bench

Before S. V. Mehrotra (AM) and
D. K. Agarwal (JM)

SA No. 235/Mum/2009

A.Y.: 2004-05 and 2005-06. Decided on: 18.12.2009

Counsel for assessee / revenue: S. E. Dastur, Nitesh Joshi
and D. V. Lakhani / Vikram Gaur

Proviso to s. 254(2A) — Tribunal can stay the proceedings
before the AO in exercise of its incidental powers as well as in view of the
proviso to S. 254(2A)—The Tribunal disposed the stay application by directing
the AO to pass the assessment order by 31.12.2009 in accordance with law, but
not to serve the same on the assessee; and, thus, not to give effect to the same
for a period of six months from the date of passing of its order or till date of
passing of the appellate order by the Tribunal, whichever is earlier.

Per S. V. Mehrotra:

Facts :

For the assessment years 2004-05 and 2005-06, the CIT passed
orders u/s 263 of the Act directing the AO to: (i) Tax the advances towards sale
of room nights by the assessee from its card members under the Holiday
Membership schemes, in the year in which such advances are received; and (ii)
Not allow deduction for the provision in respect of the prorata amount relatable
to the difference between the offer price and the surrender value.

The assessee preferred an appeal to the Tribunal against the
orders passed by CIT u/s 263 of the Act. The appeals filed by the assessee came
up for hearing on 15.12.2009, but the Tribunal adjourned the hearing to
24.3.2010 to await the decision of the Special Bench constituted in Chennai in
the case of Mahindra Holiday Resorts Ltd.

The AO was required to complete the assessment proceedings by
31.12.2009 to give effect to the orders of the CIT. As a result of the said
additions/disallowances, there would be an addition to the total income of Rs
195,07,77,400, thereby creating a huge demand against the assessee. Accordingly,
the assessee filed an application for stay of the assessment proceedings before
the AO.

Held:

It is trite law that the Tribunal can stay the proceedings
before the AO in exercise of its incidental powers as well as in view of the proviso to s. 254(2A). The Tribunal noted that
similar power had been exercised by the Tribunal in the case of M/s Reliance
Communications Infrastructures Ltd. in S.A. No. 135/M/2009, for the assessment
year 2004-05, vide its order dated 24.4.2009. The Tribunal directed the AO to
pass the assessment order by 31.12.2009 in accordance with the law, but not to
serve the same on the assessee; and, thus, not to give effect to the same for a
period of six months from the date of its order or till the date of passing of
the appellate order by the Tribunal, whichever is earlier.

Cases referred to:



1 ITO vs M. K. Mohammed Kunhi, 71 ITR 8265 (SC)

2 Lipton India Ltd. vs ACIT, (1994) 95 STC 216 (Mad)

3 State of Andra Pradesh vs V.B.C. Fertilisers & Chemicals
Ltd., (1994) (2) ALT 487.

4 M/s. Reliance Communications Infrastructure Ltd. vs ACIT,
(S.A.No.133/M/09)


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s. 254 — A request made at the time of hearing, which has not been dealt with in the order of the Tribunal, constitutes an error in the order—The action of the Tribunal in setting aside the order of CIT(A) and upholding the action of the AO in a case wher

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28 Puja Agencies Pvt. Ltd. vs ACIT

ITAT Mumbai `C’ Bench

Before N. V. Vasudevan (JM)
and Rajendra Singh (AM)

MA No. 452/Mum/2009

A.Y.: 2003-04. Decided on: 6.1.2010

Counsel for assessee / revenue: Vijay Mehta /
L. K. Agarwal

s. 254 — A request made at the time of hearing, which has not
been dealt with in the order of the Tribunal, constitutes an error in the
order—The action of the Tribunal in setting aside the order of CIT(A) and
upholding the action of the AO in a case where the CIT(A) has not adjudicated on
the specific grounds raised by the assessee and also on alternate grounds
raised, constitutes a mistake apparent on record.

Per Rajendra Singh:

Facts :

The assessee filed a miscellaneous application requesting
amendment of the order dated 20.4.2009 of the Tribunal, in ITA No. 1483/M/2007.
The facts of the case and the mistakes pointed out by the assessee in the order
of the Tribunal were as follows:

The assessee had shown a loss of Rs. 1,35,88,144 on account
of trading in shares which the AO had treated as speculative loss in terms of
Explanation to s. 73. Aggrieved, the assessee preferred an appeal to CIT(A).

In an appeal to the CIT(A), the assessee, inter alia,
contended that its case was covered by the exceptions provided in Explanation to
s. 73; and an alternate ground was raised regarding apportionment of expenses
towards speculative businesses, in case the claim of the assessee was not
accepted. The CIT(A) held that the provisions of Explanation to s. 73 were
applicable only in case of purchases and sales of shares of group companies. And
since the assessee was not trading in shares of group companies, the CIT(A),
following the decision of the SMC Bench of the Tribunal in the case of Aman
Portfolio, directed the AO to treat the loss as business loss. He did not
adjudicate on the issue as to whether the assessee was covered by the exceptions
provided in Explanation to s. 73. He also did not deal with the alternate ground
raised by the assessee.

The revenue filed an appeal against the order of the CIT(A).
The assessee did not prefer an appeal to the Tribunal.

The Tribunal, while disposing the revenue’s appeal, noted
that the decision of the SMC Bench of the Tribunal in the case of Aman
Portfolio, had been reversed by the SB of the Tribunal in the case of AMP
Spinning and Weaving Mills Pvt. Ltd (100 ITD 142), in which it was held that
Explanation to s. 73 was applicable to all transactions of purchases and sales
of shares.

It also observed that the main business of the assessee was
trading in shares and that loss had arisen on account of trading in shares.

The assessee contended that in the course of
hearing, the members had expressed an opinion that the issue be set aside to the
file of the AO, to be decided afresh after considering various decisions
regarding applicability of Explanation to s. 73. The assessee was accordingly
asked to file a letter mentioning the issues that required to be considered
afresh before the AO. In compliance, the assessee filed a letter dated
18.3.2009. Therefore, the order of the Tribunal setting aside the order of the
CIT(A) and confirming the order of the AO was contrary to the views expressed at
the time of hearing; and, therefore, there was an apparent mistake.


Held:


(i) The log book of hearing maintained by the Accountant
Member did not show that the bench had expressed any view in the matter. The
notings did show that the AR had made a request for restoring the matter to
the AO, but the bench did not express any view in the matter. The log book of
the Judicial Member was not available. In view of these facts, the Tribunal
did not accept the point made in the MA that the members of the bench had
expressed any view in the matter. However, since the request made by the AR
for restoring the matter was not dealt with, there was an error in the order
to that extent.

(ii) The Tribunal noted that the assessee had specifically
mentioned to the CIT(A) that its case is covered by the exceptions provided to
Explanation to s. 73, and had also raised an alternate ground regarding
apportionment of expenses towards speculative businesses, in case the claim of
the assessee was not accepted. Since the CIT(A) had decided the issue in favor
of the assessee on technical grounds, he had not adjudicated on these issues.
In spite of these facts, the Tribunal had stated in para 3 of its order that
according to the findings by the AO, that the main business was trading in
shares had become final, because the assessee had not appealed against the
order of the CIT(A). This finding of the Tribunal constituted a mistake,
apparent on record.

(iii) It is a settled legal position that the assessee, as
a respondent, can support the order of the CIT(A) on alternate grounds also.
The only limitation is that the assessee, as a respondent, cannot argue
against the finding of the CIT(A) which is in favour of the revenue. In the
present case, the CIT(A) had not given any finding on whether the case was
covered by exceptions provided in Explanation to s. 73 and also regarding
apportionment of expenses.

(iv) Once the Tribunal did not accept the technical ground,
it was required to restore the matter to the file of the CIT(A) for deciding
the issue on merits.

The order passed by the Tribunal was modified by holding that
the order of the CIT(A) had been set aside and the matter restored back to him
for adjudicating the specific grounds raised by the assessee with him. The
miscellaneous application of the assessee was allowed.

levitra

Section 28 — Non realisability of balances lying with a bank in FD and current accounts held to be allowable as business loss.

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New Page 1

27 Mehul H. Mehta vs ITO

ITAT ‘B’ Bench, Mumbai

Before R. K. Gupta (J. M.)
and Rajendra Singh (A. M.)

ITA No. 8531 / M / 2004

A. Y.: 2001-02. Decided on 15.06.09

Counsel for Assessee / Revenue: Pradip Kapasi / Malathi R.
Sridharam

Section 28 — Non realisability of balances lying with a bank in
FD and current accounts held to be allowable as business loss.

Per Rajendra Singh:

Facts:

The assessee was conducting business as a proprietor. His
banker was Madhavpura Mercantile Co-op. Bank Ltd. From the balance in his
current account with the bank, on 12.03.2001, he received a pay order of Rs.
6.75 lakhs favouring a company in which he was a director. On the very next day,
the bank collapsed due to a securities scam and the RBI suspended all its
operations with immediate effect. Consequently, the pay order was not cleared.
In addition, the assessee also had fixed deposits worth Rs. 4 lakhs with the
bank with provision for availing credit facilities for business purposes. As
there was no hope to recover any money, he claimed sum of Rs. 0.3 lakhs towards
balance in his current account, the Rs. 6.75 lakhs pay order and the fixed
deposit worth Rs. 4 lakhs as a business loss.

The AO disallowed the claim for the following reasons:

• The bank had not denied its liability to pay while
confirming the above balance in May 2001;

• On 7.9.2001, the assessee himself had applied for
revalidation of the pay order;

• The fixed deposit was a surplus fund withdrawn from the
business by the assessee.


The CIT (A) confirmed the AO’s order, as according to him,
the amount claimed as loss was out of the loans received by the assessee just a
few days prior to the collapse of the bank. Further, he observed that even if it
was accepted that the FDRs had been pledged for business, based on the decision
of the Madras High Court in the case of Menon Impex Ltd., it did not show any
direct nexus of the FDR with business.

Before the Tribunal, the revenue justified the orders of the
lower authorities and submitted that the amounts written-off were in fact loans
taken; and hence, it was a loss of capital and not a business loss.

Held:

According to the Tribunal, though the money in the bank
account was accountable as mainly loans received by the assessee, there was no
dispute that the current account was being operated for the purpose of carrying
on business. Therefore, according to the Tribunal, the money lost was during the
course of carrying on business. Hence, the loss was a business loss. Further,
relying on the decision of the Mumbai High Court in the case of Goodlass Nerolac
Paints Ltd. that once it was established that an amount related to trade and had
become bad, the decision of the assessee to write-off the amount in a particular
year should not be interfered with, it allowed the claim of the assessee.

Cases referred to:

1. Goodlass Nerolac Paints Ltd. 188 ITR 1 (Mum)

2. Menon Impex Ltd. 259 ITR 406 (Mad)

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‘SALE PRICE/TURNOVER’ FOR LEVY OF CST

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Introduction :

Once the transaction is held to be a sale, the next question which arises is the quantum on which such tax is leviable. This is referred to as ‘sale price’ in relation to individual transaction and ‘turnover’ in relation to aggregate of transactions during a particular period. There may be a number of different elements which require consideration while determining sale price/turnover.

Definitions :

Under the CST Act, 1956, the above terms are defined as discussed below :

“(h) ‘sale price’ means the amount payable to a dealer as consideration for the sale of any goods, less than any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged;

Provided that in the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause.”

“(j) ‘turnover’ used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-state trade or commerce made during any prescribed period and determined in accordance with the provisions of this Act and the rules made thereunder.”

From the definition of sale price, it appears that though all amounts charged to the buyer till delivery is given are to be considered as sale price, the amount charged separately for freight is not to be included in the sale price.

Interpretation of above definitions :

However, interpretation of the above definitions have attracted lengthy litigations. There are a number of judgments interpreting the above terms.

Recently, the Supreme Court had an occasion to deal with the above aspect. The Supreme Court has delivered judgment in case of India Meters Ltd. v. State of Tamil Nadu (34 VST 273).

In this case, the facts were that the appellant, M/s. Indian Meters Ltd. (referred to as dealer) sold meters manufactured by it to its customers within and outside Tamil Nadu. The dealer had charged applicable tax i.e., Tamil Nadu Sales Tax or Central Sales Tax on the price charged by it. The dealer had also collected separately amounts from the buyers towards freight charges, by raising debit notes. The dealer had not paid tax on the above amounts. The Sales Tax Authorities held that these amounts are also part of sale price and accordingly levied tax on the same under the respective Acts.

Though, the Tamil Nadu Sales Tax Appellate Tribunal held in favour of dealer, the High Court held that the said amounts are part of sale price and turnover and therefore correctly held as liable to tax.

The matter came before the Supreme Court. The Supreme Court examined the facts. It was found that the clause in the sale contract provided that the transfer of title to the goods was to take place only on delivery of goods at customer’s place and the customer’s obligation to pay would arise only after the delivery had been so effected. Simultaneously it was also found that there was a clause in the contract dealing with the price. It was provided that the price was payable per unit, ex-factory delivery. The Clause further provided that sales tax and excise duty will be payable only on ex-factory price.

Based on the above terms and conditions, it was argued by the dealer that since the prices are ex-factory and freight is charged separately, the said freight was not chargeable to tax. Various judgments were cited before the Supreme Court.

Supreme Court’s ruling :

The Supreme Court has confirmed the view of the High Court.

The Supreme Court observed that in the present case, the obligation to pay the freight was clearly on the dealer, as no sale could have taken place unless the goods were delivered at the premises of the buyer. It was further observed that for giving such delivery incurring cost of freight was required on part of the dealer. The Supreme Court held that though the contract mentioned the price as ex-factory price, the delivery was not at the factory gate. Therefore, the specification of what the price would be at the factory gate cannot have any impact on the place of delivery, held the Supreme Court. The Supreme Court also observed that had the delivery been completed at the factory gate, then the expenses incurred thereafter by way of freight could have been categorised as post-sale expenses and could not have been taxable. Thus, ultimately the Supreme Court confirmed the levy. The Supreme Court reproduced legal position in the following manner.

“In Paprika Ltd. v. Board of Trade, (1944) 1 ALL ER 372, the Court observed as under :

“Whenever a sale attracts purchase tax, that tax presumably affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even the price is expressed as ‘X’ plus purchase tax.”

In this case, the learned judge also quoted with approval what Goddard, L.J., said in Love v. Norman Wright (Builders) Ltd., (1944) 1 All ER 618:

“Where an article is taxed, whether by pur-chase tax, customs duty or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consider-ation though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up or whether the seller has included tax or not” and summed up the position in the following words:

“So far as the purchaser is concerned, he pays for the goods that the seller demands, namely, the price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.”

The Supreme Court further referred to settled position as under:

“This Court had an occasion to deal with identical issues in the case of Hindustan Sugar Mills (1978) 4 SCC 271. P. N. Bhagwati J. (as His Lordship then was), clearly held that by reason of the provisions of the Control Order which governed the transactions of sale of cement entered into by the assessee with the purchasers in both the appeals before us, the amount of freight formed part of the ‘sale price’.

In this judgement, the Court comprehensively explained the entire principle of law by giving an example in para 8 of the judgment which reads as under:

“8. Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily, it is not shown as a separate item in the bill, but it is included in the price charged by him. The ‘sale price’ in such a case could be the entire price inclusive of excise duty, because that would be the consideration payable by the purchaser for the sale of the goods. True, the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to reimburse him in respect of the excise duty already paid by him on the manufacture of the goods. But, even so, it would be part of the ‘sale price’, because it forms a component of the consideration pay-able by the purchaser to the dealer. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability, statutory or otherwise, under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. In either case, it would be part of the ‘sale price’. So also, the amount of sales tax payable by a dealer, whether included in the price or added to it as a separate item, as is usually the case, forms part of the ‘sale price’. It is payable by the purchaser to the dealer as part of the consideration for the sale of the goods and hence falls within the first part of the definition?….”

Ratio of Supreme Court judgement:

The ratio of the judgement is required to be seen carefully. Even if the freight is collected separately, if the delivery is at the door of the customer, then in spite of the above exclusion of freight from the definition of sale price, it will be includible in the sale price and taxable.

The further ratio which comes out is that if it is established that the delivery is given at the seller’s place and the freight charges are incurred thereafter, then the said collection can be considered as post-sale collection. It will also be considered as reimbursement of expenditure made on behalf of the buyer. In such circumstances, it will not be taxable.

We hope the above judgement will settle the controversy for all time to come and the dealers can determine the taxation of freight accordingly.

LEASE TRANSACTION — IMPORTANT JUDGMENT ABOUT LEASE OF ‘SPACE SEGMENT CAPACITY’ IN TRANSPONDERS IN SATELLITE

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Vat

Introduction :


Whether a particular transaction is a transaction for
‘Transfer of Right to use goods’ (Lease transaction), so as to be liable under
Sales Tax Laws, is always an issue of contest. There are a number of judgments
analysing the scope of deemed sale by way of lease transaction. Mainly two
aspects are required to be determined. One is, whether the subject matter of
transaction is ‘goods’ and the other one is, whether on the facts of the case
the transaction is of lease or not. If answer to both the issues is yes, the
next


issue arises is about situs of lease transaction.

Criteria for determining nature of lease transaction :

Up till today there are a number of judgments specifying the
criteria for determining the nature of lease transaction. Reference can be made
to the judgments in following cases :

(a) Rashtriya Ispat Nigam Ltd., (126 STC 114) (SC)

In this case, amongst others, the Supreme Court held that to
be a lease transaction, there should be delivery of possession to the lessee.
Unless effective control given to party, no lease transaction takes place.

(b) Bharat Sanchar Nigam Ltd., (145 STC 91) (SC)

The issue in this case was about levy of lease tax on
services provided by telephone companies. The Supreme Court held that no such
tax is applicable as the transaction pertains to service. While holding so, one
of the learned Judges on the Bench observed as under in para 98 about the nature
of 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;

    (e) 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, it can be said that whether a lease sale has taken
place or not, can be decided in light of the above criteria laid down by the
Supreme Court.

(c) Agrawal Brothers v. State of Haryana,


(113 STC 317) (SC)

In this case the dealer has allowed its shunting material to
the contractor to whom it has awarded contract for construction. Rent was
charged for the same. In this case the Supreme Court observed that to the extent
the shunting material is handed over to the contractor, the delivery of
possession takes place and therefore the transaction is liable to lease tax.

In light of the above judgments the criteria becomes clear
that if effective control is passed on to the lessee, then lease transaction
takes place, otherwise not.

Whether subject matter of transaction is ‘goods’


The second issue is to decide about the nature of item, which
is subject matter of lease transaction. If it is goods, then only taxable lease
transaction can take place. The term, ‘goods’, is also analyzed in various
judgments. Brief reference can be made to the following important judgments :

(a) Bharat Sanchar Nigam Ltd., (145 STC 91) (SC)

In relation to meaning of goods the Supreme Court has
observed as under :

“54. The judgment in that decision is awaited. For the time being, we will assume that an incorporeal right is ‘goods’.

55. In fact the question whether ‘goods’ for the purpose of sales tax may be intangible or incorporeal need not detain us. In Associated Cement Companies Ltd. v. Commissioner of Customs, (2001) 4 SCC 593, the value of drawings was added to their cost since they contained and formed part of the technical know-how which was part of a technical collaboration between the importer of the drawings and their exporter. It was recognized that knowledge in the abstract may not come within the definition of ‘goods’ in S. 2(22) of the Customs Act.

56. This view was adopted in Tata Consultancy Services v. State of Andhra Pradesh for the purposes of levy of sales tax on computer software. It was held :

“A ‘goods’ may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software, whether customised or non-customised, satisfies these attributes, the same would be goods.”

57. This in our opinion, is the correct approach to the question as to what are ‘goods’ for the purposes of sales tax. We respectfully adopt the same.”

(b) Tata Consultancy Services, (137 STC 620) (SC)

In para 17 the Supreme Court has observed as under :

“17.    Thus this Court has held that the term ‘goods’, for the purposes of sales tax, can-not be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc. are ‘goods’ for the purposes of sale tax. The submission of Mr. Sorabjee that this authority is not of any assistance, as a software is different from electricity and that software is intellectual incorporeal property whereas electricity is not, cannot be accepted. In India the test, to determine whether a property is ‘goods’, for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible.”

Situs of lease transaction:

If a lease transaction is a taxable lease transaction under Sales Tax Laws, then further issue is about the situs, i.e., where the sale has taken place. In this respect reference can be made to landmark judgment in case of M/s. 20th Century Finance Corporation Ltd. v. State of Maharashtra, (119 STC 182) (SC). In this case the Supreme Court has laid down as under about situs of lease transaction.

“35.    As result of the aforesaid discussion our conclusions are these:

    …………………….

    The appropriate Legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction the situs of sale in case of the transaction of transfer of right to use any goods would be the place where the property in goods passes, i.e., where the written agreement transferring the right to use is executed.

    Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use.

    In cases of where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods.
    The transaction of transfer of right to use goods cannot be termed as contract of bailment as it is deemed sale within the meaning of legal fiction engrafted in clause (29A)(d) of Article 366 of the Constitution wherein the location or delivery of goods to put to use is immaterial.”

Under the above background the Karnataka High Court had an occasion to deal with taxability of a particular transaction under the Karnataka VAT Act which is dealt with in the following judgment.

Antrix    Corporation    v.    Asst.    Commissioner    of Commercial Taxes, (29 VST 308) (Kar.):

In this judgment, delivered on 6-2-2010, the issue was about taxability of transaction of hiring of space segment capacity on transponders attached to IN-SAT Satellites. The facts are that, under the authority from the Department of Space of Government of India, the dealer entered into agreements with private parties for hiring of space in the satellite. The Sales Tax authorities considered the transaction as lease of goods liable to tax under the Karnataka VAT Act. The High Court has upheld the action of the sales tax authorities.

The High Court based on judgments cited above about ‘goods’, observed that the ‘Space Segment Capacity’ in transponders is goods by itself. The High Court also noted that they are capable of giving exclusive control to the parties. In respect of effective control the High Court observed that though the technical control on the satellite is of the dealer, (the satellite being controlled and operated by them), the ‘legal control’ is with the lessee. In respect of situs the High Court observed that though the satellite, in which the space is located and which is given on hire, is in orbit, which is 36000 kms away from the earth, still since the agreement is executed in Karnataka the situs will be in Karnataka. Accordingly the High Court justified the assessment of hire charges for space under Karnataka VAT Act, rejecting the writ petition of the dealer.

Conclusion:

The judgment will have considerable impact upon the judicial interpretation of nature of lease transaction.

Search & Seizure under mvat Act, 2002

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VAT

1. Introduction


The powers of inspection, search and seizure are necessary
for the purpose of effective administration of taxation laws, like Sales Tax. It
is, therefore, valid as per the Constitution also, subject to reasonable limits.

In Maharashtra, the Bombay Sales Tax Act, 1959 (BST Act) was
in operation till 31st March 2005. The Maharashtra Value Added Tax Act, 2002 (MVAT
Act) has come into operation from 1st April 2005.

Under the BST Act, section 49 was providing for necessary
powers of search and seizure. Similar powers have been provided through section
64 of the MVAT Act. The provisions of both the Acts are almost the same.
Therefore, the precedents and circulars issued in relation to the BST Act will
also remain applicable in that relation to the MVAT Act. At present, there are a
number of search operations. Therefore, the provisions of Search and Seizure are
briefly discussed herein.

2. Section 64 of the
Maharashtra Value Added Tax Act, 2002

2.1
Section 64 of the MVAT Act reads as under:

“64. Production and inspection of accounts and documents and
search of premises.

(1) The Commissioner may, subject to such conditions as may
be prescribed, require any dealer to produce before him any accounts or
documents, or to furnish any information, relating to stocks of goods of, or to
sales, purchase and delivery of goods or to payments made or received towards
sales or purchase of goods by the dealer, or any other information relating to
his business, as may be necessary for the purposes of this Act.

(2) All accounts, registers and documents relating to stock
of goods of, or to purchases, sales and delivery of goods, payments made or
received towards sale or purchase of goods by any dealer and all goods and cash
kept in any place of business of any dealer, shall at all reasonable times, be
open to inspection by the Commissioner, and the Commissioner may take or cause
to be taken such copies or extracts of the said accounts, registers or documents
and such inventory of the goods and cash found as appear to him to be necessary
for the purposes of this Act.

(3) If the Commissioner has reason to believe that any dealer
has evaded or is attempting to evade the payment of any tax due from him, he
may, for reasons to be recorded in writing, seize such accounts, registers or
documents of the dealer as may be necessary, and grant a receipt for the same,
and shall retain the same for so long as may be necessary in connection with any
proceedings under this Act or for any prosecution:

Provided that, on application of the dealer, the Commissioner
shall provide true copies of the said accounts, registers or documents.

(4) For the purposes of sub-section (2) or
sub-section (3), the Commissioner may enter and search any place of business of
any dealer or any other place where the Commissioner has reason to believe that
the dealer keeps or is for the time being keeping any accounts, registers or
documents of his business or stocks of goods relating to his business.

(5) Where any books of accounts, other documents, money or
goods are found in the possession or control of any person in the course of any
search, it shall be presumed unless the contrary is proved, that such books of
accounts, other documents, money or goods belong to such person.

Explanation: For the purposes of this section, place of
business includes a place where the dealer is engaged in business, through an
agent by whatever name called or otherwise, the place of business of such an
agent, a warehouse, godown or other place where the dealer or the agent stores
his goods and any place where the dealer or the agent keeps the books of
accounts.”

2.2. As per section 64(1), the Commissioner (which also
includes his deputy if so authorized) can call for any information or ask to
produce before him any accounts or documents relating to stock of goods or
sales/purchases, deliveries or any other information relating to the business as
may be necessary for the purpose of the Act. Thus above information, etc. can be
called in any proceedings. Since other information can also be called, even
ledger, cash/bank book, though not specifically mentioned, can be asked for
under the above provision. As per Rule 70 of MVAT Rules, 2005, notice for above
purpose shall be in Form 603.

2.3. As per section 64(2), the Commissioner can take
inspection of the above mentioned accounts or documents kept at any place of
business of dealer at any reasonable time and also take extracts/copies of the
same.

2.4. As per section 64(3), the Commissioner, if he has reason
to believe that the dealer is attempting to evade payment of any tax due from
him, he can seize the above mentioned accounts/documents, etc. He shall grant
receipt for the same. The said accounts can be retained so long they are
necessary in connection with any proceedings under this Act or for a
prosecution.

2.5. As per Rule 69, such seized books cannot be retained for
more then 21 days without recording reasons. However, if any longer retention is
required, and, if the authority seizing the books is below the rank of Jt. Comm.
of Sales Tax, then he can retain the same for a longer period by obtaining
permission from the higher authority. The Joint Commissioner can give permission
only up to one year, at a time, and it should be given after recording reasons
for the same. The time limit can be further extended, but only one year at a
time. However if the seizure is by a Joint Commissioner or any higher authority,
then no such permission is required.

2.6. If any accounts, documents, stocks or money is found at
any such place where visit is given then they shall be deemed to belong to the
person in whose possession they are found, unless the
contrary is proved. [Section 64(5)]. This is with a view to safeguard interest
of Revenue and to see that the dealer does not come out with false excuses.

2.7. By explanation to section 64(5), a Special meaning is
given to the ‘place of business’. Thus the authorities have very wide coverage.

2.8. Reference can be made to the judgment in case of Bhowal
Traders & Others (131 STC 145), wherein Gauhati High Court has held that when
there is no prohibition under the Act for searching the residential premises,
there can be valid search of residential premises also, if there is reason to
believe that the documents are lying there. From the above provisions in section
64(5), it appears that the authorities can search residential premises under the
MVAT Act, provided that other
conditions are fulfilled.

3.     It is expected that a search will be conducted only after having reasonable bonafide belief. (Har Kishandas Gulabdas & Sons – 27 STC 434). Reason for belief should be recorded before hand. (Hari-harajan Singh 98 STC 208 and Tapcon Int. (I) Pvt. Ltd. 104 STC 433).

    ‘Reason to believe’ means that the belief must be of a reasonable nature and as a prudent man. It must be based on some relevant material and not based on suspicions, gossip or rumours [Lit light Co. 43 STC 449 and Shree Nath Singh 82 ITR 147, Bhagwan Ind. Ltd. 31 STC 293, Lakhamani Mewal Das 103 ITR 437 (SC) and Laxman Das Saraf 103 STC 385].

    At all Reasonable Times means that it is normally not allowable for an hour or a day that is not a working hour or a working day respectively, even though the place of business is found open. (Mariyala Venkateswara Rao 2 STC 167). No entry is possible at odd or unearthly hours. (Deoralia Bros. 50 STC 113).

    Under the present provisions under the MVAT Act, there are no powers to seize goods or to ask for making advance payment of tax. The Enforcement authority (i.e. visiting officer), after inspect-ing books, etc., shall assess the dealer on the basis of materials found. As per section 23(5) of MVAT Act, such assessment can be qua transaction also. After passing such order, the tax may become due which then can be recovered as per provisions of law. The dealer can also prefer appeal, if aggrieved. However, practically, dealers are forced to make an advance payment.

Under the present MVAT Act, it is noticed that there are more issues about Input Tax Credit. The department, on the ground, that vendor of the purchaser has not paid taxes, claims the said amount from the purchaser. In fact, such ITC can be reduced only by passing the necessary statutory order. However the department tries to get the ITC difference paid without passing such order and insists upon revi-sion of returns by the dealers themselves. Legally, it appears to be an unjustified action, which the dealer can resist as per the law. The practice is neither justified nor according to the law.

    Documents seized as a result of illegal seizure.

Though search is found illegal, as per the view held by various High Courts, the materials can be used as evidence. [M.K. Annamalai Chetiar & Co. (16 STC 687) Purshottam Rangta 79 STC 39, Poornmal (93 ITR 505) and Kusanlata Singh (185 ITR 56(SC)]. However, it is worth noting that in cases where courts are satisfied about wrongful seizure action, heavy costs can be levied by the court on the De-partment. Reference can be made to judgment in case of Director General of I.T. v. Diamond Stone Export Ltd. & Others (291 ITR 438)(SC).

8. Procedure of Search and Seizure

No procedure for search action is provided in the Act itself. This will be governed by other normal provisions. Enforcement Authorities normally take a statement of the person searched. The person can reply to the extent possible. If he subsequently finds that the statement given by him was not correct or was under duress, he can retract the same. The retraction should be as early as possible. It is also held that admission in the statement is not conclusive. The retracted statement is to be read together to evaluate weight of admission for appreciating evidence. Also admission should be of concerned dealer/person and not of any other person on his behalf. Reference in this respect can be made to the judgment in case of C.I.T. v. Ashok Kumar Soni (291 ITR 172)(Raj).

    The Commissioner of Sales Tax has issued a Trade Circular bearing No.1T of 1995 dated 21.1.95, explaining the rights and duties of the dealer visited by the Enforcement Officer. The said circular will be useful under the MVAT Act also.

    “Mini Enforcement”

Under the MVAT Act, there is one more provision, which is not exactly like search/seizure, but allows the departmental authorities to visit place of business of a dealer. This provision is contained in section 22 of MVAT Act i.e. Business Audit. The business audit contemplates audit of records of a dealer by sales tax authorities at the place of business of the dealer. As per the provisions of law, it has to be by prior intimation and cannot be a surprise visit in the nature of search/seizure.

However, the Commissioner of Sales Tax has issued a Trade Circular bearing No.25T of 2008 dt.23.7.2008, in which the scope of Business Audit is explained. From the said Circular, it is clear that this provision can be treated as relating to search/seizure, if the department wants to do the same. From the above circular, it is also clear that the powers are almost the same as search except that the authorities cannot seize the records. However they can call for the investigation team and convert the ‘business audit’ into ‘search and seizure’ action, ultimately the result will be same. This provision is, therefore, called “Mini Enforcement”.

Conclusion

Though the search/seizure provisions are necessary for effective implementation of the Act, we hope that the same will be utilised in a fair manner and with the utmost care. It should not become a tool in the hands of authorities to harass the dealers.

Recent amendments to MVAT Act, 2002

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Amendments are effected in Maharashtra Value Added Tax Act,
2002 and Maharashtra Value Added Tax Rules, 2005 to carryout Budget proposals
announced by the Finance Minister in his Budget Speech.

The gist of important changes can be given as under :

The amendments are effected by the Maharashtra Act No. XII of
2010, dated 29-4-2010. The amendments are in the Maharashtra State Tax on
Professions, Traders Callings and Employment Act, 1975, Maharashtra Tax on
Luxury Act, 1987 and Maharashtra Value Added Tax Act, 2002. The changes in
general are applicable from 1-5-2010, except for S. 42(3A) of the MVAT Act,
2002, which comes into operation from 1-4-2010.

Amendments in MVAT Act, 2002 :

(i) S. 18 of the MVAT Act enumerates various occurrences on
happening of which intimation is required to be given to the Sales Tax
Department. By amendment in S. 18 of the MVAT Act, 2002 it is now provided that
the dealer should also give intimation in the following two circumstance, (i) If
there is a change in the nature of business, and (ii) change in bank account.

Vide Circular No. 17T of 2010, dated 17-5-2010, it is
clarified that the change in nature of business means if the activity is shifted
from manufacture to trading or import or vice versa.

Similarly in relation to the bank account it is mentioned
that the details about closing or opening of the bank account should be
intimated.

(ii) S. 23(5) is about transactionwise assessment. Up till
today, only officers of Investigation Branch acting u/s.64 were entitled to
carry out transac-tionwise assessment. By amendment in S. 23(5) it is now
provided that the other sales tax authorities will also be entitled to carry out
transaction- wise assessment in case of tax evasion, etc.

(iii) By amendment in S. 29 the following changes are
effected :

(a) The quantum of penalty u/s.29(6), which relates to
offence about contravention of tax invoice, is enhanced from Rs.100 to
Rs.1,000.

(b) The quantum of penalty u/s.29(7), which relates to
offence about non-compliance of notices, is enhanced from Rs.1,000 to
Rs.5,000.

(c) U/s.29(11) it was provided that no penalty order should
be passed after 5 years from the end of the concerned year for which penalty
is to be levied. The period of 5 years is now extended to 8 years.





(iv) In Budget speech it was announced that a special 1%
composition scheme will be provided for builders/developers who transfer
immovable property also in the construction contract. An enabling provision is
inserted by way S. 42(3A) to give power to the Government to notify that
composition scheme. However the actual scheme will be known only upon issue of
Notification, which can be effective from 1-4-2010.

(v) Input Tax Credit and refund of excess credit is backbone
of successful VAT implication. Up till today, the position was that the
authorities were bound to grant refund as per amount shown in refund application
in Form 501. However now by amendment in S. 51, a proviso is inserted by which
powers are given to the sales tax authorities to reduce the refund from the
refund amount claimed in the refund application. Simultaneously Rule 55A is also
inserted to implement this proviso, which is discussed subsequently.

(vi) S. 61(3) is about VAT Audit. Till today, the turnover
limit is Rs.40 lakhs and a dealer having turnover of sale/purchase exceeding the
above limit is liable to VAT Audit. By amendment in S. 61(1) the following
changes are made :


(a) The turnover limits for attracting VAT Audit is
enhanced from Rs.40 lakhs to 60 lakhs. This will apply from the year
2010-2011.

(b) It is also provided that if the dealer holds
Entitlement Certificate under the Package Scheme of Incentives, then he
should get VAT Audit done irrespective of any monetary limits of turnovers.


(vii) S. 85 enumerates orders which are not appealable. By
amendment to S. 85, appeals in the following matters are debarred :

(a) Appeals against orders levying interest u/s.30(2)/30(4) :


U/s.30(2) interest is levied for delay in payment of tax as
per return. U/s.30(4) additional interest is levied when the dealer revises his
returns as per contingencies given in the said Section. Appeals against both the
orders are debarred. This will affect the dealers harshly. There are various
circumstances under which interest is not justified or justified at lower
amount. Now the dealers will not have any opportunity to get relief in interest,
though they may deserve the same.

(b) Appeals against Provisional attachment order
u/s.35(1)/(2) :


Provision attachment orders are passed u/s. 35(1)(2).

S. 35(5) provides special mode of appeal against such orders.
The dealer has to file application to the Commissioner of Sales Tax against the
attachment order and if such order is upheld by the Commissioner of Sales Tax,
then to file appeal before the Tribunal. This mode is untouched. However there
was no prohibition to file direct appeal before the Tribunal against attachment
order and in one of the matters the Tribunal held so. Now the specific
prohibition is brought in. Therefore, no direct appeal will be entertained
before the Tribunal and one has to go through the route of application to the
Commissioner of Sales Tax and then to the Tribunal.

(c) Appeals against intimation u/s.63(7) :


Intimation is in nature of proposal. It is issued to convey
findings of business audit with suggestive redressal action on part of
the dealer. Therefore appeal was otherwise also not maintainable, as such
intimation may not be an order. However, now the doubt, if any, is put to rest.
No appeal will be maintainable against such intimation issued u/s.63(7).

(viii) S. 86 — Tax invoice :

S. 86 enumerates requirements of Tax Invoice as well as other
than Tax Invoice. By amendment in S. 86 it is now provided that the selling
dealer while issuing Tax Invoice should also mention the TIN of the purchasing
dealer. Therefore, on the Tax Invoices issued from 1-5-2010 onwards, the selling
dealer should mention TIN of the purchasing dealer.


Accordingly, Tax Invoice can now be issued to registered dealers providing TIN. If no TIN of buyer is provided, Tax Invoice cannot be issued to him and if it is issued it can amount to wrong issue. In case Tax Invoice cannot be issued to buyer due to not having TIN, probably the seller will be required to issue other than Tax Invoice, like only invoice or retail invoice, bill, cash memo, etc. and may not be able to charge tax separately in the same. However in absence of specific prohibition, the seller may charge tax separately in other invoices also, though they are not tax invoices. It is better that the Department clarifies its stand on this issue to avoid future disputes.

For buyers it will be necessary to have Tax Invoice containing his TIN, otherwise set-off will not be eligible in respect of such purchase.

(ix) Changes in entries in the Schedules?:

Entry No.

Brief description

New rate/remarks

Effective
date

 

 

 

 

A-4(c)

Sarki Pend

Exempted form tax (consequently

 

 

 

this item is excluded from entry C-30)

1-5-2010

 

 

 

 

A-55(b)/(c)

Camphor/Dhoop including Loban

Exempted from tax

1-5-2010

 

 

 

 

A-57

Katha (catechu)

Exempted from tax (consequently

 

 

 

this item is excluded from entry C-44)

1-5-2010

 

 

 

 

 

 

 

 

Entry No.

Brief description

New rate/remarks

Effective
date

 

 

 

 

 

 

 

A-58

Handmade laundry soap manufactured

 

 

 

 

 

 

by ‘Khadi Units’ excluding detergent

Exempted from tax

1-5-2010

 

 

 

 

 

 

 

B-4

Hair-pins

Brought to tax at 1% from 4%

 

 

 

 

 

 

(consequently entry C-51 is deleted)

1-5-2010

 

 

 

 

 

 

 

C-115

Vehicles operated on battery or solar

 

 

 

 

 

 

power

Brought to tax at 4% from 12.5%

1-5-2010

 

 

 

 

 

 

 

Profession Tax Act, 1975?:

S. 7A is inserted in the Act. By this Section the provisions of the Business Audit, as existing in S. 22 of the MVAT Act, 2002, are made applicable to P.T. Act, 1975. Accordingly, the Department can do Audit under Profession Tax Act, 1975 also.

Simultaneously, the provisions in the MVAT Rules, 2005 about Electronic Filing of Returns, Electronic Payment are made applicable to the Profession Tax?Act?also.?However?exact modalities are awaited by specific rules under P.T. Act and Circular.

Luxury Tax Act, 1987?:

 

Particulars

Rate

 

 

 

(a)

Charges up to Rs.750 per residential

 

 

accommodation.

Nil

 

 

 

(b)

Where the charges are exceeding

 

 

Rs.750 but are up to Rs.1200.

4%

 

 

 

(c)

Charges exceeding Rs.1200.

10%

 

 

 

Under the Luxury Tax Act the change is about increase in threshold limit. The threshold limit for application of the Luxury Tax Act was Rs.200, it is now enhanced to Rs.750. The new slabs from 1-5-2010 and onwards are as under?:

The other change is that the provisions in the MVAT Rules, 2005 about Electronic Fil-ing of Returns, Electronic Payment are made applicable to the Luxury Tax Act also.

Maharashtra Valued Added Tax Rules, 2005?:
The Government has also issued Notification dated 30-4-2010, whereby the MVAT Rules are amended from 1-5-2010. The gist of amendment is as under?:

    1) The due date for filing returns in the following categories is extended?:
    a) In relation to six-monthly returns, to be filed by retailers under composition scheme, the due?date?is?extend?to?30?days?from?the?present 21 days. The same applies from 1-5-2010 onwards [Rule 17(4)(a)(i)].

    b) In case of dealer whose periodicity to file returns is six months (due to tax liability below Rs.1 lakh or refund less than Rs.10 lakhs in previous year), the time limit for filing returns is extended to 30 days from the present 21 days. [Rule 17(4)(b)].

    c) New dealers?:

The periodicity for filing returns in case of new dealers is revised. Now they will be liable to file quarterly returns instead of previous position of six-monthly returns.

(2) Conditions of grant of refund?:

Rule 55A has been newly inserted in the MVAT Rules from 1-5-2010. As per the said Rule, Refund will be curtailed in the following two situations?:

    i) If tax has not been paid on earlier transactions of sale of goods on which set-off is claimed. The provision will affect innocent buyers harshly. By rule, it appears that simply on ground that tax is not paid earlier, the refund will be curtailed without due process of law. Against the refund order in Form 502, the dealer will be required to file appeal and contest the issue. This will involve long-drawn legal process. This rule is not desirable when general class of dealers is going to be affected.
    ii)If C/F forms are not received. The process to claim the refund where forms are received afterwards is required to be clarified by the Department.

    3) New Form 604 is inserted, which will be used for giving intimation u/s.63(7) i.e., to convey Business Audit findings.

Nature of Inter-State Lease Transaction vis-À-vis normal inter-state sale

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VAT

An important issue arose before the Maharashtra Sales Tax
Tribunal in respect of nature of interstate lease transaction in the case of
Thermax Babcock & Wilcox Ltd. (S.A. 1285 of 2003, dated 14-12-2009). The facts
are that M/s. RIL entered into a lease transaction for lease of boiler with M/s.
RUPL. Both parties are located in Gujarat. M/s. RUPL placed order on M/s. T of
Pune for supply of boiler component. The unloading place was RIL in Gujarat. The
period involved was 1997-98. M/s. T collected ‘C’ Form from RUPL. In the
assessment of T, tax at 4% was levied on the above supply value under the CST
Act, 1956. The appellant, M/s. T was agitating the levy of tax on the ground
that his supplies to RUPL are in the course of inter-state lease and the period
being prior to 11-5-2002, tax is not attracted. It was submitted that the lease
transactions are brought in the CST Act from 11-5-2002 and hence the levy of tax
in case of the appellant was argued to be illegal and unlawful.

Thus the issue before the Tribunal was whether the
transaction of M/s. T to supply boiler parts to M/s. RUPL, who has leased boiler
to M/s. RIL, amounts to inter-state lease transaction. The gist of arguments of
the appellant may be noted as under :

    (a) There was a tripartite agreement between the T, RUPL and RIL.

    (b) There was a lease agreement between RUPL and RIL by which the lessor, RUPL, agreed to purchase the goods (auxiliary boiler) from the appellant (M/s. T) and lease it out to RIL (lessee). The lease agreement between RUPL and RIL has identified M/s. T as a manufacturer and supplier of required goods as per the specification and design agreed upon.

    (c) RUPL has placed the purchase order pursuant to lease agreement between RUPL and RIL and accordingly the goods manufactured by the appellant (M/s. T) have been moved from Pune to Jamnagar (Gujarat). These goods were dispatched to RIL, Jamnagar A/c RUPL who was described as consignee.

    (d) When the manufacturer dispatched the goods to the consignee ‘RIL A/c RUPL’ and handed over the goods to the common carrier, according to M/s. T, the right to use the goods got transferred to the consignee, RIL.

    (e) Since these transactions involved inter-state movement from Maharashtra to Gujarat, it was an inter-state lease transaction, not liable to tax, being effected prior to the amendment in the Central Sales Tax Act, 1956 to this effect.

    (f) According to M/s. T, the facts and the ratio laid down in the case of M/s. ITC Classic Finance & Services v. Commissioner of Commercial Tax, Andhra Pradesh, (97 STC 337) are similar to those present in the case of the appellant, and therefore, prayer was made to delete the tax levied on inter-state lease transactions @ 4% against declarations in Form ‘C’, which were issued as a matter of abundant caution.

The M.S.T. Tribunal examined the above arguments in light of
legal position about inter-state sales transactions, as well as nature of the
lease transaction. Citing the judgments in the case of M/s. Magnese Ore India
Ltd. (37 STC 489) & M/s. Mohmad Sirajuddin (36 STC 136) (SC), the Tribunal
observed as under in relation to the inter-state lease transaction :

“That the following conditions must be fulfilled before the
sale can be said to take place in the course of inter-state trade;


1. There is a contract of sale, which contains a
stipulation express or implied, regarding the movement of the goods from one
state to another.

2. In pursuance of that agreement, the goods in fact move
from one state to another.

3. Ultimately a concluded sale takes place in the state
where the goods are sent, which must be different from the state from which
the goods moved.


If these conditions are complied with, then by virtue of S. 9
of the Central Act, it is the state from which the goods moved which will be
competent to levy the tax under the provision of the Central Act.”

The M.S.T. Tribunal also referred to the judgments cited by
the appellant viz. M/s. ITC Classic Finance & Services (97 STC 330) and M/s.
Srei International Finance Ltd. (16 VST 193). In this respect, the M.S.T.
Tribunal observed that in these judgments the issue was about lease charges
charged by respective parties. The Tribunal observed that in the present case,
the amount charged by the appellant is for supply of goods and not for leasing
of goods. Therefore, the M.S.T. Tribunal held that these judgments are not
applicable to the present case.

The Tribunal noted the factual position as under :

  • The appellant is a
    manufacturer and supplier of boilers and its parts.


  • It is an admitted fact
    that RUPL entered into an agreement to lease out the goods required by RIL,
    and this lease agreement was signed on 6-6-1997.


  • This lease agreement was
    between RUPL and RIL and not with the appellant M/s. T.


  • As per this lease
    agreement, the lessor (RUPL) agreed to give and the lessee (RIL) agreed to
    take on lease diverse equipment, details and aggregated amount whereof was
    specified in Schedule-I attached to that agreement on the terms and conditions
    mentioned therein.


  • As per this lease
    agreement the lessor (RUPL) agreed to transfer the right to use by way of
    lease and RIL (lessee) agreed to take on lease the equipment to be operated
    under the supervision and the technical assistance of RUPL.


  • The lease agreement has
    identified M/s. T as a vendor who was to manufacture and supply auxiliary
    boilers at particular value.

  •     The Schedule-I also referred to purchase order No. 22960-EE-MBB001-MA, dated 2nd August, 1997, which appears at Sr. No. 45 along with other vendors who were also identified as manufactures and suppliers of various parts and components for installing power plant at Jamnagar for RIL.
  •     The total value of entire lease agreement was at a much higher amount than the sale value of goods by the appellant.
  •     The Schedule 2 indicated that after the installation of power plant, RUPL was entitled to receive monthly lease at particular amount from RIL, with whom lease agreement was made.

Based on the above facts, the Tribunal held that RUPL becomes owner of goods after supply by M/s. T. RUPL has leased the goods as his goods. Therefore, the transaction by M/s. T was pure and simple normal sale for supply of goods and not a lease transaction. Accordingly, the Tribunal rejected the arguments of the appellant holding as under :

    1. The agreement between the appellant and RUPL was not a lease agreement which stipulated handing over the possession of goods for absolute use.

    2. There was an agreement which is reflected in the purchase order placed by RUPL, which proves that the agreement was for transfer of property in the goods and not transfer of right to use the goods as contemplated under the Lease Act.

    3. RUPL has to first acquire the property in goods by way of purchase from the appellant to become absolute owner of property and then only RUPL becomes legally competent to lease out this property and not otherwise. When RUPL acquired the property in goods, inter-state sale got concluded, which was effected by the appellant (M/s. T). The Tribunal observed that M/s. T has failed to establish inextricable link.

Accordingly, the M.S.T. Tribunal held that the leasing is between RUPL and RIL which is a separate transaction. The sale by M/s. T to RUPL is normal sale liable to tax and as such the Tribunal confirmed the levy of tax under the CST Act, 1956.

Road map to GST

In view of the announcement made by the Union Finance Minister, in his budget speech, to introduce Goods and Services Tax (GST), from 1st April 2010, in place of existing indirect taxes all over India, the Empowered Committee of State Finance Ministers has released its First Discussion Paper on 10th November 2009. And it has invited views and suggestions from all stake-holders.
Although only a broad outline of the proposed GST has been presented through this Discussion Paper, the detailed aspects thereof are yet to be revealed. It is now up to the trade, industry, professionals and people in general to come forward and give their views and suggestions, so the same can be considered by the Government before making a final draft of the proposed Law.

The views presented by the Empowered Committee, through its First Discussion Paper on GST, may be summarised as follows :

1. It would be dual GST i.e., Central GST and State GST.

2. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute separate for each State).

3. Central GST shall be administered by the Central Government and State GST by respective State Government.

4. The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.

5. Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilised only against the payment of Central GST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilisation or refund of credit.

6. Cross-utilisation of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services, which shall be liable for IGST.

7. The inter-State transactions of goods as well as services shall be liable for IGST (i.e., CGST plus SGST) with full credit in the State of destination.

8. Although CGST and SGST would be applicable to all transactions of goods and services made for a consideration, except on exempted goods and services, there would also be a list of items which shall remain out of the purview of GST.

9. The State Governments shall continue to levy excise duty and sales tax (VAT) on production/sale/purchase of goods, which are outside the purview of GST.

10. The imports shall be liable for CGST as well as SGST to be levied by Central and State Governments, respectively.

11. The Empowered Committee has recommended that certain taxes and levies, presently levied by the Central Government and the States, should be subsumed in GST, however whether to include or not certain other taxes and levies, the matter is still under consideration.

12. Although, rates of tax are yet to be decided, the Discussion Paper indicates that there may be more than two rates of tax. The rate of CGST and the rate of SGST on various goods and services may be different. The rate of tax on goods and the rate of tax on services may also differ.

13. While the threshold limit of gross annual turnover for SGST is proposed to be Rupees 10 lacs (both for goods as well as services), the threshold for CGST may be Rupees 150 lacs and a separate threshold of CGST may be worked out in respect of annual turnover of services.

14. The exemptions, remissions, etc. in relation to Special Industrial Area Schemes are proposed to be continued till legitimate expiry time both for the Centre and the States.

15. Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for income-tax, facilitating data exchange and taxpayer compliance.

16. The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.

The Empowered Committee has recommended that, to begin with, the following taxes and levies may be subsumed in the proposed Goods and Services Tax :

A. Central Taxes :

    (i) Central Excise Duty

    (ii) Additional Excise Duties

    (iii) Excise Duty levied under the Medicinal and Toiletries Preparation Act

    (iv) Service Tax

    (v) Additional Customs Duty, commonly known as Countervailing Duty (CVD)

    (vi) Special Additional Duty of Customs — 4% (SAD)

    (vii) Surcharges, and

    (viii) Cesses

B. State Taxes :

    (i) VAT/Sales tax.

    (ii) Entertainment tax (unless it is levied by the local bodies).

    (iii) Luxury tax.

    (iv) Taxes on lottery, betting and gambling.

    (v) State Cesses and Surcharges insofar as they relate to supply of goods and services.

    (vi) Entry tax not in lieu of Octroi.

There are several other taxes and levies on which a consensus is yet to be arrived.

New Composition Scheme for Builders/Developers under MVAT Act, 2002

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VAT

The Finance Minister of Maharashtra, in his budget speech,
stated that he proposes to announce a Composition Scheme for Builders/Developers
for discharging their tax liability under the MVAT Act, 2002.

U/s.42 of the MVAT Act, 2002 the State Government has power
to prescribe compositions scheme/s for different classes of dealers or for
different types of transactions. There are several schemes for discharge of tax
liability on works contracts, like 5% Composition Scheme, 8% Composition Scheme,
etc. Now, this is a special scheme announced for builders/developers.
Accordingly, the enabling provision is made in the MVAT Act, 2002 by insertion
of S. 42(3A) vide amendment effected in April, 2010. Under the said enabling
power, the State Government has notified a Composition Scheme vide Gazette
Notification dated 9-7-2010.

Before we discuss certain aspects of the said new Composition
Scheme, it may be useful to discuss relevant legal background briefly.

In case of builders, whether there is works contract sale or
sale of immovable property has become a debatable issue. When the builder sells
ready flat i.e., after the flats are constructed, it will amount to sale
of immovable property and there is no question of VAT liability.

The other possibility is that the builder enters into an
agreement for sale of flat with the prospective buyer when the construction is
under progress. Such agreements are referred to as ‘Under Construction
Contracts/Agreements’. Till the judgment of the Supreme Court in the case of
K. Raheja Construction (141 STC 298) (SC), such contracts were considered to
be for sale of immovable property and the Sales Tax Department did not
contemplate any levy on the same. However, after the above judgment a debatable
position arose, which continues as on this day. A view prevails that such under
construction contracts are a works contract transaction. However, the other view
is that such a transaction is basically a transaction for sale of immovable
property, thus, there is no question of works contract and sales tax (VAT)
thereon.

But, the Government of Maharashtra and Sales Tax Department
hold a view that the above mentioned judgment is applicable in all cases, hence,
will cover all ‘under construction agreements’ for flats/premises. Under the
said impression the Commissioner of Sales Tax issued Trade Circular, viz.
Circular No. 12T of 2007, dated 7-2-2007. Similarly, the Government has
also introduced definition of ‘Works Contract’ in the MVAT Act so as to bring
the position of the said definition at par with the definition as was under
consideration before the Supreme Court in the abovestated judgment.

However, in spite of the abovementioned changes and judgment
of the Supreme Court, in most of the cases, it is possible to contend that
‘under construction contracts’ are not covered under the Sales Tax Laws and they
are not liable to tax under the MVAT Act, 2002 as works contract.

Amongst others, the facts of K. Raheja are required to be
seen carefully. In that case the value for undivided share in land was shown
separately and cost of construction was shown separately. However, when such is
not the position i.e., when the cost of land and construction is not
shown separately, then such contract cannot be made liable. There is no enabling
power with the State Government to bifurcate the composite value into land and
construction. Accordingly, if such under construction agreements are considered
to be for sale of immoveable property, they cannot be taxed under Sales Tax
Laws.

Be as it may, the Government of Maharashtra, in its wisdom
continues with its understanding that ‘under construction contracts’ are liable
to tax, and therefore, the Government has provided for one more Composition
Scheme specifically for builders/developers. The salient features of this new
scheme are as under :

(a) The scheme applies to builders/developers who undertake
the construction of flats, etc., wherein they also transfer land or interest
underlying the land.

Normally, builders/developers commence construction on their
own land as per their own project planning. The land is to be transferred to the
society or association which may be formed by the buyers of the premises
collectively, after possession is given. An issue may arise that there will not
be transfer of land or interest in land to any individual purchaser with whom
agreements are entered into. In case of flats/premises, each sale agreement can
be considered to be construction contract. Therefore, if one reads the
Notification literally, then it may be said that when the land or interest in
land is not transferred to the very individual purchaser, the Notification
cannot apply. Therefore, to avoid any dispute in future, it would be necessary
for the Department to clarify about the nature of transfer of land or interest
in land.

(b) The scheme shall apply to registered dealers only.

It is possible that in view of debatable position, the
builders/developers are not registered under the MVAT Act, 2002. However, if
they wish to take benefit of this scheme at this moment or any time in future,
it is necessary that they remain registered dealer. However, being registered
doesn’t mean that the builder is accepting the liability. He can be registered
dealer but can still show no turnover in the returns, considering his contracts
as contracts for immovable property. In future, if the liability accrues because
of clarity in the legal position, he can opt for this scheme. Though one of the
conditions mentions that the dealer should include the contract price in the
return in which the agreement is registered and pay the tax on it by declaring
such contract price as turnover, this can be done even by revising the return at
appropriate time. Therefore, at present, awaiting clarity of the law, the
builders may opt to file return without declaring turnover of such contracts.

It may also be noted that if the builder applies today for
registration, his earlier transactions from
20-6-2006 onwards may also be scrutinised for levy of liability, if any. This
new Composition Scheme does not bring new tax but it only provides one more
method for discharging liability effective from 1-4-2010. Assuming that a
builder opts for this Composition Scheme from 1-4-2010, he can contest the
liability for past period, if the issue arises.

(c) The scheme is applicable to agreements registered on or
after 1-4-2010. Therefore, even if the agreement is executed earlier, but
registered on or after 1-4-2010, it will be eligible for composition scheme.

(d) The composition money is 1% of the agreement amount,
specified in the agreement or value adopted for the purpose of stamp duty,
whichever is higher.

(e)    The dealer/s opting for this Composition Scheme shall not be eligible to claim set-off of taxes paid on purchases.

(f)    The dealer/s opting for this Composition Scheme shall not be eligible to effect any purchases against ‘C’ Forms.

(g)    The dealer/s opting for this Composition Scheme shall not issue Form No. 409 to the sub-contractors in respect of the works contract/s in respect of which composition is opted.

(h)    A further condition is that the dealer will not be entitled to change the method of computation of tax liability. (From a plain reading, it appears that this condition is to be seen qua each contract and not the project as a whole.)

(i)    The last condition mentioned is that the dealer under this Composition Scheme should not issue tax invoice. (The issue may arise as to whether the builder can collect 1% composition separately. Though, the provisions relating to tax invoice are not worded happily, from the clarification issued by the Commissioner of Sales Tax, it can be said that though tax invoice cannot be issued, still in the normal invoice or bill, etc., the builder can charge composition amount separately. Otherwise he has to include the same in the agreement price.)

From the overall scenario, it appears that though there is uncertainty about attraction of sales tax liability on ‘under construction contracts’, the builders/developers may consider the risk factor and decide accordingly. The passing on the burden to the prospective purchasers will result in burden upon the common person. The issue will be more aggravating if ultimately the liability is not upheld by the judicial forum. There will be a number of difficulties in getting back the tax which was not due to the Government.

The earliest clarification of legal position is the need of the day.

Amendments to CST Act, 1956 by Union Budget 2010-11 and Recent Amendments toMVAT Act, 2002

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VAT

(A) The Union Finance
Minister, through the Finance Bill, 2010, has proposed certain amendments to the
Central Sales Tax Act, 1956. The important aspects of the said amendments may be
noted as under :


1.
S. 6A :


This Section refers to
branch transfers and production of ‘F’ forms.

In this sub-section two
amendments are proposed.

(i)
Ss.(2) of S. 6A :


As per the present position,
if the assessing authority is satisfied that the particulars mentioned in ‘F’
forms are correct, he can allow the transfers as other than interstate sale
i.e., branch transfer.

By amendment, it is proposed
that the authority should satisfy that the particulars are true and also that
there is no interstate sale and then he should pass the order that the transfers
are other than interstate sale. It is further provided that this allowance will
be subject to Ss.(3), which is newly inserted.

This amendment now provides
more powers to the sales tax authorities. The authorities will now be entitled
to examine whether the transfers are inter- state sales, in spite of the fact
that the particulars in the ‘F’ forms are true. This appears to be with a view
to counter the observations in certain cases, where courts have held that once
the particulars are not disputed by the authorities, the claim has to be
allowed. Even if the transaction might have been interstate sale, because the
particulars in ‘F’ form would be correct, the branch transfer claim would have
been required to be allowed. The amendment is now proposed to correct the above
position.

(ii) By another amendment in
S. 6A, Ss.(3) is proposed to be inserted. By this sub-section, the powers of
reassessment/revision are proposed to be given to the sales tax authorities. As
per this new sub-section, the respective reassessing/revision authorities will
be entitled to modify the order passed u/s.6A(2), if new facts are discovered or
that the findings of the lower authorities were contrary to law. This amendment
appears to reverse the ratio of judgment of the Supreme Court in case of Ashok
Leyland Ltd. (134 STC 473) (SC). In this case, the Supreme Court has held that
once the ‘F’ forms are allowed, it cannot be reversed through reassessment or
revision, unless the same were found to be produced fraudulently. The
interpretation put by the Supreme Court was certainly appreciable as it can save
dealer from unending fishing inquiries, in spite of completion of assessments.
This judgment, in Ashok Leyland Ltd., has been followed in many other judgments
like in the case of Steel Authority of India Ltd. (10 VST 451) (CSTAA), etc.
Now, as per proposed amendment even if the ‘F’ forms are genuine and particulars
are true, the authorities will be entitled to reassess/revise, if the order
u/s.6A(2) was contrary to law. The dealers will now be required to be prepared
for long-drawn battles in spite of initial completion of assessments.

In Maharashtra there will be
one more issue.

Under the MVAT Act, 2002
there is no provision for reassessment/revision, but there is provision for
review. The terms used in newly inserted Ss.(3) are ‘reassessment/revision’,
thus an issue may arise whether it will take into account a ‘review’. Though,
the review is in the nature of revision, its legality is certainly debatable.

2.
Chapter VA :


By another amendment,
Chapter VA is proposed to be inserted in the CST Act, 1956. This Chapter
contains S. 18A, which has (5) sub-sections. The intention of this provision is
to provide appeal against the order passed u/s.6A(2) or (3) to the highest
appellate authority of the State. This appears to avoid first appeal stage. As
per the provisions of Chapter VI, the order passed by the highest appellate
authority of the State in relation to S. 6A is appealable to the Central Sales
Tax Appellate Authority (CSTAA). Normally, the original order is passed by
assessing authorities and against the same the first appeal is provided, before
going in appeal to the highest appellate authority of the State. The amendment
appears to cut down the first appeal stage. As per this amendment, the appeal
against the original order (assessment order) u/s.6A(2) and (3) will lie to the
highest appellate authority. It is also provided that if the appeal is filed
before the highest appellate authority, involving S. 6A(2) or (3), the dealer
will be entitled to take other incidental issues like rate of tax, computation,
penalty, etc. in the same order before the said highest appellate authority.
From such order of the highest appellate authority the further appeal will lie
to CSTAA.

This S. 18A is a
self-contained code giving procedural provisions also like time limit for filing
appeal, grant of stay, time limit for deciding appeal, etc. The
proposed S. 18A can be analysed as under :


S. 18(1)
: It provides that irrespective of any provisions under the General Sales Tax
Law of the State, the appeal against the order passed by the assessing authority
u/s.6A(2) or (3) of the CST Act should lie to the highest appellate authority of
the State. By explanation at the end of S. 18A, the meaning of the highest
appellate authority is provided. As per said Explanation, the highest appellate
authority means the Appellate Authority or Tribunal constituted under the
General Sales Tax Law except the High Court.

In other words, in Maharashtra, the highest appellate authority will be the Maharashtra Sales Tax Tribunal. Thus, from order of the assessing authority u/s.6A (2)/(3) appeal will be required to be filed directly before the Tribunal.

S. 18(2) : The time limit for filing appeal is prescribed by this sub-section, which is 60 days from service of impugned order. There appears to be no speaking power for condonation of delay in filing appeal.

By proviso to the said sub-section, it is provided that where the appeal is forwarded to the first appellate authority by the highest appellate authority as per proviso to S. 25(2), such pending appeal on appointed day should get transferred to the highest appellate authority. The appointed day will be notified in the official Gazette. So this will take place in future on a day as may be notified.

S. 18(3) : The highest appellate authority will pass appropriate order, after giving opportunity of hearing to both the parties.

S. 18(4) : Time limit for passing the order — As far as possible, the highest appellate authority should pass the order within six months from filing of appeal.

S. 18(5) : Powers of granting stay against the demand— It is stated that on making application to the highest appellate authority, it can grant stay after considering the tax already paid on the subjected goods in the said State or in other State. However, it is also provided that the highest appellate authority may ask to deposit certain amount as pre condition for admission of appeal.

3.    S.20:

Amendment is also proposed in S. 20 of the CST Act, 1956, which relates to appeals to CSTAA. The Ss.(1) is proposed to be substituted. The substituted Ss.(1) provides that the appeal against the order of the highest appellate authority of the State, determining issues relating to stock transfer or consignment of goods, insofar as they involve dispute of inter-state nature, will lie to CSTAA. The present Ss.(1) is narrow in scope, as it mentions order u/s.6A r/w S. 9. The substitution appears to correct a technical flaw in existing sub-section. Since the appeal to CSTAA is from the order of the highest appellate authority, it may be passed under particular appeal provisions and hence references to S. 6A may not be necessary here. This amendment appears to be for correcting the above position.

4.    S.22:

An amendment is also proposed in S. 22 to replace the words ‘pre-deposit’ as ‘deposit’. The amend-ment is procedural in nature.

By another amendment in S. 22, Ss.(1B) is proposed to be inserted. This appears to fill up the lacuna in present provision. There is no speaking provision for directing refund of tax to the dealer or to other State. This insertion is to give power to CSTAA to direct a particular State to refund the tax which is not due to it or to transfer the same to other State to whom CST belongs, based on appeal findings. The direction to refund will not be exceeding the amount which will be payable as CST.

Though the amendment is welcome, it has not tak-en care of all the issues, particularly arising under the Local Act. For example, in transferee State the dealer has paid Local tax and CSTAA considers it as inter-state sale from moving State, disallowing branch transfer claim. Now CSTAA can ask the transferee State to refund the amount equal to CST to moving State. However the purchasing dealer in transferee state will be at loss. He might have claimed set-off considering it as local purchase which is now considered as intersate purchase which will result in denial of his set-off claim. Remedial provisions are required to be provided to tackle such a situation.

 5.   S.25:

By one more amendment, the proviso to Ss.(2) of S. 25 is proposed to be omitted. This proviso provides for availment of first appeal by the dealer. However, now, since the said first appeal is sought to be avoided, the omission of this proviso is consequential.

  B)  Recent amendments in MVAT Act, 2002 :

    The Government of Maharashtra has issued Ordinance No. II of 2010, dated 18-2-2010, by which S. 9(1) of the MVAT Act has been amended. By this amendment the proviso to S. 9(1) is deleted from the statute book. This proviso puts a limitation on the Government that it cannot amend schedules to increase the rate after two years from 1-4-2005. However, due to removal of the said proviso, now the Government can change the rates after two years also. Thus, the Government has assumed wide powers about increasing the rate of tax in VAT schedules.

    By using the expanded powers, the Government of Maharashtra has issued Notification u/s. 9(1), dated 10-3-2010. By the said Notification changes are ef-fected in Schedule A and C. On most of the goods contained in Schedule C, the rate of tax is increased from 4% to 5% from 1-4-2010. The rate of tax on declared goods contained in Schedule C is retained at 4%, whereas on all other goods contained in Schedule C, the rate is increased to 5%.

On about 101 non-declared items contained in Schedule-C, the rate is increased from 4% to 5% from 1-4-2010. The same is done just before the Budget presentation.

[This is also against the accepted principle of uniformity of rate of tax in VAT regime.]

Amongst others, the changes will affect the necessities of common person like wheat and cereals/pulses, etc. The changes can be said to be of far-reaching effect. It will also affect the prices of goods, which are already high due to inflation and other reasons.

In fact, the Government of Maharashtra proposed to levy tax even on fabrics and sugar. However, by Circular 11T of 2010, dated 17-3-2010, it is clarified that the tax position in relation to sugar and fabrics will continue as it is at present and no change will take place from 1-4-2010. We hope that the Government will reconsider this mass increase in other items also, keeping into account the common good.

Interest-free loans advanced to overseas wholly-owned subsidiaries cannot be regarded as quasi equity capital.

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Tribunal News

Part C — Tribunal & AAR International Tax Decisions

Geeta Jani
Dhishat B. Mehta
Chartered Accountants

20 Perot Systems vs DCIT

2010-TIOL-51-ITAT-DEL

Section 92,

Dated: 30.10.2009

 

Issues:

  • Interest-free loans advanced to overseas
    wholly-owned subsidiaries cannot be regarded as quasi equity capital.


  • Notional arm’s length interest on a loan to
    an AE can be taxed having regard to applicable transfer pricing provisions    .

Facts:

  • The assessee, a company
    incorporated in India, is engaged in the business of developing and designing
    technology for business solutions and also providing business consultancy
    services.

  • The assessee advanced
    interest-free foreign currency loans to its two wholly-owned subsidiaries (WOS)
    situated in Bermuda and Hungary. The funds were used by the WOS for making
    long-term investments in step down operating subsidiaries.

  • During the course of the
    assessment proceedings, the tax authorities held that the loan was an
    international transaction and grant of interest-free loan was inconsistent
    with the arm’s length principles of section 92 of the Income Tax Act.

  • The assessee resisted the
    notional assessment by contending that:

(a) The overseas entities were 100% subsidiaries. The
assessee had neither any intention nor had earned any interest, and that it
was commercially expedient to extend such interest-free loans to WOS.

(b) Interest-free loans were in the form of quasi equity as
the subsidiaries had very small capital base. Further, unavailability of easy
borrowing means to the newly set up WOS was one of the main reasons for the
funding.

(c) Requisite approval of the RBI was obtained by the
assessee for such remittance. The Income Tax Act and the OECD Guidelines
support the contention that the effect of government control/intervention
should be considered while determining ALP

(d) Reliance was placed on Para 1.37 of 1995 OECD
Guidelines to support proposition that it is legitimate to consider the
economic substance of a transaction. The thin capitalisation rules of Hungary
were also referred to support the view that debt in excess of three times the
equity of the subsidiary is to be treated as equity.

(e) Relying on the Supreme Court’s Judgments in CTV. KRMTT
Thiagaraja Chetty & Co. 24 ITR 525 and Morvi Industries Ltd v CIT 82ITR835 it
was contended that the term income includes real income and not fictitious
income, and notional income assessment was not justified.

 

Held:


 


The ITAT upheld the contentions of the tax department and
held:

(a) The agreements between the parties indicate that the
assistance to the WOS was in the nature of loans and not in the nature of
capital.

(b) The concept of real income cannot be applied in respect
of international transactions covered by transfer pricing provisions.

(c) Reliance by the assessee on OECD guidelines and thin
capitalisation norms of the source country was not apt as they dealt with the
issue from the perspective of the borrower and the recipient country, and not
from the perspective of the lender. In any case, the thin capitalisation norms
of Hungary only regulated admissibility of interest expenditure in the hands
of the payer.

(d) Interest-free loans granted in Bermuda (situated in a
tax haven) would result in higher income in the hands of the AE and the
taxpayer’s income in India would reduce by the corresponding amount. This
would result in reduction of the overall tax incidence of the group, resulting
in a case of violation of the TP norms where profits are shifted to lower tax
regimes to bring down the aggregate tax incidence of multinational groups.

(e) The approval of the Reserve bank of India does not
validate or approve the true character of the transaction from a TP
perspective. RBI regulations could not be applied for the purpose of TP under
the Income Tax Act.

(f) Based on the above, the ITAT upheld the order of the
CIT(A) and held that the transaction to provide interest-free loans was an
international transaction subject to the TP guidelines, and income thereof,
arising from such transaction, should be determined under the provisions of
Income Tax Act.

 



levitra

Payments received from the supply of software products cannot be considered as ‘royalties’, taxable under the provisions of the Income-tax Act, 1961 or under India-Japan tax treaty.

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19 Dassault Systems K. K

2010-TIOL-02-ARA-IT

Articles 5, 7 and 12, India-Japan DTAA; Section 9(1)(vi),
Dated: 29.01.2010

 

Issues:

  • Payments received from the supply of software
    products cannot be considered as ‘royalties’, taxable under the provisions of
    the Income-tax Act, 1961 or under India-Japan tax treaty.

  • In absence of a Permanent Establishment (PE)
    of non-resident in India, business income from distribution of software
    through independent distributors cannot be taxed in India.



 

Facts:

  • The applicant, a company
    incorporated in Japan, was engaged in the business of providing ‘Products
    Lifecycle Management’ (PLM) software solutions, applications and services. The
    applicant was marketing software products through a distribution channel
    comprising of Value Added Resellers (VAR).

  • The VAR were independent
    third party resellers engaged in the business of selling software to
    end-users. The applicant entered into a General VAR Agreement (GVA) with the
    VAR, authorising them to act as resellers of the products on a non exclusive
    basis. As per the business model, software solutions were sold to VAR for a
    consideration based on the standard list price, after deducting the agreed
    discount. The VAR, in turn, sold the products to end-users at a price
    independently negotiated between them and the end-users. Upon receipt of the
    order from end user, the VAR placed a back-to-back order on the applicant. The
    end-users entered into End User License Agreement with the applicant (with the
    VAR being a party) containing the terms of software license. The applicant
    thereupon provided a license key via e-mail so that the customer could
    download the product, hosted on a server located outside India through the web
    link. After download of the product, the end-user activated the software on
    the customer’s designated machine, using the license key.

  • The issue before the AAR
    was whether the payments received by the applicant on sale of the software
    products were taxable as business profits under Article 7 of the tax treaty or
    ‘royalty’ as defined in article 12 of the tax treaty.

  • The applicant contended
    that:


(a) What was transferred to the end-user was copyrighted
software. The copyright of the software continued to be with the applicant and
was neither made available to the VAR or end-users.

(b) Limited right to use the copyrighted products is not
equivalent to use of copyright for commercial exploitation — and consideration
for use of copyright for commercial exploitation alone could constitute
royalty.

(c) Each VAR was a distinct legal and independent entity
who acted as a non- exclusive distributor on a principal-to-principal basis.
Such entity did not constitute agency PE.

  • The tax authority claimed
    that the payments by the VAR were royalty payments by contending that:


(a) The payments made by the end-users were for transfer of
rights in respect of the copyright of the software, i.e., for use of the
computer programme.

(b) The Copyright Act makes a distinction between the
copyright of a literary work like a book and a computer programme. The right
to sell, in relation to a computer programme, is specifically treated as the
use of copyright under the Copyright Act.

(c) The concept of “copyrighted article” is apt for a book
or music CD, but is inapt for software where one or more rights in copyright
need to be necessarily transferred to make the same workable

(d) The End User License Agreement (EULA) makes it clear
that software use is licensed for a fee.

(e) In any case, consideration can be treated as royalty as
it is for the right to use the process.

(f) The VAR constituted agency PE as they were
substantially controlled and directed by the applicant.

 

Held:


 


The AAR accepted the contentions of the applicant and held
that there was no payment of royalty as:

(a) Computer software enjoys protection under the Copyright
Act. The term copyright needs to be understood as per the Copyright Act.

(b) Assignment of a right of the owner of a copyright is
essential to trigger royalty taxation. A non-exclusive and non-transferable
license for enabling the use of the copyrighted product is not equivalent of
the authority to enjoy the rights of the copyright owner.

(c) Parting of the IPR, inherent and attached to the
software product, in favour of the licensee is a mandatory requirement of the
Income Tax Act and the tax treaty to trigger royalty taxation.

(d) The right to copy, reproduce or store given to the
end-user is incidental to providing use of the copyrighted product. The
end-user has to use the license within the limitation of non-exclusive
self-user license. Section 52(aa) of the Copyright Act does specifically
permit the lawful possessor of the copy of computer programme to use the same
for self use, take back-up for archival purposes or protect against loss,
destruction, etc. This also supports the view that the license to the end-user
offered a limited right of use of the copyrighted product and was not meant
for commercial exploitation.

(e) The payments for the software could not be construed as
royalty, as the use of the programmes contained in the software could be
construed as the use of the process or acquisition of any rights in relation
thereto.

Capital gains arising on transfer of Indian assets by way of amalgamation of overseas companies with an Indian company, is exempt from tax in the hands of the overseas amalgamating companies under section 47(vi), read with section 2(1B) of the Act.

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18 Star Television Entertainment Limited

(AAR) (2010–TIOL-01-ARA-IT)

Sections 47(vi), 47(vii), 2(1B)

Dated: 21.01.2010

 

Issues:


  • Capital gains arising on transfer of Indian
    assets by way of amalgamation of overseas companies with an Indian company, is
    exempt from tax in the hands of the overseas amalgamating companies under
    section 47(vi), read with section 2(1B) of the Act.


  • Shareholders of overseas amalgamating companies
    are entitled to exemption under section 47(vii), read with section 2(1B) of
    the Act.


  • Taxpayers are entitled to plan affairs so as to
    avail of the benefit of tax exemptions and are not precluded from minimising
    their tax burden. Only a sham or a nominal transaction or a transaction which
    is a contrived device, solely for tax avoidance, can be ignored.



 

Facts:

  • The applicants — three
    group entities of the Star Group — were foreign companies registered in UAE/BVI.
    These companies (herein Amalgamating Companies) owned Indian telecasting
    channel rights, as also certain overseas assets. The Amalgamating Companies
    disposed of their non-Indian assets and proposed a scheme of amalgamation with
    another group company in India (viz. SIPL). SIPL is held by two Mauritius
    companies.

  • The main reason for the
    amalgamation was stated to be to obtain operational synergies, enhanced
    flexibility and to create a strong base for future growth of the entities.
    Upon amalgamation, SIPL was to issue shares to the shareholders of the
    Amalgamating Companies, based on a fair swap ratio determined by the valuer.

  • The scheme of amalgamation
    was filed with the Bombay High Court for approval, as required under the
    provisions of sections 391 and 394 of the Companies Act, 1956. The application
    to the AAR was filed at the time when the amalgamation petition was pending
    before the High Court for approval.

  • The issue before AAR was
    whether the scheme of amalgamation would result in any capital gains tax
    liability in the hands of the Amalgamating Companies or their shareholders.

  • The applicant’s
    contentions before the AAR were:



(a) The conditions stipulated for exemption under sections
47(vi) and (vii), read with section 2(1B) were fulfilled and, hence, capital
gains were exempt from tax.

(b)
The scheme of amalgamation
had specifically provided that all liabilities including arrears of tax dues
of the Amalgamating Companies would vest in and would be ultimately recovered
from the assets of the amalgamated Indian company. As a result, the interests
of the tax department were not likely to be prejudiced.



 

  • The tax
    department contended that the application was to be rejected as:


(a) The object of the scheme of amalgamation was to avoid
capital gains tax arising on the transfer of business by the Amalgamating
Companies.

(b) Had the parties directly transferred the shares of the
amalgamating companies to the amalgamated company, capital gains arising on
such transfer would have attracted tax in India.

(c) The scheme of amalgamation should be kept on hold until
the high court has accorded its sanction, as the tax department would then be
able to present its case before the court on the adverse financial
repercussions of merger.

(d) There was no business or commercial purpose for the
proposed amalgamation. The object of the scheme was primarily to avoid payment
of taxes and it was a plan to artificially inflate profits and reduce
liability of the amalgamating companies.

 

Held

The AAR accepted the applicant’s contentions and held:

(a) Capital gains arising due to the proposed amalgamation
would be exempt from tax in the hands of the Amalgamating Companies as well as
their shareholders, as the conditions prescribed under section 47 (vi)/(vii)
of the Income Tax Act would be fulfilled.

(b) The contention of the tax department that acceptance of
the application should be kept in abeyance until the high court has accorded
its approval, cannot be accepted as it would lead to the AAR, a statutory
authority, refusing to exercise jurisdiction vested in it by law. The Ruling
was sought and was also provided on the basis that the scheme will have
approval of the Court. The ruling would take effect only after the court’s
approval. The AAR can provide its ruling on the proposed transaction in the
interest of providing a firm idea of tax implications in India.



(c) The scheme is not
likely to jeopardize the interests of the tax department as all tax dues of
the amalgamating companies vest in and can be recovered from SIPL.

(d) The application cannot be rejected on the ground that
it is a pure and simple design to avoid capital gains tax. Relying on the Apex
Court’s decision in the case of Azadi Bachao Andolan and the Gujarat High
Court’s decision in the case of Sakarlal Balabhai , the AAR held that it was
possible for a taxpayer to enter into a transaction in such a manner that
legitimate tax exemptions are availed of and the tax liability is reduced. The
AAR also observed that:



Fees received by non-resident for performing services in India through a PE are taxable in accordance with Article 7 of DTAA. If Article 7 applies, S. 9(1)(vii), S. 44D and S. 115A would not apply.

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New Page 1Part C : Tribunal & AAR
International Tax Decisions

12 Rio Tinto Technical Services v.
DCIT [Unreported]
[ITA No. 3399/Del./2002, 5372/Del./2003& 4742/Del./2004]
Article 7, India-Australia DTAA; S. 5, S. 9(1)(vii), S. 44D, S. 115A, Dated :
19-3-2010

Counsels : Salil Kapoor & Ors. (for taxpayer)
Y. S. Kakkar & Other (for Revenue)

 


Fees received by
non-resident for performing services in India through a PE are taxable in
accordance with Article 7 of DTAA. If Article 7 applies, S. 9(1)(vii), S. 44D
and S. 115A would not apply.

Facts :

The taxpayer was
PE in India of an Australian Company (‘AusCo’). AusCo had entered in to contract
with an Indian Company for evaluation of coal deposit and feasibility study for
transportation of extracted coal. The taxpayer received approval of RBI for
establishing a project office in India. After completion of that project, AusCo
entered into another contract with another Indian company for evaluation of iron
ore deposit and feasibility study for transportation of iron ore. The taxpayer
received approval of RBI for establishing project office for this contract.

The PE received
consideration for performing the services under the contracts. The AO held that
the consideration was in nature of fees for technical services. The AO
considered it to be subject to S. 9(1)(vii) and accordingly, he taxed it @20% of
the gross receipts of the PE. In appeal, the CIT(A) upheld the order of the AO.

The Tribunal
perused the agreement between AusCo and Indian Company and noted that the
services to be provided were not simple technical and consultancy services, but
specific activities required to be done on site. Hence, AusCo had established a
PE in India.

Held :

When taxing a
non-resident, it should be first ascertained whether income is taxable u/s.5 or
9. If it is so taxable, and if the taxpayer qualifies to access DTAA, the option
would be with the taxpayer whether to prefer to be governed by provisions of
DTAA or the Income-tax Act.

Income of the PE
was taxable u/s.5(2) and AusCo had opted to be taxed as per India-Australia DTAA.
Income of the PE was ‘Business Profits’. Hence, Article 7 would apply. Article
7(2) provides that the PE should be treated as a distinct and independent
enterprise, and Article 7(3) provides that deductions in accordance with the
Income-tax Act shall be allowed. Since Articles 7 applies, S. 9(1)(vii), S. 44D,
S. 115A would not apply.

levitra

Execution of a contract for transportation and installation work for mineral oil exploration platforms—Whether receipts for services outside India, taxable in India u/s 44BB. Presumptive income can be taxed only if it is otherwise taxable under Income-tax

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New Page 1Part C : Tribunal & AAR
International Tax Decisions

11 DCIT v. J Ray McDermott Eastern
Hemisphere Ltd.
(2010) TII 41 ITAT (Mum.-INTL)
S. 44BB

 

Execution of a contract for transportation and
installation work for mineral oil exploration platforms—Whether receipts for
services outside India, taxable in India u/s 44BB. Presumptive income can be
taxed only if it is otherwise taxable under Income-tax Act.

Facts :

The taxpayer was a company incorporated in, and tax
resident of, Mauritius (‘MCo’). MCo was engaged in the business of designing,
fabrication, construction and installation of platforms, docks, pipelines,
jackets and other similar services which are used in the exploration and
production of mineral oil. MCo undertook and executed a contract for
transportation and installation work for certain well platforms to be used in
mineral oil exploration. While furnishing its tax return, MCo did not offer for
tax receipts pertaining to activities carried on outside India.

S. 44BB provides for presumptive taxation @10% of
the gross receipts in respect of the services that are used in prospecting,
extraction or production of mineral oil. The AO concluded that u/s.44BB, income
is computed on presumptive basis, w.r.t. all receipts and therefore the
distinction between activities carried on in India and those carried on outside
India is not relevant. He accordingly applied presumptive rate to entire gross
receipts of the contract for determining taxable income.

The CIT(A), accepted contentions of the taxpayer.

Before the Tribunal, MCo contended that the income
pertaining to installation and transportation activities carried on outside
India is not taxable under the Income-tax Act. Alternatively, the income
pertaining to such activities or work carried on outside India cannot be
attributable to a PE in India.

Held :

The Tribunal referred to the following decisions
wherein it was held that before computing income on presumptive basis, it should
be ensured that such income falls within the scope of charging provisions :

  • Saipem SPA v. DCIT,
    (2004) 88 ITD 213 (Delhi)

  • McDermott ETPM Inc v.
    DCIT, (2005) 92 ITD 385 (Mum.)

The Tribunal held
that only the income which is reasonably attributable to operations carried on
in India is taxable in India. Therefore, income computed on presumptive basis
can be taxed in India only if such income is otherwise chargeable to tax under
general provisions of the Income-tax Act.

levitra

Mauritius company executing 3 contracts in India. Whether the duration of each contract should be considered separately or should be aggregated —DTAA applied test of PE to each construction site separately—The 3 contracts were not inextricably interconnec

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New Page 1Part C : Tribunal & AAR
International Tax Decisions

10 ADIT v. Valentine Maritime Mauritius Ltd. (2010)
TIOL 195 (ITAT-Mum.)
Article 5(2)(i), India-Mauritius DTAA
A.Y. : 2001-02. Dated : 5-4-2010

 

Mauritius company executing 3 contracts in India.
Whether the duration of each contract should be considered separately or should
be aggregated —DTAA applied test of PE to each construction site separately—The
3 contracts were not inextricably interconnected and interdependent—Hence, the
duration of 3 sites cannot be aggregated—Since none of the contracts exceeded
the threshold period, there was no PE.

Facts :

The taxpayer was a company incorporated in
Mauritius (‘MCo’). The Mauritius tax authority had issued tax residency
certificate to MCo, which qualified MCo to access India-Mauritius DTAA (‘the
DTAA’). MCo was engaged in the business of marine and general engineering and
construction. During the relevant assessment year, the taxpayer executed the
following three different contracts in India :

Contract Activity Duration
1. Replacement of main
deck with temporary deck 		100 days
2. Charter of barge for
accommodation 		137 days
3. Charter of barge for
power project together with technical personnel		 225
days

In respect of contract 2, the taxpayer had applied
for lower withholding of tax order u/s.197. The AO considered the hire charges
as income u/s.44B. Accordingly, the taxpayer accepted the liability @7.5% on
gross basis.

Subsequently, the taxpayer contended that in terms
of Article 5(2)(i) of the DTAA, a building site or a construction or assembly
project or supervisory activities in connection therewith, would constitute a PE
(Construction PE), only if it continues for a period of 9 months. Since income
from the contracts was ‘business profits’ of MCo, under Article 7 of the DTAA,
such income could be taxed in India only if MCo had a PE in India. As none of
the 3 contracts continued for more than 9 months, no Construction PE of MCo was
constituted in India. Accordingly, the profits from the execution of the 3
contracts were not taxable in India.

The AO concluded that to determine existence of a
Construction PE, time spent on all contracts should be aggregated. As aggregate
time spent on the 3 contracts was more than 9 months, MCo had a PE in India and
its income from all the contracts was taxable in India.

The CIT(A), however, held that to determine the
existence of a Construction PE, the time spent on each contract should be
separately considered.

The main issue before the Tribunal was, whether MCo
had a Construction PE in India.

The Tribunal considered the relevant provisions of
the DTAA, OECD Commentary and various case laws.

Held :

As regards ‘fixed place PE’ :

To constitute a fixed place PE, there must be a
fixed place through which business of the enterprise is carried on. The business
of MCo is that of giving barge on hire and business activity is not carried on
at the barge hired out. Since the business is not carried on at a fixed place,
the barge cannot be held to be a PE of MCo.

As regards relationship between ‘fixed place PE’
and ‘Construction PE’ :

In terms of the specific treaty provision, PE,
inter alia, includes a building or construction project if such project
continues for a period of more than 9 months. Thus, the ‘duration test’ for a
Construction PE limits the general principle of permanence under the fixed place
PE rule.Hence, even if a PE is constituted under the fixed place PE rule, if the
activity is that specified in Article 5(2)(i), the PE would not be constituted
if the specified activity does not cross the prescribed time threshold.

As regards ‘duration test’ for a ‘Construction PE’
:

For the following reason, activity of each
site/project should be considered separately and all the activities in a country
are not to be aggregated :

 

  • Reference to
    Construction PE is in singular and the DTAA does not specifically provide for
    aggregating number of days spent on all sites/projects. Also, activities of
    MCo at different locations are not so inextricably interconnected that they
    should be viewed as a coherent whole.

  • Large number of India’s
    DTAAs specifically provide for aggregation of sites/projects for computing
    threshold time period under ‘duration test’.

  • If DTAA does not
    specifically mention aggregation principle, the same cannot be inferred or
    applied.

  •     
    Both OECD and UN Model Commentaries provide for application of ‘duration
    test’ to each site/project.

    •     
      OECD Commentary recognises possible abuse of duration test by
      splitting of one contract into several parts. However, the onus is on the tax
      authorities to establish artificial splitting of contract.
    •     
      OECD Commentary recognises that even if a building site is based on
      several contracts, it should be regarded as a single unit if commercially and
      geographically it forms a coherent whole.

        
    The test of geographical coherence and commercial coherence are only
    vague tests. They cannot be applied universally or conclusively due to various
    ambiguities. They are also unworkable in practical situation.

     

    The true
    test is, (in addition to geographical proximity and commercial nexus,)
    interconnection and interrelationship.

     

    The Tribunal did not
    find that the 3 contracts were inextricably interconnected, interdependent or a
    coherent whole in conjunction with each other. Hence, it held that as the
    duration of the 3 contracts executed by MCo cannot be aggregated for
    determining the existence of a PE, no PE of MCo in India was constituted.

Income-tax Act, 1961 — S. 28, S. 37 — Exchange fluctuation loss in respect of unmatured forward contracts on the last date of the accounting period on the basis of rate of foreign exchange prevailing on that date is allowable as a deduction.

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Part B : UNREPORTED DECISIONS


17 DCIT v. Bank of Bahrain &
Kuwait

ITAT ‘C’ Bench, Mumbai (SB)

Before D. Manmohan (VP),

S. V. Mehrotra (AM) and D. K.
Agarwal (JM)

ITA Nos. 4404 & 1883/Mum./2004

A.Ys. : 1999-2000 & 1998-99

Decided on : 13-8-2010

Counsel for revenue/assessee :
Ajit Kumar
Sinha/F. V. Irani

Income-tax Act, 1961 — S. 28, S.
37 — Exchange fluctuation loss in respect of unmatured forward contracts on the
last date of the accounting period on the basis of rate of foreign exchange
prevailing on that date is allowable as a deduction.

Per S. V. Mehrotra :

Facts :

The assessee was a non-resident
company carrying on banking business in India. It entered into forward contracts
with its clients to buy or sell foreign exchange at an agreed price on a future
date. On the date of maturity, the execution of the contract resulted in profits
or losses to the assessee. There was no dispute as regards losses arising on
execution of the contracts within the same year. However, in cases where the
date of maturity of the contract fell beyond the end of the accounting period,
the assessee evaluated the unmatured forward contract on the last day of the
accounting period on the basis of rate of foreign exchange prevailing on that
date and booked the profit or loss accordingly. The Assessing Officer (AO) taxed
the profit so booked but did not allow the assessee’s claim of loss, by relying
on the decision of the Madras High Court in the case of Indian Overseas Bank
(183 ITR 200), on the ground that the loss is incurred on the date of maturity
of the contract and there cannot be any loss prior to such date. In other words,
he held such loss to be notional.

Aggrieved the assessee preferred
an appeal to the Commissioner of Income-tax (Appeals) who allowed the assessee’s
appeal.

Aggrieved the Revenue preferred
an appeal to the Tribunal.

The assessee supported its claim
by relying on the decision of the Mumbai Tribunal in the case of Deutsche Bank
A.G., 86 ITD 431 (Mum.). The Tribunal noted that in the case of Deutsche Bank
(supra) the decision of the Madras High Court was distinguished on the ground
that the Court was concerned with the issue as to whether notional or
anticipated loss could be allowed as deduction or not, while the Tribunal was
concerned with the valuation of stock-in-trade. The Bench referred the matter,
since the assessee, as a banker, only entered into contract to sell/buy the
foreign currency at a future date, but did not buy or sell such contracts from
or in the market. It observed that the assessee was not holding these contracts
as stock-in-trade and, therefore, the decision in the case of Deutsche Bank was
not applicable.

The Bench framed the following
question of law for reference :

“Whether on facts and
circumstances of the case, can it be said that where a forward contract is
entered into by the assessee to sell the foreign currency at an agreed price at
a future date falling beyond the last date of accounting period, the loss is
incurred to the assessee on account of evaluation of the contract on the last
date of the accounting period i.e., before the date of maturity of the forward
contract.”

Held :

The Special Bench of the
Tribunal decided this ground in favour of the assessee and held :

(1) Deduction is allowable
under the Act in respect of those liabilities which crystalise during the
previous year. Therefore, the concept of crystalisation of liability under
the Income-tax Act assumes significance vis-à-vis commercial principles in
vogue. As per the commercial principles of policy of prudence, all
anticipated liabilities have to be accounted, but as per Income-tax Act,
only that liability will be allowed which has actually accrued. Due
weightage must be given to commercial principles in deciding such issues.

(2) Anticipated liabilities
which are contingent in nature are not allowable, but if an anticipated
liability is coupled with present obligation and only quantification can
vary depending upon the terms of the contract, then a liability is said to
have crystalised on the balance sheet date.

(3) A contingent liability
depends purely on the happening or not happening of an event, whereas if an
event has already taken place, which, in the present case, is of entering
into the contract and undertaking of obligation to meet the liability, and
only consequential effect of the same is to be determined, then, it cannot
be said that it is in the nature of contingent liability.

    4. The issues relating to accrual of income cannot be decided on the same footing and considerations on which the issues relating to loss/expense is to be decided. In case of loss/expense, it is the concept of reasonable certainty to meet an existing obligation which comes into play which in legal terminology is said to be ‘crystalisation of liability’. When outflow of economic resources in settlement of present obligation can be anticipated with reasonable accuracy, then it is to be recognised as a crystallised liability. This is in consonance with the principle of prudence as considered by the Supreme Court in the case of Woodward Governor of India Pvt. Ltd.

    5. The Revenue’s contention that liability can arise only when contract matures is completely divorced of principles of commercial accounting and, therefore, cannot be accepted. Both legal obligation and commercial principles have to be taken into consideration for deciding such issues.

    6. The anticipated losses on account of existing obligation on 31st March, determinable with reasonable accuracy, being in the nature of expenditure/accrued liability, have to be taken into account while preparing financial statements.

    7. The elements of financial statement can be broadly divided into the following five groups, viz. assets, liabilities, equity, income/gains and expenses/loss. These items are recognised in a financial statement if both the following criteria are met :

    a) future economic benefit will be there from the said events,

    b) the event can be measured in monetary terms.

In the present case, the AO himself has observed in the assessment order that at the time of entering into the contract, the assessee has recorded the income/loss on the basis of difference between the contracted rate and spot rate. Thus, to say that the contract was incapable of being recognised in the books of account, is not correct. The assessee recorded only the net effect of the transaction and not the entire transaction. Whether the deduction is allowable or not, therefore, cannot be guided by this factor.

    8. The AO cannot reject the method of accounting followed by the assessee merely on the ground that a better method of accounting could be the alternate one. However, in the present case, though observations have been made by the AO to this effect, but actual disallowance has been made by treating the impugned amount as contingent liability.

    9. Accounting Standard 11 issued by ICAI is mandatory and mandates that in a situation like in the present case, since the transaction is not settled in the same accounting period, the effect of exchange difference has to be recorded on 31st March.

    10. The foreign exchange currency held by the assessee bank is its stock-in-trade. On facts, this contract was incidental to the assessee’s holding of the foreign currency as current assets. Therefore, in substance, it cannot be said that the forward contract had no trappings of stock-in-trade.

    11. Profits are considered only when actual debt is created in favour of the assessee, but in case of anticipated losses, if an existing binding obligation, though dischargeable at a future date, is determinable with reasonable certainty, then the same is allowable.

    12. The principle that the liability in paraesenti is an allowable deduction but a liability in futuro, which for the time being is only contingent is not allowable has to be applied keeping in view the principles of prudence and applicable Accounting Standards.

13. When  profits  are  being  taxed  by  the Department in respect of such unmatured foreign exchange contracts, then there was no reason to disallow the loss as claimed by the assessee in respect of the same contracts on the same footing.

S. 40(a)(ia) read with S. 194C of the Income-tax Act, 1961 — Tax deductible for the year deducted belatedly on the last day of the accounting year and paid before the due date for filing of return — Whether AO justified in disallowing the expenditure u/s.

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Part B : UNREPORTED DECISIONS

16 Bapusaheb Nanasaheb Dhumal v.
ACIT

ITAT ‘B’ Bench, Mumbai

Before P. M. Jagtap (AM) and

Vijay Pal Rao (JM)

ITA No. 6628/Mum./2009

A.Y. : 2005-06. Decided on :
25-6-2010

Counsel for assessee/revenue :
Anil J. Sathe/

S. S. Rana

S. 40(a)(ia) read with S. 194C
of the Income-tax Act, 1961 — Tax deductible for the year deducted belatedly on
the last day of the accounting year and paid before the due date for filing of
return — Whether AO justified in disallowing the expenditure u/s.40(a)(ia) —
Held, No.

Per Vijay Pal Rao :

Facts :

During the year, the assessee
had paid various sums to contractors but the tax was deducted only on 31-3-2005.
According to the AO, as per the provisions of S. 194C, the assessee was required
to deduct and pay the tax regularly in each month when the contractors were
paid. Since the assessee had deducted full amount of the tax only on 31-3-2005,
he restricted the allowance of deduction only in respect of payments made during
the month of March and disallowed the deduction in respect of the payments which
were credited and made during the period other than the month of March 2005. On
appeal the CIT(A) upheld the order of the AO.

Before the Tribunal the Revenue
submitted that the assessee had failed to deduct and pay tax as required
u/s.194C. According to it, S. 40(a)(ia) grants relaxation of time period in
depositing the TDS only in a case when the tax was deductible and deducted in
the last month of the previous year — where the time for deposit of tax is
allowed till the due date of filing of the return u/s.139(1). In cases where the
tax is deductible prior to the month of March, then the same has to be deducted
before the end of the last month of the previous year and paid by the due date
as given in S. 194C. According to it, since the assessee had failed to deduct
and pay tax as required u/s.194C and other provisions of Chapter XVII of the
Act, the AO was justified in disallowing the expenditure claimed. It also relied
on the decision of the Supreme Court in the case of Madurai Mills and Co. Ltd.
(89 ITR 445).

Held :

According to the Tribunal the
controversy revolves around the applicability of the provisions of S. 194C while
disallowing the expenditure u/s. 40(a)(ia). According to it, the provisions of
S. 194C are relevant only for the purposes of ascertaining the deductibility of
the tax from the payments made. Once it is determined that the nature of payment
falls under the provisions of Chapter XVII, the disallowance for non-compliance
with TDS provisions would be governed by the provisions of S. 40(a)(ia).
According to it, the proviso to S. 40(a)(ia) makes it further clear that even in
the case when the tax has been deductible as per the provisions of Chapter XVII,
but deducted in the subsequent year or deducted during the last month of
previous year, but paid after the due date u/s.139(1) or deducted during the
other months of the previous year, but paid after the end of the said previous
year, then the said sum would be allowed as deduction in the previous year in
which the tax is paid. According to it, if the conditions of deduction and
payment prescribed under Chapter XVII are applicable for disallowance of
deduction, then the provisions of S. 40(a)(ia) would be rendered as meaningless.
It further added that as per S. 40(a)(ia) when the tax is deducted, even
belatedly, and deposited belatedly, then deduction is not denied and is
allowable in the previous year in which the tax was deposited. According to it,
the provisions of Chapter XVII were relevant only for ascertaining the
deductibility of the tax at source and not for the actual deduction and payment
for attracting the provisions of S. 40(a)(ia).

Therefore, since the assessee
had deducted the tax in the last month of the previous year and deposited the
same before the due date of filing of the return, it allowed the claim of the
deduction of the assessee. It further observed that the case relied on by the
Revenue is not relevant.

levitra

Consideration paid by Indian Company to American Company under assignment agreement was not capital gains but business profits – Since American Company did not have PE in India, consideration not chargeable to tax in India. Payer not required to withhold

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New Page 1Part C : Tribunal & AAR
International Tax Decisions

9 Laird Technologies India Pvt. Ltd.
(2010) 323ITR598(AAR)
Article 7, India-USA DTAA; S. 195
Dated : 18-2-2010

Consideration paid by Indian Company to American
Company under assignment agreement was not capital gains but business profits –
Since American Company did not have PE in India, consideration not chargeable to
tax in India. Payer not required to withhold tax u/s.195.

Facts :

The applicant Indian Company (‘IndCo’) was a group
company of a UK company (‘UK Co’). USCo was another group company of UK Co.
IndCo was engaged in the business of design and manufacture of antenna and
battery packs for mobile phones. USCo was a globally known designer and
manufacturer of antenna, etc. USCo had entered into a global Product Purchase
Agreement (‘PPA’) with Nokia for supply of products in respect of Nokia’s
requirements. Inter alia, PPA stipulated that “neither party shall assign any of
its rights or obligations under this agreement without prior written consent of
the other party”. USCo and IndCo entered into an Assignment Agreement under
which, USCo assigned all its beneficial rights, title, interest, obligations and
duties under PPA in favour of IndCo for a period of 5 years for certain lump sum
consideration.

IndCo applied to AAR for its ruling on the
following issues :

  • Whether amount received
    by USCo as assignment fee from IndCo was taxable under the Income-tax Act or
    under India-USA DTAA ?

  • Whether IndCo was
    required to withhold tax even if the assignment fee was not taxable in the
    hands of USCo ?

Held :

The AAR ruled as follows :

As regards taxability as capital gains :

An inference could not be
drawn that Nokia had consented to ratify the Assignment Agreement, nor was it
known whether Nokia was apprised of all the terms of Assignment Agreement.
Further, mere fact of Nokia accepting goods from IndCo would not lead to the
inference that assignment had approval of Nokia. Therefore, there was no valid
assignment in the eyes of law.

In the absence of any
valid assignment, the contention of IndCo that there was legal transfer of
capital asset and that consideration should be deemed to be capital gain cannot
be accepted. However, the fact remained that IndCo paid certain amount to USCo
which was received by USCo in its bank account. Thus, irrespective of the
validity of the Assignment Agreement, amount received by USCo can be examined
for ascertaining tax implications for USCo. Amount received on assignment was
business profits of USCo.

As regards constitution of PE :

There was nothing on
record that USCo had any role to play in regular manufacturing and business
activities of IndCo. IndCo did not constitute USCo’s PE in India. As per facts
on record, fixed place of PE of USCo is ruled out. USCo was not in picture after
IndCo started manufacture and supply of goods. The tax authorities did not
elaborate in what manner IndCo was dependent on USCo and hence, that contention
is not sustainable.

In absence of agency or
fixed rule PE, business income is not taxable in India.

As regards taxability and withholding tax :

As USCo had not derived
any income chargeable in India, IndCo was not required to withhold tax u/s.195
of the Income-tax Act.

levitra

S. 37(1) — Capital or revenue expenditure — Whether the amount paid for handsets and for talk-time charges were capital in nature — Held, No.

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Part B :
Unreported
Decisions

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8 Radial Marketing Pvt. Ltd. v. ITO
ITAT ‘SMC’ Bench, Mumbai
Before R. K. Gupta (JM)
ITA No. 3868/Mum./2008
A.Y. : 2003-04. Decided on : 19-5-2009
Counsel for assessee/revenue : G. P. Mehta/K. K. Mahajan

S. 37(1) — Capital or revenue expenditure — Whether the
amount paid for handsets and for talk-time charges were capital in nature —
Held, No.

Facts :

During the year under appeal the assessee had claimed a sum
of Rs.24,500 paid for handsets and Rs.14,000 paid for talk-time charges as
revenue expenditure. However, the AO treated the same as capital expenditure and
allowed the depreciation.

Held :

The Tribunal referred to the CBDT Circular issued with
reference to the payments made under ‘Own Your Telephone’ scheme of MTNL. It
noted that as per the Circular the amount paid for the purchase of handsets was
allowable as revenue expenditure. In view thereof, it allowed the claim of the
assessee. As regards the amount paid for talk-time — it agreed with the assessee
that it cannot be treated as capital in nature as the same was not for any
capital assets.

Reference :

CBDT Circular No. 204/70/75-IT (All), dated 10-5-1976.

levitra

S. 80-IA — Deduction in respect of profit of the power-generating undertaking — Power generated by the eligible unit captively consumed — Valuation at market price — Rates charged by the State Electricity Board, including the electricity tax levied thereo

fiogf49gjkf0d
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Part B :
Unreported
Decisions

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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
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7 DCW Ltd. v. ACIT
ITAT ‘D’ Bench, Mumbai
Before A. L. Gehlot (AM) and P. Madhavi Devi (JM)
ITA No. 126/Mum./2008
A.Y. : 2003-04. Decided on : 29-1-2010

Counsel for assessee/revenue : Salil Kapoor/R. N. Jha

S. 80-IA — Deduction in respect of profit of the
power-generating undertaking — Power generated by the eligible unit captively
consumed — Valuation at market price — Rates charged by the State Electricity
Board, including the electricity tax levied thereon, adopted as a benchmark to
arrive at the market value — Whether the CIT(A) was right in excluding the
electricity tax to arrive at the market value — Held, No.

Per A. L. Gehlot :

Facts :

One of the issues before the Tribunal was with reference to
the claim for deduction u/s.80-IA in respect of income from power plant. The
assessee was using power generated by its power plant for its own consumption.
In terms of the Explanation to S. 80-IA(8) — the assessee applied the rate
charged by the State Electricity Board and arrive at the market price of the
power used for captive consumption. The rate charged by the State Electricity
Board also included electricity tax levied by the State Government. According to
the CIT(A), since the electricity tax was a statutory payment, the same cannot
form part of the market price. For the purpose he relied on the decision of the
Mumbai Tribunal in the case of West Coast Paper Mills Ltd.

Held :

According to the Tribunal the issue before the Mumbai
Tribunal in the case of West Coast Paper Mills Ltd. was different than the case
of the assessee. In the case of the former, the issue was which rate was to be
adopted out of the two rates available on record. Referring to the Explanation
to S. 80-IA(8) defining the term ‘market value’, it observed that, the market
value could be understood by the simple fact viz., if the assessee was not
producing the electricity by itself and if it was purchased from the State
Electricity Board, the amount paid would be the market price which includes the
taxes levied by the authority. Therefore, it held that there was no reason for
exclusion of tax for the purpose of calculation of market price.

Case referred to :

West Coast Paper Mills Ltd. v. ACIT, 103 ITD 19 (Bom.).

levitra

Explanation to S. 73 — For the purpose of deciding whether the case of the assessee is covered by exceptions provided in Explanation to S. 73, speculation loss is to be excluded while computing business income and arriving at the gross total income.

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6 Paramount Information Systems Pvt. Ltd. v. ITO
ITAT ‘K’ Bench, Mumbai
Before P. Madhavi Devi (JM) and B. Ramakotaiah (AM)
ITA No. 921/Mum./2008
A.Y. : 1993-94. Decided on : 24-2-2010

Counsel for assessee/revenue : Jayesh Dadia/Anil K. Mishra

 

Explanation to S. 73 — For the purpose of deciding whether
the case of the assessee is covered by exceptions provided in Explanation to S.
73, speculation loss is to be excluded while computing business income and
arriving at the gross total income.

Per P. Madhavi Devi :

Facts :

The assessee incurred speculation loss of Rs.22,728. This
speculation loss was in addition to the loss on trading in shares amounting to
Rs.6,66,971 separately shown in P & L Account. While assessing the total income
u/s.143(3) of the Act, in order to ascertain whether the Explanation to S. 73
applies, and therefore the loss of Rs.6,66,971 on trading in shares is to be
regarded as speculation loss, the Assessing Officer (AO) treated speculation
loss of Rs.22,728 as such and excluded it from computation under the head
‘Profits and Gains of Business’. In the computation filed by the assessee, there
was a carried forward speculation business loss of Rs.22,728 and unabsorbed
depreciation of Rs.36,992 which was to be carried forward. The assessee
contended that depreciation on business premises of Rs.38,881 on new office
which was not put to use needs to be excluded since the same was claimed wrongly
and is not allowable since the new office has not been put to use. The ITAT
remanded this matter (of depreciation being not allowable) along with the issue
of application of S. 73 to the AO.

In reassessment proceedings, AO reiterated the contentions in
original assessment but the CIT(A) after admitting additional evidences and
remanding the matter back to the AO gave a finding that the assessee had not put
to use the office premises and the AO was directed to withdraw the depreciation
on the new building and recompute business loss. However, the CIT(A) worked out
gross total income by treating speculation loss of Rs.22,728 as part of business
income. He rejected the assessee’s contention that for computing gross total
income, speculation loss of Rs.22,728 should not form part of business income
and therefore also for arriving at gross total income.

Aggrieved, the assessee preferred an appeal to the Tribunal.
The question for consideration being whether the speculation loss of Rs.22,728
is to be included as part of gross total income or to be excluded while
computing business income and arriving at the gross total income.

Held :

The Tribunal after referring to the judgment in the case of
IIT Invest Trust Ltd. 107 ITD 257, held that under the scheme of the Act
whenever there is a separate loss which cannot be set off in the computation
under each head, the same cannot be included in the gross total income and it
does not enter in the computation of gross total income being a loss, unless set
off against income under any other head. The Tribunal held that the speculation
loss was to be treated separately under the provisions of the Act. Explanation 2
to S. 28 makes it mandatory that where speculative transactions carried on by
the assessee are of such a nature as to constitute the business, the business
shall be deemed to be distinct and separate from any other business. The
Tribunal held that the speculation loss of Rs.22,728 constituted a separate
business and it cannot be set off from other business loss or profit including
income from other sources. Accordingly, it was held that the same be excluded
while working out gross total income. Upon excluding the speculation loss of
Rs.22,728 the gross total income became a positive figure of Rs.2,957 and
accordingly income from other sources was more than business profits and
assessee’s loss on trading in shares was not attracted by provisions of S. 73.
The assessee’s case was held to be covered by first exception in Explanation to
S. 73. The Tribunal observed that this principle is also laid down in IIT Invest
Trust Ltd. 107 ITD 257 and also in Concord Commercial Pvt. Ltd. 95 ITD 117 (SB).

The Tribunal allowed the appeal filed by the assessee.

It observed that the judgment of the Madras High Court is a
case of liability arising on account of a retrospective amendment, as in the
present case. It held that levy of interest in respect of the amount of deferred
tax deducted while arriving at the book profit in the return is invalid.

As regards the argument raised at the time of hearing that since powers of reduction/waiver are vested in the CBDT whether the Tribunal can examine the validity of the levy of interest, the Tribunal having noted that the Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961) held that if the assessee denies his liability to pay interest the appeal on that point was maintainable. Based on the ratio of the decision of the Apex Court and also having noted that there is no express or implied restriction on the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is maintainable. It further held that the fact that the administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with a valid appeal before it.

 
The appeal filed by the assessee was partly allowed.

S. 234B — Assessee is not liable to pay interest u/s.234B when by retrospective amendment made later the amount becomes taxable. The fact that administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with

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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.)

 

 


5 Sun Petrochemicals Pvt. Ltd. v. ITO
ITAT ‘D’ Bench, Ahmedabad
Before R. V. Easwar (VP) and D. C. Agarwal (AM)
ITA No. 1010/Ahd./2009


A.Y. : 2006-07. Decided on : 5-6-2009 Counsel for assessee/revenue
: S. C. Jalan/ Abani Kanta Nayak

S. 234B — Assessee is not liable to pay interest u/s.234B
when by retrospective amendment made later the amount becomes taxable. The fact
that administrative relief can be obtained by the assessee cannot erode the
powers of the Tribunal while dealing with a valid appeal laid before it.

Per R. V. Easwar :

Facts :

The assessee company while computing book profit u/s.115JB of
the Act deducted the deferred tax amounting to Rs.4,94,21,478 and fringe benefit
tax of Rs.62,279. At the time when the assessee filed the return of income,
there was no specific provision in the Section to the effect that deferred tax
was not deductible while arriving at the book profit. However, by the Finance
Act, 2008 an amendment was made to the Section with retrospective effect from
1-4-2001, that is, w.e.f. A.Y. 2001-02, that the deferred tax cannot be deducted
in arriving at the book profit.

The Assessing Officer (AO) in the order passed u/s.143(3) of
the Act computed the book profits by adding back the amount of deferred tax and
fringe benefit tax to book profits computed by the assessee and gave a direction
to charge interest accordingly. Aggrieved the assessee filed an appeal to the
CIT(A) on the ground that levy of interest was illegal since the amount of
deferred tax became liable to be added to the book profit only because of the
retrospective amendment made to the Section which could not be anticipated by
the assessee.

The CIT(A) was of the view that levy of interest was
mandatory and power was vested with the CBDT to waive or reduce the same,
subject to certain conditions, one of which is that no interest can be charged
if addition or disallowance is due to a retrospective amendment in law. He
upheld the levy but held that it was open to the assessee to seek
waiver/reduction from the CCIT/DGIT.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that the following judgments support the
case of the assessee :

(1) CIT v. Revathi Equipment Limited, (298 ITR 67) (Mad.)

(2) Haryana Warehousing Corporation v. DCIT, (75 ITD 155)
(TM)

(3) Priyanka Overseas Ltd. v. DCIT, (79 ITD 353) (Del.)

(4) ACIT v. Jindal Irrigation Systems Ltd., (56 ITD 164) (Hyd.)

It observed that the judgment of the Madras High Court is a
case of liability arising on account of a retrospective amendment, as in the
present case. It held that levy of interest in respect of the amount of deferred
tax deducted while arriving at the book profit in the return is invalid.

As regards the argument raised at the time of hearing that
since powers of reduction/waiver are vested in the CBDT whether the Tribunal can
examine the validity of the levy of interest, the Tribunal having noted that the
Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961)
held that if the assessee denies his liability to pay interest the appeal on
that point was maintainable. Based on the ratio of the decision of the Apex
Court and also having noted that there is no express or implied restriction on
the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is
maintainable. It further held that the fact that the administrative relief can
be obtained by the assessee cannot erode the powers of the Tribunal while
dealing with a valid appeal before it.

The appeal filed by the assessee was partly allowed.

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Penalty u/s.29(8) of MVAT Act vis-à-vis High Court judgment

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VAT

S. 29(8) about levy of
penalty was amended from 1-7-2009. The amended S. 29(8), from 1-7-2009, reads as
under :

“29. Imposition of penalty
in certain instances :


(8) Where, any person or
dealer has failed to file within the prescribed time, a return for any
period as provided in S. 20, the Commissioner shall impose on him, a sum of
rupees five thousand by way of penalty. Such penalty shall be without
prejudice to any other penalty which may be imposed under this Act.”


It appears that from
1-7-2009 the quantum of penalty is sought to be fixed and also to make it
mandatory. Simultaneously, by amendment in S. 85(2) (b-2) the above penalty
order is made non-appealable. The learned Commissioner of Sales Tax has issued
Circular No. 22T of 2009, dated 6-8-2009 in which the implications of the above
amendments are explained and amongst others it is mentioned as under :


“3.
Penalty for non-filing or late filing of
returns — S. 29(8) is substituted :


(e) Amended sub-section
provides mandatory penalty and is in addition to any other penalty provided
under the Act.

(f) The officer shall
not have any discretion whether to levy or not to levy the penalty as also
to decide the quantum of penalty.

(g) The penalty order
passed under this Section is made non-appeallable; therefore there shall be
no appeal against the levy of penalty. [S. 85(2) amended]

(h) Needless to state
that since the levy of penalty for non-filing or late filing of returns has
become mandatory; there is no need to issue the show-cause notice before the
levy of such a penalty.”


The above mandatory levy of
penalty, in all circumstances, without right of appeal and without hearing
opportunity was agitating the minds of traders/dealers. On the behest of Tax
Consultants Association, Sangli and Federation of Association of Maharashtra,
writ petitions in case of Sanjay Dresses and Ravindra Udyog were filed before
Hon. Bombay High Court. In both the writ petitions the following challenges were
made :


(1) The S. 29(8) is
ultra vires the Constitution. It does not allow discretion in the matter of
levy of penalty. There can be a number of instances where delay will be due
to circumstances beyond control of the dealer, like medical emergency,
computer failure and others. The penalty amount of Rs.5000 may also exceed
the tax amount payable in return, e.g. tax payable may be Rs.100 but penalty
would be Rs.5000. The penalty is not commensurate to the object to be
achieved. This will be confiscatory as well as amounting to levy of tax on
income rather the penalty.

(2) That the order is
not appealable was also challenged. The penalty, being discretionary, the
mechanism of appeal is necessary.

(3) The penalty cannot
be levied without hearing. It is against the principles of natural justice.
Even assuming that the penalty is mandatory, still it may be levied in case
where return is not due, or the return is filed but not noticed by the
Department, etc., if levied without hearing. Therefore the hearing is a
must.

(4) The penalty be
deleted/reduced on the facts of the case.


When the above writ
petitions came up for hearing, the High Court was of the opinion that since
penalty order is passed without hearing, it is bad in law. At this juncture the
learned advocate on behalf of the Department tried to argue that post-levy
remedy is available like rectification. However when the High Court pointed out
that the hearing is required before the penalty order is passed, the learned
advocate conceded that the hearing is necessary before levy of penalty u/s.29(8)
and requested to set aside the order and remand back the matter. It is at this
point the High Court passed the order (Sanjay Dresses W.P. 1705 of 2009, dated
6-8-2010 and Ravindra Udyog W.P. 1214 of 2010, dated 6-8-2010, one of which is
reproduced below). When pointed out to the High Court that there are other
challenges, the High Court has specifically stated in the order that even after
passing a speaking penalty order, if there is a grievance, the petitioner can
again file a writ petition. Thus the other challenges are kept open to be dealt
with in subsequent matter, which may take place later.

“In the High Court of
Judicature at Bombay

Civil Appellate Jurisdiction
— Writ Petition No. 1705 of 2010

M/s. Sanjay Dresses …
Petitioner

v.

The State of Maharashtra …
Respondent

C. B. Thakar for the
petitioner.

V. A. Sonpal, ‘A’ Panel
counsel for the respondent.

Coram : V. C. Daga and S. J.
Kathawalla, JJ.

Dated : 6th August 2010.

P.C. :

Perused petition.

Heard learned counsel for
the petitioner and Mr. Sonpal, learned counsel for the respondent.

    2. Mr. Sonpal, during the course of hearing, urged that the impugned order levying penalty be set aside and the matter be remitted back for consideration afresh so as to enable the Department to comply with the requirement of principles of natural justice. He further submits that fresh notice will be issued to the petitioner indicating the grounds on which the Department proposes to levy penalty. That the petitioner would be given an opportunity to reply the same and after considering the reply and affording personal hearing to the petitioner a reasoned order would be passed dealing with all the contentions raised by the petitioner.

    3. In the above view of the submission, learned counsel for the petitioner seeks permission to withdraw this petition reserving his right to challenge adverse order on the grounds as may be available in law including the grounds raised in this petition. All contentions of the parties on merits are kept open.

    4. Petition stands disposed of as withdrawn in terms of this order with no order as to cots.
(S. J. Kathawalla, J.)    (V. C. Daga, J.)”

Conclusion :

    1) The other challenges like Constitutional validity, and non-appealability are still open issues before the High Court.

    2)Since the Department itself has accepted that hearing is necessary before levy of penalty, the said principle will be required to be followed in case of other dealers also. The Department cannot take a stand that hearing is required to be given only to those who come before the High Court and not to others, though principle of giving hearing before levy of penalty u/s.29(8) is accepted. It will be an absurd contradiction and also discriminatory. If any other dealer approaches the High Court on the same ground, surely it will be difficult for the Department to save the situation in view of their own admission about giving hearing.

Follow-up action in case of penalty orders already passed:

Since 1st July 2009, a large number of penalty orders have already been passed without giving hearing. Such dealers can now file Form 307 (Rectification) and ask for cancellation of such orders, as bad in law. The Department will be required to cancel the same, give hearing and then pass reasoned orders, if required.

It may be noted that, in several cases, in the matters of levying penalty, the courts and tribunals have ruled that penalty cannot be levied if there is a genuine reason for the delay.

Basic design services provided by US entity which includes preparation of plan, concept design, schematic design, design development and other related consultancy services during construction phase are part of architectural services provided by the US ent

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

8 HMS Real Estate
(2010) TIOL 17 ARA-IT
Article 12 of the India-US DTAA,
S. 115A & S. 195 of the Income-tax Act
Dated : 18-3-2010

Basic design services provided by US entity which includes
preparation of plan, concept design, schematic design, design development and
other related consultancy services during construction phase are part of
architectural services provided by the US entity. Payment received for such
services are fees for included services as it involved development and transfer
of technical plan and design. The agreement needs to be read having regard to
the predominant features of the contract and by taking into account crux and
substance of the contract.

Remittance made to the US entity for making payment to
consultants for the services rendered by such consultants directly to the
taxpayer represents reimbursement of actual expenses and does not represent
income chargeable to tax.

Facts :

The US entity entered into agreement with the Indian company
for providing architectural design services in connection with development and
management of commercial real estate project of ICO. In terms of the agreement,
the US entity was obliged to develop master plan, prepare concept design,
schematic designs, etc. Additionally, it was also obliged to :

(i) understand the specifications from ICO and get the
designs approved by ICO;

(ii) assist ICO in bidding and contractor selection
process;

(iii) observe construction progress;

(iv) provide alternative proposals for cost reduction; and

(v) co-operate with the local director in getting the
requisite approvals or modify the designs to conform with the regulations,
etc.

The agreement was for a fixed fee. The fee was payable on the
basis of the milestones achieved. The US entity was also entitled to
reimbursement of fees paid by it to the consultants who assisted the US entity
in rendering services if such consultants were appointed with the consent of ICO.

For rendering services, personnel of the US entity were
present in India for a period of 50 days. There was no dispute that the presence
of the US entity did not result in emergence of service PE in India.

ICO as a payer contended that substantial portion of the
consideration was for transfer and sale of designs on an outright basis. By
relying on the specific provision of the agreement, it was contended by ICO that
all the rights in designs, including right to use the designs for the other
projects vested in ICO. Hence, the contract was for sale of design which was
concluded outside India and hence not taxable, either under the IT Act or in
terms of DTAA.

AAR held :

  • The AAR rejected contention of the ICO that the agreement
    merely involved transfer of right, title and interest in the drawings, models
    and work product and that the transaction can be regarded as one of sale of
    designs. The AAR concluded that the contract was for rendering of services
    having regard to the following :

  1. The agreement needs to
    be read as a whole. The true scope and dominant object of the contract needs
    to be ascertained having regard to the predominant features of the contract
    and by taking holistic view of the matter.


  2. The US entity developed
    the designs after in depth interview with ICO and participated as an expert
    service provider at every stage from the conceptualisation till the stage of
    completion. This supported that the contract was a service contract.


  3. The role of the
    applicant did not end upon transfer of plans, drawings and designs.

  4. The substance
    and crux of the contract was rendering of services and the sale of designs
    was incidental. To contend that the essence of the contract was the sale of
    designs, models and that the services were to distort and stultify true
    nature and dominant purpose of the contract.



  • The consideration
    was for development and transfer of a technical plan and designs, which is
    specifically covered as fees for included services. Article 12(4)(b) covers
    transfer of technical plan or design which arises as a sequel to and as an
    integral part of the service contract.

  • The decision of
    the Calcutta High Court in CIT v. Davy Ashmore, (190 ITR 626) is
    distinguishable as that case involved transfer of designs which were already
    available on an outright basis and did not appear to be a case of tailor-made
    designs and drawings.


  • The remittance
    made to the US entity for reimbursements towards the fees of the consultants
    who assisted the US entity in rendering architectural services and who were
    appointed with the consent of ICO represented remittance towards reimbursement
    of actual expenses. Accordingly, it was not income chargeable to tax.

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Mutual concern — Income of the association of flat owners is not taxable on the principle of mutuality, despite the fact that most of the flats are let out and tenants are paying the contribution — Interest earned from bank on surplus funds deposited in t

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New Page 1Part 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.)


9 Wellington Estate Condominium v. ITO
ITAT ‘I’ Bench, Delhi
Before R. P. Tolani (JM) and A. K. Garodia (AM)
ITA No. 2846/Del./2007


A.Y. : 2003-04. Decided on : 16-10-2009

Counsel for assessee/revenue : Ved Jain & V. Mohan/Anusha
Khurana

Mutual concern — Income of the association of flat owners is
not taxable on the principle of mutuality, despite the fact that most of the
flats are let out and tenants are paying the contribution — Interest earned from
bank on surplus funds deposited in the bank is also not taxable on the principle
of mutuality.

Per A. K. Garodia :

Facts :

The assessee was an AOP formed by Residents’ Welfare
Association of the residents of Wellington Estate, DLF City, Phase V, Gurgaon
which consisted of 555 flats, out of which 505 flats were sold out by DLF
Universal Ltd. (Developer) and 51 unsold flats remained in possession of the
developer. The association was registered with The Registrar of Societies,
Haryana on 1-10-2002 and hence this was the first year of operation of the
assessee.

The association claimed itself to be a mutual concern and
claimed that its income is not taxable. The AO rejected the claim of the
assessee and assessed the total income at Rs.25,95,060 as against returned
income of Rs.14,180.

The CIT(A) rejected the claim of the assessee on the ground
that (i) most of the flats were rented out to tenants who were paying various
charges to the association and tenants are not the members of the association;
(ii) the assessee is receiving money on account of various charges from
non-members as per rules; (iii) profits on account of excess charges were
refundable to the members which indicates the profit making purpose of the AOP
and distribution of profits amongst members; and (iv) there is no identity
between the contributors and participators which is essential element of mutual
concern.

The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that clause 18(b) of the bye-laws of the
assessee regarding winding up or dissolution of the society provide that any
surplus remaining after satisfaction of its debts and liabilities shall not be
paid to or distributed among the members of the society at the time of
dissolution, but shall be given or transferred to some other institution having
objects similar to the objects of the society to be determined by the members of
the society at the time of dissolution. It also noted that clause 2 and 4 of the
bye-laws provided that the assessee could invest or deposit money and could let
out suitable portion of the common areas to outsiders for commercial purposes
and to accumulate the common profit for building up reserve fund.

The Tribunal observed that the Delhi Bench of Tribunal has in
the case of Standing Conference of Public Enterprise (SCOPE) v. ITO in ITA No.
5051/Del./2007, dated 31-3-2008 dealt with the situation where as per bye-laws
the surplus was not required to be distributed amongst the members on
dissolution of the society and the Revenue had denied mutuality on this ground.
Clause (xvi) of the bye-laws of SCOPE was identical to clause 18(b) of the
bye-laws of the assessee. The Tribunal after considering the decision of Apex
Court in the case of Bankipur Club (226 ITR 97) (SC) rejected the argument of
the Revenue. Further, in the case of SCOPE, interest income was earned from
surplus funds and rental income was received from non-members also. Therefore,
letting out of suitable portion of common area to outsiders for commercial
purposes and accumulation of common profit for building up reserve fund could
not be a reason for denying mutuality. As regards interest income the Tribunal
has in the case of SCOPE held that this issue is covered in favour of the
assessee by the judgment of the Delhi High Court in the case of All India
Oriental Banking Commerce of Welfare Society (184 CTR 274) (Del.).

As regards the allegation of the CIT(A) that when flats are
rented out, maintenance charges are received by the assessee from non-members,
the Tribunal held that liability of payment of maintenance and other charges is
of the member i.e., the owner and even if the same is paid to the society by the
tenant of the members, it cannot be said that the society is receiving it from
non-members because in case of default the assessee can collect the same from
members only and not from tenants. The Tribunal observed that as per clause 4(b)
of the bye-laws all the owners are obliged to pay monthly assessment imposed by
the association to meet all expenses relating to Wellington Estate Condominium,
which may include an insurance premium for a policy to recover repair and
reconstruction work in certain cases. The Tribunal held that payments made by
tenants of the members are to be considered as received from members since the
liability to pay the amount is of the member and the tenant is making the
payment to the assessee for and on behalf of the member. The Tribunal held the
assessee to be a mutual concern and allowed the appeal filed by the assessee.

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On facts, matter remanded to tax officer to determine place of effective management of the company incorporated in Mauritius.

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Part C : Tribunal & AAR International Tax Decisions

 


19 2010 TII 66 ITAT-Del. Intl.

SMR Investment Limited v. DDIT

Article 13 of India-Mauritius DTAA

Dated : 26-3-2010

On facts, matter remanded to tax officer to determine place
of effective management of the company incorporated in Mauritius.

Facts :

The taxpayer, a company in Mauritius (Mauco), earned certain
capital gain on sale of shares of Indian Company. Such gain was claimed exempt
in terms of Article 13(4) of India-Mauritius Treaty.

The tax officer of Mauco called for certain information about
investment decisions, board meetings, etc. The AO also examined and recorded
statement of the director of the share-broking company in India through which
Mauco had purchased and sold shares. Based on such statement, the AO noted that
the decision for purchase and sale of shares was conveyed to the share-broking
firm by one Mr. SR who held 99% shares of Mauco and was also one of the 3
directors of Mauco. The AO therefore asked for copy of passport of Mr. SR as
also the details of board meetings and resolutions passed by Mauco. The AO
denied the benefit of the treaty to Mauco by holding that :


(i) Copy of passport of Mr. SR was not made available
despite specific request to that effect;

(ii) In absence of evidence as to where Mr. SR was when
the investment decisions were made, it could be concluded that effective
management of Mauco was in India.


The AO accordingly held Mauco to be resident of India and
assessed Mauco in respect of capital gains income.

Held :

The Tribunal noted decision of the co-ordinate Bench in case
of Radharani Holdings Private Limited (2007) 110 TTJ 920 (Delhi). In that case,
the Company was held to be resident of Singapore as all the board meetings were
held in Singapore and this was substantiated by the residency certificate
obtained from Singapore Government in addition to furnishing minutes of the
board of directors duly authenticated by the Indian Commission in Singapore. The
Tax Department sought to distinguish applicability of the ruling on the ground
that no such evidence was furnished by Mauco. As against that, the taxpayer was
seeking to place reliance on details of board meetings, presence of other
directors at such board meetings, etc. It was also contended that onus of
proving that control and management of Mauco is not situated in Mauritius is on
the Tax Department.

The ITAT restored the matter to the AO for deciding the issue
afresh/de novo. The Tribunal directed the AO to consider all the documents and
examine the authenticity thereof with regard to claim of board meetings held in
Mauritius. The ITAT observed that :

“After considering all the documents which were either placed
before the lower authorities or before the Bench for the first time, we find
that it is very essential to once again examine the authenticity of the same and
their relevance with regard to board meetings held in Mauritius. For this
purpose, either third party evidence or evidence by any government agency either
situated in Mauritius or in India is required to be brought on record to
substantiate the assessee’s claim. In the interest of justice and fair play, we
restore both the appeals to the file of the AO for deciding the same afresh/de
novo in terms of our observations contained hereinabove.”

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Consortium of members formed for the purpose of joint bid does not constitute AOP if each of the members has specified responsibility independent of the other member and consideration flowing to each of the member is separate. Certain common covenants inc

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Part C : Tribunal &
AAR International Tax Decisions

7 Hyundai Rotem Co.
(2009) TIOL 798 ARA-IT
Dated : 23-3-2010

Consortium of members formed for the purpose of joint bid
does not constitute AOP if each of the members has specified responsibility
independent of the other member and consideration flowing to each of the member
is separate. Certain common covenants including agreeing to joint and several
liability for the comfort of the customer does not alter the situation.

Facts :


Five companies (one Korean, two Japanese and two Indian)
entered into a consortium named MRMB to bid for tender floated by Delhi Metro
Rail Corporation (DMRC). The bid was for designing, manufacturing, supplying,
commissioning, training and transfer of technology of 192 numbers of EMUs. The
contract was for a fixed consideration and was apportioned amongst various cost
centres and was linked to various milestones.

Responsibility of each of the member was clearly identified.
For example, Korean company was responsible for mechanical work, the Indian
company 1 was responsible for electric work, etc. Consideration of each one of
the members was clearly identified. Japco 1 was appointed as a consortium
leader. The amount collected from the customer was disbursed by the consortium
leader to the various members as per the pre-agreed ratio.

The tax authorities were of the view that the consortium
constituted an AOP on account of the following features :

(a) Joint participation of the consortium members in the
tender process.

(b) Bid having been submitted by the consortium.

(c) Execution of single contract.

(d) Appointment of common project director for planning,
organising and controlling execution of the project.

(e) Nomination of a consortium leader and its appointment
as a contact point between the customer and the members.

(f) Constitution of the project Board with nominee of each
member for overall planning, organising or controlling the execution of the
project.

(g) Furnishing of joint bank guarantee.

(h) Joint and several liability for the undertaking of the
contract. The overall responsibility of the consortium was to design,
manufacture, supply, etc. of 192 EMUs for which considerations was also
prefixed.

(i) All in all, there were collaborative efforts on the
part of the parties to undertake the contract which in view of the Tax
Department resulted in formation of the AOP.

AAR held :

  1. AAR noted that
    there is no definition of AOP in the IT Act or under the general law. It
    observed that AOP differs from the partnership and it falls short of a
    partnership, but the degree of distinction between the AOP or the firm is not
    clear.

  2. The constitution
    of AOP is fact-based and there are no hard and fast rules.

  3. In the context of
    IT Act, the association must be one the objects of which is to produce income,
    profits or gains by deploying assets in a joint enterprise with a view to make
    profit.

  4. The facts of the
    present case were akin to the facts before the AAR in case of Van Oord Acz BV
    (248 ITR 399). In view of the AAR, the present consortium did not constitiute
    an AOP on account of the following features :

(a) Nature of work undertaken and capable of being executed
by each member was materially different. Skill-set of each member was
different. Work of one member could not have been relocated to another.

(b) Bid evaluation by the costomer was done keeping in mind
competency of each member. There was no interchangeability or reassignment of
work or overseeing the work of each other.

(c) There was deduction in the original bid amount and the
discount agreed by each member was different. This was indicator of the fact
that economics of each of the members were detemined independently.

(d) In addition to the joint performance guarantee, each
member provided separate guarantee and undertaking.

(e) The agreement specifically clarified that there was no
intent between the parties to create any partnership or a joint venture.

(f) The covenant of joint and several liability was a
safeguard for the client to have better control over the consortium members.


  1. The facts of the case before AAR in GeoConsult ZT GMBH (304
    ITR 283) where the arrangement was regarded as giving rise to AOP were
    distinguishable. In GeoConsult’s case, there was intention to create a joint
    venture; the members had the same skill-set and scope of their work was
    overlapping. Also, the members had assisted each other in performance of the
    work and the members had unrestricted access to the work carried out by the
    other members, etc. The features in the present arrangement were different.

levitra

Payments made towards the share of the cost incurred in respect of research and development activities pursuant to cost contribution arrangement (CCA) is not the payment towards fees for technical services or royalty. Such contribution is not liable to ta

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

6 ABB Limited
(2010) TIOL 94 ARA-IT
S. 2(24), S. 195 of the Income-tax Act,
Articles 5 & 7 of India-Switzerland DTAA
Dated : 15-3-2010

Payments made towards the share of the cost incurred in
respect of research and development activities pursuant to cost contribution
arrangement (CCA) is not the payment towards fees for technical services or
royalty. Such contribution is not liable to tax in the hands of the co-ordinating
agency.

There is no obligation of tax withholding if the amount does
not represent income chargeable to tax.

Facts :


The applicant is a company incorporated in India and part of
the ABB Group, which is a leader in power and automation technologies. The Group
has presence in more than 100 countries.

As per Group’s R&D policy, all basic R&D is coordinated and
directed through group entity in Switzerland (Swissco).

The group entities who wish to participate in basic R&D enter
into a CCA with Swissco. As per the terms of CCA, the entire costs of basic R&D
is shared amongst the participants based on a pre-agreed allocation key. The
participating entities are allowed a royalty-free unlimited access to the
research results, including any Intellectual Property Rights (IPRs) generated
from basic R&D. Any revenue earned from third party is reduced from the total
cost recovered from the participants. The research programme and policy is
decided by the research Board which has nominee from the participating entities.
The research Board decides on the research to be undertaken, the budgeted cost,
recovery to be made from various participants based on budget and adjustment to
be made based on the actual cost incurred and third-party revenue earned, etc.
The research Board gets the research carried out through various research
centres to whom the remuneration is paid on cost plus basis.

CCA made it clear that though the economic benefits of
research vest in various participants, for administrative reasons and
convenience, the IPRs generated are legally registered in the name of Swissco.

In addition to the cost contribution payments, each
participant also paid a ‘coordination fee’ to Swissco for its role as
administrator and coordinating agency under the CCA. Such fee was accepted to be
chargeable to tax in India and no question was raised on taxability of such
amount.

The applicant sought the ruling on the tax implications of
the contributions proposed to be made to Swissco. The primary contentions of the
applicant before the AAR were (i) that the CCA was merely a pooling and
coordinating arrangement and represented reimbursement of actual cost incurred
in carrying out the research jointly; (ii) the contribution did not partake the
character of income and was, therefore, not chargeable to tax in India; and
(iii) even if the contribution constituted income, it represented business
income of Swissco, which in absence of PE in India, was not chargeable to tax.

AAR held :

  • The payments made to
    Swissco are not in the nature of FTS since Swissco had not rendered any
    managerial, technical or consultancy service to the participants of CCA.
    Swissco did not deploy any personnel to perform any services in India.


  • The contribution was not
    payment on account of royalty. It is true that research results in creation of
    IPR in the form of information, technical knowledge and experience. However,
    payment made to Swissco was not for getting rights to such IPRs. The contract
    research organisation through whom the research board got the research carried
    out merely works as contractor without retaining IPR or right to commercial
    exploitation of the research.


  • Even though the IPRs
    generated from the research were to be registered in the name of Swissco,
    their economic benefits and beneficial ownership vested in the contributories.
    Admittedly, all participants had royalty-free and perpetual access to IPR.
    Also, amounts received from third party or from exploitation of IPR reduced
    the cost of the research to the participants. The arrangement was thus for the
    benefit of all the participants where the resources were pooled by various
    participants for undertaking R&D for common benefit.


  • The arrangement was such
    that each participant reimbursed the actual cost incurred by making the
    proportionate contribution. The OECD Guidelines on CCA arrangement also makes
    it clear that each participant is effective owner of the IPR generated through
    common pool and hence the contribution is not royalty paid to any other
    person.


  • The amount of
    reimbursement was not chargeable to tax in India and consequentially not
    liable to TDS.


  • The AAR clarified that
    its decision on non-taxability however does not preclude enquiry in
    appropriate proceedings about the nature of contribution on an armed-length
    basis.



levitra

No income arises to the foreign company in India in the course of deputing personnel to an Indian company, who work under the control and supervision of the Indian company and thus become employee of the Indian company. Amount of salary of deputed employe

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

5 DDIT v. Tekmark Global Solutions LLC
(ITA 671/2007) (ITAT-Mum.)
Article 5(2), 7 of India-USA DTAA
Dated : 23-2-2010


No income arises to the foreign company in India in the
course of deputing personnel to an Indian company, who work under the control
and supervision of the Indian company and thus become employee of the Indian
company. Amount of salary of deputed employees reimbursed to the foreign company
is not taxable in India.

Facts :

Lucent Technologies Hindustan Private limited (ICO), an
Indian company, entered into an agreement with the assessee, a tax resident of
USA, to have their personnel deputed as per specifications of ICO.

ITAT considered the following terms of the contract between
ICO and the assessee to conclude that the arrangement between them was not for
providing of services by the assessee through its employees but that of
selecting and offering personnel for working as employees of ICO :

  • ICO provided
    specifications of the employees whom it (ICO) required pursuant to deputation
    arrangement.

  • The deputed personnel
    worked under the direction, supervision and control of ICO.


  • The assessee was not
    responsible for the work done or actions taken by the deputed personnel.


  • The lodging, boarding and
    other related expenses of deputed personnel were arranged by ICO.


  • The agreement made it
    clear that the agreement was for providing employees as per specifications of
    ICO and not for providing services to ICO.


The ITAT did note that the deputed personnel continued to be
on the payroll of the assessee and that the salary of the deputed personnel was
paid by the assessee for recoupment by way of reimbursement from ICO.

The Tax Department contended that the arrangement involved
rendering of services by the assessee to ICO through its employees in India and
that there was emergence of Service PE of the assessee in India. Accordingly,
the amounts were held chargeable in the hands of the assessee.

ITAT held :

The ITAT held :

  • No part of technical
    services were rendered by the assessee to ICO.


  • The deputed personnel for
    all practical purposes became the employees of ICO and carried out work
    allotted to them by ICO. The assessee had no control over the activities or
    the work performed by the deputed personnel. ICO alone had the right to remove
    the deputed personnel.


  • When the services
    rendered are independent of, and not under the control of, the assessee, the
    deputed personnel do not give rise to emergence of PE of the assessee in
    India.


  • In the circumstances, the
    amount received was reimbursement of salary which the assessee had disbursed
    as advance on behalf of and to the employees of ICO.


  • Even on an assumption
    that there is emergence of PE, there was no income embedded in the
    reimbursement of expenses.



levitra

Valid and commercially justifiable presence of recipient of income in treaty favourable jurisdiction cannot be disregarded to tax income in the hands of another ent

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Part C : Tribunal & AAR International Tax Decisions

 


18 2010 TII 58 ITAT-Mum.-Intl.

Satellite Television Asia Region Advertising Sales BV v.
ADIT

India-Netherlands DTAA; CBDT Circular No. 742, dated 2-5-1996
and Circular No. 23, dated 23-7-1969

Dated : 21-5-2010

Valid and commercially justifiable presence of recipient of
income in treaty favorable jurisdiction cannot be disregarded to tax income in
the hands of another entity.

Withdrawal of Circular No. 23, dated 23-7-1969, w.e.f.
22-10-2009 is prospective in its application.

Facts :

The assessee, a Netherlands company, is a wholly-owned
subsidiary of a Hong Kong Company (HKCo) and a second-generation subsidiary of a
company based in British Virgin Islands. The assessee was granted exclusive
right to sell advertising time in India on channels of TV network owned by HKCo.
The assessee engaged an Indian company (ICo) to procure business from Indian
advertisers by paying commission of 15% of receipts from business procured from
India. Based on the CBDT Circular No. 742, dated 2-5-1996, which was applicable
for the year in question, the assessee offered 10% of the advertisement revenues
to tax in India.

The AO held that the assessee was a conduit company and not a
resident of the Netherlands and that the advertisement revenues were taxable in
the hands of HKCo. As a protective measure, the
AO assessed the revenue in the hands of the assessee by estimating 20% of
revenues as income earned in India.

In support of its claim, the assessee submitted that it is
registered in, assessed to tax, and domiciled in, the Netherlands, and all its
business is conducted from the Netherlands. The assessee had also filed tax
resident certificate (TRC) issued by the Netherlands tax authorities, and
submitted that it earned revenue not only from India, but also from other
countries.

The AO contended that the assessee was appointed to sell
advertising time in India because the Netherlands had a favourable tax treaty
with India, whereas there is no tax treaty entered into between India and Hong
Kong, where the parent HKCo is located. The tax treaty between India and the
Netherlands is entered to give benefit and relief to bona fide taxpayers and not
to encourage creation of non-genuine taxpayers for the purpose of tax avoidance.
The Tax Department justified its action by contending that it was a clear case
of treaty shopping and TRC was not sufficient to justify that the assessee had
not been created with a motive to avoid taxes. The AO concluded that the
assessee is a conduit and its real residence is not in the Netherlands. In any
case, HKCo also had permanent establishment (PE) in India though ICo was
ostensibly appointed as an agent of the assessee justifying actual assessment in
the name of HKCo.

The CIT(A) concurred with the AO’s order.

Held :

On further appeal, the ITAT held :

The Department could not disregard the existence of the
assessee and proceed to tax HKCo. The ITAT noted the main contention of the Tax
Department was that the assessee is used as a commercially irrelevant entity
(commonly referred as PE blocker) so as to reduce the tax exposure of HKCo in
India and that as per the Department HKCo is deriving tax advantage by inserting
the assessee as a link in its chain entities was also unacceptable. The ITAT
concluded that the Department’s contention is based on incorrect perception that
HKCo is deriving tax advantage by interposing the assessee. The advertisement
revenues are derived through a commission agent, ICo. ICo has been paid a fair
remuneration for its services. In terms of the CBDT Circular No. 23, dated
23-7-1969, no further income could be taxable in India. Withdrawal of the
Circular in October 2009 is only prospective and does not impact the year in
question.

The group to which the assessee belongs had chosen to
centralise sale of advertisement time to the assessee on a global basis and the
choice was not driven solely by tax considerations.

The evidence produced by the assessee commercially justified
its appointment for selling advertising time and hence its existence could not
be disregarded.

In the assessment proceedings of the assessee, the Tax
Authority cannot determine taxability of the advertisement revenues in hands of
HKCo, which could be decided only after taking into account material on records
available with HKCo.

levitra

Royalty payment by one Singapore company to another Singapore company for acquiring right to broadcast live cricket matches from Singapore is not income of the recipient arising in India in terms of source rule of the Treaty. Such royalty income could hav

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Part C : Tribunal & AAR International Tax Decisions

 


17 SET Satellite (Singapore Pte Ltd.) v.
ADIT

ITA No. 7349/Mum./2004

Article 12 of India-Singapore DTAA

Dated : 25-6-2010

Royalty payment by one Singapore company to another Singapore
company for acquiring right to broadcast live cricket matches from Singapore is
not income of the recipient arising in India in terms of source rule of the
Treaty. Such royalty income could have triggered tax in India only if the payer
non-resident had PE in India, in connection with which royalty liability was
incurred and royalty was borne by such PE.

Facts :

The assessee Singapore company (Singco) is engaged in the
business of acquiring television programmes, motion pictures and sports events
and exhibiting the same on its television channels from Singapore. Singco
entered into agreement with GCC (another Singapore company) and acquired right
to live telecast of cricket matches in the territory of India, Pakistan, etc.
Payment made by Singco to GCC was held to be payment in the nature of royalty.

Singco earned revenue from selling advertisement time and
collecting fees from cable operators in India. For such sales and marketing
activity, Singco took assistance of an associate Indian company (ICo), which was
held to constitute agency PE of Singco in India.

The Tax Department held that royalty paid by Singco to GCC
was chargeable in India in terms of IT Act as also the treaty, because :


(i) Singco had a place of business in India and sourced
revenue from India;

(ii) earning of revenue from India had direct nexus with
payment made by Singco to GCC for acquiring broadcasting right; and

(iii) Singco had agency PE in India.


Singco contended that payment made to GCC was not taxable in
terms of India-Singapore Treaty applicable to GCC, because :


(i) Payment was made for acquiring broadcasting rights
outside India;

(ii) Singco had no PE in India to which royalty payment
made to GCC can be related; and

(iii) Presence in the form of agency PE did not result in
income being sourced from India as there was no direct nexus between
marketing activities of the agent and the broadcasting activity carried out
at Singapore for which rights were acquired from GCC.



Held :

The ITAT held :




(1) Royalty income of GCC received from a
non-resident was taxable in India in terms of Article 12(7) of the treaty
only if following cumulative conditions are satisfied :

(a) The payer (Singco) has a PE or fixed base in India.

(b) The liability to pay royalty is incurred in
connection with such PE or fixed base.

(c) The royalty is borne by such PE or fixed base.


(2) Mere existence of agency PE of payer in India does not
lead to a conclusion that royalty arises in India. For tax liability to arise,
royalty should have been paid in connection with PE or fixed base in India and
that such royalty should be borne by PE in India.

(3) Similar condition exists in OECD model for taxability of
interest income. As clarified by OECD commentary, interest can be regarded as
arising in source state only if interest income has economic link with the PE.
In the present case, there is no economic link between royalty payment and
agency PE. The economic link of payment made to GCC is with Singco’s HO in
Singapore. The payment to GCC cannot be said to be ‘in connection’ with the
agency PE in India. The agency PE was not involved in acquisition of right to
broadcast the cricket matches, nor has the PE borne the cost of payment to GCC.
The payments were therefore not liable to tax in India.

levitra

Conducting of impact tests on cars amounts to rendering of technical services/information; and amounts paid to a French Company were ‘fees for technical services’, chargeable to tax in India.

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New Page 216 Maruti Udyog Ltd vs ADIT [2009] 34 SOT 480 (Del)

Asst. Year: 2005-2006

Sections 9(1)(vii), I T Act ,
Article 13(4), India-France DTAA

31st August 2009

Issue

Conducting of impact tests on cars amounts to rendering of
technical services/information; and amounts paid to a French Company were ‘fees
for technical services’, chargeable to tax in India.

Facts

The assessee was an Indian company (IndCo) engaged in
manufacture of cars. Cars manufactured by it were sold globally. For evaluation
of the safety of the cars, impact tests were required to be done on the cars.
For conducting the tests, IndCo engaged a company which was a tax resident of
France (“FrenchCo”). FrenchCo was in the business of conducting impact rests on
automobiles, and manufacturers from all over the world would approach it for
conducting the tests.

FrenchCo conducted tests on IndCo’s cars only in France. At
the time of the tests, representatives of IndCo were also present. After
conducting the tests, FrenchCo furnished impact testing reports to IndCo. These
reports contained only test results and did not make available or provide any
technical know-how, knowledge or expertise to IndCo.

IndCo applied to the AO for remittance of the amount to
FrenchCo without deduction of tax. According to IndCo:

  • The payments
    were not in the nature of technical services;

  • There was no
    enrichment or gaining of technical knowledge or expertise by IndCo;

  • FrenchCo had
    merely performed its business in France;

  • FrenchCo had
    not transferred any knowledge by which IndCo could carry out testing;

  • The tests
    were required for obtaining regulatory approval; and

  • Hence, the
    payments were not fees for technical services as defined in Explanation 2 to
    Section 9(1)(vii) of the Income-tax Act.

However, the AO concluded that FrenchCo had the expertise and
the skill to perform the tests and it had rendered technical services.
Accordingly, the AO directed IndCo to deduct tax @10% from payments being made
to FrenchCo.

In appeal, CIT(A) confirmed that as the testing charges were
paid in consideration for services of technical nature, they were ‘fees for
technical services’ within the meaning of Section 9(1)(vii) of Income-tax Act
and Article 13 of India-France DTAA.

Before the Tribunal, apart from the foregoing contention,
relying on Kolkata Tribunal’s decision in DCIT Vs ITC Ltd [2002] 82 ITD 239 (Kol),
IndCo also contended that the definition of ‘fees for technical services’ in
Article 13(4) of India-France DTAA should be interpreted in the context of other
treaties between India and a member-State of OECD. It submitted that the tests
reports were just like blood test reports of a pathological laboratory and that
there is a vast difference between technical services and a technical report
obtained from a technician. From the test reports, IndCo simply came to know of
the deficiencies in the design of its cars and hence it could not be called
technical services. It also relied on Mumbai Tribunal’s decision in Raymond Ltd
Vs DCIT [2003] 86 ITD 791 (Mum). It further contended that impact testing
charges were paid for use of a standard facility which was provided by FrenchCo
to all those willing to pay and, therefore, it could not be construed as fees
for technical services. In support of this contention, it relied on Skycell
Communication Ltd Vs DCIT [2001] 251 ITR 53 (Mad), CESC Ltd Vs DCIT [2003] 87
ITD 653 (Kol) (TM),) NQA Quality Systems Registrar Ltd. v. Dy. CIT 2 SOT 249
(Del), National Organic Chemical Industries Ltd Vs DCIT [2005] 96 TTJ (Mum) and
DCIT Vs Boston Consulting Group Pte Ltd [2005] 94 ITD 31 (Mum).

The Tribunal referred to definition of ‘fees for technical
services’ in Article 13(4) of India-France DTAA and also in Explanation 2 to
Section 9(1)(vii) of the Income-tax Act. It observed that after excluding the
consideration for construction, etc., project or “salaries” from the definition
in Explanation 2 to Section 9(1)(vii) of Income-tax Act, both definitions were
same and would include payments made to any person in consideration of a
managerial, technical or consultancy services. The Tribunal also referred to
definitions in India-UK DTAA, India-USA DTAA and India-Switzerland DTAA and
observed that in these DTAAs, unless the fees for services were ancillary and
subsidiary, as well as inextricably and essentially linked to the sale of
property which is attributable to a PE and fulfills other requirements under the
business profits Article, they cannot be taxed in a source country. Thus, the
scope of ‘fees for technical services’ in these treaties was much restricted
than that under India-France DTAA.

The Tribunal further observed that the impact tests were not
in the nature of managerial services.


Held:

The impact tests were to be performed so as to pass the
quality tests. The presence of IndCo’s representatives was with an intention of
getting experience. Therefore, they were in the nature of technical services
which enhanced the product development capacity of IndCo. As the test reports
were used by IndCo for modification of its products, it would amount to
rendering of technical services/information and hence, the amounts paid would be
in the nature of fees for technical on consultancy services.

The decision in ITC Ltd was held distinguishable on the
ground that that case involved purchase of equipment. The foreign company did
not have any PE in India to which such income could be attributed. The payments
made for installation and commissioning of equipment were related to technical
services, which were ancillary and subsidiary as well as inextricably and
essentially linked to the sale of the property; and hence, it was held that the
payments were not liable to be taxed in India,

As regards the
taxability under Article 13(4), read with Explanation 2 to Section 9(1)(vii),
the Tribunal
relied on AAR’s ruling in Steffen, Robertson and Kirsten Eng Vs CIT [1998] 230
ITR 206 (AAR) wherein the AAR had held that the statutory test for
determining the place of accrual is not the place where the services for which
the payments are being made are rendered but the place where the services are utilized. Therefore, the payments
made to FrenchCo were chargeable to tax in India. Accordingly, IndCo was liable
to deduct tax at source on such payments.

The differential amount on discounting of bills with a non-resident financier are not liable to TDS under Section 195 and hence, Section 40(a)(i) cannot be invoked.

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New Page 2

15 ACIT Vs Cargill Global
Trading (I) (P) Ltd [ 2009] 126 TTJ 516 (Del)

Asst. Year: 2004-2005

Sections 40(a)(i), 195, I T Act

9th October 2009

 


Issue

The differential amount on discounting of bills with a
non-resident financier are not liable to TDS under Section 195 and hence,
Section 40(a)(i) cannot be invoked.

Facts

In the course of its business, an Indian company (“IndCo”)
exported goods out of India. Usually, the exports would on a credit term of up
to six months. IndCo would draw the bill of exchange on the foreign buyer, which
would be accepted by the foreign buyer. After acceptance, IndCo would get the
bill of exchange discounted with its affiliate company, which was a tax resident
of Singapore (“SingCo”). SingCo would immediately remit the discounted amount of
the bill of exchange. The discounting was on ‘without recourse’ basis, i.e.,
even if the buyer does not pay on due date, SingCo cannot recover its value from
IndCo. Thus, SingCo would collect the payment on its own behalf. SingCo was
engaged, among others, in the business of subscribing, buying, underwriting or
otherwise acquiring, owning, holding, selling or exchanging securities or
investments of any kind including negotiable instruments, commercial paper, etc.
Further, in the course of its business, it would draw, make, accept, endorse,
discount, execute and issue promissory notes, bills of exchange, etc. SingCo did
not have a PE in India in terms of Article 5 of India-Singapore DTAA.

The AO concluded that:

  • The
    discounting charges were in the nature of “interest” within the meaning of
    Section 2(28A) of the Income-tax Act;

  • As the
    payment of such interest was made to a non-resident, IndCo was required to
    deduct tax at source;

  • As such tax
    was not deducted, it was disallowable in terms of Section 40(a)(i) of the
    Income-tax Act.

In reaching this conclusion, the AO relied upon Gujarat High
Court’s decision in CIT Vs Vijay Ship Breaking [2003] 261 ITR 113 (Guj).

In appeal, relying on CBDT’s Circular No 65, which provides
that in such a case where a supplier discounts a usance bill with a bank, the
discounting cannot technically be regarded as interest, CIT(A) held that the
discounting charges paid by IndCo were not “interest” as neither any money was
borrowed nor any debt was incurred. Therefore, no tax was required to be
deducted from such payment. Accordingly, the CIT(A) deleted the disallowance.

The Tribunal examined the issue: What is the nature of the
discount? It observed that, according to IndCo, the discount is not in the
nature of interest and hence, it is not disallowable under Section 40(a)(i) of
Income-tax Act, whereas, according to AO, it is in the nature of interest as
defined in Section 2(28A) of the Income-tax Act. The Tribunal then referred to
the definition of “interest” in Section 2(28A) of Income-tax Act (which does not
refer to discount on bill of exchange) and Section 2(7) of Interest-Tax Act
(which specifically refers to discount on bill of exchange). Noticing this
difference, the Tribunal observed that where legislature wanted to, it had
included discount on bill of exchange within “interest”.

Held

Having relevance to the definition of “interest” in Section
2(28A) of the Income-tax Act, CBDT’s Circular No 65, which though was issued in
the context of Section 194A, would be relevant as regards discounting charges,
opining that since the property in the usance bill/hundi passes to the bank and
the collection by the bank being on its own behalf, it is the price paid for the
bill. The Gujarat High Court’s decision in CIT Vs Vijay Ship Breaking
Corporation [2003] 261 ITR 113(Guj) being reversed by the Supreme Court in Vijay
Ship Breaking Corporation Vs CIT [2009] 314 ITR 309 (SC) , the discounting
charges were not in the nature of “interest” paid by the assessee. Further, as
discounting charges were business profits of SingCo and as SingCo did not have
any PE in India, it was not liable to tax in India in respect of such discount
charges. Hence, IndCo did not have any obligation to deduct tax at source under
Section 195 of the Income-tax Act. Accordingly, the amount could not be
disallowed by invoking Section 40(a)(i) of the Income-tax Act.

levitra

In the circumstances, reorganization involves transfer of shares of an Indian company for no consideration and hence not chargeable to tax.

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New Page 2

Part C — Tribunal & AAR International Tax Decisions


14 Dana Corporation (AAR)
(2009–TIOL-29-ARA-IT)

30 November, 2009

 

Issues :


  • In the
    circumstances, reorganization involves transfer of shares of an Indian company
    for no consideration and hence not chargeable to tax.


  • Liabilities of the transferor taken over by the transferee as a part of
    reorganisation cannot be treated as “consideration”; nor can it be adopted as
    measure of “consideration”.



  • As Section 92 is
    not an independent charging provision, if no income arises from an
    international transaction, the Transfer Pricing (T.P) provisions are not
    applicable.


Facts :

The applicant, a US company (USCo), held shares in three
Indian companies (ICos), two US entities [viz Dana World trade Corporation
(DWTC) and Dana Global Products (DGP)] and other companies outside USA.

As part of a bankruptcy reorganization process, initiated
under the Bankruptcy Code of US, shares held in ICos, together with other
non-Indian assets and liabilities were transferred to DWTC and DGP, wholly owned
subsidiaries of USCo. The transfer was for no consideration and involved
reorganization in that shares which the applicant held directly in ICos (each
with > 50% stake) were now held indirectly through wholly owned subsidiaries.
The liabilities taken over by DHC from DC were more than the assets.

It was explained that one of the reasons for such transfer
was to achieve homogeneity of business in the same or similar products dealt
with by the group entities.

As part of bankruptcy transfers, the following
steps/transactions were undertaken:

  • Two new
    entities DHC and DCLLC were formed by USCo.

  • An
    independent private equity concern infused funds (capital) into DHC in
    exchange for shares of DHC.

  • Additional
    shares of DHC were distributed as settlement for certain claims made against
    USCo in bankruptcy. DHC thus became publicly held entity.

  • DC
    transferred shares held by it in the three Indian companies to DWTC and DGP.

  • DC
    transferred shares held in DWTC and DGP to DHC.

  • Finally, USCo
    merged with DCLLC.

The basic issue raised before the AAR was whether transfer of
shares of ICOs to DWTC and DGP attracted tax implications in India.

 

USCo raised the following contentions before the AAR:

  • The shares of
    ICOs were transferred without consideration. As the transfer was part of the
    overall reorganization under the Bankruptcy Code, no consideration can be
    attributed to such a transfer of shares. In the absence of or
    non-determinability of the full value of the consideration, the computation
    mechanism stipulated under the Income Tax Act failed and, consequently, the
    charge also failed.

  • Since the
    transfer of shares under the proposed reorganization did not result in any
    income chargeable to tax under the provisions of the Act, the T.P provisions
    cannot be applied.

The tax
department raised the following contentions:

  • Consideration
    did exist for transfer of ICo shares under the proposed reorganization. The
    liabilities taken over by DHC can be legitimately taken as consideration for
    transfer of shares. The tax department referred to and relied on the
    Bankruptcy Court Order which stated that the transfer was for ‘fair value’ and
    for ‘fair consideration’.

  • The applicant
    did not provide details of valuation of assets, including shares of the Indian
    companies. And whether such values have been considered while agreeing to the
    proposed reorganization. It cannot, therefore, be said that there was no
    consideration merely because the applicant had failed to identify the
    consideration attributable to ICos shares.

• In any case, since the transfer of ICos shares was between
associated persons, the arm’s length price determined under T.P provisions will
form the basis.

Held

Relying on Supreme Court’s judgments in the case of B C
Srinivasa Shetty (128 ITR 294) and Sunil Siddharthbhai (156 ITR 509), the AAR
held that the charging section must be construed harmoniously with the
computation mechanism. If the computation provision cannot be given effect to,
the charging section fails.

The profits taxable as capital gains are those which are
definite, determinable and clearly identifiable. Notional or hypothetical basis
cannot be considered.

The liabilities of the applicant, taken over as part of the
reorganization, cannot be treated as the consideration or a measure of the
consideration for the transfer. When the entire assets and liabilities have been
taken over in order to re-organize the business, it is difficult to envisage
that a proportion of the liabilities constitute the consideration for the
transfer. It cannot be said that the applicant derived profit by transferring
shares of the Indian companies to its US-based subsidiaries. In the
circumstances, the contention that the transfer was without consideration was
accepted to be the correct position.

The Annual Report of the transferees does not support the proposition
that a definite or agreed consideration has been received
by the applicant for transferring the shares of the Indian companies. The
shares may have been notionally valued for the purpose of preparing such financial statements
or to facilitate the reorganization
process. But, it cannot be said that the book value or the market value of the
shares represents the consideration for the transfer or the profit arising from
such a transfer.

 

The observations of the Bankruptcy Court, in its
order on ‘fair value’ and ‘fair consideration’ are with respect to the
creditors of the applicant and not with reference to the applicant itself or
its share-holders. As part of the reorganization, the claims of the creditors
were compromised and, therefore, the creditors received certain shares of DHC.



The T.P provisions under the Income Tax Law are applicable
only when there is income arising from an international transaction. The T.P
provisions are not independent of
charging provisions. The expression ‘income arising’ postulates that the income has
already arisen under the charging provisions of the Income Tax Law. Therefore, if no chargeable income
has arisen due to failure of the computation mechanism, then the T.P
provisions cannot be applied. In this
context, the AAR referred to its earlier ruling in the case of
Vanenbury Group B.V [289 ITR 464] which held that the T.P provisions are
machinery provisions which do not apply in the absence of liability to tax.

S. 69C—If there is a dispute of the source of the expenditure, then addition can be made u/s.69C — Merely because labour charges are shown as outstanding cannot be a ground to make addition u/s.69C.

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(Full text 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.)



14 Muscovite Construction v. ACIT
ITAT ‘I’ Bench, Mumbai
Before R. S. Padvekar (JM) and Rajendra Singh (AM)
ITA No. 2856/Mum./2009
A.Y. : 2005-06. Decided on : 21-5-2010
Counsel for assessee/revenue : C. N. Vaze/Rajnesh Dev Buvman.

S. 69C—If there is a dispute of the source of the
expenditure, then addition can be made u/s.69C — Merely because labour charges
are shown as outstanding cannot be a ground to make addition u/s.69C.

Per R. S. Padvekar :

Facts :

The assessee was carrying on business of civil construction
contract work and labour contract. It filed its return of income declaring an
income of Rs.14,29,579. In the course of assessment proceedings the Assessing
Officer (AO) noticed that the assessee had debited labour charges of Rs.1.10
crores in the P & L Account and in the balance sheet out of the said expenditure
a sum of Rs.54,56,235 was shown as outstanding. The outstanding labour charges
were for the months of Jan, Feb and March 2005. In response to the show cause
notice issued by the AO asking the assessee to explain why outstanding labour
charges/ wages should not be treated as unexplained, the assessee submitted that
it was facing a financial crunch in the business and the break-up of monthly
wages in respect of each type of labour like carpenter, mason, etc. was
furnished. The AO, not being satisfied with the explanation furnished, added the
amount of Rs.54,56,235 as unexplained expenditure u/s.69C.

Aggrieved the assessee preferred an appeal to the CIT(A) who
upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that nothing has been brought on record by
the AO to show that the assessee has used the money which was not reflected in
the books of account. It also noted that in the immediate next year the assessee
has paid the outstanding wages/labour charges and also that in the assessment
order for A.Y. 2006-07 the AO has discussed the issue. The Tribunal held that as
per the language used by the Legislature in S. 69C, if there is a dispute of the
source of the expenditure, then the addition can be made. Since the payment of
outstanding wages has been accepted by the AO in the next year, hence no
addition can be made u/s.69C of the Act. It also noted that it was not that the
expenditure was bogus or non-genuine and the AO has also not examined any of the
labourers to support his case. It held that merely because labour charges are
shown as outstanding that cannot be a ground to make the addition u/s.69C.

The Tribunal deleted the addition and decided the ground in
favour of the assessee.

levitra

S. 73—Any speculation loss computed for A.Y. 2006-07 and later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006 by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent assessment years applies only to such loss.

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(Full text 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.)



13 Virendra Kumar Jain v. ACIT
ITAT ‘B’ Bench, Mumbai
Before R. V. Easwar (Sr. VP) and
A. L. Gehlot (AM)
ITA No. 1009/Mum./2010
A.Y. : 2006-07. Decided on : 31-5-2010

Counsel for assessee/revenue : Vijay Mehta/ K. K. Das

 

S. 73—Any speculation loss computed for A.Y. 2006-07 and
later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006
by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent
assessment years applies only to such loss.

Per R. V. Easwar :

Facts :

In A.Y. 2001-02 the assessee suffered a speculation loss of
Rs.4,55,30,494 which loss was allowed to be carried forward to subsequent years
u/s.73(2) of the Act. In the return filed for A.Y. 2006-07 the assessee claimed
that speculation loss brought forward from A.Y. 2001-02 should be set off
against speculation profits for the A.Y. 2006-07. The Assessing Officer (AO)
denied the claim of the assessee on the ground that u/s.73(4) no loss shall be
carried forward for more than four assessment years immediately succeeding the
assessment year for which it was first computed. He held that speculation loss
for A.Y. 2001-02 cannot be carried forward beyond A.Y. 2005-06.

Aggrieved the assessee preferred an appeal to CIT(A) who
upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

It is a settled rule of interpretation that a vested right
can be taken away only by express language or by necessary implication. This is
settled by the decision of the Privy Council in Delhi Cloth & General Mills
Company Ltd. v. CIT, AIR 1927 (PC) 242 and the same has been cited with approval
by the Supreme Court in the case of Jose Dacosta v. Bascora Sadashiv Sinai
Narcomin, AIR (1975) SC 1843. The assessee had a vested right to carry forward
the speculation loss for a period of eight assessment years as per S. 73(4) as
it stood before the amendment made by the Finance Act, 2005. That such a right
is a vested right cannot be doubted after the judgment of the Supreme Court in
the case of CIT v. Shah Sadiq & Sons, 166 ITR 102 (SC). In S. 73(4) or in any
other provision there is no express language or any implication to the effect
that the right of the assessee to carry forward the speculation loss for a
period of eight subsequent assessment years has been taken away.

Any speculation loss computed for the A.Y. 2006-07 and later
assessment years alone would be hit by the amendment and such loss can be
carried forward only for four subsequent assessment years. The vested right of
the assessee has not been taken away.

The amendment made by The Finance Act, 2005 w.e.f. 1-4-2006
is merely to substitute the words ‘four assessment years’ for the words ‘eight
assessment years’ in Ss.(4) of S. 73. Ss.(4) of S. 73 refers only to the loss to
be carried forward to the subsequent years. It does not say anything about the
set-off of the speculation loss brought forward from the earlier years. There is
a distinction between a loss brought forward from the earlier years and a loss
to be carried forward to the subsequent years. The sub-section deals only with
the speculation loss to be carried forward to the subsequent years and in the
very nature of the things, it cannot apply to speculation loss quantified in any
assessment year before the A.Y. 2006-07.

The Tribunal made a reference to the Income-tax Rules
prescribing form of return of income and noted that the form in ITR 4 makes a
distinction between loss brought forward and loss to be carried forward. It held
that since in the present case it was concerned with the assessee’s right to set
off the brought forward speculation losses against speculation profits for A.Y.
2006-07, Ss.(4) of S. 73 has no application.

The Tribunal allowed the appeal filed by the assessee.

levitra

Indian company engaged Chinese company for testing of bauxite and providing test reports— Testing done entirely in China—Issue of taxability of payment by Indian company for services—Held : (i) After amendment to S. 9, irrespective of the place of utilisa

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16 Ashapura
Minechem Ltd. v.
ADIT
(2010) 5 Taxman.com 57 (Mum-ITAT)
Article 7, 12(4) of India-China DTAA
S. 9, S. 195 of Income-tax Act
Dated : 21-5-2010


 

Indian company
engaged Chinese company for testing of bauxite and providing test reports—
Testing done entirely in China—Issue of taxability of payment by Indian company
for services—Held : (i) After amendment to S. 9, irrespective of the place of
utilisation or rendition and territorial nexus, payment was chargeable as FTS
under Income-tax Act; and (ii) As per source rule under India-China DTAA, place
of rendition is not material and FTS is deemed to accrue in country where payer
is resident.

Facts :

The taxpayer
was an Indian company (‘IndCo’), in the process of building an alumina refinery.
It engaged a Chinese company (‘ChinaCo’) for testing of bauxite to be mined by
IndCo in India. ChinaCo was to test bauxite in its laboratories in China and
prepare test reports so that IndCo could define the process parameters for
processing of bauxite. The test reports were to provide complete chemical
composition of bauxite, performance tests, etc. IndCo agreed to pay certain
payment to ChinaCo for these services.

According to
IndCo : testing charges were in the nature of business profits subject to
Article 7 of India-China DTAA; ChinaCo did not have any PE in India; and hence,
no taxes were required to be withheld u/s.195. Accordingly, it applied for
certificate for no withholding of tax.

According to
the tax authorities, the payments were for services and were taxable as ‘Fees
for Technical Services’ (FTS).

The CIT(A)
upheld the order of the tax authority.

The Tribunal
referred to and relied on its earlier order in case of Hindalco Industries Ltd
v. ACIT, (2005) 94 ITD 242 (Mum.) which laid down certain principles of
interpretation of tax treaties, stating that the language used in a tax treaty
need not be examined in literal sense and a departure from plain meaning is
permissible where the context so requires.

Held :

The Tribunal held that :

  • As regards taxability
    under the Income-tax Act :

  • Payments received by
    ChinaCo were covered within the definition of FTS under the Income-tax Act.

  • In light of the amendment
    to S. 9 by the Finance Act, 2010, the legal proposition regarding utilisation,
    rendition and territorial nexus is no longer good in law. Income of ChinaCo
    for services rendered to IndCo is taxable as FTS under the Income-tax Act.

  • As
    regards taxability under India-China DTAA :

  • The definition of FTS
    covers payments for provision of managerial, technical or consultancy
    services by a resident of one country in the other country. The expression
    ‘provision of services’ is not defined or elaborated anywhere in the tax
    treaty.

  • As per the source rule,
    FTS will be deemed to have accrued in the country where the payer is a
    resident and place of rendition of technical services is not material.

  • Literal interpretation
    of definition of FTS to mean rendition of service would render the source
    rule meaningless.

  • Literal interpretation
    to a tax treaty, which renders treaty provisions unworkable and which is
    contrary to the clear and unambiguous scheme of the treaty, has to be
    avoided.

  • he payments made to
    ChinaCo were taxable as FTS under India-China DTAA as well as under the
    Income-tax Act and hence, IndiaCo was liable to deduct tax from these
    payments.

levitra

UK company had contractual obligation to provide repair and overhaul support and components to an Indian aircraft operator—maintained stock of components with Indian operator—consideration from Indian company for repair and overhaul and use, or right to u

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15 Airlines Rotables Ltd v. Jt. DIT (Unreported)
ITA No. 3254/Mum./2006
Article 5, 7, 13 of India-UK DTAA
A.Y. : 1998-99. Dated : 21-5-2010

 

UK company had contractual obligation to provide repair and
overhaul support and components to an Indian aircraft operator—maintained stock
of components with Indian operator—consideration from Indian company for repair
and overhaul and use, or right to use, of component—repair and overhaul of
component only outside India. Held : (i) UKCo did not have PE in India; (ii)
even if PE, no profit could be attributed to that PE; (iii) stock maintained
with Indian company was not for delivery on behalf of UK companY—even if Indian
company assumed to be agent, no agency PE constituted.

Facts :

The taxpayer was a company incorporated in the UK (‘UKCo’),
and a tax resident of the UK. Principal business of UKCo was to provide spares
and component support to aircraft operators. UKCo entered into an agreement with
an Indian company (‘IndCo’) for providing certain support services for aircraft
operated by IndCo. Under the agreement, UKCo was required to repair or overhaul
a component when IndCo discovered that such components had become operationally
unserviceable. In such case, UKCo was also required to provide replacement of
the component. UKCo was also required to ensure that airworthiness directives in
respect of such component (whether replaced, repaired or overhauled) were fully
complied with. The consideration received by UKCo comprised two parts. One, for
repair and overhaul of the component. Two, for use or right to use, replacement
component. To ensure timely availability of the component, UKCo maintained stock
of replacement component at the operational bases of IndCo in India and also in
the UK at its depot. IndCo was forbidden from loaning, pledging, selling,
exchanging or encumbering any items from the stock.

Before the AO, UKCo contended that it did not have any PE in
India and hence, its business profits were not taxable in India. However, the AO
inferred that the stores staff of IndCo was acting as agent of UKCo and since
UKCo maintained stock of goods in India, in terms of Article 5.4(b) read with
Article 5.5 of India-UK DTAA, PE of UKCo came into existence. The AO estimated
10% of gross receipts of UKCo as profits attributable to PE.

The CIT(A) concurred with the view of the AO.

The Tribunal observed that in terms of Article 5(1) (i.e.,
the basic rule), a PE is said to exist in the other contracting state when an
enterprise of one of the contracting state has a fixed place of the business in
that contracting state through which the business of the enterprise is wholly or
partly carried out. There are three criteria embedded in this definition (i)
physical criterion (i.e., existence of physical location); (ii) subjective
criterion (i.e., right to use that place); and (iii) functionality criterion
(i.e., carrying out of business through that place). Only when these three
criteria are satisfied, a PE can come into existence.

Thus, it is necessary that for PE to exist not only should
there be a physical location through which the business of the foreign
enterprise is carried out, but also that such place should be at its disposal.

Held :

The Tribunal held that :




  • Even though
    the stock of UKCo was stored at a specified physical location, it was under
    the control of IndCo and UKCo did not have any place at its disposal in the
    sense that it could carry out its business from that place. As the physical
    location was under the control of IndCo, UKCo did not have any place at its
    disposal. Thus, it cannot be said to constitute PE of UKCo in India.

  • Even if there is a PE,
    only profit attributable to that PE can be taxed in India. Hence, as entire
    repair and overhaul work was done outside India, no part of the profit could
    be taxed in India.

  • A dependent agent PE
    (‘DAPE’) under Article 5(4)(b) of India-UK DTAA can come into existence only
    when business of UKCo is carried through that DAPE. It would be absurd to
    contend that IndCo is dependant agent of UKCo, which the tax authorities have
    not established. Even if IndCo is regarded as an agent, the maintenance of
    stock by it was for IndCo’s business. Further, even if it is assumed that
    IndCo is an agent, it would be an independent agent. Also, it maintained the
    stock for stand by use and not for delivery on behalf of UKCo. Therefore, UKCo
    does not have PE in India.

  • As part of the
    consideration pertains to use, or right to use, of components, taxability
    under Article 13(3)(b) (i.e., ‘equipment royalty’) should be examined.
    Non-taxability under Article 7 would still require consideration of
    application of Article 13. As these aspects had not been heard by the lower
    authorities, the matter was remanded to the CIT(A) for limited adjudication
    only on this aspect.



levitra

Indian company purchasing shares of another Indian company from non-resident—Non-resident assessed to tax—AO treated Indian company as agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is not a bar to order u/s.163; (ii) there is

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14 Hindalco Industrial Ltd v.
DCIT
AIT 2010 211 ITAT-Mum.
S. 163 of Income-tax Act
A.Y. : 2001-02. Dated : 14-5-2010


Indian company purchasing shares of another Indian company
from non-resident—Non-resident assessed to tax—AO treated Indian company as
agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is
not a bar to order u/s.163; (ii) there is no time limit u/s.163; and (iii) same
income cannot be assessed simultaneously in hands of non-resident as well as
agent.

Facts :

The taxpayer was an Indian company (‘IndCo’). IndCo purchased
shares of another Indian company from a foreign company. the foreign company was
a non-resident in terms of the Income-tax Act. The non-resident applied to the
AO u/s.197 of the Income-tax Act for lower withholding tax on the sale proceeds
of the shares. The AO issued certificate for lower withholding tax. Based on
this certificate, IndCo withheld and deposited the tax. Pursuant to the transfer
of the shares, the non-resident was chargeable to capital gains tax.

The non-resident furnished the return of its income. In the
course of assessment, the AO while assessing the non-resident, also issued
notice u/s.163 of the Income-tax Act to IndCo as representative assessee of the
non-resident, because the non-resident was in receipt of income from IndCo.
IndCo contended before the AO that as per the scheme and intent of the
Income-tax Act and particularly the provisions of S. 160(1)(i) read with S.
161(1), S. 162 and S. 163, no person could be treated as ‘Agent’, in relation to
a non-resident after the expiry of previous year corresponding to the assessment
year in question. The AO however, treated IndCo as Agent on the basis of plain
reading of S. 163(1), S. 160(1)(i) and S. 149(3).

The CIT(A) dismissed the appeal of IndCo.

Held :

The Tribunal held that :

  • The non-resident received
    income from IndCo. Therefore S. 163(1)(c) was attracted. Liability is not
    fastened on the representative assessee merely on passing of order u/s.163.

  • The fact that the agent
    had withheld tax u/s.195 cannot be a bar to pass order u/s.163.

  • The Income-tax Act does
    not contemplate any time limit for initiating proceeding u/s.163. The purpose
    of S. 163 is to secure payment of taxes by the non-resident. The proceedings
    were also not time-barred under the
    Income-tax Act. Hence order u/s.163 was valid.

  • In a similar issue in
    Saipem UK Ltd v. DDIT, (2008) 298 ITR (AT) 113 (Mum.), the Mumbai Tribunal has
    held that the same income cannot be assessed simultaneously in the hands of
    the non-resident as well as the agent, since such double taxation militates
    against the cardinal principles of taxation. Hence, once the assessment in the
    case of principal becomes final, the assessment of the same income in the
    hands of the agent cannot be made. Therefore the assessment of capital gain of
    the non-resident in the hands of IndCo was not proper.



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Mauritius company performing contract for transportation and installation of platforms to be used in mineral oil exploration—Part of income pertained to activities carried on outside India— Whether entire income taxable in India—Income under presumptive t

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13 JDIT v. J. Ray McDermott Eastern Hemisphere Ltd.
(2010) TII 41 ITAT (Mum.-INTL)
Article 4 of India-Mauritius DTAA;
S. 5, S. 9(1)(i), S. 44BB of Income-tax Act
A.Y. : 2003-04. Dated : 30-4-2010

Mauritius company performing contract for transportation and
installation of platforms to be used in mineral oil exploration—Part of income
pertained to activities carried on outside India— Whether entire income taxable
in India—Income under presumptive tax provision can be taxed only if it is
otherwise chargeable to tax.

Facts :

MCo, a tax resident of Mauritius, undertook and executed a
contract for transportation and installation for certain well platform projects
to be used in mineral oil exploration. The contract was undertaken and performed
with an Indian company. Certain portion of the receipts of MCo pertained to work
carried on outside India.

While furnishing its return of income, MCo did not offer the
receipts pertaining to the work carried on outside India on the ground that in
terms of Explanation (a) to S. 9(1)(i) of the Income-tax Act, they were not
chargeable to tax. MCo also contended that, alternatively, such receipts cannot
be attributed to its PE in India.

While assessing the income, the AO held that : income
pertained to work to be carried out in India; source of income is related to
work to be carried out in India; and hence the entire receipts are taxable in
India. Further, S. 44BB does not distinguish between income for activities
carried on in India and for those carried on outside India.

The CIT(A) reversed the order.

The Tribunal relied on the decision on Saipem SPA v. DCIT,
(2004) 88 ITD 213 (Delhi ITAT) and McDermott ETPM Inc v. DCIT, (2005) 92 ITD 385
(Mumbai ITAT).

Held :

The Tribunal held that :

  • Only the income which is
    reasonably attributable to operations carried on in India is taxable in India.

  • Income computed on
    presumptive basis can be taxed in India only if it is otherwise chargeable
    under the provisions of the Income-tax Act.



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Explanation (aa) to S. 80HHC — Date of export out of India — Held that the relevant date was the date when the goods were dispatched and cleared by the customs and not the date as per the bill of lading.

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22. Dy. CIT v. Vallabh Metal Inc..


ITAT ‘H’ Bench, Delhi

Before I. P. Bansal (JM) and

Shamim Yahya (AM)

ITA No. 2564/Del./2009

A.Y. : 2004-05. Decided on : 27-11-2009

Counsel for revenue/assessee : Piyuash Kaushik/

N. K. Chand

Explanation (aa) to S. 80HHC — Date of export out of India
— Held that the relevant date was the date when the goods were dispatched and
cleared by the customs and not the date as per the bill of lading.

Per Shamim Yahya :

Facts :

One of the issues before the tribunal was regarding the
year in which the exports made by the assessee under certain invoices fall.
The AO noted that exports under Invoice Nos. 435 to 444, though dated March,
the corresponding bills of lading were dated April. The assessee contended
that during the financial year itself the goods were dispatched and the custom
clearance was obtained. However, the AO held that these goods cannot be
considered as export of the current year. On appeal the CIT(A) held that the
AO’s view that the bill of lading was the date of sale was absolutely contrary
to the provisions of explanation (aa) of S. 80HHC.


Before the Tribunal the Revenue submitted that the bill of
lading was the authoritative document for dealing with the period of export
sales. It was further submitted that those goods had been exported on FOB
(Free on Board) wherein risk passes to buyer, once goods were delivered on
board of the ship by the seller.


Held :


The Tribunal noted the following facts :


(a) it had been regular system of accounting wherein
exports were accounted according to the date of export invoices;

(b) the goods had been dispatched from the factory
premises of the assessee and had been duly cleared by the customs during the
financial year;


Further, referring to Explanation (aa) to S. 80HHC defining
‘export out of India’ and relying on the decision of the Apex Court in the
case of Silver and Arts Place which explains what is ‘export out of India’,
the Tribunal upheld the order of the CIT(A).


Case referred to :



CIT v. Silver and Arts Place, 259 ITR 684 (SC).



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S. 37(1) — Capital or revenue expenditure — Cost of tools and dies — Allowed as expenditure on its issue for production.

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21. Central Electronics Ltd. v. AO


ITAT ‘B’ Bench, New Delhi

Before R. P. Tolani (JM) and

R. C. Sharma (AM)

ITA. Nos. 233 & 1821/Del. of 2009

A.Ys. : 2004-05 & 2005-06. Decided on : 27-11-2009

Counsel for assessee/revenue : R. S. Singhvi/Ashima Nab &
Manish Gupta

S. 37(1) — Capital or revenue expenditure — Cost of tools
and dies — Allowed as expenditure on its issue for production.

S. 145A — Valuation of inventory in accordance with the
method of accounting regularly followed — Assessee justified in valuing three
years old inventory at nil value.

Per R. P. Tolani :

Facts :

The assessee was engaged in the business of developing and
producing various electronic components, sophisticated systems, solar
photovoltaic cells and other allied items for defence and other government
departments. In its accounts it used to treat items of loose tools and small
dies used in production as consumables. At the time of purchase of tools/dies
the same were entered in the stock as consumable tools and were charged to
consumption as and when issued for production activities. However, the AO
treated the same as of capital nature subject to depreciation @ 25%, the rate
applicable to plant and machinery.

Out of the other issues before the Tribunal — the one was
regarding allowability of Rs.50.2 lakhs claimed by the assessee towards
provision for slow moving inventory. As per the method of accounting regularly
followed, the assessee used to write off all inventories which were more than
three years old. According to the AO — the writing off was premature and was
not allowable under the Act. The assessee justified its method of accounting
on the ground of obsolescence resulting from change and/or upgradation in
technology with the passage of time. It was submitted that the inventory so
written off had no market value and for all practical purposes had only scrap
value. The same was shown as income in the year of sale.

Held :

The Tribunal noted that the assessee was a Government
undertaking and the accounting policy was being followed consistently. Its
accounts were audited by CAG. Further, relying on the judgment of Rajasthan
High Court in the case of Wolkem India Ltd., it allowed the claim of the
assessee.

Case referred to :


CIT v. Wolkem India Ltd., 221 CTR 767 (Raj.)

 

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Explanation to S. 73 — Speculation business — Assessee company earning income from the sale of shares — AO holding that income earned was from speculation — On the facts held that income earned was in the nature of capital gains.

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20. Axis Capital Markets (India) Ltd. v. ITO


ITAT ‘A’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

R. K. Panda (AM)

ITA No. 4098/Mum./2007

A.Y. : 2004-05. Decided on : 30-11-2009

Counsel for assessee/revenue : Rajan R. Vora and Sheetal
Shah/Vikram Gaur

Explanation to S. 73 — Speculation business — Assessee
company earning income from the sale of shares — AO holding that income earned
was from speculation — On the facts held that income earned was in the nature
of capital gains.

Per R. K. Panda :

Facts :

The assessee was a public limited company engaged in the
business of investment, dealing in shares/ securities/bonds, etc. The assessee
during the impugned assessment year had shown income under the head capital
gain at Rs.22,98,229 the break-up of which was as under :

 

Rs.

Long-term capital
gains

41,85,744

Less :

 

Adjusted b/f
long-term capital loss

18,80,681

Less :

 

Short-term capital
loss

6,834

 

22,98,229

On being questioned the assessee explained that in the
current year no shares were purchased or sold as stock in trade. It was only
the shares held as investment that were sold during the year. However, the
Assessing Officer did not accept the contention of the assessee on account of
the reasons, amongst followings :

(a) The assessee had claimed deduction of entire expenses
on share dealings as business expenses though the transactions shown were
for sale of investments;

(b) In earlier years also the assessee had not shown any
stock in trade, even though, shares were acquired for resale;

(c) Memorandum of Association of the assessee company
showed that it was formed with the main objective of carrying on the
business of share trading along with other activities mentioned therein.

(d) As per Note in Part I of Schedule VI of the Companies
Act — for an investment company, shares take the character of stock in trade
and as such, shares shown as investment in the balance sheet could be
stock-in-trade also. The Companies Law does not differentiate between the
capital or revenue nature of transactions of investments and stock-in-trade.

Further, relying on a couple of decisions, the Assessing
Officer concluded that Explanation to S. 73 of the Act was applicable to the
transactions in question. He accordingly treated the net result of the profit
and loss of such transactions as arising out of speculation business. He
further did not allow any set-off of the brought forward long-term capital
loss of the preceding year against the income of the current year.

Before the CIT(A) the assessee submitted that the original
intention of the assessee at the time of entering into share transactions was
to earn dividend and hold them for appreciation in value. The shares were held
as investment and not as stock-in-trade. However, the CIT(A) held that the
claim of the assessee cannot be sustained on the following reasons :

(a) Although the appellant admitted that in the earlier
years as well as in the subsequent year, transactions in share trading were
carried out but not during the current year, in earlier years also no
stock-in-trade of shares was shown in the balance sheet. Shares were always
shown as investments only;

(b) All the expenses incurred on transactions in share
investments were claimed as business expenses in the Profit and Loss A/c.;

(c) The appellant had shown short-term capital loss of Rs.6,834. It means that it was engaged in frequent purchase and sale of shares during the year under consideration, which fact clearly proves the intention of the appellant for dealing in shares as stock-in-trade.

Held :

The Tribunal found merit in the submission of the assessee that the provisions of Explanation to S. 73 were not applicable to the facts of the present case for the reasons that :

    a) In the assessment order passed u/s.143(3) of the Act for the A.Ys. 2005-06 and 2006-07, the Assessing Officer in the orders had considered the income from sale of shares as income from long-term capital gain/short-term capital gain and not as speculation business.

    b) There is no purchase or sale of shares during the year and the assessee has sold the shares/units of mutual funds which were shown under the head investment.

    c) The shares were held for a long period and no borrowed fund had been utilised by the assessee for purchase of shares/units.

As regards the Assessing Officer disallowing the expenses of Rs.4 lakhs out of the total expenses of Rs.6.16 lacs on the ground that the same could have been incurred for earning of speculation income, the Tribunal agreed with the assessee’s contention that the entire expenditure relates to maintaining the corporate entity of the assessee. Accordingly it held that no part of expenditure was disallowable.

S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation O


    19. Abbas T. Reshamwala v. ITO

        ITAT ‘A’ Bench, Mumbai

        Before N. V. Vasudevan (JM) &

        R. K. Panda (AM)

        ITA No. 3093/Mum./2009

        A.Y. 2006-07. Decided on 30-11-2009

        Counsel for assessee/revenue : Ajay R. Singh/

        Vikram Gaur

        S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation Officer to determine fair value.

        Per R. K. Panda :

        Facts :

        During the year the assessee had sold an industrial gala for a consideration of Rs.20 lakhs. Based thereon the assessee had offered to tax the sum of Rs.18.73 lacs by way of capital gains. The Assessing Officer noted that the stamp duty authorities had valued the said property at Rs.44.62 lakhs. The assessee brought to the notice of the AO the various negative factors. He also filed a valuation report of the registered valuer, according to which, the value of the said premises was Rs.18.66 lakhs. He also requested the Assessing Officer if the valuation report was not accepted, then the same may be referred to the DVO u/s.50C of the Act.

        However, the Assessing Officer did not accept the contention of the assessee. He was of the opinion that since the assessee had not taken objection before the Registrar in the initial stages when the property was sold and it was only during the stage when objection was raised, the assessee filed a valuation report of registered valuer after giving second thought. Therefore, he was not under obligation to refer the matter to the DVO. He accordingly adopted the value determined by the stamp duty authorities at Rs.44.62 lakhs u/s.50C and made the addition of Rs.25.88 lakhs as short-term capital gain being the difference between the amount declared by the assessee and the amount finally determined by him. In appeal the learned CIT(A) upheld the action of the Assessing Officer.

        Before the Tribunal the Revenue submitted that the Assessing Officer can refer the matter to the DVO only if the assessee claims that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property on the date of transfer and the value adopted or assessed by the stamp valuation authority had not been disputed in any appeal or revision or no reference had been made before any authority. According to it, in the absence of the word ‘or’ between sub clause (a) and (b) of S. 50C(2), both the conditions, as per clauses (a) and (b) of S. 50C(2), are to be fulfilled before referring the matter to the DVO.

        Held :

        According to the Tribunal, the word ‘may’ used in Ss.(2) of S. 50C had to be read as ‘should’ and the Assessing Officer had no discretion but to refer the matter to the DVO for the valuation of the property when the assessee had raised an objection that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property. Accordingly, the matter was referred back to the file of the Assessing Officer with a direction to refer the matter to the DVO and decide the issue afresh as per law.

S. 43(6)(c) — When an asset is sold, the block of assets stands reduced only by moneys payable on account of sale of the asset and not by the fair market value of the asset sold.

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18. DCIT v. Cable Corporation of India Ltd.


ITAT ‘E’ Bench, Mumbai

Before Pramodkumar (AM) and

V. D. Rao (JM)

ITA No. 5592/Mum./2002

A.Y. : 1995-96. Decided on : 29-10-2009

Counsel for revenue/assessee : Vandana Sagar/

Arvind Sonde

S. 43(6)(c) — When an asset is sold, the block of assets
stands reduced only by moneys payable on account of sale of the asset and not
by the fair market value of the asset sold.

Per Pramodkumar :

Facts :

During the previous year relevant to the assessment year
under consideration, the assessee sold a flat which formed part of block of
assets and on which depreciation was claimed and was allowed @ 5%, for a
consideration of Rs.9,00,000. The District Valuation Officer (DVO), on a
reference by the Assessing Officer (AO), valued the flat at Rs.66,44,902. For
the purposes of computing the amount of depreciation allowable, the AO
computed the written down value of the block by reducing the value determined
by the DVO instead of reducing the consideration for which the flat was sold.
He, therefore, disallowed depreciation of Rs.2,96,551.

Aggrieved, the assessee preferred an appeal to the CIT(A)
who allowed the appeal and held that for computing written down value it is
only the sale consideration of the asset sold, which needs to be deducted and
not the fair market value of the asset sold.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

In view of the provisions of S. 43(6)(c) read with
Explanation 4 to S. 43(6) and also Explanation below S. 41(4), when an asset
is sold, the block of assets shall stand reduced by ‘moneys payable’ in
respect of the asset sold. The expression moneys payable refers to ‘the price
at which it is sold’. What really matters is the price at which the asset is
sold and not its fair market value. The AO does not have any power to tinker
with the sale price of the asset sold. The AO ought to take the sale price for
computing the WDV of the block.

The Tribunal dismissed the appeal filed by the Revenue.

S. 45 and S. 48 — Amount received by the society from the builder for permitting him to construct additional floors on existing building of the society by utilising TDR FSI belonging to him is not chargeable to tax since there is no cost of acquisition.

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17. Om Shanti Co-op Hsg. Society Ltd. v. ITO


ITAT ‘C’ Bench, Mumbai

Before D. Manmohan (VP) and

R. K. Panda (AM)

ITA No. 2550/Mum./2008

A.Y. : 1999-2000. Decided on : 28-8-2009

Counsel for assessee/revenue : Subhash Shetty/

Virendra Ojha

S. 45 and S. 48 — Amount received by the society from the
builder for permitting him to construct additional floors on existing building
of the society by utilising TDR FSI belonging to him is not chargeable to tax
since there is no cost of acquisition.

Per D. Manmohan :

Facts :

The assessee, a co-operative society, on request of the
developer granted him permission to construct 2 floors having 8 flats, on the
existing building of the assessee by utilising TDR FSI available to the
developer. As consideration, the developer paid Rs.26 lakhs to the assessee
and Rs.5.50 lakhs to each of the 12 members of the assessee.

According to the assessee, the members owned a piece of
land on which 12 flats were constructed by utilising maximum FSI available to
them. These persons formed a society. Since the assessee had no right to
construct further structure, there was no question of exploiting any of its
available right so as to earn income out of it. The assessee had regarded the
amounts received by it as not being chargeable to tax.

The Assessing Officer held that the permission granted by
the assessee-society resulted into transfer by way of relinquishment of the
right i.e., ‘to load TDR and construct additional floors’ and since
there was no cost of acquisition, in absence of details, he taxed the entire
consideration of Rs.26 lakhs as long-term capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A)
who enhanced the assessment and charged even Rs.66 lakhs, being the amount
paid by the developer to individual members of the society, as long-term
capital gains in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The assessee and its members had exhausted the right
available while constructing the flats and therefore the assessee and its
members had no right to construct additional floors on the existing building.
The Tribunal noted that TDR was not obtained by the assessee and sold to the
developer. The Tribunal held that the assessee had not transferred any
existing right to the developer, nor any cost was incurred/suffered prior
to permitting the developer to construct the additional floors. Since there
was no cost of acquisition, following the ratio of the decision of the Apex
Court in B. C. Srinivasa Shetty 128 ITR 294 (SC), the consideration was held
to be not assessable as capital gains.


The Tribunal dismissed the appeal filed by the Revenue.


Cases referred to :

1. CIT v. B. C. Srinivasa Setty, (1981) 128 ITR
294 (SC)

2. Deepak S. Shah v. ITO, (2009) 29 SOT 26 (Mum.)

3. M/s. New Shailaja CHS Ltd. v. ITO, ITA
512/M/2007 dated 2-12-2008

4. Maheshwar Prakash-2 Co-op Hsg. Soc. Ltd v. ITO,
(2009) 118 ITD 223 (Mum.)




 

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S. 28 — Contractual payment made by the assessee firm to its retiring partners, in terms of the partnership deed, is not includible in the total income of the assessee since to that extent income has never reached the hands of the assessee.

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16. RSM & Co.
v. ACIT


ITAT ‘D’ Bench, Mumbai

Before P. M. Jagtap (AM) and

R. S. Padvekar (JM)

ITA No. 3269/Mum./2007

A.Y. : 2004-05. Decided on : 12-10-2009

Counsel for assessee/revenue : Sunil M. Lala & Dhanesh
Bafna/Sanjay Agarwal

S. 28 — Contractual payment made by the assessee firm to
its retiring partners, in terms of the partnership deed, is not includible in
the total income of the assessee since to that extent income has never reached
the hands of the assessee.

Per R. S. Padvekar :

Facts :

The assessee, a partnership firm, claimed a sum of Rs.10
lakhs towards payment made by it to its retiring partner, as per the terms of
the partnership deed. The partnership deed provided that a partner retiring
after a specified age would be entitled to receive from the firm an amount,
computed in the manner stated in the deed, for a period of 5 years from the
date of retirement. Before the Assessing Officer (AO) the claim was made
u/s.37 of the Act. The AO held that the amount was not allowable as a
deduction.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where this sum was contended to be not taxable on the principles of diversion
of income by overriding title. The CIT(A) held that the amount paid was
application of income. He, accordingly, dismissed the assessee’s appeal.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The Tribunal noted the relevant clause of the partnership deed and
also the judicial precedents relied upon by the assessee.

Held :

Payment of retirement benefits for a period of five years
from retirement was a contractual obligation of the assessee. The retired
partner had nothing to do with the profit earned or losses suffered by the
assessee firm, but the quantum of retirement benefits had been fixed. On
facts, there was a charge on the profits of assessee firm. The Tribunal upon
considering the facts and the legal principles laid down in the precedents
relied upon by the assessee held that there was diversion of income to the
extent of the retirement benefits paid by the assessee firm to the retired
partner. The Tribunal held that the retirement benefit paid in accordance with
the terms of the partnership deed was not to be included in the total income
of the assessee firm as to that extent the income never reached the hands of
the assessee.

The assessee’s appeal was allowed.


Cases referred to :

1. CIT v. Sitaldas Tirathdas, 41 ITR 367 (SC)

2. CIT v. Crawford Bayley & Co., 106 ITR 884 (Bom.)

3. CIT v. Nariman B. Bharucha & Sons, 130 ITR 863
(Bom.)

4. CIT v. C. N. Patuk, 71 ITR 713 (Bom.)

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The total amount of adjustment, along with the arm’s length price already reported by an assessee, cannot exceed the total amount of revenues earned by the assessee and its associated enterprises from third party customers.

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Tribunal News

Part C — Tribunal & AAR International Tax Decisions

Geeta Jani
Dhishat B. Mehta
Chartered Accountants


 


21 DCIT vs Global Vantedge Pvt. Ltd.

2010-TIOL-24-ITAT-DEL

Section 92

Dated: 17.12.2009

 

Issues:

 

  • The total amount of adjustment, along with
    the arm’s length price already reported by an assessee, cannot exceed the
    total amount of revenues earned by the assessee and its associated enterprises
    from third party customers.

  • In undertaking a transfer pricing analysis,
    the least complex entity should be selected as the tested party. However,
    selecting an overseas entity as the tested party may not be appropriate;
    because it is difficult to obtain all relevant facts and data required for
    undertaking a proper analysis of functions, assets and risks (FAR) and making
    the requisite adjustments    .

 

Facts:

 

  • Global Vantedge Pvt. Ltd.
    (GV), is an Indian company engaged in providing IT enabled services. RCS
    Centre Corp (RCS), a company incorporated in USA, is a customer of GV. GV and
    RCS are held by a common parent company and, hence, are associated enterprises
    (AE).

  • RCS is engaged in the
    business of providing debt collection and telemarketing services to clients in
    USA. RCS contracts with third party customers in USA. In turn, RCS enters into
    contracts with GV which has the requisite infrastructure and capacity for
    providing the services which RCS has contracted to render to its customers.

  • RCS retains 9.4% of the
    revenues earned from third party customers in USA and remits the balance 90.6%
    to GV. GV is also engaged in rendering services to other independent clients
    which constitute approximately 18% of its total revenue.

  • GV selected RCS as the
    tested party for the purpose of TP analysis. The TPO rejected selection of RCS
    as the tested party by contending that it is difficult to benchmark an entity
    in overseas jurisdiction.

  • The TPO selected GV as the
    tested party and by making a comparative analysis, he arrived at an average
    operating margin of 11.88%, as against the loss of 53.5% incurred by GV. As a
    result, GV was virtually assessed on revenue of Rs 101.1 as against the
    transaction value with RCS of Rs 90.8, and as against the billing of Rs 100
    raised by RCS on third party customers.

  • Aggrieved, the assessee
    preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].
    Before the CIT(A), the assessee, inter-alia, contended that:

(a) The least complex entity (RCS in the present
case) needs to be selected as a tested party for the purpose of carrying out
transfer pricing analysis because a simpler party requires fewer and more
reliable adjustments to be made to its operating margins.

(b) Without prejudice, the adjustment to the transfer price
between the AE and the taxpayer cannot be more than the revenue earned by the
group from independent third parties. Also, the transfer price needs to be
determined after excluding a fair remuneration payable to the AE, from the
revenue earned from third parties.

  • Based
    on the contentions of the assessee, the CIT(A) held as follows:

(a) The least complex entity should be selected as a tested
party.

(b) However, selection of RCS as a tested party and
consequent use of international comparables would be inappropriate, as it is
difficult to benchmark ALP in different jurisdictions on account of the
differences in facts and circumstances in each geographical area.

(c) The total amount of adjustment along with the arm’s
length price already reported by the assessee cannot exceed the total revenue
earned by the assessee and its associated enterprise from dealing with third
party clients.

(d) Also, the ALP of the assessee in the present case
cannot be 100% of revenues earned from third party customers. RCS was
admittedly rendering market support for which it was entitled to a fair
consideration.

(e) ALP remuneration of RCS was determined @1.4% by
adopting a report issued by the Information and Credit Rating Agency of India
Limited (ICRA report) on marketing expenses in the BPO industry.

(f) The balance 98.6% (100 – 1.4) of the revenues was held
to represent an arm’s length price between GV and RCS.

 

Held:



 


The ITAT upheld the order of the CIT(A) as neither GV nor the
tax authority was able to controvert the its findings.


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Income : Excess cash received at cash counters of bank : Liable to be repaid to the real owner : Not income of assessee.

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6 Income : Excess cash
received at cash counters of bank : Liable to be repaid to the real owner : Not
income of assessee.


[CIT v. Bank of Rajasthan
Ltd., 326 ITR 526 (Bom.)]

The assessee-bank claimed
that the excess cash received at the cash counter is liable to be repaid to the
real owner and therefore it cannot be treated as income of the assessee. The
Assessing Officer did not accept this contention and treated the excess cash as
income of the assessee. The Tribunal allowed the assessee’s claim. The Tribunal
held that the liability on account of excess cash received at the cash counters
of the bank represents the liability to pay the customers as and when they may
demand payment. The Tribunal, therefore held that it can not be considered as
income of the assessee.

On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under :

“(i) Before the Tribunal
reliance was placed on the cash manual of the assessee which provides that the
bank has to make a record of the excess cash, this has to be considered as
liability of the bank and the collection is required to be handed back to the
real owner in accordance with the prescribed procedure.

(ii) The reasoning of the
Tribunal has not been demonstrated to suffer from any perversity.

(iii) The question raised
does not give rise to any substantial question of law.”

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Income : Accrual of : Amount due to assessee in terms of royalty agreement : Dispute between parties and arbitration proceedings pending : No accrual of income : Assessment only on completion of arbitration proceedings.

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5 Income : Accrual of :
Amount due to assessee in terms of royalty agreement : Dispute between parties
and arbitration proceedings pending : No accrual of income : Assessment only on
completion of arbitration proceedings.


[FGP Ltd. v. CIT, 326
ITR 444 (Bom.)]

The assessee had a royalty
agreement with one M/s. UPT, under which certain amounts were payable to the
assessee. The assessee company had not received any amount as UPT had denied
that any amount was due and payable by it to the assessee-company and
arbitration proceedings were pending. The Assessing Officer added the amount to
the total income of the assessee holding that the income has accrued. The
Tribunal upheld the addition.

On appeal by the assessee,
the Bombay High Court reversed the decision of the Tribunal and held as under :

“(i) The real income of
the assessee can be assessed and the test before the income can be taxed is
whether there is real accrual of income.

(ii) There was no real
accrual of income. There was dispute between the parties which was pending in
arbitration during the assessment year. The income received by the assessee
would be liable to be assessed only after passing of an award.”

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Charitable purpose : Registration u/s.12A of Income-tax Act, 1961 : Rejection on the ground that amended deed not produced : Amended deed is not a pre-requisite condition : Matter remanded.

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4 Charitable purpose :
Registration u/s.12A of Income-tax Act, 1961 : Rejection on the ground that
amended deed not produced : Amended deed is not a pre-requisite condition :
Matter remanded.


[CIT v. R. M. S. Trust,
326 ITR 310 (Mad.)]

The assessee, a charitable
trust, came into existence on December 1, 1995. On 10-3-2006 the assessee-trust
filed application for registration u/s.12A. The application was belated by more
than 10 years for which condonation petition was filed stating that the delay
was due to ignorance of law. The Commissioner of Income-tax noticed that the
requisite clause indicating that any amendment to the trust deed would be
carried out after obtaining approval from the Commissioner of Income-tax, has
not been incorporated, and on that ground directed the assessee-trust to file an
amended deed duly registered along with notes on the activities of the trust
with regard to various expenses debited in the income and expenditure account.
The assessee did not respond to the letter. Therefore, the Commissioner held
that the assessee-trust was not entitled to registration u/s.12AA and exemption
u/s.80G(vi) of the Act. The Tribunal allowed the assessee’s appeal.

On appeal by the Revenue,
the Madras High Court upheld the decision of the Tribunal and held as under :

“(i) The amended trust
deed is not a pre-requisite as required by the Commissioner and it is also not
a pre-requisite condition for registering the applicant as a trust as per the
provisions of the Act. The requisition made by the Commissioner is an
extra-statutory requisition.

(ii) Hence, the Tribunal,
by reason of the impugned order, had set aside the rejection made by the
Commissioner and remitted to decide the issue afresh after affording a
reasonable opportunity of being heard.

(iii) We do not find any
reason to interfere with the order of the Tribunal.”

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Charitable or religious trust : Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Additional condition by way of Explanation to S. 11(2) inserted w.e.f. 1-4-2003 is to apply only to accumulations in excess of 15% u/s. 11(2) and not to accumulation

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3 Charitable or religious
trust : Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Additional
condition by way of Explanation to S. 11(2) inserted w.e.f. 1-4-2003 is to apply
only to accumulations in excess of 15% u/s. 11(2) and not to accumulations up to
15% u/s.11(1)(a).


[DIT Exemption v. Bagri
Foundation, 192 Taxman 309 (Del.)]

The assessee was a trust
duly registered u/s.12AA and duly recognised u/s.80G(5)(vi) of the Income-tax
Act, 1961. For the relevant year, i.e., A.Y. 2003-04, the assessee had
shown certain gross income and deducted therefrom the amount applied for
charitable purposes by way of donation to another charitable trust, BLB, as
corpus donation and to others. The source of the amount over and above the
income of the year was the accumulation of income of the past. The AO added the
amount of donations to the income of the assessee, holding that owing to the
Explanation appended to S. 11(2) with effect from the A.Y. 2003-04, any donation
made out of income accumulated or set apart during the period of accumulation or
thereafter to any trust or institution registered u/s.12AA was liable to be
added in the income of the donor-trust. On appeal, the Commissioner (Appeals)
deleted the addition holding the donation by the assessee to BLB trust was made
out of excess of income over expenditure and not out of amount accumulated
u/s.11(1)(a). The Tribunal affirmed the order of the Commissioner (Appeals).

On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held as under :

“(i) It is clear from S.
11(1)(a) that the income applied for charitable purposes is not to be included
in the total income for the relevant year. In CIT v. Shri Ram Memorial
Foundation, (2004) 269 ITR 35/140 Taxman 263 (Delhi), the Court has held
that when a donor-trust, which is itself a charitable and religious trust,
donates its income to another trust, the provisions of S. 11(1)(a) can be said
to have been met by such donor-trust and the donor-trust can be said to have
applied its income for religious and charitable purposes, notwithstanding the
fact that the donation is subject to a condition that the donee-trust will
treat the donation as towards its corpus and can only utilise the accruing
income from the donated corpus for religious and charitable purposes.

(ii) Explanation to S.
11(2) inserted w.e.f. 1-4-2003, provides that the amount accumulated cannot be
donated to another trust. The Explanation to S. 11(2) is nothing but an
additional condition attached to accumulation in excess of 15% permitted
u/s.11(2). It cannot be held as a condition on accumulation up to 15% as
provided for in S. 11(1)(a) also. There is no rational classification for
imposing the restriction as contained in the Explanation to the accumulation
up to 15% also when there is no such restriction to donating the entire income
of a year to another charitable trust.

(iii) If the Legislature
intended to completely ban/discourage inter se donation between trusts,
it would have changed the position as existing in law, as noticed in the case
of Shri Ram Memorial Foundation (supra). The Legislature did not do so.

(iv) Even after the
insertion of the Explanation, if a trust donates its entire income for a year
to another charitable trust, it would still be entitled to exemption
u/s.11(1)(a). It defies logic as to why such donations cannot be permitted out
of 15% accumulation permitted u/s.11(1)(a) itself.

(v) There is, however,
rationale for imposing the restriction as contained in the Explanation to
accumulations in excess of 15%. Such accumulations, but for the conditions
imposed in S. 11(2) and in the Explanation aforesaid, would have been liable
to be taxed. One of the conditions in S. 11(2)(a) is the purpose for which
accumulation in excess of 15% being made is to be notified; another condition
is of the accumulation being permitted for a period not exceeding 5 years; yet
another condition is as to the modes in which the accumulation can be
invested. There are no such restrictions on accumulation u/s.11(1)(a).

(vi) The scheme of the
Section indicates that the additional condition by way of the aforesaid
Explanation is intended to apply only to accumulations in excess of 15%
u/s.11(2) and not to accumulations up to 15% u/s.11(1)(a). The Explanation is
not found to be intended to take away something from the accumulation up to
15% permitted without any condition whatsoever u/s.11(1)(a).

(vii) It also followed
that even if the donations by the assessee were to be out of accumulations
from previous years and not out of surplus reserves, the same would still not
be liable to be included in the total income as assessed by the Assessing
Officer and the orders of the Commissioner (Appeals) and the Tribunal would
still be upheld. It was nobody’s case that the said accumulations were beyond
the accumulation of 15% permitted in S. 11(1)(a).”

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Charitable purpose : Exemption u/s.11 : S. 11, S. 12A and S. 13(1)(d) of Income-tax Act, 1961 : A.Y. 2005-06 : Interest-free loan by assessee-society to another society : Loan neither ‘investment’, nor ‘deposit’ : Both societies having similar objects, re

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2 Charitable purpose :
Exemption u/s.11 : S. 11, S. 12A and S. 13(1)(d) of Income-tax Act, 1961 : A.Y.
2005-06 : Interest-free loan by assessee-society to another society : Loan
neither ‘investment’, nor ‘deposit’ : Both societies having similar objects,
registered u/s.12A and approved u/s.80G : Loan later repaid : Assessee entitled
to exemption u/s.11.


[DIT (Exemption) v. Acme
Educational Society, (Del.)]

For the A.Y. 2005-06, the
Assessing Officer disallowed the claim of the assessee-society for exemption
u/s.11 of the Income-tax Act, 1961 on the ground that the assessee-society had
given a loan of Rs.90,50,000 to another educational society, whose president was
the brother of the president of the assessee-society. The Assessing Officer held
that there was a violation of S. 13(1)(d) read with S. 11(5) of the Act. The
Commissioner (Appeals) allowed the assessee’s claim and held that there was no
violation of S. 13(1)(d) read with S. 11(5) of the Act, as both societies had
similar objects and that the Assessing Officer had not brought anything on
record to show that the advance of Rs.90,50,000 was a ‘deposit’ or ‘investment’.
The Tribunal upheld the decision of the Commissioner (Appeals).

In appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held as under :


“(i) The interest-free
loan of Rs.90,50,000 given by the assessee-society to another society did
not violate S. 13(1)(d) read with S. 11(5) of the Act, as the loan was
neither an ‘investment’, nor a ‘deposit’. Moreover both societies had
similar objects and were registered u/s.12A of the Act and had approvals
u/s.80G.

(ii) The fact that the
loan was interest-free and had been subsequently returned was also
significant.”



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Appellate Tribunal : Rectification u/s.254(2) of Income-tax Act, 1961 : A.Y. 1994-95 : Appellate order u/s.254(1) gets merged in rectification order only on issues raised in rectification application and not on other issues decided by Tribunal in appeal,

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1 Appellate Tribunal :
Rectification u/s.254(2) of Income-tax Act, 1961 : A.Y. 1994-95 : Appellate
order u/s.254(1) gets merged in rectification order only on issues raised in
rectification application and not on other issues decided by Tribunal in appeal,
Appellate order u/s.254(1) survives and is available for rectification again on
any other issue on an application filed by either of parties : Once
rectification application filed by one of parties is considered and decided by
Tribunal rightly or wrongly, another rectification application on same issue is
not maintainable.


[CIT v. Aiswarya Trading
Co., 192 Taxman 385 (Ker.)]

For the A.Y. 1994-95, while
deciding the appeal, the Tribunal did not consider one of the grounds raised by
the assessee pertaining to the levy of interest u/s.220(2) of the Income-tax
Act, 1961. Therefore, the assessee filed rectification application before the
Tribunal to rectify the Appellate order, which was allowed by the Tribunal. The
Department thereafter filed a rectification application for rectifying the order
issued by the Tribunal in the assessee’s rectification application. The Tribunal
held that the Department’s rectification application was on the very same issue
agitated by the assessee in its rectification application and allowed by the
Tribunal and, therefore, it was not maintainable u/s.254(2).

On appeal, the Revenue
contended that by virtue of the merger of the rectification order in the
Appellate order, the application filed u/s.254(2) by the Revenue was still
maintainable.

The Kerala High Court upheld
the decision of the Tribunal and held as under :


“(i) The second
application on the very same issue is not maintainable before the Tribunal.
In fact, merger applies only on issues decided in rectification proceedings
and the Tribunal’s order issued u/s.254(1) will remain unaffected on all
matters other than those covered by the rectification order issued
u/s.254(2). In other words, even after the Tribunal rectifies the Appellate
order u/s.254(2) on any issue raised, still the original order can be
rectified on any other issue decided by the Tribunal.

(ii) However, if the
rectification application filed by one of the parties is allowed or rejected
by the Tribunal, the very same issue cannot be agitated in another
rectification application by the opposite party. If this is done and allowed
to be entertained by the Tribunal, then what happens is that the Tribunal
gets an opportunity to review its own order for which it has no powers under
the statute. Therefore, once the rectification application filed by one of
the parties is considered and decided by the Tribunal rightly or wrongly,
another rectification application on the same issue is not maintainable
against the order issued by the Tribunal u/s.254(2).

(iii) In the instant
case, the question of liability for interest payable by the assessee u/s.
220(2) rightly or wrongly was decided by the Tribunal in the rectification
application filed by the assessee in its favour and, therefore, the
Department could not seek to rectify the very same order again u/s.254(2) by
filing another application.

(iv) Consequently, the
order of the Tribunal was to be upheld.”



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Refund : S. 119, S. 240 and S. 244A of Income-tax Act, 1961 : A.Ys. 1998-99 and 1999-00 : Refund payable consequent on appeal : Application not necessary : Assessee entitled to interest on refund : Chief Commissioner has no power to deny interest on groun

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Reported :

34 Refund : S. 119, S. 240 and S. 244A of Income-tax Act,
1961 : A.Ys. 1998-99 and 1999-00 : Refund payable consequent on appeal :
Application not necessary : Assessee entitled to interest on refund : Chief
Commissioner has no power to deny interest on ground of delay in filing revised
return.

[S. Thigarajan and ors. v. ACIT, 322 ITR 581 (Kar.)]

In respect of the A.Ys. 1998-99 and 1999-00, the Deputy
Commissioner (TDS) held that the shares allotted to the assessee employees were
perquisites and tax had to be deducted on their value. Therefore, the employer
deducted tax and remitted it to the Department, and issued revised Form No. 16
to the assessee employees for claiming credit for the deduction. This was
followed by the assessee filing revised returns, though beyond the time
stipulated u/s.139. The order of the Deputy Commissioner was reversed by the
Tribunal. The Assistant Commissioner gave effect to the order of the Tribunal
and directed the assesses to claim credit of the TDS by filing Form No. 16, as
the employer was not entitled to the Refund of TDS. The assesses filed revised
return with a request to refund the TDS amount. The assesses also filed
applications to condone the delay in preferring the revised returns. In exercise
of the jurisdiction u/s.119(2)(b) of the Income-tax Act, 1961, the Chief
Commissioner condoned the delay, but declined admissible interest on the ground
that the claims were belated and the petitioners had forgone their claims.

The Karnataka High Court allowed the writ petition filed by
the assessee petitioners held as under :

“(i) The first and the second revised returns along with
the application to condone the delay in filing the same, were rendered
infructuous, by the law declared in the matter of allotment of shares to the
employees, not being a perquisite, attracting TDS. Hence, the question of
exercise of jurisdiction u/s.119(2)(b) of the Act did not arise. The order of
the Chief Commissioner was arbitrary, without jurisdiction and illegal and as
a consequence the orders of the Assistant Commissioner, giving effect to the
orders of the Chief Commissioner were unsustainable. They were liable to be
quashed.

(ii) Where a refund is due to the assessee consequent on an
Appellate Order, an obligation is cast on the Revenue u/s.240, to effect the
refund without the assessee having to claim it. U/s.244A, the Revenue is bound
to pay interest at one-half percent on the amount of refund.

(iii) It is no doubt true that the Revenue had the benefit
of the monies belonging to the petitioners, up to the date of refund, and
there are a catena of decisions of the Apex Court over payment of compounded
interest on refund, which the petitioners are entitled to press into service.
Without, however going into the merits or demerits of the quantum of interest
or compounding either quarterly or half-yearly, the request of interest at 18%
per annum compounded monthly, is kept open for consideration by the first
respondent, to be decided within a period of four weeks from today and effect
payment immediately thereafter.”

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KVSS 1998 : Rectification u/s.154 of Income-tax Act, 1961 : A.Y. 1993-94 : During the pendency of appeal before the Tribunal the assessee preferred an application under KVSS 1998 : After issue of certificate under KVSS a rectification order demanding addi

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Reported :

33 KVSS 1998 : Rectification u/s.154 of Income-tax Act, 1961
: A.Y. 1993-94 : During the pendency of appeal before the Tribunal the assessee
preferred an application under KVSS 1998 : After issue of certificate under KVSS
a rectification order demanding additional interest u/s.234B cannot be validly
made.

[CIT v. Goel Lottery Centre, 323 ITR 262 (All.)]

During the pendency of appeal before the Tribunal for the A.Y.
1993-94, the assessee preferred an application under KVSS 1998. Pursuant thereto
the designated authority issued certificate u/s.90 of the KVSS 1998. Thereafter,
on 31-3-2000 the Deputy Commissioner passed an order of rectification u/s.154 of
the Income-tax Act, 1961 and raised an additional demand of interest u/s.234B.
According to him the demand of interest calculated earlier was low. The
Commissioner (Appeals) set aside the order and this was upheld by the Tribunal.

On appeal by the Revenue, the Allahabad High Court upheld the
decision of the Tribunal and held as under :

“(i) In view of the provisions of the Finance (No. 2) Act,
1998, which lays down the Kar Vivad Samadhan Scheme, it is apparent that the
order passed u/s.90(1) determining the sum payable under the Scheme shall be
conclusive in respect of all the matters stated therein and no matter covered
by such order shall be reopened in any other proceeding under the direct tax
enactment or indirect tax enactment or under any other law for the time being
in force. It further contemplates that only in a case where the certificate is
found to be false, the designated authority at any stage can withdraw the
same.

(ii) After the issue of the certificate u/s.90 of the KVSS
1998, the assessing authority had no authority to sit over the certificate.
The rectification was not permissible.”

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Industrial undertaking : Deduction u/s.80-IA of Income-tax Act, 1961 : A.Y. 2005-06 : Computation : Adjustment of brought forward losses and depreciation set off in earlier years : Only the losses of the years beginning from the initial assessment year ar

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Reported :

32 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2005-06 : Computation : Adjustment of brought forward losses
and depreciation set off in earlier years : Only the losses of the years
beginning from the initial assessment year are to be brought forward and not the
losses of the earlier year which have been already set off against other income
of the assessee.

[Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT, 231
CTR 368 (Mad.)]

For the A.Y. 2005-06, the assessee had claimed a deduction of
Rs.1,70,76,945 u/s.80-IA of the Income-tax Act, 1961. The Assessing Officer
disallowed the claim on the ground that the eligible income is a negative
figure. CIT(A) allowed the claim and held that since the A.Y. 2005-06 is the
initial assessment year, unabsorbed depreciation and the losses of earlier
years, which had already been absorbed, cannot be notionally carried forward and
taken into consideration for computing deduction u/s.80-IA. The Tribunal
reversed the order of the CIT(A) and restored the order of the Assessing
Officer.

On appeal by the assessee, the Madras High Court reversed the
decision of the Tribunal and held as under :

“Losses and depreciation of the years earlier to the
initial assessment year which have already been absorbed against profits of
other businesses cannot be notionally brought forward and set off against the
profits of the eligible business for computing the deduction u/s.80-IA.”

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Depreciation : Business expenditure : S. 32 and S. 37 of Income-tax Act, 1961 : A.Y. 1994-95 : Closure of business due to riots : Closure for reasons beyond control of assessee : Assessee entitled to depreciation and business expenditure.

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Reported :

30 Depreciation : Business expenditure : S. 32 and S. 37 of
Income-tax Act, 1961 : A.Y. 1994-95 : Closure of business due to riots : Closure
for reasons beyond control of assessee : Assessee entitled to depreciation and
business expenditure.

[CIT v. Blend Well Bottles P. Ltd., 323 ITR 18 (Kar.)]

The assessee was engaged in the manufacture and sale of
Indian-made foreign liquor. In the financial year ending 31-3-1994 the assessee
had not carried on the manufacturing activities as the business was closed on
account of local problems. The Assessing Officer therefore disallowed the claim
for depreciation for the A.Y. 1994-95. The Tribunal allowed the assessee’s claim
and held that the assessee is entitled to depreciation and business expenditure.

On appeal by the Revenue, the Karnataka High Court upheld the
decision of the Tribunal and held as under :

“(i) The business premises of the assessee were situated in
Punjab. On account of riots and other activities in the place, where the
factory of the assessee was situated, the assessee was forced to close down
the activity till peace was restored in the locality. This fact was not
disputed by the Revenue.

(ii) If for reasons which were beyond the control of the
assessee, its business activities were closed, such a closure could not be
treated as a closure with an intention to close the business once for all and
such closure had to be treated as an act of God or vis major. The assessee
would be entitled to claim depreciation as well as business expenditure u/s.32
and u/s.37 of the Income-tax Act, 1961, respectively.”

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Industrial undertaking : Deduction u/s.80-IA of Income-tax Act, 1961 : A.Y. 2003-04 : Trial production in A.Y. 1998-99 and commercial production in A.Y. 1999-00 : Therefore initial assessment year is the A.Y. 1999-00 in which there was commercial producti

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Reported :

31 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2003-04 : Trial production in A.Y. 1998-99 and commercial
production in A.Y. 1999-00 : Therefore initial assessment year is the A.Y.
1999-00 in which there was commercial production and not the A.Y. 1998-99 in
which there was only trial production : Therefore, the assessee is entitled to
100% deduction u/s.80-IA in the A.Y. 2003-04.

[CIT v. Nestor Pharmaceuticals Ltd., 231 CTR 337
(Del.)]

In the Goa unit of the assessee’s industrial undertaking
there was trial production in the A.Y. 1998-99 and the commercial production
commenced in the A.Y. 1999-00. Therefore, the assessee claimed that the initial
assessment year is the A.Y. 1999-00 and accordingly claimed 100% deduction
u/s.80-IA of the Income-tax Act, 1961 in the A.Y. 2003-04. The Assessing Officer
was of the view that the initial assessment year is the A.Y. 1998-99 in which
there was trial production and accordingly restricted the deduction to 30%. The
Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) Initial assessment year for the purpose of S. 80-IA is
the assessment year relevant to the previous year in which the commercial
production is started and not the A.Y. in which there was only a trial
production.

(ii) There was only a trial production in the A.Y. 1998-99
and commercial and full-fledged production commenced only in the A.Y. 1999-00.
Merely the trial production will not be regarded as beginning to manufacture
or produce articles. The Tribunal was therefore justified in holding that the
benefit of Section would be allowed in the year in which commercial production
started i.e., A.Y. 1999-00 and, therefore, would be extendable up to the A.Y.
2003-04.”

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Assessment : Notice u/s.143(2) of Income-tax Act, 1961 : A.Y. 1997-98 : A valid notice u/s.143(2) can be issued only after the AO examines the return filed by the assessee.

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Reported :

29 Assessment : Notice u/s.143(2) of Income-tax Act, 1961 :
A.Y. 1997-98 : A valid notice u/s.143(2) can be issued only after the AO
examines the return filed by the assessee.

[DIT v. Society for Worldwide Inter Bank Financial,
Telecommunications, 323 ITR 249 (Del.)]

In an appeal against the assessment order u/s. 143(3) of the
Income-tax Act, 1961 for the A.Y. 1997-98 the Tribunal found that the assessee
had filed the return of income on 27-3-2000, whereas the notice u/s.143(2) was
issued on 23-3-2000 i.e., before filing the return of income. The Tribunal
therefore held that the notice was invalid and hence the consequential
assessment order is invalid.

In appeal before the Delhi High Court, the Revenue contended
for the first time that the notice was issued on March 27, 2000 and not on March
23, 2000. The High Court upheld the decision of the Tribunal and held as under :

“(i) In the memorandum of appeal, the Revenue had stated
that the return was filed by the assessee on March 27, 2000 and the notice
u/s.143(2) was served upon the authorised representative of the assessee by
hand when the authorised representative of the assessee came and filed return
and that the date of the notice was mistakenly mentioned as March 23, 2000.

(ii) Even if it was true, the notice was served on the
authorised representative simultaneously on his filing the return, which
clearly indicated that the notice was ready even prior to the filing of the
return.

(iii) The provisions of S. 143(2) make it clear that the
notice could only be served after the Assessing Officer had examined the
return filed by the assessee. Thus, even if the statement of the Assessing
Officer is taken at face value, it would amount to gross violation of the
scheme of S. 143(2) of the Act.

(iv) That being the case, no interference with the impugned
order is called for.”

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Appellate Tribunal : Powers and duty : A.Y. 1990-91 : Assessee filed cross-objections in appeal filed by Revenue : Revenue’s appeal dismissed without considering cross-objections of assessee : Cross-objections should be disposed of on merits.

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Reported :

28 Appellate Tribunal : Powers and duty : A.Y. 1990-91 :
Assessee filed cross-objections in appeal filed by Revenue : Revenue’s appeal
dismissed without considering cross-objections of assessee : Cross-objections
should be disposed of on merits.

[Ram Ji Dass and Co. v. CIT, 323 ITR 505 (P&H)]

In an appeal filed by the Revenue before the Tribunal the
assessee had preferred cross-objections. The Tribunal dismissed the appeal filed
by the Revenue but the cross objections of the assessee were not considered on
merits. Therefore the assessee applied for recalling the order and requested for
decision on the cross-objections on merits. The Tribunal rejected the
application observing that the Tribunal had already dismissed the appeal of the
Revenue and that while deciding the Revenue’s appeal the Tribunal had already
considered the question relating to the rate of profits and had upheld it and it
could not be re-examined thereafter in the assessee’s cross objections.

On reference at the instance of the assessee, the Punjab and
Haryana High Court held that the cross-objections of the assessee were required
to be heard and decided on merits.

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Disallowance of loss u/s.94(7) of Income-tax Act, 1961 : A.Y. 2004-05 : The conditions spelt out in clauses (a), (b) and (c) are cumulative and not alternative : Purchase of units within a period of less than three months from the record date, but sale be

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Unreported

26 Disallowance of loss u/s.94(7) of Income-tax Act, 1961 :
A.Y. 2004-05 : The conditions spelt out in clauses (a), (b) and (c) are
cumulative and not alternative : Purchase of units within a period of less than
three months from the record date, but sale beyond a period of three months :
Loss cannot be ignored.

[CIT v. Smt. Alka Bhosle (Bom.), ITA No. 2656 of 2009
dated 9-6-2010]

In the previous year relevant to the A.Y. 2004-05 the
assessee had purchased certain units within a period of less than three months
from the record date, but the units were sold beyond a period of three months
from the record date. The Tribunal held that the provisions of S. 94(7) of the Income-tax Act, 1961 are not applicable and there would be no disallowance of loss.

In the appeal filed by the Revenue, the following question
was raised :

“Whether on the facts and in the circumstances of the case
and in law, the ITAT was right in holding that clauses (a), (b) and (c) of S.
94(7) of the Income-tax Act, 1961, are to be satisfied independently or
cumulatively ?”

The Bombay High Court upheld the decision of the Tribunal and
held as under :

“(i) The question that falls for consideration is as to
whether the conditions spelt out in clauses (a), (b) and (c) of Ss.(7) are
cumulative.

(ii) The contention of the Revenue is that though the units
were, as a matter of fact, sold beyond a period of three months of the record
date, the provisions of S. 94(7) would apply since they were acquired within a
period of three months from the record date.

(iii) There is no merit in the submission. Ss.(7) of S. 94
spelt out three requirements; these being (i) The purchase or acquisition of
any of the securities or units should take place within a period of three
months prior to the record date; (ii) The sale or transfer should take place
within a period of three months after the record date; and (iii) The dividend
or income received or receivable should be exempt. In the event that these
three conditions are fulfilled, the loss, if any, arising from the purchase or
sale of securities or units has to be ignored for the purpose of computing the
income chargeable to tax, to the extent such loss does not exceed the amount
of dividend or income received or receivable.

(iv) Ex-facie, all the three conditions that are spelt out
in clauses (a), (b) and (c) of Ss.(7), must be fulfilled before the
consequence that is envisaged in the Section comes into force. The conditions
prescribed in clauses (a), (b) and (c) of Ss.(7) are intended to be cumulative
in nature.

(v) In the present case, the sale of the units has taken
place after the expiry of a period of three months from the record date.
Hence, the second condition spelt out for the applicability of Ss.(7) would
not come into force.

(vi) In the circumstances, the appeal by the Revenue is
lacking in merit and does not raise any substantial question of law. The
appeal is accordingly dismissed.”

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Appellate Tribunal : Power and duty : Third proviso to S. 254(2A) of Income-tax Act, 1961 : The Tribunal has power to grant stay of recovery for a period of 365 days only : The Tribunal is therefore under a bounden duty and obligation to ensure that the a

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Reported :

27 Appellate Tribunal : Power and duty : Third proviso to S.
254(2A) of Income-tax Act, 1961 : The Tribunal has power to grant stay of
recovery for a period of 365 days only : The Tribunal is therefore under a
bounden duty and obligation to ensure that the appeal is disposed of within that
period: Fact that same issue was pending before the Special Bench cannot be a
reason for the Tribunal not to dispose of the appeal.

[Jethmal Faujimal Soni v. ITAT, 231 CTR 332 (Bom.)]

In an appeal preferred by the assessee before the Tribunal,
the assessee’s application for stay of recovery was allowed by the Tribunal and
the recovery was stayed for a period of six months. On a subsequent application
the stay was extended by a further period of six months. The hearing of the
appeal was adjourned from time to time for the reason that the issue in the
appeal was pending before the Special Bench. The Tribunal rejected the third
application for stay dated 4-11-2009 for the reason that the third proviso to S.
254(2A) of the Income-tax Act, 1961 prohibits the Tribunal from granting such
stay.

On a writ petition filed by the assessee, the Bombay High
Court directed the Tribunal to dispose of the appeal within a period of four
months. The counsel appearing on behalf of the Revenue informed the Court that
the Revenue shall not take any coercive steps for enforcing the demand during
that period. The High Court held as under :

“(i) A stringent provision is made by the third proviso to
S. 254(2A), as a result of which even if the delay in disposing of the appeal
is not attributable to the assessee, the stay has to stand vacated in any
event upon the lapse of a period of three hundred and sixty-five days. Having
regard to the nature of the provision which has been enacted by the
Parliament, the Tribunal is under a bounden duty and obligation to ensure that
the appeal is disposed of, so as not to result in prejudice to the assessee,
particularly in a situation like the present where no fault could be found
with the conduct of the assessee.

(ii) The fact that an issue was pending before the Special
Bench was not a reason for the Tribunal not to dispose of the appeal,
particularly since the consequence of the inability of the Tribunal to do so
would result in vacating of the order of stay, which was passed originally in
favour of the assessee.

(iii) It is unfortunate that the Tribunal simply adjourned
the appeal merely on the ground of the pendency of an identical issue before
the Special Bench. The state of affairs which has come to pass could well have
been avoided by the appeal being taken up for final disposal.”

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Scientific research expenditure : Deduction u/s.35 of Income-tax Act, 1961 : Research not restricted to applied or natural science but includes any scientific research which may lead to or facilitate extension of business.

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Reported :

20. Scientific research
expenditure : Deduction u/s.35 of Income-tax Act, 1961 : Research not restricted
to applied or natural science but includes any scientific research which may
lead to or facilitate extension of business.

[CIT v. Engineering
Innovation Ltd., 327 ITR 392 (HP)]

The assessee was carrying on
the business of manufacture and sale of metal components. The assessee decided
to manufacture and market automatic coffee machines. It imported an automatic
coffee machine from abroad and engaged the services of an engineer for
indeginising and copying the machine in such a fashion so as to make it suitable
for Indian conditions. In the A.Y. 1992-93, the assessee claimed the deduction
of the cost of the imported machine and the retainership fees paid to the
engineer as scientific research expenditure u/s.35 of the Income-tax Act, 1961.
The Assessing Officer disallowed the claim holding that the expenditure was not
incurred on research work. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue,
the Himachal Predesh High Court upheld the decision of the Tribunal and held as
under :

“(i) The definition of
scientific research in S. 43(4) is comprehensive, but the use of the word
‘include’ in every clause of the Section clearly implies that the definition
is inclusive and not comprehensive. Therefore, the contention of the
Department that scientific research must be in the fields of natural or
applied science, could not be accepted.

(ii) Any methodical or
systematic investigation based on science into the study of any materials or
sources, is a scientific research.

(iii) The investigation
done by the assessee to improvise, indigenise and improve the imported machine
to suit the Indian market would have resulted in expanding and extending its
business and therefore fell within the meaning of the term ‘scientific
research’ as defined in S. 43(4)(iii) of the Act.

(iv) The assessee was entitled for
deduction in terms of S. 35(4).”

levitra

Companies Act, 1956 and IFRS Convergence — An overview

IFRS

IFRS Convergence in India has gained significant momentum due
to the issuance of the Press Announcement by the Ministry of Corporate Affairs
(MCA) in January and March 2010 and subsequent clarifications issued in May
2010.

The Institute of Chartered Accountants of India (ICAI), on
its part, has issued 38 exposure drafts of ‘Ind-AS’ — i.e., the converged
accounting standards, in line with the IFRSs.

ICAI has also issued a document identifying areas where
provisions of the Companies Act, 1956 (‘the Act’) need to be changed to bring it
in line with IFRS. This article attempts to discuss those areas (listed below)
and the recommendations proposed by ICAI :

  • Proposed dividends


  • Accounting of
    depreciation


  • Restatement of prior
    years’ numbers


  • Presentation of financial
    statements


  • Financial instruments and
    preliminary expenses


  • Definition of ‘Control’


  • Accounting for business
    combinations







Proposed dividends :

Paras 12 and 13 of IAS 10 Events after the reporting
period state that proposed dividend does not meet the criteria of a present
obligation in IAS 37 (Provisions, Contingent Liabilities and Contingent Assets)
and hence it shall not be recognised as a liability, but disclosed in
notes.

The Company Law department via circular no. 3/124/75-CL-V,
dated November 22, 1976 had expressed its views that proposed dividends
should be shown as ‘Current liabilities and provisions’ and part I of the
Schedule VI also requires proposed dividends to be shown as ‘Current liabilities
and provisions’.

Actions required to comply with IFRS :

The said Circular should be suitably amended. Also, Schedule
VI should be revised (ICAI has already submitted the proposed revisions to
Schedule VI to the Ministry of Corporate Affairs).

Other matters to be considered :

Under the present provisions of the Act, profits reported as
per books of account can be utilised for declaration of dividend, provided
adequate depreciation as required by the Act, has been provided for.

Under IFRS there are situations (illustrated below) where the
Company has to record unrealised gains/losses in the financial statements.

1. Unrealised gains/losses on fair value of equity

investments classified as fair value through profit and loss
account and derivatives

2. Revenue recognised during the construction period for a
public private service concession arrangement.

Though, in such situations, the Company would have reported
profits which can be utilised for dividend, the Company may not have sufficient
cash flows to fund the same and at the same time maintain adequate liquidity in
the system.

Similarly, there are situations where the Company has
received the cash flows, however is not permitted to recognise revenue, for
example,

1. For real estate sale contracts, revenue is generally
recognised on transfer of possession of property as against the current practice
of recognising revenue on a proportionate completion basis. Though, in such
situations, the Company would have sufficient liquidity, since collections are
made on achievement of individual milestones, the Company would not have
sufficient profits, since all revenue will be recognised only at the end on
transfer of possession of the property.

Further, under IFRS there are certain gains/losses which are
not accounted in the profit and loss account, but in the ‘other comprehensive
income’ statement, such as :

1. Mark to market of derivatives designated as hedging
instruments (for all effective hedges)

2. Fair value changes of financial instruments classified
as available for sale securities

Regulators will need to consider, whether such items need to
be adjusted to compute profit available for distribution as dividends to
shareholders.

Accounting of depreciation :


1. Component accounting :


Para 43 (read with BC 26 and 27) of IAS 16 ‘Property,
Plant and Equipment’ (PPE) states that each part of an item of PPE
with a cost that is significant in relation to the total cost of the item shall
be depreciated separately. For example, the engine of an aircraft needs
to be separately depreciated from its body.

The Act, on the other hand, does not indicate any such
requirement.

2. Depreciation rates :


Paras 50 and 53 of IAS 16 ‘Property, Plant and Equipment’
state that the depreciable amount of an asset, determined after reducing its
residual value from its cost, shall be allocated on a systematic basis over
its useful life. Further, para 51 requires annual review of useful life
and residual value.

The Act, under Schedule XIV, prescribes minimum rates of
depreciation for different classes of assets based on shift working and does not
recognise allocation of depreciation based upon the useful life of an asset and
deduction of residual value of the asset from its cost for arriving at the
depreciable amount. Further, S. 205(2) and S. 205(5) of the Act permits
depreciation to be provided either for 100% of the cost of the asset or 95% of
the cost of the asset and also allows the Central Government to approve any
basis of providing depreciation on assets for which no rate has been laid down
in the Act.

3.         Depreciation
method?:

Paras 60 to 62 of IAS 16 ‘Property, Plant
and Equipment’ state that the depreciation method used shall reflect the
pattern in which the asset’s future economic benefits are expected to be
consumed by the entity. The depreciation method applied shall be reviewed
annually. Further, it allows ‘units of production method’ as a method of
depreciation along with ‘straight-line method (SLM)’ and ‘diminishing balance
method (WDV)’.

The Act, under Schedule XIV, specifies
depreciation rates as per SLM and WDV methods only.


Actions required to comply with IFRS?:

Schedule XIV should be revised. It should
prescribe only industry-specific guidelines for indicative rates. These shall
serve as industry-specific benchmarks. It should state that the manner of
computing depreciation on assets, whether specified in the Schedule or not,
shall be as per the requirements of the accounting standards prescribed by the
Central Government referred to in S. 211(3C) of the Act. These shall be the
general guidelines and used as rebuttable presumptions.

 The Ministry of Corporate Affairs has
already issued a draft Schedule XIV which is placed on their website. ICAI is
involved in the process of revising the same to make it consistent with IFRS.

 The proviso (a), (b) and (c) u/s.205(1) and
item 3(iv) of Schedule VI-PART II — that recognises non-provision of
depreciation — should be repealed. Also, clauses (b), (c) and (d) of S. 205(2)
and S. 205(5) — that permit 95% of the cost to be depreciated and allows the
Central Government to approve any basis — should be repealed.

 

Restatement of prior years’ numbers:

Para 19 of IAS 8 Accounting policies,
changes in accounting estimates and errors requires an entity to apply any
changes in accounting policies retrospectively. As per para 22, when a change
in accounting policy is applied retrospectively, the entity shall adjust the
opening balance of each affected component of equity for the earliest prior
period presented and the other comparative amounts disclosed for each prior
period presented as if the new accounting policy had always been applied.

Similarly, para 42 requires correction of
material prior period errors retrospectively by restating the prior period
numbers. Further, para 46 requires exclusion of correction of a prior period
error from profit or loss for the period in which error is discovered. 

As per the Circular No. 1/2003, dated
January 13, 2003 issued by the erstwhile Company Law Board, a company could
reopen and revise its accounts even after their adoption in the annual general
meeting only to comply with technical requirements of taxation laws and
of any other law to achieve the object of exhibiting true and fair view. It
does not permit revision for changes in accounting policies or prior period
errors. All such adjustments and corrections have to be included in the current
year’s profit or loss.

Actions required to comply with IFRS:

The Circular issued by the Company Law
Board should be revised to allow re-statement of the numbers in order to comply
with the requirements of IFRS.

The Circular should further state that the
financial statements presented shall be deemed to be in agreement with the
books of account to the extent of such re-statement for all such periods.

It should also allow the amount of net
profit, assets and liabilities as per the approved audited accounts for all
such periods to be considered as final for the purpose of the computation of
the total managerial remuneration payable u/s.198, u/s.199 and u/s.349 of the
Act or any provision u/s. 205 of the Act relating to declaration of any
dividend or any other such provision of the Act i.e., the managerial
remuneration, dividend paid as per profits reported in the prior years need not
change because of restatements in any of the subsequent periods.


Presentation of financial statements:

The existing form of balance sheet
(statement of financial position) set out in part I of Schedule VI and the
requirements as to Profit and loss account set out in part II of Schedule VI do
not comply with the requirements set out in IAS 1 Presentation of financial
statements regarding the presentation of financial statements, as mentioned
below?:

1.         A
separate statement of changes in equity (SOCIE) presenting all owner
changes in equity is not permitted under the Act

2.         The
concept of Comprehensive Income and Other Comprehensive Income (OCI)
is not recognised in the Act

3.         Distinction
between owner changes in equity

(SOCIE) and non-owner changes in equity
(OCI) is not recognised in the Act

4.         As
per para 39 of IAS 1, when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial
statements, it shall present, as a minimum, three statements of financial
position (as at the end of the current period, the end of the previous period
and the beginning of the earliest comparative period).

The Act does not mandate presentation of a
third statement of financial position.

5.         As
per para 60 of IAS 1 Presentation of Financial Statements, an entity shall
present current and non-current assets and liabilities in its statement of
financial position except when a presentation based on liquidity provides
information that is reliable and more relevant. For example, in case of
long-term borrowings, the amount repayable within 12 months from the reporting
date shall be presented as current and the balance as non-current liabilities.

The form of balance sheet set out in Part I
of Schedule VI does not consider current/ non-current classification of
assets/liabilities.

 

6.         Extraordinary
items?:

As per para 87 of IAS 1, an entity shall
not present any items of income or expense as extraordinary items.

Whereas, as per part II(3)(xii)(b) of the
Schedule VI, the profit and loss account shall disclose profits or losses in
respect of transactions of a kind, not usually undertaken by the company or
undertaken in circumstances of an exceptional or non-recurring nature,
if material in amount.

 

Actions required to comply with IFRS:

 

Schedule VI would need to be revised.
Further regulators will also need to consider that the companies in India would
be converging with IFRS in a phased manner, with only approximately 500+
companies converging from 1 April 2011 (phase 1). Hence, regulators may need to
consider two parts of Schedule VI — one that complies with the requirements of
IFRS and other which will be applicable to companies either covered in later
phases or exempt from convergence (i.e., companies not covered in any of the
phases).

 

Financial instruments and preliminary
expenses?: 

1.         Substance
v. legal form?:

As per para 18 of IAS 32 Financial
Instruments: Presentation, substance of a financial instrument, rather than its
legal form, governs its classification in the entity’s balance sheet. For
example, compulsorily convertible debenture is an equity instrument and
compulsorily redeemable preference share is a financial liability.

However, the Act mandates classification
based on legal form only i.e., as per S. 86 of the Act, share capital shall be
of two kinds — equity and preference.

2.         Dividends
on capital designated as financial liability?:

As per IFRS, interest, dividends, losses
and gains relating to a financial liability shall be recognised as income or
expense in profit or loss. Distributions to holders of an equity instrument
shall be debited directly to equity.

However, as per the Act, dividend on all
types of capital is to be presented only as an appropriation of profit.

 

3.         Transaction
costs?:

As per IFRS, transaction costs of an equity
transaction shall be accounted for as a deduction from equity, net of any
related income tax benefit.

However, as per the Act, these have to be
presented as Miscellaneous Expenditure on the assets side of the balance sheet.
They can also be written off against the securities premium account, as per S.
78(2)(c) of the Act.


4.         Premium
on redemption of preference shares?:

As per IFRS, gains and losses associated
with redemptions or refinancings of financial liabilities are recognised in
profit or loss.

 However, proviso (C) u/s.80(1) and u/s.78(2)(d)
of the Act permits writing off premium on redemption of preference shares
against the securities premium account.

Similarly, losses and expenses relating to
other financial liabilities like debentures may be allowed to be written off
against securities premium as per S. 78(2)(d) of the Act, but shall be
recognised in the profit or loss as per para 36 of IAS 32.

 

5.         Preliminary
expenses?:

As per para 69 of IAS 38 Intangible Assets,
expenditure on start-up activities shall be recognised as an expense when
incurred. Start-up costs may consist of establishment costs such as legal and
secretarial costs incurred in establishing a legal entity.

However, the Act permits such costs to be
carried forward as Miscellaneous Expenditure (part I of the Schedule VI) or be
written off against securities premium account [S. 78(2)(b) of the Act].


Actions required to comply with IFRS:

Proviso (C) u/s.80(1) and u/s.78(2)(b), (c)
and (d), regarding utilisation of securities premium, should be suitably
amended.

 

Definition of ‘Control’:

Para 4 of IAS 27 Consolidated and Separate
Financial Statements define ‘control’ as the power to govern the financial and
operating policies of an entity so as to obtain benefits from its activities.
Further, as per para 13 of IAS 27, control is presumed to exist when the parent
owns, directly or indirectly through subsidiaries, more than half of the voting
power of an entity. Also, as per para 14 of IAS 27, the existence and effect of
potential voting rights that are currently exercisable or convertible,
including potential voting rights held by another entity, are considered when
assessing whether an entity has the power to govern the financial and operating
policies of another entity.

However, as per S. 4(1) of the Act, a
company shall be deemed to be a subsidiary of another if, but only if:

(a)        that
other controls the composition of its Board of directors

(b)        that
other?:

(ii)        where
the first-mentioned company is any other company, holds more than half in
nominal value of its equity share capital;

(c)        the
first-mentioned company is a subsidiary of any company which is that other’s
subsidiary.

Hence, the definition of ‘control’ as per
IAS 27 is wider in scope than the definition as per S. 4(1) of the Act.

Further, para 4 of IAS 27 defines
‘subsidiary’ as an entity including an unincorporated entity, such as
partnership, that is controlled by another entity (known as parent). However,
as per S. 4(1), only a company can be a subsidiary of another company.

 

Actions required to comply with IFRS:

The Act should be suitably amended to
facilitate preparation of Consolidated Financial Statements under the
principles prescribed under IFRS. However, the definition of a subsidiary
company presently given u/s.4 of the Act should not be used as it is rule-based
and different from AS 27 Consolidated and Separate Financial Statements. The
definition should be revised to be in line with the definition of ‘control’ as
under IAS 27.

Accounting for business combinations:

As per para 18 of IFRS 3 Business
Combinations, the acquirer shall measure the identifiable assets acquired and
the liabilities assumed at their acquisition-date fair value.

 

However, in accordance with clause (vi)
u/s.394(1) of the Act, the order of the Court may provide for such incidental,
consequential and supplemental matters concerning mergers and acquisitions
which may not be as per the recognition, measurement and disclosure
requirements of IFRS.

 

Further, as per IFRS the acquisition date
is to be factually determined i.e., the date on which an acquirer obtains
control of the acquiree, which is generally the date on which the acquirer
legally transfers the consideration, acquires the assets and assumes the
liabilities of the acquiree.

 

Conversely, the order of the Court, in accordance
with the powers granted under the clause (vi) u/s.394(1) of the Act, may
provide for any other date as the acquisition date.

 

Actions required to comply with IFRS:

Clause (vi) u/s.394(1) should be amended to
state that such incidental, consequential and supplemental matters shall not be
in conflict with the requirements of the accounting standards.

 

The Proviso u/s.391(2) should be amended to
require a certificate by the company that the scheme is not in conflict with
the requirements of the accounting standards. This is now required by SEBI for
listed companies, as per amendment to clause 24 of the Equity Listing
Agreement.

 

India has come a long way along the journey
of convergence with IFRS, increasing the confidence about the transition. The
regulators need to address some of these important matters to ensure a smooth
transition and ensure that an entity that complies with IFRS should not be in
non-compliance with other regulatory requirements in that process.
Implementation of the Converged Accounting Standards in the absence of
corresponding changes in the statute will dilute the implementation/convergence
process.

How will convergence with IFRS affect audit procedures ?

IFRS

The use of International Financial Reporting Standards (IFRS)
as a universal financial reporting language is gaining momentum across the globe
especially from the position only seven years ago where numerous different
national standards existed.

In line with the global trend, the Ministry of Corporate
Affairs (MCA) has notified a plan for convergence with IFRS in a phased manner.

Convergence with IFRS will also need careful analysis of the
present auditing standards. Auditing standard-setters may also need to assess
the requirement of auditor obtaining requisite IFRS knowledge which can be
evidenced through a certification process.

Auditing standard-setters will need to address the impact on
auditing procedures for the changes proposed in the accounting principles due to
convergence with IFRS.

Under IFRS, management is required to make several estimates
in the below-mentioned areas in applying accounting policies that have a
significant effect on the amounts recognised in the financial statements.

Audit of non-current assets :

Property, plant and equipment :

IFRS requires an asset to be depreciated over its own useful
life instead of rates suggested under regulations (like Schedule XIV to the
Companies Act). Further, significant components of an asset are depreciated
separately. The estimate of useful life of assets needs to be reassessed at
least once every balance sheet date.

The audit procedures relating to fixed assets would need to
be designed to obtain sufficient appropriate audit evidence whether the
management’s assessment of useful life is appropriate. The auditor may require
performance of inquiry procedures with the plant engineers to assess the
reasonableness of the process for estimating the useful lives and identification
of components within individual assets that have a different useful life and
needs to be separately depreciated. Companies would also need to maintain
suitable audit trail for the basis for estimation of useful life and
identification of components.

Intangible assets :

The depreciation/amortisation of an intangible asset depends
on whether its useful life is finite or indefinite (indefinite does not mean
infinite). An intangible asset has an indefinite useful life when, based on an
analysis of all relevant factors, there is no foreseeable limit to the period
over which the asset is expected to generate net cash inflows for the entity.

An intangible asset with indefinite useful life is not
depreciated; instead it is tested for impairment every balance-sheet date.

Classification of intangible assets acquired in business
combination (like brands, trademarks, customer relationships) needs to be
assessed closely by the auditor. For instance, in assessing whether the useful
life of a brand is indefinite or finite, the auditor may need to assess the
following factors :


  • How well and for how long has the brand been established in the market ?
    If the brand is mature and contributes significant value to the business and
    therefore its abandonment would represent an unrealistic decision, then this
    might be an indicator of an indefinite useful life.




  • How stable is the industry in which the brand is used ? In rapidly
    changing industries it is less likely that a brand will be identified as
    having an indefinite useful life.




  • Is the brand expected to become obsolete at some point in the future ?




  • Is the brand used in a market that is subject to significant, enduring
    entry barriers ?




  • Is the useful life of the brand dependent
    on the useful lives of other assets of the entity ? If so, what are the
    useful lives of those assets ?




Embedded leases under IFRIC 4 :

The purpose of IFRIC 4 — ‘Determining whether an arrangement
contains a lease’, is to identify an arrangement which, in substance, is or
contains a lease (even if the contract does not use the term lease). For
instance, A Company has a contract with its supplier (job worker) whereby the
Company is contractually bound to get 10,000 units of goods manufactured by the
supplier. The supplier has installed a machinery to manufacture and supply the
goods for the contract.

Price terms are as under :


  • For first 10,000 units — Rs.22 per unit




  • 10,001 onwards — Rs.10 per unit




  • In case of any shortfall as compared to 10,000 units, a penalty of Rs.12
    per unit of shortfall shall be levied.



An analysis of the arrangement would indicate that up to
initial 10,000 units, the Company is bound to pay Rs.120,000 (10,000 x 12) to
the contract manufacturer (as there is a penalty of Rs.12 per unit for any
shortfall in offtake by the Company up to 10,000 units) and this would be
nothing other than lease rent for the asset being used. The balance amount of
Rs.10 (22 – 12) per unit would be job work charges for the manufacture of goods.

A lease arrangement conveys rights to use an asset for agreed
period of time in return for a payment or series of payments.

The assessment whether an arrangement is or contains a lease
is based on whether :


  • fulfilment of the arrangement is dependent on the use of a specific asset
    or assets; and




  • the arrangement conveys a right to use the asset(s).



A challenge to audit-embedded lease arrangements is to derive sufficient appropriate audit evidence that a specific asset(s) would be used throughout the arrangement. Further, audit procedures need to include determining fair values of embedded lease component and other components of the arrangement. This would involve judgment on the part of the company and a process to be set for determining appropriate audit trail for the basis of determination of fair value.

Appropriate representation may also be needed from the Company for identification of all embedded lease arrangements.

Investment property :
Investment properties include properties that are either held to earn rental income or capital appreciation, or are held with undetermined use. Investment properties are measured at cost or at fair value every balance-sheet date. If the client measures investment properties at cost, it still needs to disclose its fair value.

Audit procedures must include procedures to assess the classification of property as ‘Investment Property’. Further, the audit procedures may be performed on the appropriateness of assumptions/ factors considered in deriving the fair value of the Investment Properties.

Audit of Business Combinations and Consolidation :

Consolidation :
Unlike Indian GAAP, the definition of a subsidiary focusses on the concept of control and has two parts, both of which need to be met in order to conclude that one entity controls another :

  •     the power to govern the financial and operating policies of an entity;   
  •  to obtain benefits from its activities.

Thus, if a Company A holds 80% of the issued share capital of Company B and another investor C holds balance 20% of the share capital and participates in the management (through shareholders agreement) of the Company, then Company A cannot treat Company B as a subsidiary, as it cannot unilat-erally control that Company.

Thus, the auditor needs to verify the shareholder’s rights for classification of an investee as subsidiary.

Appropriate representation may also need to be sought from the company for non-existence of participative rights with minority shareholders.

Consolidation of special purpose entities :
A special purpose entity (SPE) is an entity created to accomplish a narrow and well-defined objective, e.g., a vehicle into which trade receivables are securitised. The principles discussed above for identifying control apply equally to an SPE. The control concept in SIC-12 is based on the substance of the relationship between an entity and an SPE, and considers a number of indicators.

Audit procedures that auditor may need to apply to identify whether the SPE needs to be consolidated need to be established.

Appropriate representation may also need to be sought from the company for identification of all SPEs.

Accounting policies across the Group :
The separate financial statements of subsidiaries, joint ventures and associates are prepared based on their accounting policies. However for the purpose of consolidation with parent company, all the sub-sidiaries, associates, joint ventures and SPEs need to prepare IFRS financial statements with the same accounting policies as that of the parent company.

Auditors need to verify consistency in application of IFRS accounting policies throughout the group. Thus auditors of the parent company may need to engage actively with the management and auditors of the subsidiary, joint ventures and associates to assess application of consistent accounting policies within the group.

Business combinations :

A business combination is defined as ‘a transaction or other event in which an acquirer obtains control of one or more businesses’.

In relation to business combination, the following audit procedures may need to be performed :

  •     Verify the date of actual transfer of control to the acquirer i.e., the date of acquisition. An appointed date as per agreement or court scheme cannot be termed as date of acquisition.

  •     Verify valuation reports as at acquisition date relating to assets transferred, liabilities incurred and equity interests issued by the acquirer. Verify the reasonableness of the assumptions used for valuation purposes.

  •     Verify intangibles assets that qualify for recognition. Verify the reasonableness of the assumptions used in the valuation of assets acquired, liabilities and contingent liabilities assumed.


Audit of income statement items :

Revenue : linked transactions :
In some cases, two or more transactions may be linked so that the individual transactions have no commercial effect on their own. For instance, a Company may enter into a contract to buy 100,000 units of goods from a vendor for Rs.1.5 per unit when market price for the goods is Rs.4 per unit (thus a cost savings of Rs.250,000). At the same time, the Company shall subscribe to the debentures of the vendor for Rs.400,000, whereby the vendor has a call option over the debentures to settle the liability at Rs.150,000 in all. Such transactions are linked transactions as the individual contracts have no commercial effect of their own.

In these cases it is the combined effect of the two transactions together that is accounted for. Audit procedures for linked transactions may include :

  •     Verify whether two or more transactions are linked based on the substance of the transaction.

  •     Verify identification of components in the overall arrangement.

  •     Verify allocation of consideration to the different components of the arrangement either on relative fair value method or on residual fair value method.

  •     Verify the basis for recognition of revenue for every delivered component of the arrangement.

Share-based payments :
Share-based payments under IFRS are measured at fair value, unlike Indian GAAP that allows use of intrinsic value method. The auditors need to verify the underlying assumptions relating to the fair value of the instruments. If the client has subsidiaries, the audit procedures are required to verify the extent of grants given to employees of the subsidiary company.

The auditor needs to verify the classification of the share-based payment into equity-settled and cash-settled share-based payment for the parent and subsidiary. Under certain circumstances, the classification of share-based payment could differ in the books of parent and subsidiary. For instance, subsidiary issues options to its employees that it settles by issuing its own shares. Upon termination of employment, the parent entity is required to purchase the shares of the subsidiary from the former employee. In such cases, as the subsidiary has an obligation to deliver its own equity instruments, the arrangement should be classified as equity-settled in its financial statements. However, the arrangement should be classified as cash-settled in the consolidated financial statements of the parent.

Audit of presentation of financial statements :

Current and non-current classification :
IFRS requires the assets and liability to be segregated into current and non-current assets/liabilities. Thus the audit procedures are required to determine the entity’s business cycle and thereby classification into current/non-current.

Disclosure of segment information :
IFRS requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters (the ‘management approach’). Such components (operating segments) are identified on the basis of internal reports that the entity’s ‘Chief operating decision maker’ (CODM) reviews regularly in allocating resources to segments and in assessing their performance.

Audit of segment information under IFRS would also lead to additional audit procedures like :

  •     Identification of the entity’s CODM;

  •     Audit of information reviewed by the CODM in the decision-making process; and

  •     Use of accounting policy for internal review.

The auditor might face challenges in performing audit procedures relating to information used by the management for decision-making process, as this information is always considered as strictly confidential and for internal use. Further, the information reviewed by the CODM (for instance, contribution margin analysis) may not be in strict compliance with GAAP. Hence test of completeness and accuracy of such financial information may be difficult.

Others :

Audit of IT system controls :
Entities where the use of Information systems is dominant (ERPs like SAP or Oracle) may require modifications in the IT configuration to track the information as required under IFRS. In such a scenario, the auditor would also require to test the new IT controls.

Audit of opening IFRS balance sheet :
To audit the opening balance sheet of the client, the auditor may prepare an audit programme to assist engagement team in issuing an audit opinion on the opening IFRS balance sheet prepared prior to the first complete set of IFRS financial statements. The audit programme may include the following audit steps :

  •     Understand the client’s transition process

  •     Update the understanding of the client’s business environment for transition matters

  •     Review compliance of the selected IFRS accounting policies with IFRS

  •     Assess the completeness and accuracy of the client’s gap analysis

  •     Identify IFRS balances with significant and/or high-risk gaps

  •     Identify appropriate audit objectives relating to gaps

  •     Evaluate the design and test the effectiveness of relevant internal controls

  •     Evaluate audit evidence and conclude.

Conclusion :
An entity may expect significant changes to its balance sheet and income statement due to transition to IFRS. It is essential for an auditor to carefully evaluate the IFRS impact areas both at the time of first-time adoption of IFRS and on a go-forward basis.

The auditor would need to suitably modify the design of its audit procedures to obtain sufficient appropriate audit evidence that the financial statements are not materially misstated.

Given the enhanced use of fair value in the presentation/preparation of IFRS financial statements and use of management judgment, the auditor will have to constantly be abreast of the client’s products/services, business and the related industry developments.

TDS : S. 194C(2) of Income-tax Act, 1961 : Payment to sub-contractors : Assessee a registered co-operative society constituted by truck operators : Contracts with companies for transportation of their goods : Contracts executed by member truck operators :

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17 TDS : S. 194C(2) of Income-tax Act, 1961 : Payment to
sub-contractors : Assessee a registered co-operative society constituted by
truck operators : Contracts with companies for transportation of their goods :
Contracts executed by member truck operators :

Companies make payment to assessee after deduction of tax u/s.194C : Member
truck operators are not sub-contractors : Assessee not required to deduct tax at
source on payment to member truck operators u/s.194C(2)



[CIT v. Ambuja Darla Kashlog Mangu Transport Co-op. Society,
188 Taxman 134 (HP)]

The assessee was a registered co-operative society
constituted by truck operators. It entered into contracts with companies such
as cement manufacturers for transport of their goods. The company, which had
entered into contract with the assessee, deducted tax at source u/s.194C(1) on
payments made to the assessee. Thereafter, the assessee-society paid that
entire amount to its members, who had actually carried the goods, after
deducting a nominal amount of Rs.10 or Rs.20 for administrative expenses known
as ‘parchi charges’ for running of the society. The Assessing Officer held
that the assessee was liable to deduct tax at source from the amount paid to
the members/truck operators in terms of S. 194C(2). The Tribunal held that
since there was no sub-contract between the society and its members, the
provision of S. 194C(2) was not attracted.

On appeal by the Revenue, the Himachal Pradesh High Court
upheld the decision of the Tribunal and held as under :

“(i) The main contention of the Revenue was that since the
assessee had a separate juristic identity and each of the truck operators, who
were members of the assessee, had separate juristic identity, they were
covered within the meaning of S. 194C(2). It was urged by the Revenue that
since the assessee was a person paying a sum to the member-truck operator who
was a resident within the meaning of the Act, TDS was required to be deducted.
That argument did not take into consideration the heading and entire language
of S. 194C(2) which clearly indicates that the payment should be made to the
resident who is a sub-contractor. The concept of a sub-contract is
intrinsically linked with S. 194C(2) and if there is no sub-contract, then the
person is not liable to deduct tax at source, even if payment is being made to
a resident.

(ii) In the instant case, the assessee-society was created
by the transporters themselves who formed the societies or unions with a view
to enter into a contract with companies. The companies entered into contracts
for transportation of goods and materials with the society. However, the
society was nothing more than a conglomeration of the truck operators
themselves and had been created only with a view to make it easy to enter into
a contract with the companies as also to ensure that the work to the
individual truck operators was given strictly in turn, so that every truck
operator had an equal opportunity to carry the goods and earn income. The
society itself did not do the work of transportation. The members of the
society were virtually the owners of the society. It might be true that they
both had separate juristic entities, but the fact remained that the reason for
creation of the society was only to ensure that work was provided to all the
truck operators on an equitable basis. A finding of fact had been rendered by
the authorities that the society was formed with a view to obtain the work of
carriage from the companies since the companies were not ready to enter into a
contract with individual truck operators but had asked them to form a society.

(iii) Admittedly, the society did not retain any profits.
It only retained a nominal amount as ‘parchi charges’ which was used for
meeting the administrative expenses of the society. There was no dispute with
the submission that the society had an independent legal status and was also a
contractor within the meaning of S. 194C. It was also not disputed that the
members had a separate status, but there was no sub-contract between the
society and the members. In fact, if the entire working of the society was
seen, it was apparent that the society had entered into a contract on behalf
of the members. The society was nothing but a collective name for all the
members and the contract entered into by the society was for the benefit of
the constituent members and there was no contract between the society and the
members.


(iv) For the
foregoing reasons, S. 194C(2) was not attracted and the assessee-society was
not liable to deduct tax at source on account of payments made to the truck
owners who were also members of the society.”



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TDS : S. 194A of Income-tax Act, 1961 : Interest other than interest on securities : Once a decree is passed, it is a judgment and order of Court which culminates into final decree being passed which has to be discharged only on payment of amount due unde

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16 TDS : S. 194A of Income-tax Act, 1961 : Interest other
than interest on securities : Once a decree is passed, it is a judgment and
order of Court which culminates into final decree being passed which has to be
discharged only on payment of amount due under said decree : Judgment debtor is
not liable to deduct tax at source on interest component of decree.




[Madhusudan Shrikrishna v. Enkay Exports, 188 Taxman
195 (Bom.)]

In this case the dispute was settled and while passing the
order and decree, the counsel appearing on behalf of defendants raised a query
regarding deduction of TDS on the interest component of the decree.
Apprehension was expressed by the learned counsel appearing on behalf of
defendants that under the provisions of S. 194A of the Income-tax Act, on the
interest component which is payable, tax has to be deducted at source and if
it is not so done, the person who does not deduct tax at source on the
interest component would be liable for prosecution and penal consequences
under the provisions of the Income-tax Act. It was, therefore, submitted that
the defendants had withheld the payment of the amount which is payable to the
Income-tax Department as TDS and a certificate to that effect was also kept
ready.

The Bombay High Court held as under :

“Once a decree is passed, it is a judgment and the order of
the Court, which culminates into final decree being passed which has to be
discharged only on payment of the amount due under the said decree. The
judgment debtor, therefore, cannot deduct tax at source, since it is an order
and direction of the Court and, as such, would not be liable for penal
consequences for non-deduction of the tax due. Tax, if payable, can be decided
by the ITO after the amount is paid to the decree holder. The defendants,
therefore, were not entitled to withhold the payment on the pretext that it
had to be deducted as tax at source. Defendants would, therefore, pay the said
amount to the plaintiff and for that purpose they would not be liable for
non-deduction of tax at source as that issue had to be decided by the
income-tax authorities and if tax was payable, the same would be paid by the
plaintiff.”

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