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Year: 2012

Quality Water Management Systems Pvt. Ltd. v. State of Tamil Nadu, (2011) 42 VST 308 (Mad).

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Sales Tax – Rate of Tax – Machinery used for manufacture to produce water – Which is used for dyeing fabrics – Is machinery used for manufacture of goods – Subject to concessional rate of tax – Section 3 and Entry 3 of Schedule VIII of Tamilnadu General Sales Tax Act, 1959.

Facts
The dealer sold water treatment plant and claimed concessional rate of tax u/s 3(5) of the Act being sale of plant and machinery used for manufacture of goods duly covered by Entry 3 of Schedule VIII of the Act. The Department including Tribunal did not accept claim of the dealer on the ground that the water treatment plant is not used for manufacturing any goods and as such not eligible for concessional rate of tax u/s 3(5) of the Act. The dealer filed revision petition before the Madras High Court against such decision of the Tribunal.

Held
In order to prove the claim of the concessional rate of tax u/s 3(5) of the Act, the dealer has to satisfy three conditions namely;-

i) The goods sold must be one enumerated in Schedule VIII,
ii) The goods must be used in factory site within the State, and
iii) It should be used for manufacturing of any goods.

Entry 3 of Schedule VIII covers machineries of all kinds other than those mentioned in First Schedule. There is no dispute that machinery sold by the dealer is not covered by Entry 3 of schedule VIII. The first condition is satisfied and the second condition is also satisfied as the machinery is used in factory site within the State.

The dispute is with regard to third condition of use in manufacturing any goods. The use of machinery may be direct or in aid in the manufacture. It is not in dispute that the plant is used by the customer for treating the effluent which resulted in purified water and the same is used for manufacturing fabrics. The words” used in factory site within the State for manufacture of goods “cannot be construed narrowly so as to confine it to direct use only. The use may be direct or indirect.

It is a well settled principle that a provision which is a taxing statute, granting concessional and incentives for promoting growth and development, should be construed liberally.

The High Court accordingly, allowed the revision petition filed by the dealer and held that the dealer is entitled to the concessional rate of tax and set aside the order passed by the lower authorities.

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2012-TIOL-848-CESTAT-MUM MIRC Electronic Ltd. v. CCE, Thane – I.

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CENVAT Credit taken of Rs 2.59 crore against service tax paid for providing after sales service during warranty period – Appellants under contractual obligation to provide after sales service during the warranty period without any consideration – strong prima facie case in favour – pre-deposit waived and stay granted.

Facts:
The applicant contented that the service of providing after sales service during the warranty period without any consideration is in relation to business and, therefore, covered by the definition of input service. The applicant submitted that the decision of the tribunal in the case of Mercantile & Indus. Developers Co. Ltd. vs. CCE, Mumbai-III reported in 2011 (21) STR 564, to make pre-deposit of part amount for hearing of the appeal was set aside by the Hon’ble Bombay High Court vide order dated 3.3.2011, after taking into consideration the judgement of the Hon’ble High Court in the case of CCE, Nagpur v. Ultratech Cement Ltd. 2010 (20) STR 577 (Bom.), and directed the Tribunal to hear the appeal on merits without insisting on pre-deposit. The applicant also relied upon the stay order in the case of Samsung India Electronics P. Ltd. vs. CCE, Noida 2009 (126) STR 570, waiving the pre-deposit of dues on the same grounds. The revenue on the other end contended that activity for which service tax was paid was conducted after clearing manufactured TVC and therefore the same could not be treated as input service.

Held:
After referring to the definition of ‘input service’ under the CENVAT Credit Rules, it was held that since the applicant was under the contractual obligation of providing after sales service during the warranty period and as they are recipients of taxable service, prima facie their case is strong. Thus, the pre-deposit of the duty, interest and penalty was waived granting the stay.

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2012-TIOL-808-CESTAT-AHM Commissioner (Appeals) Central Excise and Customs Ahmedabad v. M/s GE Nuova Pignone.

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The respondent paid service tax for maintenance services – deducted value of spare parts under Notification No.12/2003-ST – Revenue contended, exemption not available for the value of spare parts – Commissioner (A) set-aside the order taking a view that the said service related to immovable property and during the period 01/07/2003 to 09/09/2004, the activity was not liable – Held, no merit in the appeal filed by the revenue as no evidence was adduced to support the view that turbine is a movable property and benefit of Notification No.12/2003 also available.

Facts:
The respondent was engaged in providing maintenance and repair services under the contract for the maintenance of the Gas Turbines and related ancillaries which form integral part of the power plant. The respondent paid service tax in respect of the maintenance fees after deducting the value of spare parts supplied by them under Notification No.12/2003-ST. Revenue took a view that respondent was not eligible for exemption under the said notification. The respondent also argued that gas turbines are huge and embedded to earth and thus an immovable property. The respondent relied on the decision of the Apex Court in the case of TTG Industries Ltd. (Madras) Manu/ SC/0459/2004, where the Apex Court observed that mudguns and drilling machines cannot be shifted from one place to another and assembled or erected and are to be operated from that place till they are worn out or discarded, and thus had held that mudguns and drilling machines erected at sites on specially made platform are immovable property.

Held:
The decisions cited by the respondent and the photographs submitted, made it clear that turbines are nothing but immovable property. The Revenue’s stand was merely based on the ground that the assessee himself has used the word ‘equipment’. However, substance of the contract indicated that turbine formed part of immovable property. Since the Revenue was not able to produce any evidence to support the view that turbine is movable property, the Commissioner (Appeals)’s decision was found correct and as such, during the period from 01/07/2003 till 09/09/2004, the service was not taxable. As regards the eligibility of deduction of value of goods, it was observed that the very fact of existence of transaction value at the time of import and issue of invoice by a local party to the recipient of service, would go to show that there was a sale of spare parts in the course of international deal and therefore, no VAT was chargeable. Just because the contract provided that replacement of parts was free of charge would not mean there was no sale. The value of spare parts formed a part of contract for maintenance and repair and therefore exemption under the Notification No.12/2003-ST was available and thus Revenue’s appeal was rejected.

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2012 (27) STR 48 (Tri-Mumbai) Enpee Earthmovers v. CC & CE, Goa.

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Scope of Show Cause Notice-the demand of service tax under category of “Business auxiliary services” – However, the demand confirmed under “cargo handling service”- Demand set aside as the authorities travelled beyond show cause notice.

Facts:
The appellant entered into an agreement with their client to provide excavation of mines, drilling, levelling, etc. The show cause notice proposed to levy demand on such activities considering the same as ‘Business auxiliary services’ which finally culminated in a demand order. However, in the order, the demand was confirmed under the category of ‘cargo handling services’. The order got affirmed by the CCE – Appeals. The appellant challenged the order on the ground that the adjudicating authorities travelled beyond the scope of show cause notice.

Held:
The Tribunal, agreeing to the appellant’s argument, set aside the order. While allowing the appeal, the Tribunal relied on Delhi Tribunal’s decision in case of Joginder Pal vs. Commissioner – 2011 (21) STR 666 (Tri-Del).

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2012 (27) STR 99 (Tri-Del) Havells India Ltd. v. CCE, Jaipur-I.

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CENVAT credit taken on the basis of invoices of an importer – Importer stated in his Statement that most of the goods were actually not supplied – He issued only invoices without actual supply of goods – Appellant provided evidences like transport company’s GRs, Dharmakanta receipts, bank statements indicating payment to the supplier – Held, the importer made a statement which was not retracted by him – Credit cannot be allowed.

Facts:
The appellant was a manufacturer and availed credit on the basis of invoices issued by Shulabh Impex Incorporation supplier-importer having Dealer’s registration (supplier). The Revenue gathered intelligence that the said supplier is issuing fake invoices. On being raided, the proprietor of the supplying firm made a statement that he was not in a capacity to import goods therefore, some other people have imported goods using his IEC code and that he has issued only invoices in most of the cases without actual supply of goods. Therefore, CENVAT credit claimed by the appellant was disallowed by the Revenue. The appellant argued that as per the statement of the supplier, not all the invoices were fake. Moreover, other evidences like GRs issued by transport companies, the receipts issued by Dharmakanta (weigh bridge) and the entries in the bank statement showing payments made to such supplier proved that the appellant actually purchased goods from the supplier and therefore entitled to take the credit in respect of invoices of such supplier.

Held:
Since the statement made by the supplier was not retracted by him, the same needed to be accepted as the truth and therefore, it was held that the CENVAT credit cannot be availed by the appellant on the basis of such fake invoices.

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2012 (27) STR 94 (P & H) V.G. Steel Industry v. Commissioner of Central Excise.

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CENVAT credit – taken in respect of duty which had been paid in excess – Can credit be denied to the person who availed? – Held, No.

Facts:
The appellant paid duty on goods purchased in excess of the duty payable on such purchases. The supplier had paid such duty to the Government and raised the invoices for such duty. Moreover, no refund was granted to anyone in respect of such duty. Department denied the credit in the hands of the appellant, arguing that duty paid more than due can be available as refund, but not as credit. The order was confirmed by the First and the Second appellate authorities. The appellant preferred appeal before the High Court and relied upon the following judgments of the same Court as well as other Courts:
• Commissioner vs. CEGAT 202 ELT 753 (Mad)
• Commissioner vs. Guwahati Carbons Ltd. Appeal no. 42/2012 (P & H)
• Commissioner vs. Ranbaxy Labs Ltd. 203 ELT 213 (P & H)
• Commissioner vs. Swaraj Automotives Ltd. 139 ELT 504 (P & H)

Held:
The Court held that the counsel of the respondent was unable to distinguish the applicability of the above judgments and therefore, ordered in favour of the appellant.

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2012 (27) STR 97 (P & H) Commissioner of Central Excise, Ludhiana v. Best Dyeing.

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Condonation of delay 190 days – Service of order by improper mode Speed post – Revenue did not have any evidence of having served the order – Tribunal order condoning delay upheld.

Facts:
The order was dispatched by Speed Post which was not returned. However, the respondent did not receive the same. Therefore, respondent preferred an appeal after a delay of 190 days before CESTAT. The Tribunal condoned the delay and the same was challenged by the Revenue before the Honourable High Court.

Held:
The mode of serving order has been prescribed by Section 37C which does not contemplate serving order by speed post. The order passed must be served by registered post with an acknowledgement due. Moreover, the Tribunal had already held that the Revenue has no evidence of having served the order. In view of the same, it was held by the Court that delay of 190 days had rightly been condoned by the Tribunal. Moreover, the Court viewed department’s approach seriously and also ordered for a cost of Rs. 5,000 and the same was ordered to be deducted from the salary of the employee who had advised for filing the appeal.

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2012 (27) STR 5 (Kar.) Commissioner of Service Tax, Bangalore v. LSG Sky Chef Pvt. Ltd.

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Outdoor catering services – Whether value of goods can be deducted from the gross consideration charged for the purposes of calculating service tax liability – Notification No.12/2003 STHeld, similar facts were covered by judgment in case of Sky Gourmet Catering – Yes

Facts:
The respondent was engaged in providing catering services falling under “outdoor catering services”. The respondent paid service tax after deducting value of food and beverages and thus availing benefit under Notification No.12/2003, instead of availing abatement. The department denied the same on the ground that service tax needs to be paid on the gross amount collected and Notification No.12/2003 is not available to the respondent. The respondent argued on the basis of the judgment of the Apex Court in case of BSNL 2 STR 161 (SC) and relying upon the same, the Tribunal passed order in their favour. However, the Revenue filed appeal against the said order.

Held:
Referring to respondent’s own case, i.e. Sky Gourmet Catering Pvt. Ltd. v. Commissioner in writ Appeal no. 671-726 dated 18/04/2011 on the identical issue the appeal was disposed off. The Court held that the respondent is eligible to claim deduction in respect of goods portion while discharging the service tax liability as in the said writ, the case was examined with detailed consideration and relying on various Supreme Court judgments, the Division Bench concluded that outdoor catering contract has to be treated as composite contract under Article 366 – Clause 20A(f) of the Constitution of India and the State legislature is competent to levy sales tax on the sale aspect only i.e. the value of food. The remaining aspect including transportation is to be treated as service and service tax accordingly would be levied on service aspect and sales tax is payable on deemed sale aspect. Consequently, the substantial question of law was answered in favour of the assessee.

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2012 (27) STR 4 (Bom) Fidelity Magnetics v. Commissioner of Central Excise.

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Pre-deposit cannot be demanded by Tribunal when matter is remanded.

Facts:
The appellant was engaged in the manufacture of recorded audio cassettes. Aggrieved by an adverse order from the adjudicating authorities, the appellant preferred an appeal before CCE-Appeals which got dismissed on technical ground of non deposit of pre-deposit. The appellant approached CESTAT to waive the pre-deposit order. The Tribunal waived the pre-deposit. However, subsequently, the Tribunal set aside the order of the CCE-Appeals and restored the matter to the CCE-Appeals with a direction to the appellant to deposit 50% of the amount involved.

Held:
Having granted full waiver of pre-deposit, the Tribunal in the absence of any special circumstances ought not to have passed an order of pre-deposit. The order of the Tribunal as well as CCE-Appeals asking for pre-deposit was set aside by the Honourable High Court and CCE-Appeal was directed to dispose of the appeal on merits without insisting on pre-deposit.

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[2012] 23 taxmann.com 93 (Del) ACIT v Result Services (P) Ltd. ITA No. 2846/Del/2011 Assessment Year: 2008-09. Date of Order: 28.06.2012

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Section 194I – Reimbursement by the assessee to its holding company of amount of rent for a portion of premises being used by the assessee company, which premises were taken on lease by the holding company from the landlord and the lease deed provided for use of part of the premises by the subsidiary company, do not qualify for TDS u/s 194I since there was no lessor and lessee relationship between the holding company and the assessee.

Facts:
M, a holding company of the assessee, had taken certain premises on lease/leave and license basis. The lease/leave and license agreements was for the premises to be used by M, its subsidiaries, affiliates, group entities and associates. However, the obligation to pay rent was of the lessee i.e. M. The amount of rent paid by M under these agreements was paid after deduction of TDS u/s 194I.

Part of the premises taken on lease/leave and license were used by the assessee. The assessee reimbursed to M certain amounts towards such user. However, these amounts were paid without deduction of TDS u/s 194I. The Assessing Officer (AO) while assessing the total income of the assessee, disallowed a sum of Rs. 56,23,456 paid by the assessee to M u/s 40(a) (ia) on the ground that tax was not deducted at source u/s 194I.

Aggrieved, the assessee filed an appeal to the CIT(A) who deleted the addition made by the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the assessee was paying rent to the holding company as reimbursement since many years. This position was accepted by the department all through and it was never disputed even when the provisions of section 194I were introduced on the statute w.e.f. 1.6.1994. It also noted that even after amendment to section 40(a) (ia) w.e.f. 1.4.2006, this position was not disputed. It noted that there is no material change in the facts and law during the year under consideration. It also noted that the lease deed provided for use of the premises by the subsidiary companies. Tax was deducted at source from the actual payments made by the holding company to the lessor and holding company had not debited the whole of rent to its P& L account but had only debited rent pertaining to the part of the premises occupied by it. Considering these facts, the Tribunal held that there was no lessor and lessee relationship between the holding company and the assessee which could attract the provisions of section 194I. The Tribunal upheld the order of CIT(A).

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A.P. (DIR Series) Circular No. 93, dated 19-3- 2012 — Investment in Indian Venture Capital Undertakings and/or domestic Venture Capital Funds by SEBI registered Foreign Venture Capital Investors.

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Presently subject to certain terms and conditions, a SEBI-registered Foreign Venture Capital Investor (FVCI) can invest in equity, equity linked instruments, debt, debt instruments, debentures of an Indian Venture capital Undertaking (IVCU) or of a Venture Capital Funds (VCF) through Initial Public Offer or Private Placement or in units of schemes/funds set up by a VCF.

This Circular permits, subject to certain terms and conditions, all FVCI to invest in eligible securities (equity, equity-linked instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes/funds set up by a VCF) by way of private arrangement/ purchase from a third party also. This Circular further clarifies that, subject to certain terms and conditions, SEBI-registered FVCI are also permitted to invest in securities on a recognised stock exchange.

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Filing of Balance Sheet and Profit and Loss Account by Companies in Non-XBRL for accounting year commencing on or after 01.04.2011

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Vide Circular No. 21/2012 dated 2nd August 2012,
the Ministry of Corporate affairs has informed that the Forms 23 AC and
23 ACA are under finalization, as they are being revised as per the
Revised Schedule VI.

All companies who required to file Non-
XBRL e-form 23 AC and 23 ACA as per Revised Schedule VI will be allowed
to file their financial statements without any additional fees/penalty
upto 15th September 2012 or within 30 days from the date of their AGM,
whichever is later.

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A.P. (DIR Series) Circular No. 92, dated 13- 3-2012 — Opening of Diamond Dollar Accounts (DDAs) — Change in periodicity of the reporting.

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Presently, banks are required to submit a monthly report to RBI, giving details of the name and address of the firm/company in whose name the Diamond Dollar Account is opened, along with the date of opening/closing the Diamond Dollar Account, by the 10th of the following month to which it relates.

This Circular has reduced the periodicity of reporting from monthly basis to quarterly basis with effect from the quarter ending March 31, 2012. As a result, banks are required to submit details of the name and address of the firm/company in whose name the Diamond Dollar Account is opened, along with the date of opening/closing the Diamond Dollar Account by the 10th of the month following the quarter to which it relates.

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Sales / Exchange / Works Contract

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Introduction

Various types of transactions take place in day to day commercial world. A peculiar issue which is being considered here is about the status of a transaction where the dealer received goods for repair from his customer. The dealer replaces the same with his own goods and receives charges for repair. The old one, received from customer, is retained with him for further replacement after repair. The issue is whether on receipt of money from customer towards repair, whether the dealer would be liable to tax under Sales Tax Laws or it can be considered as transaction of exchange of goods thereby not liable to sales tax, or whether it falls in the category of works contract?

Judgment of Hon. M.S.T. Tribunal

The above issue was dealt with by Maharashtra Sales Tax Tribunal in the case of Kirloskar Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011).

In this matter, the appellant, M/s. Kirloskar Copeland Ltd., is a manufacturer & seller of compressors used in air-conditioners. It accepted defective compressors beyond the warranty period with certain fixed repair charges from customer & replaced them at the option of customer with another repaired compressor off the shelf. The defective compressor was then sent for repairs. The said repaired compressor was then available for replacement in lieu of defective compressor of another customer. The cycle goes on. The repairs charges received were mentioned in books as ‘repair charges’. This was treated by assessing officer as ‘sale’ of old repaired compressors and levied tax on the same.

Before Tribunal, reliance was placed on following judgments. G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT

(1) Gannon Dunkerley & Co. (9 STC 353) (SC)

(2) Devi Dass Gopal Krishnan (20 STC 430) (SC)

(3) Hotel Sri Lakshmi Bhavan (33 STC 444)

(4) Vishnu Agencies (P) Ltd. (42 STC 31) (SC) & others.

Tribunal held that in a transaction of cross transfer of property in defective compressor received from customer and giving repaired compressor off the shelf, there is no consensual agreement of sale supported by price or money consideration. Holding this as not a ‘sale’ transaction, Tribunal set aside the tax.

Therefore, the situation that developed is that, such receipt of money is not liable to tax under Sales Tax Laws.

Madras High Court’s Judgment

 Recently, Madras High Court had an occasion to deal with a similar issue. Reference is to the judgment of Madras High Court in Sriram Refrigeration Industries Ltd. Vs. State of Tamil Nadu (53 VST 382)(Mad).

In this case also, the dealer received defective compressors, in its Tamil Nadu office, gave another repaired compressor and also charged repair charges. The defective compressor was then transferred to Hyderabad workshop to repair and keep it in rolling stock.

The Tamil Nadu Sales Tax authorities levied Sales Tax on the same considering the transaction as works contract.
Based on above facts, the arguments on behalf of assessee, can be noted as under:

“The learned counsel appearing for the petition/ assessee contended that the Tribunal was wrong in holding that it is a deemed sale. He further contended that the Tribunal is wrong in holding that the transfer of property by way of replacement of defective parts in the compressors while undertaking repair works took place within the State of Tamil Nadu and hence, the transactions are liable to tax. He further submitted that the authorities have failed to appreciate the fact that the petitioner/assessee received defective compressors from their dealers, who had earlier received the same from their respective customers to whom the said compressors were sold by them and later, these defective compressors were despatched to the factory at Hyderabad for repair and reconditioning; that the repaired compressors were taken into the petitioner’s/assessee’s floating stock in due course on receipt from Hyderabad. But soon after the receipt of defective compressors, the reconditioned compressor was given to the authorized dealer from their floating stock and flat rate was charged as repairing charges, therefore, the assessing officer ought to have appreciated that the transactions partake the character of an exchange not exigible to tax under the provisions of the Tamil Nadu General Sales Tax Act.”

 In addition, it was also argued that the transaction is not works contract as use of spares etc. is negligible and not amounting to works contract. In alternative, it was argued that it is a transaction from Andhra Pradesh and not in Tamil Nadu. Hon. High Court rejected contention and upheld the levy considering it as works contract. In its judgment, Hon. High court observed as under:

 “The petitioner/assessee is the manufacturer of compressors and the said compressor is an important component in the air-conditioner/ refrigerator. The petitioner/assessee supplied refrigerators to the customers. There is no factory with repairing facility within the State of Tamil Nadu. The defective compressors were brought to the petitioner for repairs. When the defective compressor is handed over, a rectified compressor is immediately supplied by the petitioner. The petitioner, in order to have quick servicing, replaced the defective compressor by a re-conditioned compressor of the same model. The defective compressor received was subsequently transferred to the factory in Andhra Pradesh for rectification of the defects. The appellant/dealer collected repair charges for the defective compressors. The whole transaction is completed within the State. Therefore, the authorities below have taken a view that the transaction is works contract and the transfer of property in goods involved in the execution of works contract and thereby imposed sales tax on such transfers. The authorities have also held that there is no separate particulars towards labour charges and value of the property transferred. The provision of section 3B of the Act was attracted and the lower authorities correctly allowed 30 per cent deduction towards labour charges and the remaining 70 per cent was taxable at the appropriate rate. From the transaction, it is clear that the supply of defective compressor has been returned as a rectified compressor and therefore, the authorities below held that it amounted to works contract.
After the 46th Amendment, the definition of “sale” was enlarged including the transfer of property of goods involved in the execution of the works contract and thereby, imposed sales tax on such transfer and therefore, the tax on transfer of property in goods “whether as goods or in some other form” involved in the execution of works contract falls within the ambit of article 366(2A) of the Constitution of India. In this case, the defective compressor is repaired and regarding the same, the assessee also produced certain invoice wherein it is categorically stated that the repair charges were charged.”

It is further observed as under:
“26. While looking deep into the nature of transaction, it is found that the customer is never aware of the repair work being carried out in other State. The customer is not placing orders with the factory at Hyderabad for repair and return of the repaired compressor from Hyderabad to him. On the other hand, the transaction is made across the counter of the appellant by the customer, by delivering the defective compressor and receiving the repaired compressor. The point to be noted is that the parts to be replaced in the defective compressor and labour charges are arrived at and collected and even before the same compressor could be got repaired and given a replacement by a repaired compressor is made from the godown-stock. The parts to be replaced and the ‘work to be carried out’ are clearly identified as soon as the defective compressor is handed over to the appellant by the customer and charges there for are collected and the transaction is completed within the State. Thus the standard parts with particular reference to the ‘type and make’ of the compressor are determined, and thus they are only standard goods or ascertained goods. In the case of ascertained goods in a transaction of ‘sale’, the transfer of property takes place when the contract of sale or purchase is made. Accordingly, to settled position of law, the principles that apply to ‘sale’ will apply to ‘deemed sale’ as well.”

“From a reading of the above finding, it is clear that the whole transaction forms part of an implied contract for repair of the defective compressor in the State. It is only a replacement with a reconditioned compressor of the same mode instead of a defective compressor. Therefore, the authorities below are correct in coming to the conclusion that there is no contract for sale of compressors. Therefore, the transaction has to be treated only as works contract. The reconditioned compressors are handed over and the defective compressors were received by the assessee after charging repair charges and the whole transaction is within the State. After considering the nature of the transaction, all the authorities have given a categorical finding that there is a works contract and the transfer of property acquired within the State in the said contract. Further, the authorities below are correct in holding that in the absence of separate particulars towards labour charges and the value of property transferred the provisions of section 3B of the Act were attracted and allowed 30 per cent deduction towards labour charges and only the remaining turnover was chargeable to tax at the appropriate rate. The concurrent findings given by the authorities below are based on valid materials and there is no error or illegality in the order of the Tribunal warranting interference.”

Conclusion

It appears that such replacement in repair transaction will be works contract transaction. However, it is a debatable issue. It is possible to argue that replacement by a repaired compressor is normal ‘sale’ itself as there is transfer of a pre-existing repaired compressor from the assessee to the customer at a specific charge. The receipt of the defective compressor only helps the customer to bring down the take away price for the repaired compressor. In any case, in this judgment, based on finding of lower authority that the transaction is a works contract, the High court has upheld the levy as a works contract.

In the light of the above judgment, the judgment of Tribunal cited above will be correct to the extent that it is not ‘sale’ simpliciter. However, the position that it will not be covered under the Sales Tax Laws at all, cannot be a correct position. Though not as normal sale, but by way of a works contract, it will be taxable under the Sales Tax Laws.

EXPORTED SERVICES

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Preliminary

Under the Export of Services Rules, 2005 (ESR) which were in force prior to 01/07/2012, it was provided in Rule 4 that, any service which is taxable under clause (105) of section 65 of the Finance Act, 1994 (‘Act’), may be exported without payment of service tax. Further clarifications were issued in the context of proportionate credit rules under CENVAT Credit as to the treatment to be given to “exported services”.

W.e.f. 01/07/2012, ESR have ceased to exist, and Place of Provision of Services Rules, 2012 (POP Rules) have been introduced. Importantly, for the first time, the concept of “exported services” has been specifically introduced under Service Tax Rules, 1994 (ST Rules).

This feature discusses the concept of “exported service” and consequent implications in terms of CENVAT Credit Rules, 2004 (CENVAT Rules) and Point of Taxation Rules, 2011 (POT Rules) in regard to “exported services” However, it needs to be expressly noted that, for determination as to whether a service constitutes “export” or not, provisions under ST Rules should be read with the provisions under POP Rules.

Relevant Statutory Provisions

ST Rules Rule 6A – (Export of Services)

“(1) The provision of any service provided or agreed to be provided shall be treated as export of service when –

a) The provider of service is located in the taxable territory,

b) The recipient of service is located outside India,

c) The service is not a service specified in section 66D of the Act,

 d) The place of provision of the service is outside India,

 e) The payment for such service has been received by the provider of service in convertible foreign exchange, and

f) The provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of Section 65B of the Act.

(2) Where any service is exported, the Central Government may, by notification, grant rebate of service tax or duty paid on input services or inputs, as the case may be used in providing such service and the rebate shall be allowed subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification.”

CENVAT Rules
Rule 2(e) “exempted service” means a –

 (1) Taxable service which is exempt from the whole of the service tax leviable thereon; or

 (2) Service, on which no service tax is leviable under section 66B of the Finance Act; or

(3) Taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken; but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994”.

Rule 5: Refund of CENVAT Credit

 “(1) A manufacturer who clears a final product or an intermediate product for export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT Credit……… Explanation 1 – For the purpose of this rule – (1) “export service” means a service which is provided as per Rule 6A of the Service tax Rules, 1994.”

Rule 6 – Obligation of a manufacturer or producer of final products and a provider of output service “………..

(7) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the taxable services are provided, without payment of service tax, to a unit in a Special Economic Zone or to a developer of a Special Economic Zone for their authorized operations or when a service is exported.

(8) For the purpose of this rule, a service provided or agreed to be provided shall not be an exempted service when –

(a) the service satisfies the conditions specified under rule 6A of the Service Tax Rules, 1994 and the payment for the service is to be received in convertible foreign currency; and

(b) Such payment has *not been received for a period of six months or such extended period as may be allowed from time-totime by the Reserve Bank of India, from the date of provision.” [*Note: The use of the word ‘not’ appears erroneous].

Exported Service – Whether “taxable service” or “exempted service”

Under Central Excise, it has been a settled position that, exported goods are in the nature of taxable goods and not exempted goods. However under service tax, there was no clarity and issues continued to be raised. In the context of CENVAT Credit, vide Circular No. 868/6/2008 – CX dt. 9/5/08 it was clarified, as under: ……………

6 Whether export of service without payment of service tax under Export of Service Rules shall be treated as exempted service for the purpose of rule 6(3)?

No, export of services without payment of service tax are not to be treated as exempted services. W.e.f. 01/07/2012, Rule 2(e) of CENVAT Rules which defines “exempted services”, clearly provides that, services exported in terms of Rule 6A of ST Rules, would not be “exempted services”.

However, it needs to be expressly noted that, this is for the purpose of CENVAT Rules only.

 Brief Analysis of Rule 6A of ST Rules – “export of service”

 Each of the specified conditions is discussed hereafter.

 a) Service provider should be located in the taxable territory. This is in line with the concept of export which presupposes that service is usually provided from taxable territory to non– taxable territory. In this regard, the following definitions under the Finance Act, 1994 as amended (FA12) need to be noted.

Section 64 of FA 12

“(1) This Chapter extends to the whole of India except the State of Jammu and Kashmir.” ……… Section 65(27) of FA 12 “ ‘India’ means, –

 (i) the territory of the Union as referred to in clauses (2) and (3) of article 1 of the Constitution;

(ii) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters. Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976);

(iii) the seabed and the subsoil underlying the territorial waters;

(iv) the air space above its territory and territorial waters and (v) the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof;” Section 65 (52) of FA 12 “ “Taxable territory” means the territory to which the provisions of this Chapter apply.” Thus, simply stated, service provider should be located in India except in the State of Jammu & Kashmir.

b) Service recipient should be located outside India. Here also, it is to be understood that Jammu & Kashmir is otherwise a non-taxable territory. However, if recipient is located in Jammu & Kashmir, the condition of location outside India is not satisfied. This is also in line with the general concept of ‘export’.

 c) Service should not be a service specified in the Negative List of Services under section 66D of FA 12. This is very important inasmuch it spells out an important legislative intent that services which are specified in the Negative List are totally excluded from the service tax ambit. Hence, the question of the same being regarded as ‘export’, does not arise at all.

d)    The place of provision of service is outside India. This does raise many questions inasmuch as POP Rules contemplate that services could be provided by a service provider based in the taxable territory to a service recipient based in a non–taxable territory.

For instance, if the services are physically provided/performed outside India, the same would be completely out of the service tax ambit and hence, the question of the same being considered as ‘export’ would not arise at all. This anomaly also existed under ESR which was in force prior to 01/07/2012.

In this regard, attention is drawn to the following clarifications by the department in the context of some specific services:

CBEC Circular No. B-11/3/98-TRU dt. 7/10/98 – Market Research Agencies

Para 6.3

“An issue has been raised whether service tax is payable in respect of services rendered to foreign clients in India, and in respect of such services rendered abroad. It is clarified that service tax is payable on all taxable services rendered in India whether to an Indian or foreign client. However, services rendered abroad shall not attract service tax levy as service tax extends only to services provided within India.”

Dept Trade Notice No 1/2000 dt. 27/4/2000, Pune I – Tour Operator Services

Para 6.7

“Service tax on services rendered by tour opera-tors is only on services rendered in India in respect of a tour within Indian Territory. Services rendered by tour operators in respect of out-bound tourism i.e. for tours abroad, do not attract service tax. In case of a composite tour which combines tours within India and also outside India, service tax will be leviable only on services rendered for tours within India provided separate billing has been done by the tour operators for services provided in respect of tours within India.”

This remains an unresolved issue. Possibly the only logical reason appears to be treatment for determination of availability of CENVAT Credit.

e)    Realisation of consideration in convertible foreign exchange by a service provider. Compliance of this condition has assumed increased significance.

It needs to be expressly noted that, w.e.f. 01/07/2011, POT Rules have been introduced, whereby there is a liability to pay service tax on the service provider irrespective of realisation from the service recipient. Hence, in cases where consideration is not received (either fully or partly) by a service provider from the service recipient within the time limit permitted by RBI, the benefit of export would be denied subject to discussion in paras hereafter and service tax liability may be triggered from the date of completion of service in terms of POT Rules with applicable interest.

In cases where payments are not received by an exporter service provider within the time permitted by RBI, it would be advisable that appropriate procedure under RBI Regulations (like seeking an extension of time for unrealised proceeds) are complied with by service providers.

(f)    Service provider and service recipient should not be merely establishments of a distinct person in terms of Explanation 2(b) (should be read as 3) to section 65B(44) of the Act which defines ‘Service’. The said explanation reads as follows:

“(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons”.

At this point, it is required to note the relevant extracts from Department clarifications titled “Education Guide” dated 20/06/2012 issued in the context of Negative List based taxation of services introduced w.e.f. 01/07/2012 reproduced below:

Para 10.2.2

“Can there be an export between an establishment of a person in taxable territory and another establishment of same person in a non–taxable territory?

No. Even though such persons have been specified as distinct persons under the Explanation to clause (44)    of section 65B, the transaction between such establishments have not been recognized as exports under the above stated rule.”

Para 2.4.1

“What is the significance of the phrase “carried out by a person for another”?

The phrase “provided by one person to another” signifies that services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice versa.”

Para 2.4.2

“Are there any exceptions wherein services provided by a person to oneself are taxable?

Yes, two exceptions have been carved out to the general rule that only services provided by a person to another are taxable. These exceptions, contained in Explanation 2 (read as ‘3’) of clause (44) of section 65B, are :

  •     “An establishment of a person located in tax-able territory and another establishment of such person located in non-taxable territory are treated as establishments of distinct persons.” [Similar provision exists in section 66A(2). The said section is effective till 30/06/2012].

  •    “An unincorporated association or body of persons and members thereof are also treated as distinct persons.” [Also exists presently in part as explanation to section 65].

Implications of these classificatory remarks are that inter se provision of services between such per-sons, deemed to be separate persons, are likely to be taxed by the department. For example, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multinational company located outside India would be treated as taxable provided other conditions relating to taxability of service are satisfied.

The term ‘establishment’ has not been defined under FA12/POP Rules/ST Rules. However, in this regard useful reference can be made to, “Education Guide” dated 20/06/2012 available on www. cbec.gov.in

In the line with the legislative intent, whereby services availed from an establishment based outside India by another establishment of the same legal entity in India are deemed to be taxed under reverse charge (as per Education Guide at least), it is being provided that in a reverse case scenario the benefit of export would be denied in such cases even if all the other conditions of Rule 6A of ST Rules are satisfied.

Despite the deeming fiction, which was introduced u/s 66A of the Act (in force upto 30/06/2012) and has been continued w.e.f. 01/07/2012 [section 65B(44) – Explanation 2], whether transactions between two establishments within one legal entity can be taxed at all under service tax, remains an unresolved legal issue which would have to be judicially tested.

Implications in case of delays in realisation of export proceeds

An important practical issue that would arise in such cases is, what would happen in cases where there is a delay in realisation of proceeds for “exported services” and application for extension has been made before RBI, and the case comes up for scrutiny/inquiry by the service tax authorities?

Similar issues did arise under income tax, wherein there was a procedure which prescribed for an application to be made to the Commissioner for seeking extension of time in cases of delays in realization of export proceeds. It was commonly found that applications were not disposed off/ nor proceeds realised till the time of completion of assessment. In many cases, assessing officers disallowed deduction claimed u/s 80HHC (subject to rectification) and raised demands which had to be appealed against.

It is felt that, similar situations may arise under service tax as well, whereby subject to discussions in paras hereafter, service tax authorities may raise protective demands with interest which would have to be contested by service providers. It would be advisable for the service providers to make appropriate disclosures in service tax returns.

Implications in cases where proceeds for exported services are not realised either fully or partially.

As stated earlier, non–realisation of proceeds for exported services, may trigger liability to service tax with interest from the point of completion of service in terms of POT Rules.

Further, it needs to be expressly also noted that, POT Rules do not have any provisions for abatements of service tax in case of bad debts (either fully or partially). Hence, this could cast an additional burden on the “exported services” provider, in addition to the loss on account of bad debt.

Implications under CENVAT Rules/ST Rules in cases of non–realisation of proceeds for exported services

a)    It has been a settled position in the context of duty drawback under the Customs law, that in case of non–realisation of export proceeds, drawback benefits received by an exporter are required to be paid back to the Government with appropriate interest.

b)    On the lines of duty draw back rules, it would appear that, refunds availed by an “exported services” provider under Rule 5 of CENVAT Rules/Notifications issued in terms of Rule 6A of ST Rules would have to be paid back to the Government with appropriate interest.

c)    On a combined reading of Rule 2(e) & Rule 6(8) of CENVAT Rules, it prima facie appears that, in cases where proceeds are not realised for “exported services”, the said services could be treated as “exempted services” with consequent implications.

This appears to be inconsistent considering the fact that, in cases where proceeds for exported services are not realised as prescribed in Rule 6A of ST Rules, export benefit would be denied and service tax liability may arise. Hence, if appropriate service tax liability has been discharged by an “exported services” provider, there should not be any adverse implications in terms of CENVAT Rules.

POP Rules v. ST Rules:

POP Rules were introduced w.e.f. 01/07/2012 in terms of the powers granted u/s 66C of FA 12 to determine the place where services are provided/ agreed to be provided or deemed to have been provided/agreed to be provided. This is essentially done to determine the taxability of cross border transactions. In addition to the said POP Rules, Rule 6A as discussed above in detail is introduced under ST Rules w.e.f. 01/07/2012, specifying conditions for determination of ‘export’ service. The said Rule 6A has not been made subject to POP Rules. Further, the clarification of the Government dated 20/06/2012 (para10.21 of Education Guide), clearly states that all the conditions under the said Rule 6A should be satisfied for a service to be treated as ‘exported’ service. On this backdrop, an important issue that arises for consideration is what would happen in cases where all the conditions specified in Rule 6A are not satisfied (for example, realisation in convertible foreign exchange) but the transaction is outside the taxable territory as per POP Rules.

According to one school of thought, such transaction would be regarded as non-taxable and therefore for the purpose of CENVAT Rules, the same would be treated as “exempted service” and hence the benefit of credits/refunds would be denied. The amendments in CENVAT Rules w.e.f. 01/07/2012 seem to support this line of thinking. According to an alternative school of thought, non-compliance of any of the conditions specified in Rule 6A of ST Rules could trigger service tax liability from the date of completion of service as per POP Rules with interest. This would result in apparent inconsistency vis-à-vis amendments in CENVAT Rules w.e.f. 01/07/2012.

To conclude, it appears that it is a contentious issue which needs to be speedily addressed/clarified to avoid litigation in this regard.

Channel Guide India Limited v. ACIT [ITA No.1221/Mum/2006] Article 12 of India-Thailand DTAA, section 9(1)(vi), 40(a)(i) of the IT Act 2004-05 29 August 2012 Present for the Appellant: Shri P.J. Pardiwalla Present for the Respondent: Shri Jitendra Yadav

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4. Channel Guide India Limited v. ACIT [ITA
No.1221/Mum/2006]
Article 12 of India-Thailand DTAA, section
9(1)(vi), 40(a)(i) of the IT Act
2004-05
29 August 2012
Present for the Appellant: Shri P.J. Pardiwalla
Present for the Respondent: Shri Jitendra Yadav
Consideration for the facility of satellite up-linking and telecasting programmes cannot be treated as an income chargeable to tax in India in the hands of non-residents u/s.9(1)(vi) or 9(1)(vii) of IT Act.

During the relevant year i.e., AY 2004-05, the amount paid was not taxable as per the legal position prevalent at the relevant time and hence, Taxpayer was not liable to withhold tax on the amount paid, irrespective of the retrospective amendment to bring to tax such payments. Accordingly, the provisions of section 40(a)(i) of IT Act, triggering disallowance for not withholding tax, cannot be invoked. Facts The Taxpayer, an Indian Company (ICO), entered into an agreement with a Thailand Company (FCO), for satellite up-linking and telecasting programmes. The amount paid to FCO was claimed by ICO as expenditure on account of broadcasting and telecasting. In addition, consultancy charges were also paid by ICO to FCO. Tax Department considered the payments made by the ICO to FCO as royalty/FTS under the DTAA/IT Act and disallowed the amount paid to FCO on the ground that tax withholding was not made by ICO.

Held:

On Characterisation of payments made to FCO As the ICO does not utilise the process or equipment involved in the operations, relying on Delhi HC decision in the case of Asia Satellite Telecommunication Co. Ltd. (332 ITR 340), ITAT held that the charges paid can neither be treated as royalty nor be treated as FTS under the IT Act. The receipt is in the nature of business income which is not chargeable in the absence of PE.

There is no need to take recourse to other income Article of the DTAA which covers only the items of income not covered expressly by any other article in the DTAA. On deduction of taxes at source on account of retrospective amendment

On Tax Department’s contention that the payments were taxable due to the clarificatory retrospective amendments made by Finance Act 2012, the ITAT held that during the relevant year i.e., AY 2004-05, the amount paid was not taxable as per the legal position prevalent at the relevant time and hence, ICO was not liable to withhold tax on the amount paid irrespective of the retrospective clarificatory amendment carried out by Finance Act 2012 in section 9 of IT Act, which seeks to tax such payments.

Reliance was placed on SC’s decision in the case of Krishnaswamy S.PD (281 ITR 305) and Ahmedabad ITAT’s decision in the case of Sterling Abrasive Ltd (ITA No. 2243,2244 Ahd/2008) where emphasis was placed on the legal maxim ‘lex non cogit ad impossiblia’ meaning that the law cannot possibly compel a person to do something which is impossible to perform.

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In the facts of the case, payments made for transfer of allocated capacity in telecommunication submarine cable system does not constitute transfer of ownership right in the system. In the facts of the case, payment for transfer of capacity was consideration for right to use a process and/or right to use commercial or scientific equipment. Payment was therefore ‘royalty’ under the IT Act as well as the India-Saudi Arabia DTAA.

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    3. Dishnet Wireless Limited (AAR No. 863 of 2010)
    Article 13 of India- Saudi Arabia DTAA
    24 August 2012
    Present for the Applicant: Dr. Anita Sumanth
    Present  for  the  Department:  Mr.  G.  C. Srivastava & Others
    

In the facts of the case, payments made for transfer of allocated capacity in telecommunication submarine cable system does not constitute transfer of ownership right in the system.

In the facts of the case, payment for transfer of capacity was consideration for right to use a process and/or right to use commercial or scientific equipment. Payment was therefore ‘royalty’ under the IT Act as well as the India-Saudi Arabia DTAA.


Facts

The Applicant, a company incorporated in India, was engaged in the business of providing telecommunication services in India. A company registered in Saudi Arabia, (FCO), was engaged in operating telecommunication paths, facilities and network infrastructures in Saudi Arabia and other countries (except India). FCO was part of a consortium which entered into an agreement to plan and lay the Europe India Gateway cable (EIG Cable System), linking Indian subcontinent and the UK as part of telecommunication system. Each member of the consortium was entitled to a capacity allocation in the EIG Cable System, based on the proximity to the country to which the consortium member belonged. Further, the member was entitled to transfer its allocated capacity in the EIG Cable System to other telecommunication entities on a private basis, subject to a condition that the transferee should agree to the terms of the consortium arrangement. FCO entered into a Capacity Transfer Agreement (CTA) with the Applicant for transfer of 40% of its total allocated capacity in the EIG Cable System and received consideration of INR1,252 million from the Applicant. The total investment of FCO was agreed at INR3,129M in the project, out of which the Applicant contributed INR1,252M, as consideration for transfer of 40% capacity by FCO. The Applicant approached the AAR on the taxability of the consideration paid to FCO for capacity transfer.

AAR Ruing

The following features of CTA were considered by AAR to conclude that agreement was for grant of use of capacity and not for transfer of ownership rights in the system.

(1) A member of consortium held the allotted capacity on an ownership basis and was entitled to transfer the capacity to other telecommunication entities;

(2) Transfer of the capacity meant ‘making available to a non-member the right of use of capacity’, though primary responsibility to meet consortium obligations continued with the member;

(3) Right to use the agreed capacity is granted only for use by the transferee and it is not-transferable to any third party;

 (4) CTA did not result in transfer of the entire rights and obligations of FCO;

(5) No right of ownership, property in or title to the capacity, facilities or network infrastructure, equipment or software were conveyed to or vested in the Applicant;

(6) In the event of termination of the CTA, all rights of the capacity transferred were to revert to FCO unless mutually agreed otherwise.

In view of clarificatory amendment vide Finance Act 2012 and even otherwise, there is not much doubt that the amount paid was for right to use a process and/ or a right to use commercial or scientific equipment. Under the DTAA, consideration paid for use of or right to use a design or model plan, commercial or scientific equipment is royalty. Further, such royalty would be taxable in India as the payer is located in India. Payments made by the Applicant do not constitute reimbursements of FCO’s costs.

Such payments are not made by the Applicant to the consortium on behalf of FCO. The obligation towards consortium is and continues to be that of FCO. The payment, therefore, can neither be regarded as reimbursement nor cost recoupment.

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Fiscally transparent Swiss partnership firm is not eligible to claim benefits of India–Switzerland DTAA either at the partnership level or at the level of its partners.

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2. Schellenberg Wittmer (AAR No. 1029 of 2010)
Article 1, 4 and 14 of India-Switzerland DTAA,
section 9 of the IT Act
27 August 2012
Present for the Applicant: Mr. Nishith Desai & Others
Present for the Department: Mr. R.S. Rawal, & Others

Fiscally transparent Swiss partnership firm is not eligible to claim benefits of India–Switzerland DTAA either at the partnership level or at the level of its partners.


Facts

The Applicant, a Switzerland-based partnership firm (Swiss firm) was engaged in the practice of law and carried out its activities only in Switzerland. All the partners of the firm are tax residents of Switzerland. An Indian Company (ICO) appointed the Swiss firm to represent ICO in the adjudication proceedings in Switzerland.

The work in relation to the adjudication proceedings was performed by the Swiss firm primarily in Switzerland and Germany, except for a site visit and an adjudication hearing which happened over a period of six days in India. The Applicant approached the AAR to determine whether the fees received for legal services would be chargeable to tax in India under the provisions of the DTAA.

AAR Ruling

 The AAR denied benefit of the treaty to the firm as also to the partners and held that the income was sourced from India so as trigger tax in India.

It held :

(1) The partnership can be said to be domiciled in Switzerland or having its place of residence in Switzerland.

(2) However, for claiming treaty benefits, one needs to determine whether the firm is a ‘person’ within the meaning of the DTAA. If the body of individuals or any other entity is not a taxable entity in the contracting State, it will not be a ‘person’ under the DTAA.

(3) There is no definition of person in Swiss tax law corresponding to the IT Act, which confers the status of a ‘person’ on a partnership. Considering that partnership is not a taxable entity under the Swiss laws, it cannot claim the benefit of the DTAA.

(4) Benefit of DTAA cannot even be claimed by the partners as they are not the recipients of income. Partners merely have right to share profits of the partnership.

(5) Reliance placed on the OECD Commentary to support treaty eligibility is not accepted, since India is not a member of the OECD and India has also expressed its reservations on that part of commentary conclusion .

(1) The source of the income received by the Swiss firm, for rendering professional services to the Indian company, is in India. The fact that the major part of the services are rendered outside India in respect of a dispute arising in India cannot alter the source of income. Income would, therefore, be chargeable in India irrespective of whether it is FTS or not.

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Buy back of shares by an Indian Company from its Mauritius Parent is not a scheme designed for tax avoidance and Mauritius Parent is entitled to claim benefit of ‘no-taxation in India’ under the India- Mauritius DTAA. Under the IT Act, buy back is taxable and exemption u/s. 47 would be available only when either the holding company or the nominee holds the entire share capital and not otherwise. TP provisions under the IT Act would apply, even though the transaction may not be taxable in view o<

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    1. Armstrong  World  Industries  Mauritius
    Multiconsult Ltd (AAR No. 1044 of 2011)
    Article 13 of India-Mauritius DTAA, section
    47(iv) of the IT Act
    22 August 2012
    Present for the Applicant: Mr. B.L. Narasimhan & Others
    Present for the Department: Mr. R.S. Rawal & Others
    

Buy back of shares by an Indian Company from its Mauritius Parent is not a scheme designed for tax avoidance and Mauritius Parent is entitled to claim benefit of ‘no-taxation in India’ under the India-Mauritius DTAA.

Under the IT Act, buy back is taxable and exemption u/s. 47 would be available only when either the holding company or the nominee holds the entire share capital and not otherwise.

TP provisions under the IT Act would apply, even though the transaction may not be taxable in view of the DTAA.


Facts:

The applicant (MCO), a tax resident of Mauritius holding a valid Tax Residency Certificate (TRC), is a wholly owned subsidiary (WOS) of a company incorporated in UK (UKCO). UKCO was, in turn, held by an US Company (USCO). Pursuant to the scheme of corporate reorganisation, one of the businesses of existing Indian company was demerged into another Indian company (ICO) which eventually came to be held by MCO.

ICO proposed to buyback certain number of shares from MCO in terms of the provisions of Indian Companies Act, 1956. Capital gains arising to MCO on buy-back was claimed to be tax exempt under DTAA. Tax Department resisted the claim by alleging that MCO was a shell company without any business purpose and buy-back was not a bonafide transaction.

AAR Ruling

Though MCO is incorporated in Mauritius and the investment was made through it for acquiring shares of ICO and such was the structure to take advantage of the beneficial provisions of the DTAA, this fact, by itself, is not sufficient to deny the benefits of the DTAA. This aspect had been laid down by the Supreme Court (SC) in the case of Azadi Bachao Andolan [263 ITR 706].

The Tax Authority had not disclosed adequate material to justify a finding that MCO or its parent resorted in devising a scheme for tax avoidance. Once MCO is eligible to claim the benefits of the Mauritius DTAA, capital gains arising out of the proposed buyback of shares of ICO is not taxable in India irrespective of its taxability in Mauritius.

As the proposed buyback is an international transaction and out of which income arises, same is subject to the Transfer Pricing (TP) provisions under the IT Act, even if same is exempt under DTAA. Based on its earlier ruling in the case of RST [AAR No. 1067 of 2011], the AAR held that exemption u/s.. 47 of the Act would be available only when either the holding company or the nominee holds the entire share capital and not otherwise.

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Part A : DIRECT TAXES

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1) Where the variation between the arm’s length price determined u/s. 92C and the price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price for assessment year 2012-13.Notification No. 31/2012 dated 17th August,2012

2) Income-tax (Dispute R esolution Panel)(first amendment) R ules, 2012 – Notification No. 33/2012 dated 24th August,2012

CBDT will assign one CIT as a Reserve Member to each panel who would replace any Member of the Panel as and when the DGIT(Intl Tax) deems it necessary. He would function as a Member of the Panel in addition to his regular duties. Further, the notification states that the DGIT (Intl Tax) maytransfer the case of an eligible assessee from one Panel to the other after giving him due opportunity of being heard.

3) Report u/s. 115JC of the Income-tax Act, 1961 for computing adjusted total income and alternate minimum tax for LLP –Rule 40BA and Form 29C introduced– Notification no. 34/2012 dated 28th August 2012

4) Multilateral convention on mutual administrative assistance on tax matters with OECD member countries signed on 26th January, 2012 notified – Notification 35/2012 dated 29th August,2012

5) Advance Pricing Agreement Scheme notified- Notification 36/2012 dated 30th August, 2012

Income-tax (10th Amendment) Rules, 2012 notifies following rules detailing the Advance Pricing Agreement Scheme:

  •  Rule 10F explains the meaning of the terms application, bilateral agreement, covered transactions, most appropriate transfer pricing method, etc
  •  Rule 10G any person who has entered into an international transaction or any person contemplating to do so, can take benefit of this scheme.
  •  Rule 10H contains provisions for the Pre-filing Consultation.Before filing an application – in Form 3CEC to DGIT(Intl tax), meeting will be held between the team involving IT authorities and experts nominated by DGIT(Intl tax) and the person filing the application.
  •  Rule 10I specifies the procedure for making an application for Advance Pricing Agreement in Form 3CED along with the requisite fee. Such an application should be made to the DGIT(Intl tax) in case of a unilateral agreement and to the Competent Authority in case of a bilateral or multilateral agreements. Time limits are also prescribed for filing such application.
  •  Rule 10J contains procedure for withdrawal of the application by the assessee before finalisation of the terms of agreement in Form 10 CEE. Fees paid alonwith the application would not be refunded on withdrawal.
  •  Rule 10K details procedure for preliminary processing of application wherein any deficiencies or defects would be identified and applicant would be given the opportunity to rectify the same within prescribed time limit. In case thesame is not done, The DGIT(Intl tax) or the Competent Authority, as the case may pass an order after giving due opportunity, not allowing the application to be processed further. Rule 10L lays down the procedure for framing the agreement.
  •  Rule 10M provides that the Agreement would not be binding on the Board or the applicant if any of the critical assumptions change. In such an event, a notice needs to be given and the Agreement can be modified by following the prescribed procedure. The revision or the cancellation of the agreement shall be in accordance with rules 10Q and 10R respectively.
  •  Rule 10N provides for revision of the application.
  •  Rule 10O provides for the Annual Compliance Report to be furnished by the applicant in Form 3CEF.
  •  Rule 10P details the Annual Compliance Audit of the Agreement by the jurisdictional TPO.  

Rules 10S prescribes the renewal of the said agreement and Rule 10T deals with Miscellaneous matters. Rule 44GA has been introduced, which prescribes the procedure to be followed to deal with requests for bilateral or multilateral agreements

6) Income-tax (11th Amendment) Rules, 2012. -Notification No. 37 dated 12th September 2012 Rule 31ACB and Form 26A introduced being the format of the certificate to be issued by an Accountant under the first proviso to sub-section (1) of section 201. Rule 37J and Form 27BA introduced being the format of the certificate to be issued by an Accountant under first proviso to sub-section (6A) of section 206C

7) Cost Inflation Index for the financial year 2012-13 is 852 – Notification No. 38/2012 dated 17 September 2012

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Section 263 r.w.s. 40(b) – Allowability of interest to partners – Interest amount calculated as per daily product method by the assessee – Whether CIT is justified in holding the view that the interest should be calculated on the average amount of opening and closing balances – Held, no.

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2. Muthoot Bankers vs. DCIT
In the Income Tax Appellate Tribunal
Cochin Bench: Cochin
Before N. R. S. Ganesan (J. M.) and B. R.
Baskaran (A. M.)
ITA No. 223/Coch/2010
Decided on 27.07.2012
Counsel for Assessee / Revenue: R.
Sreenivasan / A. S. Bindhu

Section 263 r.w.s. 40(b) – Allowability of interest to partners – Interest amount calculated as per daily product method by the assessee – Whether CIT is justified in holding the view that the interest should be calculated on the average amount of opening and closing balances – Held, no.


Facts:

The CIT noticed that the assessee had paid interest of Rs. 2.05 crores to a partner on his current account, which was computed under daily product method. According to him, it should have been calculated on the average amount of opening and closing balances, based on which, the interest payable to partner worked out to Rs. 1.59 crore. Accordingly, he set aside the order of the AO by holding that the assessment was erroneous and prejudicial to the interest of the revenue. The assessee appealed before the tribunal challenging the order of the CIT.

Held:

Referring to the Supreme court decision in the case of Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83), the tribunal observed that the revision of order u/s. 263 is permissible only after showing that the order passed by the AO is erroneous and prejudicial to the interest of the revenue. It further noted that the assessee has followed the product method for the purpose of calculating interest payable to the partner, since the partner was having frequent transaction of both receipts and payments. According to it, the said product method is scientific and also followed by the banks and financial institutions. The method takes into account all transactions of payments and receipts carried out throughout the year. On the other hand, the method suggested by the CIT was unscientific which does not taken into account the transactions that have taken place during the year. Accordingly, it held that the CIT has failed to establish that the assessment order was erroneous. Therefore, it set aside the order of the CIT.

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Section 12A – Registration as charitable institution – Assessee formed for improving the quality and profitability of the members’ enterprises by providing suitable platform to its CEOs who only could become assessee’s members – Whether entitled to registration – Held, yes.

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1. XYZ vs. DIT (Exem)
In the Income Tax appellate Tribunal “C”  
Bench: Mumbai
Before N. V. Vasudevan (J. M.) and
rajendra (A. M.)
ITa No. 3503/Mum/2011
Decided on 13.06.2012
Counsel for Assessee / Revenue: A. H. Dalal / V. V. Shastri

Section 12A – registration as charitable institution – assessee formed for improving the quality and profitability of the members’ enterprises by providing suitable platform to its CEOs who only could become assessee’s members – Whether entitled to registration – Held, yes.


Facts:

The assessee incorporated as a private limited company was granted license u/s. 25 of the Companies Act, 1956. Its main object as per its Memorandum of Association was as under: “To promote and provide networking facilities to the Chief Executive Officers (CEOs) of both private and public companies for improving the quality and profitability of their enterprises by providing a platform for CEOs for exchange of ideas and promotion of entrepreneurship through shared experience in India and to apply its income or profits if any, solely for the promotion of its objects and for the promotion of commerce in India and abroad.” The assessee applied for registration u/s. 12A.

According to the DIT, the object for which the assessee was incorporated were clearly not for the benefit of general public as a whole, but was confined to specific members only, viz., CEOs of companies and was commercial in nature. Hence, the assessee cannot be termed as a charitable association falling within the definition of section 2(15). Further, from the details filed, he noted that most of the activities of the assessee were held outside India. Therefore, relying on the decision of the Bombay high court in the case of State Bank of India (169 ITR 298), he held that the trust would not be entitled to exemption.

Held:

From the decision of the Supreme Court in the case of Surat Art Silks Cloth Manufacturers Association (121 ITR 1), the tribunal noted that the object which seeks to promote or protect the interest of a particular trade or industry is object of public utility. It further noted that the main object of the assessee, was to promote networking facilities to the CEOs for improving the quality and profitability of their enterprises, by providing a platform for CEOs for exchange of ideas and promotion of entrepreneurship through shared experience in India. According to it, advancement or promotion of trade, commerce and industry leading to economic prosperity ensures a benefit of the entire community. It further observed that, that prosperity would also be shared by those who engage in the trade, commerce and industry, but on that account, the purpose is not rendered any less an object of general public utility. As regards holding of conference abroad, it held that the said act would not make the activities of the assessee being carried out outside India. The benefit of such conference will ultimately go to assessee and its members. Thus, it held that the reasons assigned by the DIT for rejecting the assessee’s application for registration cannot be sustained.

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Sections 50C of the Income Tax Act, 1961 – Section 50C cannot be invoked on receipt of refund of booking advance paid earlier to a builder.

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3. (2012) 147 TTJ 94 (Ahd)
ITO V. Yasin Moosa Godil
ITA No.2519 (Ahd.) of 2009
A.Y.2006-07. Dated 13.04.2012

Sections 50C of the Income Tax Act, 1961 – Section 50C cannot be invoked on receipt of refund of booking advance paid earlier to a builder.

The assessee had booked a flat with a builder and paid advance of Rs.16.12 lakh for the same from time to time. Since the entire amount was not paid by the assessee, the builder had neither handed over the possession of the flat to the assessee nor had he executed any registered sale deed in favour of the assessee. During the relevant assessment year, the assessee requested the builder to cancel the booking and return the advance paid of Rs. 16.12 lakh. The builder, the new buyer and the assessee entered into a tripartite registered sale agreement for transfer of the said flat, wherein the appellant (addressed as the vendor in the sale agreement) was to transfer all his rights, title and interest in the said flat to the buyer, the builder (addressed as the confirming party in the sale agreement) was to give possession of the said flat to the buyer and was also to allot the said flat to the buyer, which was originally agreed to be allotted to the assessee and the new buyer (addressed as the purchaser in the sale agreement) was to acquire only the rights in the said flat from the appellant and the possession and the allotment thereof from the builder. Accordingly, during the year under consideration, the assessee received back from the buyer the booking amount paid by him to the builder.

The Assessing Officer held that the flat was registered for value of Rs.57.57 lakh as against Rs.16.12 lakh refund received by the assessee. He, therefore, treated the difference of Rs.41.45 lakh as unexplained income u/s.50C. The CIT(A) deleted the addition made by the Assessing Officer.

The Tribunal, relying on the decision in the case of Dy.CIT V. Tejinder Singh (2012) 147 TTJ 87 (Kol)/ (2012) 72 DTR (Kol) (Trib) 160 held in favour of the assessee. The Tribunal noted as under:

Prior to the execution of the tripartite agreement, the assessee had neither paid full consideration of the flat nor had he acquired the possession of the flat from the builder.

 From the agreement, it was evident that it is the builder who is transferring the capital asset i.e. the flat to the new buyer by handing over the possession of the flat as also the legal ownership thereof to the new buyer and the appellant only received back the advance paid by him to the builder by relinquishing his booking right in respect of the said flat.

From the reading of section 50C, it is evident that it is a deeming provision and it covers only to land or building or both. Section 50C can come into play only in a situation where the consideration received or accruing as a result of the transfer by an appellant of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of State Government for the purpose of payment of stamp duty in respect of such transfer. It is a settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section.

Therefore, it is essential that for application of section 50C the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both”, then section 50C will not apply.

From the facts of the case, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with the capital asset and therefore section 50C cannot be invoked.

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S/s 56(2)(v) – Gift of India Millennium Deposit Certificate (IMD) received by an assessee is not taxable u/s. 56(2)(v) since the same is not money.

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2. 2012-TIOL-528-ITAT-MUM
ACIT v Anuj Jitendra Mehta
ITA No. 6399/Mum/2010
Assessment Year: 2006-07.  
Date of Order: 05.09.2012

S/s 56(2)(v) – Gift of India Millennium Deposit Certificate (IMD) received by an assessee is not taxable u/s. 56(2)(v) since the same is not money.


Facts:

On 25.9.2005, the assessee received, from a nonresident Indian, a gift in the form of IMD of face value of INR94,000. On 5.10.2005, the assessee prematurely encashed these IMDs and received maturity amount of INR139,452 equivalent to Rs. 98,56,827. While assessing the total income of the assessee, the AO stated that the assessee utilised the unaccounted income of the group company to obtain a non-genuine gift. He also held that the IMDs were equivalent to sum of money and attracted provisions of section 56(2) (v). He added the amount received by the assessee u/s.. 56(2)(v) on the ground that the status of IMDs with the facility of premature encashment available was on par with the legal status of a bank fixed deposit. Aggrieved, the assessee filed an appeal to the CIT(A) who held that the gift was a genuine gift and following the ratio of the decision of ITAT in the case of Shri Anuj Agarwal (130 TTJ 49)(Mum) held that the gift of IMDs is gift in kind and outside the purview of section 56(2)(v) of the Act. He deleted the addition made by the AO. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

 The Tribunal noted that the facts of the present case before it were identical to the facts before the Tribunal in the case of Haresh N. Mehta (ITA No. 6804/M/2010, AY 2006-07, order dated 31.1.2012). In the case of Haresh N. Mehta, the Tribunal relying on the decision of co-ordinate Bench in the case of ACIT v Anuj Agarwal, 130 TTJ 49(Mum) and also the decision of ITAT Vizag Bench in Sri Sarad Kumar Babulal Jain v ITO (ITA No. 29/Viz/2011) order dated 11.8.2011 dismissed the appeal of the department by confirming the order of CIT(A). Following the decision of the

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ITO v DKP Engineers & Construction P. Ltd. ITAT Mumbai `D’ Bench Before D. Manmohan (VP) and Rajendra Singh (AM) ITA No. 7796/M/2010 A.Y.: 2006-07. Decided on: 31st August, 2012. Counsel for revenue/assessee: Amardeep /Dr. K. Shivram & Rahul Hakani

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S/s. 28, 45 – In case of assessee following project completion method, sale proceeds of TDR allotted consequent to development of road need to be reduced from WIP.

Facts:
The assessee company engaged in construction activity had undertaken to develop the D.P. Road leading to Vikroli property on which it was to construct flats. Upon development of the road, the assessee became entitled to TDR which was sold on 5.8.2005. Cost incurred on development of road was considered as part of WIP and the sale consideration of TDR was reduced from WIP which had the effect of reducing the total expenditure incurred till the end of the year, on the project under development. The AO assessed the receipts arising on sale of TDR under the head `Income from Capital Gains’.

Aggrieved the assessee preferred an appeal to CIT(A) who allowed the assessee’s appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the receipt of TDR had direct nexus with the work done by the appellant and was incidental to the entire project undertaken. It held that the assessee was correct in reducing the sale proceeds of TDR from work-in-progress. The Tribunal confirmed the order passed by the CIT(A) and dismissed the appeal filed by the revenue.

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A.P. (DIR Series) Circular No. 90, dated 6-3- 2012 — Clarification — Liberalised remittance scheme for resident individuals.

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With regards to the Liberalised Remittance Scheme (LRS), this Circular clarifies that:

(i) This facility is available to all resident individuals including minors. Where the remitter is a minor, the LRS declaration form should be countersigned by the minor’s natural guardian.

(ii) Remittances under LRS can be consolidated in respect of family members. However, individual family members must comply with the terms and conditions of the scheme.

(iii) Remittances under LRS can, subject to provisions of other applicable laws, be used for purchasing objects of art.

The modified LRS application-cum-declaration form is also annexed to this Circular.

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A.P. (DIR Series) Circular No. 89, dated 1-3-2012 — Foreign Institutional Investor (FII) investment in ‘to be listed’ debt securities.

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Presently, SEBI registered FII are allowed to invest only in listed non-convertible debentures (NCD)/ bonds issued by an Indian company.

This Circular permits SEBI registered FII/sub-accounts of FII to invest in primary issues of to be listed NCD/ bonds only if listing of such NCD/bonds is committed to be done within 15 days of such investment. In case the NCD/bonds are not listed within 15 days of issuance, then the FII/sub-account of FII must immediately dispose of these NCD/bonds either by way of sale to a third party or to the issuer. The terms of offer must contain a clause stating that the issuer will immediately redeem/buy back the said securities from the FII/sub-accounts of FII if they are not listed within 15 days of issuance.

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A.D.I.T. v Shri Vile Parle Kelvani Mandal ITAT Mumbai ‘E’ Branch Before Dinesh Kumar Agarwal (J.M.) and N.K. Billaiya (A.M.) ITA No. 7106/Mum/2011 Assessment Year: 2008-09. Decided on 05-10-2012 Counsel for Revenue/Assessee : A.B. Koli/A.H. Dalal

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Section 11 – (i) Income from management development program earned by educational institute considered as eligible for exemption; (ii) Income from hiring premises and advertisement rights since applied for educational activities eligible for exemption; (iii) Claim for depreciation on fixed assets, the cost of which was allowed as application of income, allowed.

Facts:
The assessee is a trust engaged in running more than 30 schools and colleges and is registered u/s 12A and also under the Bombay Public Trust Act. The assessee has got approval u/s 10(23C)(vi) as approved educational institution valid from A.Y. 2008-09 and onwards.

The return was filed declaring total income at Rs. ‘nil’. However, the assessment was completed at an income of Rs. 4.19 crores vide assessment order dtd. 31-12-2010 passed u/s. 143(3) of the Act. This was based on the finding that:

i) the assessee had shown receipt of Rs. 3.25 crore under the head ‘Management Development Program & Consultancy Charges’ in the case of one of its institutions viz., NMIMS University. According to the AO, the same was not education in itself, as defined by the Supreme Court in the case of Lok Shikshana Trust vs. CIT (1975) 101 ITR 234 even though it may be incidental to its main activity of providing education. He further observed that since it was an organised systematic activity, it can be called business incidental to the main objects of the trust. He further observed that since the assessee had maintained only the ledger account for this activity separately, as against the requirement to maintain separate books of accounts, the assessee would not be entitled to exemption u/s. 11(4A) of the Act. Accordingly, the difference of Rs. 2.29 crore between the receipt and expenditure was treated as the business income.

ii) The income from hiring premises and advertisement rights of Rs. 1.91 crore was treated as business income.

On appeal, the CIT(A) observed that the element of business was missing in conducting management courses i.e. profit motive, repetitive nature, frequency of transactions etc.. Further, according to him, the assessee was maintaining separate ledger account for Management Development Programme, which should be regarded as sufficient compliance of provisions of section 11(4A) of the Act as held by the Delhi Tribunal in the case of ITO v Jesuit Conference of India (2010) 40 DTR (Del) (Tribunal) 493. As regards the income from hiring of premises and advertisement rights, he noted that income from these rentals were applied towards the educational purpose of the Institute and, hence, eligible to claim exemption u/s 11(1). Further, relying on the decision of the Supreme Court in CIT vs. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC), wherein it has been held that the rental income from letting out of property cannot be held to be income from business and the income will be exempt as income from property held for charitable purpose, he directed the A.O. to delete the addition made by him.

The other issue before the tribunal was regarding allowability of depreciation claimed by the assessee. According to the AO, since the cost of fixed assets was fully allowed as application of funds, the depreciation on the same cannot be allowed. In support, reliance was placed on the decision of the Supreme Court in the case of Escorts Ltd. vs. Union of India (1993) 199 ITR 43. On appeal the CIT(A) distinguished the said decision and relied on the decision of the Bombay High Court in CIT vs. Institute of Banking, (2003) 264 ITR 110 and directed the AO to allow depreciation.

Before the tribunal, the assessee pointed out that it was maintaining separate books of accounts. In support, the separate accounts i.e. balance sheets etc. of all the Institutes were placed on record. The revenue, as regards allowability or otherwise of depreciation claimed by the assessee, also relied on the decision of the Kerala High Court in Lissi Medical Institutions, Kochi v CIT, (2012)-TIOL-303-HC-Kerala, ITA No. 42 of 2011 dtd. 17-2-2012.

Held:
In the absence of any contrary material placed on record by the Revenue against the aforesaid finding of the CIT(A) and keeping in view that the assessee was maintaining separate books of accounts for each Institute and also keeping in view that the rental income was applied towards the educational purpose of the Institute, the tribunal upheld the order of the CIT(A).

As regards the allowability of depreciation – the tribunal observed that the assessee was not claiming double deduction on account of depreciation as has been held by the AO. According to it, the income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purpose of Trust. Thus, there was no double deduction claimed by the assessee. The tribunal also referred to the decision of the Punjab & Haryana High Court in CIT v Market Committee, Pipli (2011) 330 ITR 16 where the decision of the Supreme Court in Escorts Ltd.’s case was distinguished, while relying on various decisions including the decision of the jurisdictional High Court in Institute of Banking’s case. Accordingly, the order of the CIT(A) was upheld and deleted the disallowance made by the AO.

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(2012) 73 DTR (Mum)(Trib) 265 Kotak Securities Ltd. v DCIT A.Y.: 2004-05 Dated: 3-2-2012

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TDS u/s. 194H – Commission paid to bank for issuing bank guarantee is not liable for TDS u/s. 194H

Facts:
The assessee was a company engaged in stock broking business and was a member of the BSE and NSE. During the course of business carried on by the assessee, it furnished bank guarantees, mainly in lieu of margin deposits, to various agencies, such as BSE and NSE. In consideration for issuance of such bank guarantees, banks charged the fees which was termed as bank guarantee commission. He further noted that the assessee has taken bank guarantees from various banks and these bank guarantees protect the stock exchanges from any default by the assessee and acts as security for due performance and fulfilment of obligations by the assessee. The bank guarantee commission paid by the assessee for these bank guarantees, according to the AO, was liable for deduction at source u/s. 194H. The assessee’s failure to deduct the tax source was, accordingly. visited with demands raised u/s. 201(1) r.w.s. 194H, to make good the shortfall in TDS and u/s. 201 (1A) r/w s. 194H, to compensate interest for delay in realizing the TDS revenues. Aggrieved by the stand so taken by the AO, assessee carried the matter in appeal before the CIT(A) but without any success.

Held:
Even when an expression is statutorily defined u/s. 2, it still has to meet the test of contextual relevance as section 2 itself starts with the words “In this Act, unless context otherwise requires…”, and, therefore, contextual meaning assumes significance. Every definition in the IT Act must depend on the context in which the expression is set out, and the context in which expression ‘commission’ appears in section 194H, i.e. along with the expression ‘brokerage’, significantly restricts its connotations. The common parlance meaning of the expression ‘commission’ thus does not extend to a payment which is in the nature of fees for a product or service; it must remain restricted to a payment in the nature of reward for effecting sales or business transactions etc.

The inclusive definition of the expression ‘commission or brokerage’ in Explanation to section 194H is quite in harmony with this approach. Therefore, what the inclusive definition really contains is nothing but normal meaning of the expression ‘commission or brokerage’. An inclusive definition does not necessarily always extend the meaning of an expression. When inclusive definition contains ordinary normal connotations of an expression, even an inclusive definition has to be treated as exhaustive. That is the situation in this case as well. Even as definition of expression ‘commission or brokerage’, in Explanation to section 194H, is stated to be exclusive, it does not really mean anything other than what has been specifically stated in the said definition.

Principal agent relationship is a sine qua non for invoking the provisions of section 194H. In the present case there is no principal agent relationship between the bank issuing the bank guarantee and the assessee. When bank issues the bank guarantee, on behalf of the assessee, all it does is to accept the commitment of making payment of a specified amount to, on demand, the beneficiary, and it is in consideration of this commitment, the bank charges a fees which is customarily termed as ‘bank guarantee commission’. While it is termed as ‘guarantee commission’, it is not in the nature of ‘commission’ as it is understood in common business parlance and in the context of the section 194H. This transaction is not a transaction between principal and agent so as to attract the tax deduction requirements u/s. 194H.

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A.P. (DIR Series) Circular No. 88, dated 1-3- 2012 — Clarification — Establishment of Branch Offices (BO)/Liaison Offices (LO) in India by Foreign Entities — Delegation of powers.

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Presently, the following powers have been delegated by RBI to banks:

(i) Acceptance of Annual Activity Certificate from BO/LO.
(ii) Extension of the validity period of LO.
(iii) Closure of BO/LO of foreign entities in India.

This Circular clarifies that powers regarding transfer of assets of LO/BO to others have not been delegated by RBI to banks. Hence, approval from Foreign Exchange Department, Central Office, RBI is required for transfer of assets by LO/BO to subsidiaries or other LO/BO or any other entity.

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A.P. (DIR Series) Circular No. 87, dated 29-2-2012 — Know Your Customer (KYC) norms/Anti-Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT) Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 — Cross-Border Inward Remittance under Money Transfer Service Scheme.

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This Circular requires, Authorised Persons (Indian Agents) to take additional steps to identify and assess their ML/TF risk for customers, countries and geographical areas as also for products/services/ transactions/delivery channels.

Authorised Persons (Indian Agents) must have policies, controls and procedures, duly approved by their boards, in place to effectively manage and mitigate their risk adopting a risk-based approach as discussed above. They must also design risk parameters according to their activities for risk-based transaction monitoring, which will help them in their own risk assessment.

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2012-TIOL-559-ITAT-DEL ITO v Indian Printing Packaging & Allied Machinery Manufacturers Association ITA No. 2934/Del/2012 Assessment Year: 2003-04. Date of Order: 31-08-2012

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S/s. 194I, 197, 201, 201(1A)–When certificate u/s. 197 has been issued and is valid till 31st March of the financial year, demand u/s. 201/201(1A) cannot be sustained for deduction of tax at a lower rate during the period before the issue of certificate.

Facts:
The assessee had on 01-04-2002 made a payment of advance rent to NESCO Ltd. after deduction of TDS @ 2% instead of 20% as provided u/s. 194I. NESCO Ltd. had on 1.4.2002 applied for issuance of certificate u/s 197 authorising the assessee to deduct TDS @ 2%. The certificate u/s. 197 authorising the payee to deduct TDS @ 2% u/s. 194I was granted on 23-04- 2002. This certificate was valid upto 31-03-2003. The tax so deducted by the assessee was deposited by the assessee to the Government Account on 06-05-2002.

The Assessing Officer levied tax u/s. 201(1) on the assessee for deducting tax u/s. 194I @ 2% instead of 20% on the ground that at the time of deduction of tax (i.e. at the time of payment of advance rent) the assessee did not have certificate u/s. 197. He also levied interest u/s. 201(1A).

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the assessee’s appeal and quashed the demand raised by the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the application for certificate u/s. 197 was made before the payment was made by the assessee. It also noted that the certificate was to remain in force till 31-03-2003 unless cancelled earlier. The Tribunal agreed with the finding of CIT(A) that such a breach, if at all, was only a venial breach or default. It held that such default could have been ascribed to the assessee only if no tax had been deducted in accordance with the provisions of section 201(1). Assessee can be deemed to be an assessee in default only in the case of non-payment of tax within the prescribed time. In the present case, tax having been deducted @ 2% and having been deposited before the prescribed date, by no stretch of imagination can the assessee be deemed to be an assessee in default. The Tribunal decided the issue in favour of the assessee.

The appeal filed by the revenue was dismissed.

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A.P. (DIR Series) Circular No. 85, dated 29- 2-2012 — External Commercial Borrowings (ECB) for Infrastructure facilities within National Manufacturing Investment Zone (NMIZ).

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For the purposes of ECB, infrastructure sector includes: (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects), (viii) mining, refining and exploration and (ix) cold storage or cold room facility, including for farm-level precooling, for preservation or storage of agricultural and allied produce, marine products and meat.

Presently, developers of SEZ are allowed to avail ECB to provide such infrastructure facilities within the SEZ.

This Circular permits developers of NMIZ also to avail of ECB under the Approval Route for providing infrastructure facilities within the NMIZ.

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A.P. (DIR Series) Circular No. 83, dated 27-2-2012 — Import of gold on loan basis — Tenor of loan and opening of stand-by letter of credit.

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Presently, the maximum tenor of gold loan, as per the Foreign Trade Policy 2004-2009 of the Government of India, is 240 days — 60 days for manufacture and exports +180 days for fixing the price and repayment of gold loan.
The Foreign Trade Policy 2009-2014 of the Government of India has increased the period of completion for export from 60 days to 90 days. As a result, the maximum tenor of gold loan is increased from 240 days to 270 days — 90 days for manufacture and exports +180 days for fixing the price and repayment of gold loan.

Further, this Circular requires banks to see that:

(i) Maximum period of gold loan must be as per the Foreign Trade Policy 2009-14 or as notified by the Government of India from time to time.

(ii) Tenor of stand-by letter of credit, for import of gold on loan basis, wherever required, must also be in line with the tenor of gold loan.

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A.P. (DIR Series) Circular No. 82, dated 21- 2-2012 — Release of foreign exchange for imports — Further liberalisation.

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Presently, advance towards imports up to US $ 500 or its equivalent can be issued for any current account transaction without any documentation formalities.

This Circular has increased that limit from US $ 500 or its equivalent to US $ 5,000 or its equivalent. Hence, advance towards imports can be made up to US $ 5,000 or its equivalent for any current account transaction without submitting any documents except for a simple letter containing basic information such as the name and address of the applicant, name and address of the beneficiary, amount to be remitted and the purpose of remittance and the application is accompanied by a cheque drawn on the applicant’s bank or demand draft.

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2012-TIOL-530-ITAT-MUM DCIT v BOB Cards Ltd. Assessment Year: 2007-08. Date of Order: 18-09-2012

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Section 37 – Amount of TDS borne by the assessee, as part of its liability under an agreement entered into by the assessee, is allowable as a deduction.

Facts:
The assessee company, engaged in the business of credit card operations and financing payments, had in its return of income claimed under the head Operating Expenses a sum of Rs. 21,61,004 towards non-reimbursible TDS for Master Card and Visa Card. This amount represented TDS which was to be borne by the assessee under the agreements entered into by the assessee with Visa and Master International. The Assessing Officer (AO) disallowed these payments on the ground that they are not incurred wholly and exclusively for business purposes.

Aggrieved, the assessee filed an appeal to the CIT(A) who allowed the appeal by relying on the decision of the Madras High Court in the case of Standard Polygraph Machines P. Ltd. (243 ITR 788) wherein it has been held that amount paid by the assessee for discharging a liability undertaken in terms of an agreement entered into between the assessee and its collaborator, forms part of consideration for agreement relating to knowhow and hence is allowable.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal held that the payment made as a result of a contractual liability is an allowable expenditure. It held that the CIT(A) was correct in placing reliance on the decision in the case of Standard Polygraph Machines P. Ltd. It also noted that the issue has been decided in favor of the assessee by `I’ Bench of ITAT vide order dated 20-06-2012 (AY 2003-04, 2004-05 and 2005-06); ITA Nos. 4882, 2475, 6527/Mum/2010). Following the decision of the co-ordinate bench, the Tribunal decided the grounds in favour of the assessee.

The appeal filed by the revenue was dismissed.

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A.P. (DIR Series) Circular No. 81, dated 21- 2-2012 — Export of goods and services — Receipt of advance payment for export of goods involving shipment (manufacture and ship) beyond one year.

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Presently, an exporter is required to obtain prior
approval of RBI for receiving advance from the foreign buyer where the
export agreement permits shipment of goods beyond one year from the date
of receipt of advance.

This Circular has granted powers to
banks to permit exporters to receive advance from the foreign buyer
where the export agreement permits shipment of goods beyond one year
from the date of receipt of advance, subject to the following
conditions:

(i) KYC and due diligence exercise has been done by the bank for the overseas buyer.
(ii) Compliance with the Anti-Money Laundering Standards has been ensured.
(iii)
Export advance received by the exporter must be utilised to execute
export and not for any other purpose i.e., the transaction is a bona
fide transaction.
(iv) Progress payment, if any, must be directly received from the overseas buyer strictly in terms of the contract.
(v) Rate of interest, if any, payable on the advance payment must not exceed LIBOR + 100 basis points.
(vi) Exporter should not have refund of amount exceeding 10% of the advance payment received in the last three years.
(vii) Documents covering the shipment must be routed through the same bank.
(viii)
If the exporter is unable to make the shipment, partly or fully, he
will have to obtain prior approval of RBI before remittance towards
refund of unutilised portion of advance or towards interest payment is
made to the foreign buyer.

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Elections are Coming

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Elections to the Central Council and the Regional Councils will be held
in the month of December 2012. Those aspiring to be council members will
have, by now, filed their nominations. The Code of Conduct has come
into force from 5th September 2012.

Council members play an
important role in deciding the destiny of the profession in general. It
is important that the profession gets a capable and an efficient council
consisting of members who can shoulder that responsibility.

The
Institute, established as a statutory body, is entrusted with the
responsibility of regulating the profession of accountancy in the
country. This includes training and education of students aspiring to be
chartered accountants. Alongwith regulating the profession, the
Institute wields a significant influence at various levels. Opinion of
the Institute matters and should matter, while framing various economic
and corporate laws and policies.

Our Institute, to a large extent, is an
autonomous body. If the autonomy of the Institute has to be preserved,
then it is important that the profession conducts itself well and the
Council, the body that represents the profession, performs its functions
in a manner, that respect for the views of the profession is enhanced
in the government as well as within the industry. Great burden lies on
the shoulders of the members of the Central Council.

As a member of the
profession, what do I expect from the Council members who represent the
profession? I believe we must convey our expectations to those aspiring
to be our leaders. First and foremost, any person who aspires to become a
Council member must have impeccable integrity. Just as citizens expect
politicians to be honest, so also the professionals expect their
representatives to be persons of integrity. Is it too much to ask?

I
expect my Council members to have the will and the capacity to serve the
interest of the profession alongwith the interest of the nation. I put
the two – the national interest and the professional interest – together
because by encouraging the complicated laws, one may apparently serve
the professional interest by creating work for the profession, but that
certainly would not augur well in the national interest.

Our Institute is of the professionals, so it is important that the council members have good domain knowledge and the capacity to think ahead, take a holistic view, form a considered opinion and convey it effectively. As an emerging economy with a large market, India evokes great interest amongst the developed countries. At this juncture, it is necessary that our Institute plays a greater role at international accounting bodies in formulating accounting and auditing pronouncements.

This requires research and that is possible if the Institute collaborates with those in the industry and academics. Last but not the least, the ethics. Ethical behaviour goes beyond the Code of Ethics under the Rules and Regulations. Can a Council member change his name (albeit following all the legal formalities) to include a phrase as a part of his name that indicates he represents CAs? To me, that is seeking publicity in an inappropriate manner. Members of the Council that regulates the profession must refrain from such gimmicks.

Members of the profession expect more transparency. Every year, there are elections for the post of the President and the Vice-President. When one attempts to get the information about who were the candidates and how they fared in that election, that information is just not available. Why not make this information public? There have been frequent changes in the criteria for joining the CA course. One is unaware of the thought process behind these frequent changes. There are many such issues where transparency will only inspire confidence of chartered accountants in the Council and its members. Elections are still more than two months away.

So, let us give a thought to these issues and also give some food for thought, to the candidates for the Central Council and the Regional Councils. If we don’t think and act, we don’t have the moral right to blame our representatives.

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Commissioner of Sales Tax V. Dev Enterprises Ltd. [2011] 42 VST 504 (BOM)

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VAT-Rate of Tax – Entries in Schedule-Plastic Footwear (Moulded) – Means made wholly of plastic – Entry 74 of Schedule C of The Maharashtra Value Added Tax Act, 2002

Facts
The Maharashtra Sales Tax Tribunal, in an appeal filed by the dealer against the order of DDQ passed by the Commissioner of Sales Tax, held that footwear predominantly made from plastic is covered within meaning of the description of “Plastic Footwear (Moulded)” used in entry 74 of Schedule C of the MVAT Act, 2002. The Commissioner of Sales Tax filed an appeal before the Bombay High Court against the said decision of the Tribunal.

Held
The Entry 74 of Schedule C, adverts to plastic footwear, which has to be construed as it stands. Admittedly, the sole of the footwear is made of PVC compound; the upper portion is made out of plastic coated textile, which is used as base in order to avoid direct contact with skin. The question whether the footwear is made from plastic can not be determined on the basis of the notes annexed to section XII of Chapter 64 to the Excise Tariff. In order to fall for classification under Schedule Entry C-74, the product must constitute Plastic Footwear. Adding the expression “predominant” to the interpretative process is to add words to the entry; that is to amend the entry – something that is impermissible. Further, the High Court noting the fact that in the market footwear made completely of plastic available for sale held that the entry adverts to plastic footwear; it must mean what it states.

The High Court allowed the appeal filed by the Department and held that the Tribunal committed error in holding that footwear which is predominantly made of plastic and made by a moulding process gets covered by the description of plastic moulded footwear.

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[2012] 23 taxmann.com 347 (Mum) Ashok C. Pratap v Addl CIT ITA No. 4615/Mum/2011 Assessment Year: 2007-08. Date of Order: 18.07.2012

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Section 56(2)(vi) – Amount received by a Trusteecum- Beneficiary of a discretionary trust, on dissolution of a trust, is not chargeable to tax u/s 56(2)(vi).

Facts:
The mother of the assessee was settlor of a private discretionary trust, created vide trust deed dated 19th January, 1978, wherein the assessee and his wife were the trustees and the two daughters of the assessee (viz. grand daughters of the settlor) were the beneficiaries. By letter dated 15th January, 2001, the assessee and his wife were added as beneficiaries to the said trust. On 30th March, 2001, two daughters of the assessee, both being major, signed the document of release whereby they relinquished their right, title, interest, share and benefits in and from the property and assets of the said trust including accumulated income. On 27th February, 2007, the said trust was dissolved and the assets were equally distributed amongst the two beneficiaries viz. the assessee and his wife. The assessee received Rs. 1,36,00,595. This sum of Rs. 1,36,00,595 was not included by the assessee in his returned income.

While assessing the total income of the assessee for AY 2007-08, the AO noticed that the trust was never registered u/s 12AA of the Act. He held that if the assessee claims to be a trustee, then his status will always be of a trustee and if he claims to be one of the beneficiaries, then he has no right to dissolve the trust. Accordingly, he held that, applying the provisions of section 77(b) of the Indian Trust Act, he included the said sum of Rs. 1,36,00,595 in the total income u/s 56(2)(vi).

Aggrieved the assessee preferred an appeal to CIT(A) who upheld the addition on the ground that the trust is not a relative of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that it is an un controverted fact that the trust had borne tax at maximum marginal rate on its income and also that the assessee had received the amount in the capacity of beneficiary. It held that amount received being in pursuance of dissolution of the trust cannot be termed to be an amount received by the beneficiaries “without consideration”. The addition made by the AO and upheld by CIT(A) was deleted.

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(2012) 72 DTR (Mum)(Trib) 175 Sandvik Asia Ltd. v. JCIT A.Y.: 1994-95 Dated: 29-11-2011

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Section 40(a)(i) – No disallowance of incremental amount due to foreign exchange rate fluctuation on account of non-deduction of TDS u/s 195 if the TDS is already deducted earlier at the time of credit.

Facts:
The assessee had entered into a research and know-how agreement with A.B. Sandvik Coromant, Sweden during AY 1991-92 in terms of which the assessee was liable to pay Swiss Kroner 38,58,000. In the assessment order for AY 1991-92, the AO held that since the duration of the agreement was five years, the appellant was entitled to deduction of 1/5th of the amount payable under the agreement (Swiss Kroner 7,71,600) in each assessment year for five years. However, the assessee had deducted TDS also and remitted the same to the exchequer, on the entire amount of fees payable as the assessee had credited the entire amount in the account books. Accordingly, in the year under consideration, assessee claimed deduction of Rs. 42,89,872 as fourth instalment of fee in its return of income. While remitting the instalment during the year, it suffered foreign exchange fluctuation loss of Rs. 8,82,234 which was comprised in its claim of Rs. 42,85,872. The CIT (A) noticed that deduction of earlier instalments have been allowed on actual payment basis and, hence, directed that even in this year deduction for exchange loss should be allowed. However, he directed the AO to check whether remittances are actually made subject to appropriate deduction of tax at source as per section 40(a)(i) of the Act.

Thereafter, AO passed an order denying the claim of deduction of foreign exchange fluctuation loss amounting to Rs. 8,82,234 on the ground that TDS was deducted in the initial year only with respect to the amount (Rs. 34,07,638) corresponding to Sw. Kr 7,71,600 (i.e. 1/5 of the amount payable) and not on the additional sum of Rs. 8,82,234 (foreign exchange loss) and was to be disallowed u/s 40(a)(i) of the Act. The CIT(A) upheld the disallowance.

Held:
Section 195(1) of the Act requires TDS either “at the time of credit” or “at the time of payment” of an income, whichever is earlier. When the assessee credited the income payable to the foreign concern as research and technical know-how in the earlier year, the provision so made on the basis of the exchange rate then existing was subjected to TDS u/s 195(1). Notably, section 195(1) of the Act prescribes TDS on a sum payable to non-resident either at time of credit or at the time of payment, whichever is earlier. Quite clearly, section 195(1) does not envisage TDS at both instances, i.e. at the time of credit as well as at the time of payment thereof.

Also, as per agreement, the assessee is to make a total payment of Swiss Kroner 38,58,000 and out of which, it was required to remit Swiss Kroner 7,71,600 during the year under consideration. In this year, the cost of remitting the amount to foreign concern has increased due to foreign exchange fluctuation and there is no additional amount payable to foreign concern. The transaction remained of Swiss Kroner 38,58,000 and the same having been subjected to TDS earlier at the time of credit, it would not again call for deduction of tax at source per section 195(1) of the Act.

Alternatively, out of the total claim of Rs. 42,89,872 as fourth instalment of research and know-how fee in this year, tax has been deducted in relation to a sum of Rs. 34,07,638 and, therefore, it is merely a case involving short deduction of tax at source and not a case for failure to deduct tax at source. In decisions of Chandabhoy & Jassobhoy [ITA No. 20/Mum/2010] and S.K. Tekriwal [ITA No. 1135/ Kol/2010], which have been rendered in the context of section 40(a)(ia) of the Act, it has been held that the disallowance envisaged in section40(a)(ia) can be invoked only in the event of non-deduction of tax, but not in cases involving short deduction of tax at source. The ratio of the decisions is squarely applicable in the present case also, inasmuch as the provisions of section 40(a)(ia) of the Act are akin to those of section 40(a)(i). On this count also, the sum of Rs. 8,82,234 cannot be disallowed u/s 40(a)(i).

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(2012) 72 DTR (Mum)(Trib) 167 ITO v. Yasin Moosa Godil A.Y.: 2006-07 Dated: 13-04-2012

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Section 50C does not apply to transfer of booking right in a flat.

Facts:
During the course of assessment proceedings the AO noticed that in the preceding assessment year, the assessee had booked a flat with a builder which was under construction. Out of the agreed aggregate consideration of Rs. 16,12,000, an amount of Rs.1,00,000 was kept outstanding, since the builder had failed to give the possession of the flat in time and also failed to allot the promised parking place. As the entire amount was not paid by the assessee, the builder had neither handed over the possession of the flat to the assessee nor had executed any registered sale deed in favour of the assessee. In the current assessment year, the assessee requested the builder to cancel the booking of the flat and return the booking amount as paid by him towards the said flat. Upon such request, a tri-party registered sale agreement for transfer of said flat was executed between the assessee, the builder and the new buyer wherein the assessee was to transfer all his rights, title and interest in the said flat to the buyer and the builder was to give the possession of the said flat to the buyer and was also to allot the said flat to the buyer which was originally to be allotted to the assessee. Accordingly, during the year under consideration, the appellant received back the booking amount paid by him to the builder from the buyer.

During the course of assessment proceedings, the AO observed that the Jt. Sub-Registrar’s Office had considered the value of the said flat at Rs.57,57,255 for registration of flat as against the total value of Rs.16,12,000. Accordingly, on the basis of information received from the Jt. Registrar’s Office, the AO treated the difference amount of Rs.41,45,255 (i.e. Rs. 57,57,255 – Rs. 16,12,000) as the unexplained income of the appellant and made addition thereof to the total income of the assessee.

The CIT(A) deleted the addition on the ground that such addition can only be made u/s 50C and in the present case provisions of section 50C do not apply since what is transferred is only booking rights in the flat.

Held:
It is an undisputed fact that prior to the execution of the tripartite agreement the assessee had neither paid full consideration of the flat nor had the assessee acquired the possession of the flat from builder. From the agreement it is evident that it is the builder who is transferring the capital asset i.e. the flat to the new buyer, by handing over the possession of the flat as also the legal ownership thereof to the new buyer and the assessee only received back the booking advance paid by him to the builder, by relinquishing his booking right on the said flat.

It is settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and one cannot go beyond the explicit mandate of the section. It is essential that for application of section 50C, the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both” then section 50C will not apply. From the facts of the case narrated above, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with land or building and therefore section 50C cannot be invoked.

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Wealth Tax: Valuation of land in excess of ULC limit: Section 7 of W. T. Act, 1957: A. Y. 1991-92: Land in excess of limit permitted by ULC Act to be valued taking restriction into account and not at market value.

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[Aims Oxygen Pvt. Ltd. v. CIT; 345 ITR 456 (Guj.) (FB):]

The assessee owned certain open land which was the subject of the Urban Land (Ceiling and Regulation) Act, 1976. For the A. Ys. 1988-89 to 1990-91, the Tribunal had held that for the purposes of wealth tax, the valuation of the land in excess of the limit laid down under the 1976 Act had to be made on the basis of the compensation which the assessee would be entitled to receive under the 1976 Act. For the A. Y. 1991-92, the Tribunal directed the Assessing Officer to value the light in the light of the above decisions for the earlier years. The Assessing Officer valued the land at market value on the basis of the report of the Departmental Valuation Officer. The Tribunal confirmed the order of the Assessing Officer.

On appeal by the assessee, the Gujarat High Court reversed the decision of the Tribunal and held as under:

“i) The land of the assessee was acquired as early as in 1960. The land in question was declared surplus land under the 1976 Act, which had a depressing effect on the value of the asset. The valuation has to be made on the basis of the assumption that the purchaser would be able to enjoy the property as the holder, but with restrictions and prohibitions contained in the 1976 Act and in such case value of the property or land would be reduced.

ii) The Department, having already accepted the depressed valuation for the A. Ys. 1988-89 to 1990-91 and then for the A. Y. 1991-92, it was not open to the department to assess the property on the basis of the market value, without any restriction or prohibition.

iii) The Tribunal is incorrect in holding that the land should be valued in accordance with the open market rate, without any restriction and prohibition.

iv) Whenever there is any restriction on transfer of any land, the value of the property or land, as the case may be, would be normally reduced and the valuation is to be ascertained, taking note of the restrictions and prohibitions contained in the Ceiling Act as if the land is notified as excess land.

v) Once the competent authority issues any notification u/s. 10(1) or (3) of the Land Ceiling Act, the land has to be deemed to have been acquired by the Government and what the assessee owned was the right to compensation and in such case, the compensation amount would only be the maximum compensation as provided under the Ceiling Act which is to be taken into consideration.”

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TDS: S/s 194H, Expl (i), 201(1A): A. Ys. 2009- 10 and 2010-11: (i) Trade discount is not a discount, commission or brokerage: Tax not deductible at source: (ii) Failure to deduct tax at source: When payer deemed in default: Only if payee fails to pay tax directly: Tax not to be recovered from payer if payee pays directly : Liability of payer only for interest and penalty:

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[Jagran Prakashan Ltd. v. Dy. CIT; 345 ITR 288 (All): 251 CTR 65 (All.)]

The petitioner is a publisher of a hindi daily newspaper. The petitioner had granted trade discount of 10% to 15% to the advertising agencies in accordance with the rules and regulations of the Indian Newspaper Society of which the petitioner was a member. For the A. Ys. 2009-10 and 2010-11, the Assessing Officer treated the petitioner as an assessee in default on the ground that the petitioner has failed to deduct tax at source u/s 194H of the Income-tax Act, 1961 on the trade discount and also passed orders u/s 201(1A) levying interest. The case of the Department was that allowing trade discount to the advertising agencies by the petitioner is nothing but payment of commission within the meaning of section 194H Explanation (i) and the petitioner was liable to deduct tax at source.

The petitioner preferred a writ petition challenging the order. The Allahabad High Court allowed the writ petition and held as under:

“i) The proceedings u/s 201/201(1A) of the Act were clearly not permissible because the two fundamental facts did not exist: (a) the relationship between the petitioner and the advertising agency was not that of principal and agent; and (b) advertising agencies rendered service to advertisers and were accredited by the society not as an agent of the newspaper agency. The observation of the Assessing Officer that advertising agencies rendered service to the petitioner was without any basis and foundation. No fundamental facts existed on the basis of which any inference could be drawn that advertising agencies were agents of the petitioner and further that advertising agencies rendered any services to the newspaper.

ii) The authorities had not adverted to the Explanation to section 194H nor had applied their mind to whether the assessee had also failed to pay such tax directly. Directing recovery of interest from the petitioner and recovery of tax alleged to be short deducted, was beyond the scope of section 201 and without jurisdiction.”

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Penalty: S/s 269T, 271E and 273B A. Y. 2003-04: Repayment of loan or deposit otherwise than by account payee cheque or draft: Provision mandatory: Repayment by debit of accounts through journal entries is in contravention of the provision: Assessee becoming liable to repay loan and receive similar sum towards sale price of shares sold to creditor: Account settled by journal entries: No finding that repayment not bonafide or attempt at evasion of tax: Reasonable cause shown: Penalty not leviable<

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[CIT v. Triumph International Finance (I) Ltd.; 345 ITR 270 (Bom.)]

The assessee was engaged in the business of share trading. The assessee had accepted a sum of Rs. 4,29,04,722/- as loan from I which was repayable during the A. Y. 2003-04. In that year the assessee sold 1,99,300 shares to I for an aggregate consideration of 4,28,99,325/-. The parties set off that amount in the respective books of account by making journal entries and the balance amount of Rs. 5,397/- was paid by the assessee by a crossed cheque. The Assessing Officer imposed penalty u/s 271E on the ground that the assessee had repaid the loan to the extent of Rs,4,28,99,325/- in contravention of the provisions of section 269T of the Income-tax Act, 1961. The Tribunal held that the payment through journal entries did not fall within the ambit of sections 269SS or 269T and consequently no penalty could be levied u/ss. 271D or 271E.

On appeal by the Revenue, the Bombay High Court held as under:

“i) The Tribunal was not justified in holding that repayment of loan or deposit through journal entries did not violate the provisions of section 269T of the Act.

ii) It would have been an empty formality to repay the loan or deposit amount by account-payee cheque or draft and receive back almost the same amount towards the sale price of the shares. Neither the genuineness of the receipt of loan or deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business had been doubted in the regular assessment.

iii) There was nothing on record to suggest that the amounts advanced by I to the assessee represented money of I or the assessee. The fact that the assessee company belonged to a group involved in the security scam could not be a ground for sustaining penalty.

iv) Settling claims by making journal entries in the respective books is also one of the recognised methods for repaying loan or deposit. Therefore, on the facts, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan or deposit was not a bona fide transaction and was made with a view to evade tax, the cause shown by the assessee was a reasonable cause and in view of s. 273B of the Act, no penalty u/s 271E could be imposed for contravening the provisions of s. 269T of the Act.”

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Capital gains: Exemption u/s 54F: A. Y. 2006- 07: Sale of shares and part of net consideration paid to developer for construction of a residential house: Construction almost complete in three years: Assessee entitled to exemption u/s 54F.

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[CIT v. Sambandam Udaykumar; 345 ITR 389 (Kar.)]

In the previous year relevant to the A. Y. 2006-07, the assessee sold certain shares and invested a part of the net consideration in purchase of house property and paid the said amount to the developer. The assessee claimed exemption u/s 54F in respect of the said investment. The Assessing Officer found that the flooring work, electrical work, fitting of door shutters and window shutters were still pending. Therefore, the Assessing Officer came to the conclusion that the construction was not complete even after the lapse of three years of time from the date of transfer of the shares and hence the exemption u/s 54F of the Act, is not allowable. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) The assessee had invested Rs. 2,16,61,670/- as on October 31, 2006, within 12 months from the date of realisation of sale proceeds of the shares. Assessee had produced before the authorities the registered sale deed dated 07/11/2009, showing the transfer of the property in his favour. The assessee had been put in possession of the property and he was in occupation. The assessee had invested the sale consideration in acquiring residential premises and had taken possession of the residential building and was living in the premises.

ii) Section 54F of the Act is a beneficial provision of promoting the construction of residential house. Therefore, the provision has to be construed liberally for achieving the purpose for which it was incorporated in the statute. The intention of the legislature was to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of law. The words used in the section are ”purchased’ or “constructed”. For such purpose, the capital gain realised should have been invested in a residential house. The condition precedent for claiming the benefit under the provision is that capital gains realised from sale of capital asset should have been invested either in purchasing a residential house or in constructing a residential house. If after making the entire payment, merely because a registered sale deed had not been executed and registered in favour of the assessee before the period stipulated, he cannot be denied the benefit of section 54F of the Act.

iii) Similarly, if he has invested the money in construction of a residential house, merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit u/s 54F of the Act. Once it is demonstrated that the consideration received on transfer has been invested either in purchasing a residential house or in construction of a residential house, even though the transactions are not complete in all respects as required under the law, would not disentitle the assessee from the benefit.

iv) The Tribunal was justified in extending the benefit of section 54F of the Act to the assessee.”

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Capital gains: Long term/short term: S/s 2(42A), 10(38) and 54EC: A. Y. 2006-07: Period of holding : If an assessee acquires an asset on 2nd January in the preceding year, the period of 12 months would be complete on 1st January, next year and not on 2nd January: If it is sold on 2nd January and if the proviso to section 2(42A) applies, it would be treated as a long term capital gain.

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[Bharti Gupta Ramola v. CIT; 252 CTR 139 (Del.)]
The assessee had sold two mutual fund instruments on 29/09/2005 and 14/10/2005 which were purchased on 29/09/2004 and 14/10/2004 respectively. In the return of income for the A. Y. 2006-07, the assessee claimed that the capital gain on such sales were long term capital gains and had claimed exemption u/s 10(38) and section 54EC as the case may be. The Assessing Officer treated the two capital gains as short term capital gains on the ground that the instruments had not been held for a period of more than 12 months immediately preceding the date of transfer and accordingly disallowed the claim for exemption. 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:

“If an assessee acquires an asset on 2nd January in a preceding year, the period of 12 months would be complete on 1st January, next year and not on 2nd January. If it is sold on 2nd January and if the proviso to section 2(42A) applies, it would be treated as long term capital gain.”

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Business loss: Section 28: A. Y. 2004-05: Real estate business: Amount advanced for purchase of property: Property not transferred and amount not repaid: Loss is business loss, deductible.

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[CIT v. New Delhi Hotels Ltd; 345 ITR 1 (Del.)]

Assessee
was carrying on business in construction and real estate. The assessee
had paid an amount of Rs. 44,28,000/- to M/s Gulmohar Estate for
purchase of property/plot. The property/plot was neither
transferred/sold nor the amount was refunded. The assessee claimed the
said amount as bad debt/business loss in the A. Y. 2004-05. The
Assessing Officer disallowed the claim on the ground that the provisions
of section 36(1)(vii) r.w.s. 36(2) of the Income-tax Act, 1961 are not
satisfied. The Tribunal found that the assessee treated immovable
properties as stock in trade and 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)
The assessee also had rental income but this factum alone did not show
and establish that the properties which were being purchased from
Gulmohar Estate were to be treated as investment and not for the purpose
of stockin- trade.

ii) In view of the factual findings recorded by the Tribunal, the loss was deductible.”

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Assessment: Notice: Section 143(2) A. Y. 2006- 07: Notice not served on correct address mentioned in return.

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[CIT Vs. Mascomptel India Ltd.; 345 ITR 58 (Del.)]
For the A. Y. 2006-07, the Assessing Officer issued notice u/s 143(2) of the Income-tax Act, 1961. The notice could not be served and was received back with the remark that no such person existed at the address mentioned. An inspector was deputed to serve the notice personally, but he also reported that the company was not available at the address. The Assessing Officer, thereafter, served the notice by affixture. The assessment was made ex parte and a best judgment assessment order was passed. The Tribunal found that the assessee had mentioned a different address in the return of income filed for the A. Y. 2006-07 and held that the service by affixture was not valid and accordingly the assessment order was invalid.

On appeal by the assessee, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) No attempt was made to serve the assessee at the correct address which was available with the Department and in fact stated in the return of income for the A. Y. 2006-07.

ii) Subsequent attempt to serve another notice long after the expiry of the limitation period prescribed by the proviso, could not help the Revenue.”

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Capital gain: Exemption u/s 54EC: A. Y. 2006- 07: Section 54EC bonds not available in the last period of limitation: Investment in bonds as soon as available: Assessee entitled to exemption.

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[CIT Vs. Cello Plast (Bom); ITA No. 3731 of 2010 dated 27/07/2012:]

The assessee sold factory building on 22/03/2006 and earned long term capital gain of Rs. 49.36 lakhs. The last date for investment in section 54EC bonds was 21/09/2006. The assessee invested the capital gain in section 54EC bonds of Rural Electrification Corporation (REC) bonds on 31/01/2007. The assessee claimed that from 04/08/2006 to 22/01/2007, the bonds were not available and the investment was made immediately on the bonds being available. The Assessing Officer disallowed the claim for exemption on the ground that the investment was beyond the period of limitation. The Tribunal allowed the assessee’s claim.

In appeal before the High Court, the Revenue argued that (i) even if the bonds were not available for part of the period, they were available for some time in the period after the transfer (01/07/2006 to 03/08/2006) and the assessee ought to have invested then & (ii) the section 54EC bonds issued by National Highway Authority (NHAI) were available and the assessee could have invested in them.

The Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The Department’s contention that the assessee ought to have invested in the period that the section 54EC bonds were available (01/07/2006 to 03/08/2006) after the transfer is not well founded. The assessee was entitled to wait till the last date (21/09/2006) to invest in the bonds. As of that date the bonds were not available. The fact that they were available in an earlier period after the transfer makes no difference, because the assessee’s right to buy the bonds up to the last date cannot be prejudiced.

ii) Lex not cogit impossibila (law does not compel a man to do that which he cannot possibly perform) and i (law does not expect the party to do the impossible) are well known maxims in law and would squarely apply to the present case.

iii) The Department’s contention that the assessee ought to have purchased the alternative section 54EC NHAI bonds is also not well founded, because if section 54EC confers a choice of investing either in the REC bonds or the NHAI bonds, the Revenue cannot insist that the assessee ought to have invested in the NHAI bonds.”

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Authority of Advance Ruling – Advance Ruling of the Authority could be challenged before the appropriate High Court under Article 226 and/or 227 of the Constitution of India and is to be heard by the Division Bench hearing income tax matters expeditiously.

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[Columbia Sportswear Co. v. DIT, Bangalore (2012) 346 ITR 161 (SC)]

The Petitioner, a company incorporated in the United States of America (for short ‘the USA’) was engaged in the business of designing, developing, marketing and distributing outdoor apparel. For making purchases for its business, the petitioner established a liaison office in Chennai with the permission of the Reserve Bank of India (for short “the RBI”) in 1995. The RBI granted the permission in its letter dated 01.03.1995 subject to the conditions stipulated therein. The permission letter dated 01.03.1995 of the RBI stated that the liaison office of the petitioner was for the purpose of undertaking purely liaison activities viz. to inspect the quality, to ensure shipments and to act as a communication channel between head office and parties in India and except such liaison work, the liaison office will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without the prior permission of the RBI. The petitioner also obtained permission on 19.06.2000 from the RBI for opening an additional liaison office in Bangalore on the same terms and conditions as mentioned in the letter dated 01.03.1995 of the RBI.

On 10.12.2009, the petitioner filed an application before the Authority for Advance Rulings (for short ‘the Authority’) on the questions relating to its transactions in its liaison office in India.

The Authority heard the petitioner and the respondent and passed the order dated 08.08.2011. In para 34 of the said order, the Authority gave its ruling on the six questions raised before it as follows:

(1) A portion of the income of the business of designing, manufacturing and sale of the products imported by the applicant from India accrued to the applicant in India.

(2) The applicant had a business connection in India being its liaison office located in India.

(3) The activities of the Liaison Office in India were not confined to the purchase of goods in India for the purpose of export.

(4) The income taxable in India would be only that part of the income that could be attributed to the operations carried out in India. This was a matter of computation.

(5) The Indian Liaison Office involved a ‘Permanent Establishment’ for the applicant under Article 5.1 of the DTAA.

(6) In terms of Article 7 of the DTAA only the income attributable to the Liaison Office of the applicant was taxable in India.

Aggrieved, the petitioner challenged the said order of the Authority on various grounds mentioned in special leave petition, before the Supreme Court.

The Supreme Court held that the Authority is a body exercising judicial power conferred on it by Chapter XIX-B of the Act and is a tribunal within the meaning of the expression in Articles 136 and 227 of the Constitution. The fact that subsection (1) of Section 245S makes the advance ruling pronounced by the Authority binding on the applicant, in respect of the transaction and on the Commissioner and the income tax authorities subordinate to him in respect of the applicant, would not affect the jurisdiction of either the Supreme Court under Article 136 of the Constitution or of the High Courts under Articles 226 and 227 of the Constitution to entertain a challenge to the advance ruling pronounced by the Authority. The reason for this view is that Articles 136, 226 and 227 of the Constitution are constitutional provisions vesting jurisdiction on the Supreme Court and the High Courts and a provision of an Act of legislature making the decision of the Authority final or binding could not come in the way of this Court or the High Courts to exercise jurisdiction vested under the Constitution.

The Supreme Court noted that in a recent advance ruling in Groupe Industrial Marcel Dassault, In re [2012] 340 ITR 353 (AAR), the Authority had, observed as under:

“But permitting a challenge in the High Court would become counter productive since writ petitions are likely to be pending in High Courts for years and in the case of some High Courts, even in Letters Patent Appeals and then again in the Supreme Court. It appears to be appropriate to point out that considering the object of giving an advance ruling expeditiously, it would be consistent with the object sought to be achieved, if the Supreme Court were to entertain an application for Special Leave to appeal directly from a ruling of this Authority, preliminary or final, and tender a decision thereon rather than leaving the parties to approach the High Courts for such a challenge.”

The Supreme Court after considering the aforesaid observation of the Authority, felt that it could not hold that an advance ruling of the Authority can only be challenged under Article 136 of the Constitution before this Court and not under Articles 226 and 227 of the Constitution before the High Court. The Supreme Court observed that in L. Chandra Kumar v. Union of India and Others [(1997) 3 SCC 261], a Constitution Bench of the Supreme Court has held that the power vested in the High Courts to exercise judicial superintendence over the decisions of all courts and tribunals within their respective jurisdictions was part of the basic structure of the Constitution. Therefore, to hold that an advance ruling of the authority should not be permitted to be challenged before the High Court under Articles 226 and/or 227 of the Constitution would be to negate a part of the basic structure of the Constitution. Nonetheless, the Supreme Court appreciated the apprehension of the Authority that a writ petition may remain pending in the High Court for years, first before a learned Single Judge and thereafter in Letters Patent Appeal before the Division Bench and as a result the object of Chapter XIX-B of the Act which is to enable an applicant to get an advance ruling in respect of a transaction expeditiously would be defeated. The Supreme Court, therefore, opined that when an advance ruling of the Authority is challenged before the High Court under Articles 226 and/or 227 of the Constitution, the same should be heard directly by a Division Bench of the High Court and decided as expeditiously as possible.

The Supreme Court accordingly disposed of the Special Leave Petition granting liberty to the petitioner to move the appropriate High Court under Article 226 and/or 227 of the Constitution. The Supreme Court requested the concerned High Court to ensure that the Writ Petition, if filed, is heard by the Division Bench hearing income-tax matters and further requested the Division Bench to hear and dispose of the matter as expeditiously as possible.

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S. 43(5)(d), Rules 6DDA and 6DDB, Notification dated 22.5.2009 recognizing MCX as a recognized stock exchange – Transactions in commodity derivatives carried out on MCX are not speculative transactions w.e.f. 1.4.2006 though MCX has been notified, vide notification dated 22.5.2009, as a recognised stock exchange prospectively.

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1. [2012] 25 taxmann.com 252 (Mum)
ACIT v Arnav Akshay Mehta
ITA No. 2742/Mum/2011
Assessment Year: 2007-08.  
Date of Order: 12.09.2012

Section 43(5)(d), Rules 6DDA and 6DDB, Notification dated 22.5.2009 recognising MCX as a recognised stock exchange – Transactions in commodity derivatives carried out on MCX are not speculative transactions w.e.f. 1.4.2006 though MCX has been notified, vide notification dated 22.5.2009, as a recognised stock exchange prospectively.


Facts:

During the previous year relevant to the assessment year 2007-08, the assessee suffered a loss of Rs. 77,63,237 in trading in commodity derivatives on MCX. The assessee regarded this loss as a non-speculative business loss which was set off against short term capital gains and income from other sources.

While assessing the total income of the assessee for AY 2007-08, the AO noticed that w.e.f. AY 2006- 07, section 43(5)(d) provides that transactions in derivatives will not be regarded as speculative transactions if they have been carried out on a notified stock exchange. He also noted that MCX has been notified as a recognised stock exchange vide notification dated 22.5.2009 prospectively. He, accordingly, held the loss in trading in commodity derivatives to be speculative and denied the set off of the same against short term capital gains and income from other sources as was claimed by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the assessee’s appeal. Aggrieved, the Revenue preferred an appeal to the Tribunal. C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants Tribunal news

Held:

The Tribunal noted that the AO has treated the loss under consideration to be speculation loss mainly on the ground that the Notification No. 46 of 2009 issued by CBDT on 22.5.2009, recognising MCX as a recognised stock exchange for the purpose of section 43(5) only from the said date has a prospective effect and therefore, derivative trading in commodity through MCX prior to the said date will amount to speculation business. The Tribunal also noted that The Finance Act, 2005 has w.e.f. 1.4.2006 inserted clause (d) in the proviso to section 43(5) as a result of which w.e.f. 1.4.2006 trading in derivative carried out through the recognised Stock Exchange is treated as non-speculative transaction. For this purpose, Rules 6DDA and 6DDB provide that notification of recognised stock exchange will be done by the Central Government (CBDT).

The Tribunal held that a combined reading of 43(5) (d) and rules 6DDA and 6DDB and Explanation (ii) to section 43(5) indicates that the rules prescribed are only procedural in nature and they prescribe the method as to how to apply for necessary recognition and consequent notification. When a rule or provision does not affect or empower any right or create an obligation but merely relates to procedural mechanism, then it is deemed to be retrospective and will apply to all the proceedings, pending or to be initiated, unless such an inference is likely to lead to an absurdity. It also held that just because the procedural mechanism has taken a long time to notify a stock exchange as recognised stock exchange, it will not lead to an inference that the same would be applicable from the date the stock exchange is notified to be a recognised stock exchange. It observed that the notification does not empower any right or create an obligation, but only recognises what is already provided in the statute. It held that the transactions carried out through MCX Stock Exchange after 1.4.2006 would be eligible for being treated as non-speculative within clause (d) of proviso to section 43(5).

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Delegation of powers to Regional Directors u/s 17, 18, 19, 141 and 188 of the Companies Act, 1956

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Vide Notification Dated 30th August 2012, the Ministry of Corporate Affairs has directed that wherever fee on cases pending u/s. 17, 18, 19, 141 and 188 of the Companies Act, 1956 have already been paid by the companies/stakeholders at the time of filing of petition, consequent upon the transfer of applications/ petitions from Company Law Board to the concerned Regional Directors, which is on account of operation of law, the company/stakeholders need not pay fee for the same petitions. Further, all pending cases before CLB under these sections stand transferred to Regional Directors and objections, if any, received by CLB with respect to these petitions shall be forwarded to the concerned RDs by the Secretary, CLB in writing.

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15 A. P. (DIR Series) Circular No. 31 dated 17th September, 2012

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Establishment of Liaison Office (LO)/Branch Office (BO)/Project Office (PO) in India by Foreign Entities – Clarification.

This circular clarifies that foreign Non-Government Organisations/Non-Profit Organisations/Foreign Government Bodies/Departments, by whatever name called can set-up/establish offices in India (liaison/ branch/project) only after obtaining prior approval of RBI under the Approval Route.

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A. P. (DIR Series) Circular No. 30 dated 12th September, 2012

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Comprehensive Guidelines on Over the Counter (OTC) Foreign Exchange Derivatives – Cost Reduction Structures

Presently, use of cost reduction structures, i.e., cross currency option cost reduction structures and foreign currency – INR option cost reduction structures, is permitted only to hedge exchange rate risk arising out of trade transactions and the External Commercial Borrowings (ECB).

This circular permits the use of cost reduction structures, additionally, for hedging the exchange rate risk arising out of foreign currency loans availed of domestically against FCNR (B) deposits.

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A. P. (DIR Series) Circular No. 29 dated 12th September, 2012

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Overseas Direct Investments by Indian Party – Rationalisation

 This circular has amended the guidelines relating to submission of Annual Performance Report (APR) as under: –

An Indian party, which has set up/acquired a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) overseas, will have to submit to its designated Bank every year, an Annual Performance Report (APR) in Form ODI Part III in respect of each JV or WOS outside India and other reports or documents as may be specified by the Reserve Bank from time to time, on or before the 30th of June each year.

The APR so required to be submitted, has to be based on the latest audited annual accounts/unaudited accounts, as the case maybe, of the JV/WOS, unless specifically exempted by the Reserve Bank.

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A. P. (DIR Series) Circular No. 28 dated 11th September, 2012 Trade Credits for Import into India

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Presently, trade credits upto INRNaN million per import transaction with a maturity period of more than one year and less than three years (from the date of shipment) can be availed of for the import of capital goods. This circular permits companies in the infrastructure sector to avail trade credit upto five years (instead of upto three years) for import of capital goods subject to the following: –

(i) The trade credit must be initially contracted for a period not less than 15 months and must not be in the nature of short-term roll overs.

(ii) Banks cannot issue Letters of Credit/Guarantees / Letter of Undertaking (LOU)/Letter of Comfort (LPC) in favour of the overseas supplier/bank /financial institution for the period beyond three years. The all-in-cost ceiling of the trade credit, with maturity period upto five years will be 350 basis points over six months, LIBOR for the respective currency of credit or applicable benchmark. The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.

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A. P. (DIR Series) Circular No. 27 dated 11th September, 2012 External Commercial Borrowings (ECB) Policy – Bridge Finance for infrastructure sector

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Presently, Indian companies in the infrastructure sector can, under the Approval Route, import capital goods by availing of short term credit (including buyers’/suppliers’ credit) in the nature of ‘bridge finance’, subject to the following conditions:-

(i) Bridge finance must be replaced with a long term ECB.

(ii) ECB must comply with all the extant norms.

 (iii) Prior approval of RBI will have to be obtained for replacing the bridge finance with long term ECB.

This circular permits replacement of bridge finance (including buyers’/suppliers’ credit) availed of for import of capital goods with ECB under the Automatic Route subject to the following: –

 i. Buyers’/suppliers’ credit is refinanced through an ECB before the end of the maximum permissible period of trade credit.

 ii. Import of capital goods must be verified from the Bill of Entry by the Bank.

 iii. Buyers’/suppliers’ credit availed of is compliant with the extant guidelines on trade credit. iv. The goods that are imported, comply with the DGFT policy on imports. v. The proposed ECB must be compliant with all extant ECB guidelines. vi. Banks in India cannot provide any form of guarantees for the ECB. However, the borrower will still have to obtain prior approval of RBI (under Approval Route) for availing of bridge finance.

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A. P. (DIR Series) Circular No. 26 dated 11th September, 2012 External Commercial Borrowings (ECB) Policy – Repayment of Rupee loans and/or fresh Rupee capital expenditure – $ 10 billion scheme

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Presently, an Indian company in the manufacturing and infrastructure sector, which has consistent foreign exchange earnings during the last three years ,can avail, under Approval Route, ECB up to 50% of the average annual export earnings realised during the past three financial years (within the overall of ECB ceiling of INRNaN billion) for repayment of Rupee loan(s) availed of from the domestic banking system and/or for fresh Rupee capital expenditure, provided the companies are not in the default list/ caution list of the Reserve Bank of India. This circular has modified the above facility as under: –

(a) An Indian company in the manufacturing and infrastructure sector, which has consistent foreign exchange earnings during the last three years can avail ECB; i. upto 75% of the average foreign exchange earnings realised during the immediate past three financial years; or ii 50% of the highest foreign exchange earnings realised in any of the immediate past three financial years, whichever is higher.

(b) A Special Purpose Vehicles (SPV), which have completed at least one year of existence from the date of incorporation and do not have sufficient track record/past performance for three financial years, can avail ECB upto 50% of the annual export earnings realised during the past financial year.

(c) The maximum ECB that can be availed of by an individual company or group, as a whole, under this scheme is INRNaN billion.

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A. P. (DIR Series) Circular No. 25 dated 7th September, 2012 Overseas Investment by Indian Parties in Pakistan

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Presently, investment in Pakistan is not permitted. This circular permits Indian parties to invest in Pakistan under the Approval Route of ODI Scheme in terms Regulation 9 of Notification No. FEMA 120/ RB-2004 dated 7th July, 2004 [Foreign ExchangeManagement (Transfer or Issue of any Foreign Security).

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A. P. (DIR Series) Circular No. 21 dated 31st August, 2012 Foreign investment by Qualified Foreign Investors (QFIs) – Hedging facilities

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This circular permits Qualified Foreign Investors (QFI) to hedge their currency risk for the following: –

 i) Entire investment in equity and/or debt in India as on a particular date through foreign currency – INR options.

ii) Initial Public Offers (IPO) related transient capital flows under the Application Supported by Blocked Amount (ASBA) mechanism through Foreign Currency – INR swaps.

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A. P. (DIR Series) Circular No. 20 dated 29th August, 2012

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Non-resident guarantee for non-fund based facilities entered between two resident entities.

 Presently, a non-resident can issue a guarantee to a resident lender as security for funds lent to a resident borrower. RBI has granted general permission to resident borrower to make payment to the non-resident guarantor who has met the liability under the guarantee.

This circular grants general permission to a nonresident to issue a guarantee to a resident provider of non-fund based facilities, such as Letters of Credit/ Guarantees/Letter of Undertaking/Letter of Comfort, etc., to a resident borrower. General permission has also been granted to a resident borrower to make payment to the non-resident guarantor who has met the liability under the guarantee.

Further, annexed to this circular is a format introduced by RBI for reporting, on a quarterly basis, the issue and invocation of such guarantees. This format has to reach the Chief General Manager, Foreign Exchange Department, ECB Division, Reserve Bank of India, Central Office Building, 11th floor, Fort, Mumbai – 400 001, not later than 10th day of the following month.

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Wealth Tax: Exemption: Section 40(3)(vi) of Finance Act, 1983: A. Ys. 1988-89 to 1992-93: Assessee in leasing business: Property given on lease is asset used in business: Property falls within specified assets u/s. 40(3)(vi): Exemption available.

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[CIT Vs. Donatus Victoria Estates and Hotel P. Ltd.; 346 ITR 114 (Mad.)]

Assessee was carrying on the business of leasing. The assessee had let a hotel building and the lessee used it as a hotel. In the A. Ys. 1988-89 to 1992-93, the assessee claimed exemption from wealth tax in respect of the property u/s. 40(3)(vi) of the Finance Act, 1983 as an asset used in the assessee’s business. The Assessing Officer rejected the claim. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) One of the conditions to be satisfied by the assessee u/s. 40(3) was that, the asset must be used in the assessee’s business. The assets let out were used in the leasing business. Not all the assets used in the business were exempt from the purview of the wealth tax. Once the asset let out came within the specified clause as contemplated u/s. 40(3)(vi) of the Finance Act, 1983, the assessee was entitled to exemption.

 ii) One of the objects of the assessee was leasing and another object was running a hotel in the property. Accordingly, the assessee had leased out the property as a hotel and the lessee also used the property as a hotel. Therefore, the assets came within the specified assets as contemplated u/s. 40(3)(vi) of the Finance Act, 1983. The assessee was entitled to exemption.”

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Transfer pricing: Arm’s length price: A. Y. 2002-03: Merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction: Once it is accepted that the ALP of the royalty is justified, there can be no reduction in the value thereof on account of the assessee’s customers failing to pay the assessee for the product purchased by them from the assessee<

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[CIT Vs. CA Computer Associates India (P) Ltd.; 252 CTR 164 (Bom.)]

For the A. Y. 2002-03, the assessee had filed the return of income, declaring a loss of about Rs. 14.5 crore. Assessee had claimed the ALP of royalty at the contractual value of Rs. 7.43 crore. The Assessing Officer computed the ALP of royalty at Rs. 5.85 crore on the ground that the assessee had paid royalty even in respect of the products sold by it to the clients who had not paid for the products purchased by them. This resulted in the reduction of the loss of about Rs. 1.50 crore. The Tribunal allowed the assessee’s appeal and held that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal rightly came to the conclusion that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction. Section 92C provides the basis for determining the ALP in relation to international transactions. It does not either expressly or impliedly consider failure of the assesee’s customers to pay for the products sold to them by the assessee to be relevant factor in determining the ALP.

 ii) Indeed, in the absence of any statutory provision or the transactions being colourable bad debts on account of purchasers refusing to pay for the goods purchased by them from the assessee can never be a relevant factor, while determining the ALP of the transaction between the assessee and its principal.

iii) Once it is accepted that the ALP of the royalty is justified, there can be no reduction in the value thereof on account of the assessee’s customers failing to pay the assessee for the products purchased by them from the assessee.

iv) The question is therefore, answered in the affirmative in favour of the assessee. The appeal is accordingly dismissed.”

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Search and seizure: Abatement of assessment proceedings: Section 153A: A. Y. 2002- 03: Assessment or reassessment proceedings pending at the time of search abate: Appeal from assessment pending before Tribunal would not abate.

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[CIT Vs. Smt. Shaila Agarwal; 346 ITR 130 (All.)]

When the assessee’s appeal for the A. Y. 2002-03 was pending before the Tribunal, search proceedings were initiated against the assessee. The Tribunal passed the order as under:

 “i) The present appeal arises out of the assessment made prior to the date of search. The intention of the Legislature is to make a combined assessment of all the income disclosed or assessed in regular assessment and discovered in search. We accordingly restore the assessment to the file of the Assessing Officer to consider these additions in the assessment u/s. 153A as well. However, in an event where search is declared illegal by any court or the assessment u/s. 153A is held invalid, then this appeal in relation to regular assessment will revive at the instance of the Department, if an application is moved to the Tribunal in this behalf.

 ii) Accordingly, the appeal of the assessee was allowed, but for statistical purposes and subject to the observations made above.”

On appeal by the Revenue, the Allahabad High Court reversed the decision of the Tribunal and held as under:

“i) We are of the opinion that the Income Tax Appellate Tribunal erred in abating the regular assessment proceedings, which had become final, and restoring them as a consequence of search u/s. 132, and notice u/s. 153A of the Act to the file of the Assessing Officer.

ii) The appeal is allowed. The order of the Tribunal is set aside. The Tribunal will decide the appeal on the merits in accordance with law.”

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Reassessment: Notice u/s. 148 to be issued for each year separately: AO issuing combined notice for all four years: Reassessment not valid.

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[Mohd. Ayub Vs. ITO; 346 ITR 30(All.)]

For the A. Ys. 1994-95 to 1997-98, the Assessing Officer issued a combined notice u/s. 148 of the Income-tax Act, 1961 and passed reassessment orders. The Tribunal upheld the validity of the notice and the reassessment order.

On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under:

 “i) Each assessment year is an independent unit of assessment and the provisions of the Act applied separately. Even where there had been escapement of income, the Assessing Officer was obliged to issue a separate notice for each assessment year.

ii) He had not issued a separate notice u/s. 148 of the Act and instead had issued a composite notice which did not meet the requirement of section 148 of the Act. Thus the entire reassessment proceedings were wholly without jurisdiction.”

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Microsoft Office 2013 – Part II

About this write-up

MS Office is a popular application software and enjoys wide usage across the world. Recently, Microsoft released the Customer Preview of the latest version of its Office suite i.e. Microsoft Office 2013 (a. k.a Office 15). This write up briefly discusses some of the new features likely to be introduced in the new software, product enhancements to existing features, some pros and cons associated there with.

Background

This write up is the second part of the article on MS Office 2013. The first part dealt with some of the new features that are expected to be a part of MS Office 2013. Some of the features described in the article were:

  • Cloud integration
  • Touch and stylus based interface
  • The new “Metro” look
  • Convenience of editing PDF documents in MS Word 2013
  • Support for Open document format (“ODF”) 1.2
  • Social media-related integration

In this part, we will look at some of the enhancements, new features which are expected to be a part of MS Office 2013. While there are many features that one could write about, given below is a short summary of the changes / new features that you may find useful:

MS Word:

Right from the first moment you start Word, you will notice the crisp new interface. The basic interface has been changed (“Metrified”). The ribbon feature has been changed (Microsoft has made it more flatter) to appear more spacious. One of the reasons for this is that, when the MS Word is used on a smart phone, the look and feel and the user experience while switching from desktop to tablet / smart phone would appear seamless.

Besides the above, cleaning up the main inter-face has the effect of giving more space and allows the user to focus on the document itself rather than the tools (which are supposed to help and not hinder). To be candid, when I migrated from Office 2003 to Office 2007, the one convenience that I appreciated the most, was that the interface allowed me to work on the document / spreadsheet. All the tools that I would need, were neatly organised on the ribbon. Whenever the need arose, they were only 2 or 3 clicks away or (most of the time) just a right click away. I haven’t had the chance to use the MS Word 2013, but I have a feeling that the experience is going to be even better.

The Read Mode feature is yet another feature to look forward to. This feature is particularly aimed at tablet users. As the name suggests, this feature is for reading. When you switch to the Read Mode, the interface is literally reduced to a bare minimum, thus allowing the document to reflow and to fit in to the screen. One can say its almost like the full screen mode. The interface provides “thumb friendly” buttons on either side of the screen for easy navigation. Some users may be in for some disappointment, because this mode allows the reader to read only one document at a time. Duh ….. you wanted to read ….right!!!!, what else do you want???.

The track changes feature too has been improved for better user experience. The user interface in Word 2013 uses a simpler mark-up look, which appears to be less overwhelming (for many) and intimidating (for some) than the earlier red (strikethroughs) and blue (bold/ underline) mark ups. The new Markup view provides final version of the document with indicators in the margin to indicate the sentences which may have been edited. Whenever you are ready to focus on the changes, just click on the indicator line and it will expand into a thread. Users may find this feature particularly useful while collaborating with others.

One of the conveniences that have been discontinued in MS Office 2013 is the option to add spelling in auto correct by right clicking. This feature was introduced way back in MS Office 97 (I think) and was an instant hit. This feature was very useful for correct typos – – the types you make while typing any document for instance you type “o fthe” instead of “of the”. Earlier, all the user needed to do was to right click and instead of just correcting this one instance—add to the auto correct and save the effort for all similar typos. MS Office 2013 will no longer offer this convenience… but don’t despair, you can still go to the Auto Correct menu and add the same. The only difficulty will be finding it.

EXCEL:

Once again, the basic interface has been metrified i.e. looks and feels very crisp. The look and feel is common between all the other applications of MS Office 2013.

If you thought that MS Excel was an outstanding product, the latest version Excel is even better. Microsoft has added some awesome tools, Quick Analysis tool is one them. In the earlier version, if you selected a range of cells with numbers, nothing happened. In MS Office 2013 – Excel, if you select a range of cells with numbers, a QUICK ANALYSIS tool pops up next to the selected range and gives you a variety of options like—Conditional formatting, charts showing most of the information, formulae, tables formats and in cell sparklines (introduced in Office 2010). However, go around any of the options and you will see it either in the data or in one of the pop up charts. The suggestions are intuitive and change according to the data highlighted. While the overall number of options remain the same, the interface would suggest some of the options (such as why a particular chart or a pivot table may be more suitable) which you may find useful.

The next in line is the Chart advisor. An early prototype was featured on the Office Labs, which has now been fully integrated along with other analytical tools in excel. One can say its a plain vanilla version of professional business analytic tools. With the Chart Advisor, the likelihood of you getting the right chart or pivot table in the first attempt itself is far higher…….which many may agree……… translates to tremendous savings in time. Guess that’s one up for artificial intelligence.

The previous avatar of MS Office ie Office 2010 brought in several features which kinda added “jazz” to Excel. The current version ie Office 2013 has focussed more on functionality rather than “jazz”. But that does not mean that there is no “jazz” added in MS Office 2013. As a matter of fact, the error function (ie the indicator which highlight errors or inconsistencies) has been spruced up quite a bit. For instance: if you move between cell or add or delete some figures that lead to a change in some other result or formula, you are likely to see subtle animations to draw your attention to what changes have happened. So what’s new eh!!!!! Well, for starters, if the change is in the area (ie the displayed area / sheet) then the animation is …. let’s just say …..less animated and if its in a different sheet or so …. the animation is …..a bit more animated. If you click the cell, there will be onscreen prompts to lead you to whatever it is that Excel intends to draw your attention to. This makes it much harder to change or delete information that changes your results without noticing that it makes a difference.……sounds exciting, doesn’t it?

Even the error messages are more useful. For instance: suppose you drag a cell across the worksheet when what was really meant to do was to click somewhere else — the older version would give you a fairly “cryptic” warning ….. but this will not be a problem in MS Office 2013— now Excel gives you a warning in far more simple / descriptive manner, suggesting what’s wrong. Add to this, now there is a whole new add-in to look for errors and inconsistencies between worksheets.

Time slicer & the Quick analysis tools are some other tools to look forward to. The time slicer tool helps you to dig further into your data. For instance: it organises data by date, so you can filter down to a specific period or jump through figures month by month to see the differences. The Quick Analysis is like a shortcut of sorts for making sense of your data as it is or one may say that it is a way to preview different visuals i.e. you’ll see various format-ting options, and as you hover over them you’ll see the document change accordingly, giving you a glimpse of what you’ll see if you end up selecting that option. This is quite similar to the formatting and fonts option available since the Office 2007 days.

In MS Office 97, Microsoft introduced the auto fill feature. It’s one of the features that I have come to appreciate over a period of time. It is an excellent tool to use when filling up data in tables. The Flash Fill apparently is a step up. Flash Fill is a feature that recognizes your data patterns to the point where it should be able to predict what belongs in the remaining blank cells and fill them in for you. For example, if you were to make a time sheet spreadsheet detailing on which client time was spent and by which employee, Excel would eventually pick up on the fact of every employee who has worked on the client / specific project and fill up the data for you. For instance: every Saturday is booked for internal filing etc– in theory, you just have to enter some of that data and then go to the Data tab, where you press the Flash Fill button to make it fill in the rest. A bit of caution here …. Feedbacks available indicate that the Flash Fill is not able to interpret / pick on trends in “all” data.

There are several other features to write about but may be in future… once I lay my hands on the official version. Well that’s all for this month… wish you a Happy Diwali in advance.

Disclaimer: The discussion regarding the features and enhancements contained in this write up are based on the various feedbacks/ reviews available on the internet and various magazines, blogs, etc. The purpose of this write up is only to share the knowledge and not to malign any person or product.

Income from house property: Section 22: A. Y. 2004-05: Where service agreement is dependent upon rent agreement, service charges have to be included as a part of its rental income.

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[CIT Vs. J. K. Investors (Bom) Ltd.; 25 Taxman.com 12 (Bom.)]

In the A. Y. 2004-05, the assessee received rent and service charges in respect of a property owned by it. It claimed both rent income and service charges as ‘Income from house property’. The Assessing Officer accepted the rent income as ‘Income from house property’. So far as service charges were concerned, he held that these service charges were for ancillary services and, therefore, assessable under the head ‘Income from other sources’ and not as ‘Income from house property’. The CIT(A) allowed the claim of the assessee. The Tribunal held that the assessee was providing no services/facilities to the occupants of its property. The services, if any, were being provided by the society. Mere splitting of rent was not decisive and each case had to be examined on its own facts to determine whether the service charges were part of the rent. Therefore, the service charges could not be taxed under the head ‘Income from other sources’, but had to be taxed along with rent income as ‘Income from house property’. Further, the service charges received by the assessee were considered by the Assessing Officer to determine the net maintainable rent and fair market value of the property under the provisions of the Wealth-tax Act. It, therefore, upheld the order of the CIT(A).

 On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) There are concurrent findings of fact by the Commissioner (Appeals) as well as the Tribunal that no services are being provided by the assessee to the occupants of its property and that the service charges have to be included as a part of its rental income.

 ii) The test to determine whether the service agreement is different from the rent agreement would be whether the service agreement could stand independently of the rent agreement. In the instant case, the service agreement is dependent upon the rent agreement, as in the absence of the rent agreement there could be no service agreement.

iii) It may also be pointed out that according to the assessee, the services being provided under the service agreement are in respect of staircase of the building, lift, common entrance, main road leading to the building through the compound, drainage facilities, open space in/ around the building, air condition facility, etc. These are services which are not separately provided, but go along with the occupation of the property. iv) Therefore, the amounts received as service charges are to be considered as a part of the rent received and subjected to tax under the head ‘Income from house property’.”

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Fees for technical services: DTAA between India and Netherlands art. 12 r/w. ss. 9 and 90: Indian company prospecting for minerals: Agreement with Netherlands company for conducting geophysical survey and providing data and maps to Indian company: Ownership of data and maps vesting with Indian company: Amount paid by Indian company not assessable in India.

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[CIT Vs. De Beers India Minerals P. Ltd.; 346 ITR 467 (Kar.)]

The assesses were private companies engaged in the business of prospecting and mining for diamonds and other minerals. For the purpose of carrying out geophysical survey, the assessee entered into an agreement with a Netherlands company Fugro. For the technical services rendered by them, the assessee paid a consideration. The Assessing Officer treated the consideration as falling within the definition of fees for technical services under article 12 of the DTAA between India and Netherlands r.w.s. 90 of the Income-tax Act, 1961. Alternatively, he also held that the payment in question was for development and transfer of a technical plan or technical design. He, therefore, held that the assessee had failed to deduct tax on the payments made to Fugro and treated the assessee in default. He levied tax u/s. 201(1) and interest u/s. 201(1A) of the Act. The Tribunal allowed the assessee’s appeal and held that Fugro had not developed or transferred any technical plan or design to the assessee so as to attract article 12(5)(b) of the DTAA and that the amount was not assessable in India.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

 “i) In terms of the contract entered into with Fugro, Fugro had given the data, photographs and maps, but had not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessee, which the assessee could apply independently and without assistance and undertake such survey independently. The technical services provided by Fugro would not enable the assessee to undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the survey. In view of the matter, though Furgo rendered technical services as defined under Explanation 2 to section 9(1)(vii), it did not satisfy the requirement of technical services as contained in the DTAA. Therefore, the liability to tax was not attracted.

ii) By way of technical services, Fugro delivered to the assessee the data and information after such operations. The data was certainly made use of by the assessee. Not only the data and information was furnished in the digital form, it was also provided to the assessee in the form of maps and photographs. These maps and photographs which were made available to the assessee could not be construed as technology made available. Fugro had not devised any technical plan or technical design. Therefore, the question of Fugro transferring any technical plan or technical design did not arise in the facts of the case.

 iii) Therefore, the cases did not fall in the second part of clause 15 dealing with development and transfer of plans and designs. Thus, the amount was not taxable in India.”

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Deduction u/s. 80-IA(4) : A. Ys. 2003-04 to 2005-06: Infrastructure facility: Meaning of inland port: Inland container depots are inland ports: Assessee entitled to deduction:

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[Container Corporation of India Vs. Asst. CIT; 346 ITR 140 (Del.)]

The assessee, a public sector undertaking, was engaged in the business of handling and transportation of containerised cargo. The activity of the assessee was carried out mainly on its inland container depots, Central freight stations and port container terminals which were spread all over the country. The assessee had a total of 45 inland container depots. For the A. Ys. 2003-04 to 2005-06, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80-IA(4). The Tribunal upheld the disallowance.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:

 “i) Out of the total 45 inland container depots operated by the assessee, except two, all others were notified by the Central Board of Direct Taxes for the purposes of section 80-IA(12)(ca). Having regard to the provisions of the Customs Act, the Communication issued by the Central Board of Excise and Customs as well as the Ministry of Commerce and Industry, the object of including “inland port” as an infrastructure facility and also that customs clearance also takes place in the inland container depot, the assessee’s claim that the inland container depots were inland ports under Explanation (d) to section 80-IA(4) required to be upheld.

ii) The appeals are allowed.”

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Business expenditure: Capital or revenue: Section 37: A. Y. 2001-02: Assessee manufacturing telecommunication and power cables: Software is not a part of profit-making apparatus of the assessee: Software expenditure is revenue expenditure:

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[CIT Vs. Raychem Rpg Ltd.; 346 ITR 138 (Bom.)]

The assessee is in the business of manufacturing telecommunication and power cables. For the A. Y. 2001-02, the assessee claimed deduction of the software expenditure as revenue expenditure. The Assessing Officer disallowed the claim, holding it to be capital expenditure. The Tribunal allowed the assessee’s claim. On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal in the assessee’s own case for the preceding year had allowed the software expenditure as revenue expenditure, finding that software did not form part of the profit making apparatus of the assessee. The appeal filed by the Revenue for that year has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for that year has attained finality.

 ii) Further, it held that the business of the assessee was that of manufacturing telecommunication and power cable accessories and trading in oil tracing system and other products. The software was an enterprise resource planning package and, hence, it facilitated the assessee’s trading operations or enabled the management to conduct the assessee’s business more efficiently or more profitably but it was not in the nature of profit making apparatus. Therefore, the expenditure is to be allowed.”

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Big Data – What is it all About??

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About this article

Big Data is not a
very new idea, it’s been out there for quite some time. Nonetheless,
very few people have realised the full potential of this idea. To
highlight a few advantages, Big Data can help businesses become more
efficient, help them in servicing the customers better and at the same
time improve their bottomline. In a completely different sphere of life,
Big Data helps various research organisations track a variety of data,
such as tracking meteorological data, data related to clinical tests
conducted, etc.

Be it business establishments like eBay, Amazon,
Facebook or research organisation like NASA, the UN, Governments across
the world, etc., the one common link for all those who use Big Data is
Technology. This article seeks to create awareness about how technology
is used to store and analyse Big Data. Like all big ideas, there are
several stories – success as well as failure, myths, etc. associated
with it. This article will deal with some of the successes and failures.


Background
Ever wondered how a weather bureau
predicts weather or for that matter, how organisations like NASA, ISRO
monitor space, (in case you didn’t know already – apart from secretly
tracking UFOs) that includes tracking various stars, planets,
meteorites, comets, space crafts, satellites, millions of objects of
floating junk which were in some form or another a part of a satellite
or some cargo carried by the satellites. Also, there is the curious case
of the measurements that scientists do, such as that in a nuclear test,
the Hadron Collider. How about mapping the human genome – did you know
that there are more than a billion unique data sets ?

I know
that sounds hugely futuristic and the question that begs to be answered
is “What do I care” or “How does it matter to me”. Well let’s just say
that what is described above are some of the sources and users of Big
Data. Closer to home or to our everyday life, Big Data is used by giants
like Facebook, Amazon, Walmart, to name a few, for improving customer
experience.

Characteristics of Big Data:
Well, to be
honest, “Big Data” is more like a term which was coined in reference to
the data. What I mean is that, there no “official” definition of “Big
data” or for that matter “Small Data”. But, generally speaking, Big Data
refers to data characterised by four features i.e. volume, variety,
velocity and veracity. To understand this better, let’s take a few
illustrations of these characteristics that are closely identified with
Big Data:

Volume: Today, businesses everywhere, are awash
with ever-growing data of all types. Conservatively speaking, they
collect huge amounts of data (often the volume is in terabytes – in some
cases petabytes – of information).

For instance, someone like
Twitter would churn x terabytes of tweets created each day, into
improved product sentiment analysis. Someone like General Electric is
likely to convert billions of annual meter readings to better predict
power consumption. One company boasts of systems which track events
(crime related) which can help Governments reduce crime rates.

Velocity:
Sometimes, a few minutes is too late. Certain time-sensitive processes
such as catching fraud, Big Data must be used as it streams into your
enterprise in order to maximise its value.

For instance,
exchanges like the Bombay Stock Exchange, National Stock Exchange etc.,
scrutinise millions of trade events created each day to identify
potential fraud (like the punching error report very recently). Couple
of weeks ago (and even in the past), these exchanges had assisted SEBI
is pinpointing instances of circular trading and front running.

Variety: For the readers of this Journal, data
would mean spreadsheets, word documents, accounting records, etc. But in
reality, there is a vast variety of forms/formats in which data can
exist. In case of Big Data, data may be of any type – structured and
unstructured data, text data, sensor data, audio, video, click streams,
log files and more. Typically, new insights are found when all these
different types of data is put together and analysed from a specific or
variety of specific points of reference.

The classic examples of
this would be Facebook, Amazon etc., and if I may dare to say so,
“Algorithmic trading solutions”. It is said that in some cases, the
“algos” are so advanced that they analyse the tweets and social media
trends for “sentiments” and execute trades on the basis of such analysis
alone.

Veracity: What role does veracity have to play
here. Imagine this – you spend a fortune, putting in place a system to
collect the data. Thereafter, the data is stored before an analysis is
made. What good would be the collection, storage and analysis, if the
data collected was inaccurate. Further, customers part with the data
willingly (most of the time unknowingly), who ensure that their privacy
is not violated. Statistically speaking, one in three business leaders
don’t trust the information they use to make decisions.

How can
you act upon information, if you don’t trust it? Establishing trust in
Big Data presents a huge challenge, as the variety and number of sources
grows.

Big Data – has been out there for some time:

Most
people go under the assumption that Big Data is a recent phenomenon.
But that’s not quite true. As a matter of fact, companies like American
Express1 and Google have been using Big Data in some form or the other,
to analyse and predict customer behaviour, with a view to enhance
customers’ service and public perception. While this may or may not be
true, the fact remains that the amount of data captured and analysed in
the last two to three years, far exceed the total data (in volume and
variety) captured over the last millennia (at the least).

Big Data – recent changes:
What
most people don’t realise, is the manner and extent to which changes
have taken place in the last couple of years. To begin with, storage
space has increased dramatically, our ability to process such data has
been growing exponentially. One could also attribute some positives to
the technological advancement, development of new analytical models,
etc. Given all these, our need and manner of use, the very application
of such data, has undergone a sea of change (one may say. A change of
epic proportions). Here is why:

  • Walmart handles more
    than 1 million customer transactions every hour, which is imported into
    databases estimated to contain more than 2.5 petabytes of data.
  • Facebook handles 40 billion photos from its user base.
  • FICO Falcon Credit Card Fraud Detection System protects 2.1 billion active accounts world-wide.
  • Decoding the human genome originally took 10 years to process; now it can be achieved in one week.
  • There
    are 4.6 billion mobile-phone subscriptions worldwide and there are
    between 1 billion and 2 billion people accessing the internet.
  •  Between
    1990 and 2005, more than 1 billion people worldwide entered the middle
    class, which means more and more people who gain money will become more
    literate, which in turn leads to information growth.
  • The world’s effective capacity to exchange information through telecommunication networks was
  • 281 petabytes in 1986,
  • 471 petabytes in 1993,
  • 2.2 exabytes in 2000,
  • 65 exabytes in 2007; and
  • it is predicted that the amount of traffic

flowing over the internet will reach 667 exabytes annually by 2013. (Source: Wikipedia)

How big is “Big data”:

Consider this. In 2012, the Obama administration announced the Big Data Research and Development Initiative, which explored how Big Data could be used to address important problems facing the government. The initiative was composed of 84 different Big Data programs spread across six departments. The United States Federal Government owns six of the ten most powerful supercomputers in the world.

Big data has increased the demand of information management specialists due which software giants of the likes of SAG, Oracle Corporation, IBM, Microsoft, SAP, and HP, have spent more than $15 billion on software firms only specialising in data management and analytics. This industry on its own is estimated to be worth more than $100 billion. That’s not all, it’s reported to be growing at almost 10% a year, which is roughly twice as fast as the software business as a whole.

In the Indian scenario, the Indian Big Data industry is expected to grow from $ 200 million in 2012 to $ 1 billion in 2015, at a CAGR of over 83%. Nasscom’s prediction is that Big Data will help the BPO industry move forward as it will help in “evidence-based” decision-making for clients, which in turn has a high impact on business operations.

Can we ignore Big data?

The answer seems to a resounding NO. Why?????? Cause………… To remain competitive, all organisations need to analyse both internal and external data, as quickly and cost effectively as possible. As the world becomes more instrumented, with RFID tags, sensors and other sources, companies are creating more and more data. When paired with external data – like that generated by social media sites – there’s incredible opportunity that is largely untapped and unanalysed.

Parting remarks:

This write-up was intended to be a precursor – to give the readers a basic overview of Big Data. In the next part, we will cover some more ground and delve into some more details, understand what’s all the hype about and whether there is a hidden pot of the gold at the end of the rainbow or not.

Until then, I wish all the readers a Happy Dassera.

Disclaimer: The information/factual data provided in the above write-up is based on several news reports, articles, etc., available in the public domain. The purpose of this write-up is not to promote or malign any person or company or entity. The purpose is merely to create awareness and share knowledge that is already available in the public domain.

Appeal to CIT(A)/Tribunal: Power: A. Y. 2004- 05: CIT(A)/Tribunal have power to admit/ allow additional ground/claim not made in the return:

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[CIT Vs. Pruthvi Brokers & Shareholders (P) Ltd.; 252 CTR 151 (Bom.)]

For the A. Y. 2004-05, in the return of income, the assessee had claimed deduction of Rs. 20,00,000/- in respect of payment of SEBI fees taking into account the provisions of section 43B of the Income-tax Act, 1961. Subsequently, the assessee found that the amount actually paid and allowable u/s. 43B was Rs. 40,00,000/-. As the time for filing revised return was over, the assessee made the claim for deduction of Rs. 40,00,000/- by a letter, in the course of assessment proceedings and also filed the relevant evidence.

The Assessing Officer disallowed the claim, relying on the judgment of the Supreme Court in Goetz (India) Ltd. Vs. CIT; 284 ITR 323 (SC). CIT(A) allowed the assessee’s claim and the same was upheld by the Tribunal. On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “In an appeal before the CIT(A) and Tribunal, an assessee is entitled to raise additional grounds not merely in terms of legal submissions, but also additional claims not made in the return filed by it.”

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Housing project: Deduction u/s. 80IB(10): A. Y. 2006-07: Ceiling on commercial area inserted w.e.f. 01/04/2005 in section 80-IB(10(d) does not apply to projects approved before that date:

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[Manan Corporation Vs. ACIT (Guj); ITA No. 1053 of 2011 dated 03/09/2012:]

The assessee’s housing project commenced prior to 01/04/2005, when section 80-IB(10) of the Incometax Act, 1961 did not impose any ceiling on the commercial area that could be embedded in the project. For the A. Y. 2006-07, the Assessing Officer denied deduction u/s. 80-IB(10) relying on the ceiling prescribed in section 80-IB(10) as amended by the Finance (N0.2) Act, 2004 w.e.f. 01/04/2005. The Tribunal upheld the decision of the Assessing Officer.

On appeal by the assessee, the Gujarat High Court reversed the decision of the Tribunal and held as under:

 “i) The judgment of the Bombay High Court in Brahma Associates 333 ITR 280 (Bom) holding that w.e.f. 01/04/2005, deduction u/s. 80-IB(1)) would be governed by the restriction on the commercial area imposed by clause (d) does not mean that even projects approved prior to 01/04/2005 would be governed by the said restriction.

ii) Neither the assessee nor the local authority responsible to approve the construction projects are expected to contemplate future amendment in the statute and approve and/or carry out constructions maintaining the ratio of residential housing and commercial construction as provided by the amended Act.

iii) The entire object of section 80-IB(10) is to facilitate the construction of residential housing project and if at the stage of approving the project, there was no such restriction in the Act, the restriction subsequently imposed has to be necessarily construed on the prospective basis
and as applying to the projects approved after that date.”

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DDIT v Mitchell Drilling International Pty Ltd (ITA No 698/Del/2012) Section 44BB of I T Act Asst Year: 2008-09 Decided on: 31 August 2012 Before J.S. Reddy (AM) and U.B.S. Bedi (JM) Counsel for assessee/revenue: Amit Arora/ Vijay Babu Vasanta

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Service tax collected from customer does not form part of receipts for computing presumptive income u/s. 44BB of I T Act.

Facts:
The taxpayer was a company incorporated in Australia. It was engaged in the business of providing equipment on hire and manpower for exploration and production of mineral oil and natural gas. It had received income from drilling operations and exploration of mineral oil and had received reimbursement for mobilization expenses. The taxpayer offered its income to tax u/s. 44BB(1) and 10% of the gross receipts was deemed to be income chargeable to tax. The taxpayer did not include service tax collected by it from its customers. It contended that service tax was levied and collected by a service provider as an agent of the Government and it was held in trust as custodian/trustee for the Government and therefore, it cannot be added to its receipts for determination of presumptive profit u/s. 44BB of I T Act.

Held:
Relying on the decision of Delhi Tribunal in Sedco Forex International Drilling Inc [2012] 24 taxman.com 390 (Delhi), the Tribunal held that service tax should not form part of receipts for computing presumptive income u/s. 44BB of I T Act.

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Hess ACC Systems B. v In re [2012] 24 taxmann. com 297 (AAR New Delhi) A. A. R. No 1033 of 2010 Date of Order: 27-08-2012 Before P K Balasubramanyan (Chairman)

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Where the Applicant had entered into two separate contracts – one for supply of plant and another for erection and installation services, and the period between supply of plant and commencement of erection and installation services was considerable, the services could not be said to fall under the exception in Article 12(6)(a) of India-Netherlands DTAA.

Facts:
The Applicant was a company incorporated in, and resident of, Netherlands (“DutchCo”). The Applicant entered into two contracts with an Indian company (“IndCo”) on the same day. The first contract was for supply of machinery, spare and technical documentation for production of certain products. The second contract was for supply of project services for erection and installation of the machinery supply under the first contract. DutchCo supplied machinery under the first contract and thereafter, approached AAR for its ruling on the issue whether the payments made by IndCo towards project services were chargeable to tax, either under I T Act or under India- Netherlands DTAA.

DutchCo contended that both the contracts were entered into on the same day, they were part of the same transaction, the consideration was also dependent on each other and the contract for project services was ancillary and inextricably linked to the supply contract. Accordingly, in term of Article 12(6) (a) of DTAA, it would not be FTS. The tax authority countered that once DutchCo and IndCo having treated the two contracts as separate contracts, it was not open for DutchCo to plead otherwise.

Held:
The AAR observed hand held as follows.
? The DutchCo did not dispute that the payments were FTS, but claimed that the payments were for services that were ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property.
? It was really an indivisible contract which was artificially split up, possibly, to avoid tax.
? It was hence, not open for DutchCo to claim that the project services contract was for services that were ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property.
? While the supply of plant was completed on 5th December, 2009, the supply of services was ‘expected to commence from March 2011’, which showed lack of proximity between the two contracts.
? Therefore, the payments under the second contract were fees for technical services not falling within the exception in Article 12(6)(a) of India-Netherlands DTAA.

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Company Law Settlement Scheme, (Jammu & Kashmir) 2012

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The Ministry of Corporate Affairs has launched the Company Law Settlement Scheme for the state of Jammu & Kashmir, as the non compliance of filing Balance Sheets and Annual returns is more critical there. The scheme condones the delay in filing of documents with the Registrar, grants immunity from prosecution and charges additional fee of 25% of the actual additional fee payable for filing belated documents under the Companies Act and Rules made there under. The scheme shall remain in force from 15.08.2012 to 14.12.2012. It applies to only Companies registered in the state of Jammu and Kashmir and foreign companies falling under section 591 of the act having their liaison office in the state of Jammu and Kashmir.
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Applicability of Service Tax on commission payable to Non- Whole Time Directors of a Company u/s 309(4) of the Companies Act, 1956

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The Ministry of Corporate Affairs has decided that any increase in remuneration of Non Whole Time Director(s) of a company, solely on account of payment of Service Tax on commission payable by the Company shall not require approval of the Central Govt. u/s 309 & 310 of the Companies Act, even if it exceeds the limit of 1% or 3% of the profit u/s 309(4) of the Company, as the case may be, in the financial year 2012-13.
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Clarification on Para 46A of Notification No. GSR 914(E) dated 29.12.2011 on AS 11 relating to “ Effects of Changes in Foreign Exchange Rates”

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In view of the several representations from industry associations, the Ministry of Corporate Affairs has vide Circular No 25/2012 dated 9th August 2012, clarified that Para 6 of of AS 11 relating to “Effects of Changes in Foreign Exchange Rates” and Para 4(e) of AS 16 relating to borrowing costs, shall not apply to a company which is applying clause 46A of AS 11.
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A. P. (DIR Series) Circular No. 16 dated 22nd August, 2012

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Foreign Direct Investment by citizen/entity incorporated in Pakistan. Press Note No.3 (2012 Series) Press Note No.3 (2012 Series) dated: 1st August, 2012.

Presently, a citizen of Pakistan or an entity incorporated in Pakistan, is not allowed to purchase shares or convertible debentures of an Indian company under Foreign Direct Investment (FDI) Scheme.

This circular permits, under the Approval Route, a person who is a citizen of Pakistan or an entity incorporated in Pakistan to purchase shares and convertible debentures of an Indian company under FDI Scheme. However, the Indian company in which FDI is received must not be engaged/must not engage in sectors/activities pertaining to defense, space and atomic energy and sectors/activities prohibited for foreign investment.

RBI HAS ISSUED NEW MASTER CIRCULARS ON 2nd JULY, 2012.

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A. P. (DIR Series) Circular No. 15 dated 21st August, 2012

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Overseas Direct Investments – Rationalisation of Form ODI

The circular has amended Part E & Part F of Form ODI by adding new items to the same. The amended new Form ODI is annexed to this circular.

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A. P. (DIR Series) Circular No. 12 dated 31st July, 2012

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Exchange Earner’s Foreign Currency (EEFC) Account, Diamond Dollar Account (DDA) & Resident Foreign Currency (RFC) Account – Review of Guidelines.

This circular permits EEFC/DDA/RFC account holders to credit 100% of their foreign exchange earnings to the respective accounts. However, the sum total of the accruals in the account during a calendar month will have to be converted into Rupees on or before the last day of the succeeding calendar month after adjusting for utilization of the balances for approved purposes or forward commitments.

As a result, balances outstanding in the said accounts as on 31st July, 2012 together with balances accruing on and from 1st August, 2012 to 31st August, 2012, will have to be converted into Rupee balances on or before close of business on 30th September, 2012. Similar procedure will have to be followed for accruals to the respective accounts in subsequent months.

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A. P. (DIR Series) Circular No. 11 dated 31st July, 2012

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Foreign Exchange Management Act, 1999 (FEMA)- Compounding of Contraventions under FEMA, 1999.

This circular clarifies that, whenever a contravention is identified by RBI or brought to its notice the entity concerned by way of a reference other than through the prescribed application for compounding, RBI will continue to decide: –

(i) Whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/cautionary advice;

(ii) Whether it is material and, hence, is required to be compounded, for which the necessary compounding procedure has to be followed; or

(iii) Whether the issues involved are sensitive/serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE).

However, once a suo moto compounding application is filed, by the entity concerned, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process will be initiated.

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A. P. (DIR Series) Circular No. 8 dated 18th July, 2012

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Exchange Earner’s Foreign Currency (EEFC) Account

This circular states that the provisions of A. P. (DIR Series) Circular No. 124 dated May 10, 2012 will not apply to the Resident Foreign Currency (RFC) Accounts. As a result, the RFC account holder can now retain 100% of his/her foreign exchange earnings in the said account.

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A. P. (DIR Series) Circular No. 7 dated 16th July, 2012

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Scheme for Investment by Qualified Foreign Investors (QFIs) in Indian corporate debt securities.

Presently, QFI are permitted to invest only in rupee denominated units of domestic Mutual Funds and listed equity shares.

This circular has revised the definition of QFI and permitted them to also invest on repatriation basis debt securities subject to certain terms and conditions. QFI can now invest up to $ 1 billion in corporate debt securities (without any lock-in or residual maturity clause) and Mutual Fund debt schemes. This limit shall be over and above $ 20 billion for FII investment in corporate debt. For this purpose, QFI must open a single non-interest bearing Rupee Account with a bank in India for investment in all ‘eligible securities for QFI’. As per the revised definition, QFI shall mean a person who fulfills the following criteria:

(a) Resident in a country that is a member of Financial Action Task Force (FATF) or a member of a group which is a member of FATF; and
(b) Resident in a country that is a signatory to IOSCO’s MMoU (Appendix A Signatories) or a signatory of a bilateral MoU with SEBI.

PROVIDED that the person is not resident in a country listed in the public statements issued by FATF, from time to time, on jurisdictions having a strategic AML/ CFT deficiencies to which counter measures apply or that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies;

PROVIDED that such person is not resident in India;

PROVIDED FURTHER that such person is not registered with SEBI as a Foreign Institutional Investor (FII) or Sub-Account of an FII or Foreign Venture Capital Investor (FVCI).

Explanation – For the purposes of this clause:

(1) “Bilateral MoU with SEBI” shall mean a bilateral MoU between SEBI and the overseas regulator that, inter alia, provides for information sharing arrangements.
(2) Member of FATF shall not mean an associate member of FATF.

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A. P. (DIR Series) Circular No. 5 dated 12th July, 2012

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Foreign Exchange Management Act, 1999 – Submission of Revised A-2 Form.

RBI has revised the purpose codes for submitting R-Returns by Banks. As a consequence of this revision, purpose codes in Form A-2 have also been revised. Annexed to this circular is the revised list of purpose codes along with Form A-2.

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A. P. (DIR Series) Circular No. 1 dated 5th July, 2012

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Buyback/Prepayment of Foreign Currency Convertible Bonds (FCCBs). This circular states that RBI will permit buyback of FCCB under the approval route upto 31st March, 2013, subject to: –

a) The buyback value of the FCCB must be at a minimum discount of 5% on the accreted value.

b) In case the buyback is to be financed by foreign currency borrowing, all FEMA rules/regulations relating to foreign currency borrowing shall be complied with.

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A. P. (DIR Series) Circular No. 137 dated 28th June, 2012

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Foreign Investment in India – Sector Specific conditions.

Annexed to this circular is the revised Annex A and Annex B of Schedule 1 to Notification No. FEMA 20/2000-RB dated 3rd May 2000. The revision has been made to bring uniformity in the sectoral classification position for FDI as notified under the Consolidated FDI Policy Circular 1 of 2012 dated April 10, 2012 and FEMA Regulations.

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A. P. (DIR Series) Circular No. 136 dated 26th June, 2012

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External Commercial Borrowings (ECB) – Rationalisation of Form-83.

Attached to this circular is the new Form 83. This new Form 83 has to be submitted to RBI from 1st July, 2012 for obtaining Loan Registration Number (LRN).

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A. P. (DIR Series) Circular No. 135 dated 25th June, 2012

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Foreign investment in India by SEBI registered FIIs in Government securities and SEBI registered FIIs and QFIs in infrastructure debt.

This circular has increased the present limits for investment by FII and other foreign investors (Sovereign Wealth Funds (SWFs), Multilateral agencies, endowment funds, insurance funds, pension funds and foreign Central Banks) in Government Securities from $ 15 billion to $ 20 billion.
Conditions for investment in Infrastructure Debt Funds (IDF), within the overall limit of $ 25 billion, have been changed as under: –

  • The lock-in period for investments has been uniformly reduced to one year; and
  • The residual maturity of the instrument at the time of first purchase by an FII/eligible IDF investor must be at least fifteen months.

QFI can now invest in MF schemes that hold at least 25% of their assets (either in debt or equity or both) in the infrastructure sector, under the current $ 3 billion sub-limit for investment in mutual funds related to infrastructure.

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A. P. (DIR Series) Circular No. 134 dated 25th June, 2012

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External Commercial Borrowings (ECB) – Repayment of Rupee loans.

This circular permits Indian companies in the manufacturing and infrastructure sector who have consistent foreign exchange earnings during the last three years to avail, under Approval Route, ECB for repayment of Rupee loan(s) availed of from the domestic banking system and/or for fresh Rupee capital expenditure, provided the companies are not in the default list/caution list of the Reserve Bank of India.

The overall ceiling for such ECB will be US $ 10 (ten) billion and the maximum permissible ECB that can be availed of by an individual company, based on its foreign exchange earnings and its ability to service, is limited to 50% of the average annual export earnings realized during the past three financial years. Draw down of the entire facility must be undertaken within a month after taking the Loan Registration Number (LRN) from RBI.

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A. P. (DIR Series) Circular No. 133 dated 20th June, 2012

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Annual return on Foreign Liabilities and Assets Reporting by Indian Companies – Revised format.

This circular contains the new format of the annual return on Foreign Liabilities and Assets that is required to be submitted by all the Indian companies which have received FDI and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year. This annual return has to be submitted every year on or before 15th July, 2012, directly by Indian companies to the Director, External Liabilities and Assets Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, C-8, 3rd floor, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051. The new form can be duly filled-in, validated and sent by e-mail to RBI.

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A. P. (DIR Series) Circular No. 132 dated 8th June, 2012 Money Transfer Service Scheme

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Presently, a single individual beneficiary can receive for personal use upto 12 remittances not exceeding US $ 2,500 each in a calendar year.

This circular has increased the number of remittances that an individual can receive from 12 to 30. Thus, an individual can now receive for personal use upto 30 remittances each not exceeding $ 2,500 in a calendar year.

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A. P. (DIR Series) Circular No. 131 dated 31st May, 2012

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Overseas Direct Investments by Indian Party – Online Reporting of Overseas Direct Investment in Form ODI.

Presently, although banks can generate the UIN online for overseas investments under the Automatic Route, reporting of subsequent remittances for overseas investments under the Automatic Route as well as the Approval Route, could be done online in Part II of Form ODI only after receipt of the letter from RBI confirming the UIN.

This circular states that, in the case of overseas investments under the Automatic Route, UIN will be communicated through an auto generated e-mail sent to the email-id made available by the Authorized Dealer/Indian Party. This auto generated e-mail giving the details of UIN allotted to the JV/WOS will be treated as confirmation of allotment of UIN, and no separate letter will be issued with effect from 1st June, 2012 by RBI either to the Indian party or to the Authorized Dealer. Subsequent remittances are to be reported online in Part II of form ODI, only after receipt of the e-mail communication/ confirmation conveying the UIN.

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AN ARBITRARY DECISION OF SEBI/SAT – overturns its own consistent interpretation and levies penalty

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A recent strange decision of SEBI, upheld by the Securities Appellate Tribunal leaves companies and others puzzled as to how at all securities laws should be interpreted and applied. Should, for example, a particular interpretation which is not only followed by SEBI, which itself confirms in writing as correct and is otherwise widely applied in practice without objection by SEBI, be overturned? And if such an interpretation which is almost certainly not harming any public interest and is well within the spirit and perhaps even the letter, should be so overturned and, moreover, a person severely penalised for it?

This is exactly what SEBI has done recently and the SAT has upheld such a decision (Order of SAT in matter of Hanumesh Realtors Private Limited v. SEBI dated 25th July 2012).

What was the issue?
The broad issue and background is explained as follows:

SEBI Takeover Regulations 1997 (“the Regulations”) require that a person who acquires substantial shares in a listed company or acquires control over it, should make an open offer to acquire shares from the public shareholders. A person already holding substantial shares can increase his holding without having to make an open offer by a small percentage only every year – normally upto 5%. This is called “creeping acquisition” in common parlance. For the purposes of the 5% limit holding not only the acquirer himself is considered but that of persons acting in concert with him is aggregated. To ensure that there is no misuse of the provisions, inter se transfer of shares amongst the persons acting in concert is allowed with certain safeguards.

In case of acquisition of shares by way of a fresh issue, a slightly peculiar situation arises on account of a calculation/mathematical issue. Take a situation where a person holds 40% of equity share capital of Rs. 10 crore. If he seeks to acquire another 5% in accordance with creeping acquisition provisions, and if he is accordingly allotted Rs. 50 lakh worth of equity shares, then his holding will increase only by 2.86% to 42.86%. The reason is that as his holding increases by Rs. 50 lakh, the equity share capital also increases by Rs. 50 lakh. Thus, his increased holding of Rs. 4.50 crore is calculated with reference to the equity share capital that has also increased to Rs. 10.50 crore. To enable him to increase his holding by 5%, he would have to be allotted equity shares of about Rs. 91 lakh, i.e., almost double.

Now, a further peculiar situation may arise when the acquirer group consists of more than one person. Unless shares are acquired by all the persons in the group in proportion of shares already held by them, there could be increase of holding of more than 5% by the acquirer and dilution of holding by those who do not acquire.

To continue the above example, let us say that the 40% or Rs. 4 crores was held by two persons – one holding Rs. 1.50 crores and another holding Rs. 2.50 crores. If shares are acquired by the person holding Rs. 1.50 crores, then his percentage holding increases from 15% to 22.09%, i.e., by 7.09%. However, the holding of the other person gets reduced by way of dilution from 25% to 22.91%. The overall holding of the two persons taken together, of course, increases to 45%, i.e., within the prescribed limits.

The question is whether the holding and the increase is to be considered individually or as a group. If it is considered individually, then the first holder may be deemed to have exceeded the limit of 5%.

Facts of the present case
The Promoter Group held 49.62% in the share capital of the Company. Further shares were allotted to a particular person in the Promoter Group. The overall holding of the Promoter Group consequent to such allotment increased from 49.62% to 54.59%, i.e., by 4.97% i.e., well within the prescribed limits. However, the individual holding of the person who was allotted shares increased from 36.62% to 42.87%, i.e., by 6.25% which is more than 5%. Needless to add, the holding of the other persons in the Promoter Group decreased by way of dilution. The question is whether such increase is to be considered on a stand alone basis or on a group basis.

SEBI had issued an interpretive letter in 2009 where SEBI had opined that if overall holding did not increase by more than 5%, there would not be any violation of the limits. To be fair, firstly, the facts in that letter were not identical to the present facts, since there was nothing on record to show that one individual’s holding increased more than 5% but was balanced by another person’s dilution of holding. However, the interpretation given was broad enough. Secondly, interpretive letters, in law, do have limited application and are even officially termed as “informal guidance”. Thus, one may not want to apply analogy of other laws such as tax laws where circulars of CBDT are given considerable weight. Still, in securities laws, a certain level of sanctity is to be given to such interpretive letters and SEBI ought to take a consistent view on the issue.

In another case, as explained in the SAT Order, SEBI even passed an adjudication order on similar principles. In that case, the holding of one acquirer increased from 0.43% to 28.22% ! In other words, he even crossed the 15% threshhold which would require an open offer to be made. However, because of non-acquisitions by other persons in the group, their holding decreased from 40.13% to 16.79%, thus the overall increase being from 40.56% to 45.01% which was within 5% limit. SEBI held that this was in consonance with law since the net increase was within 5%. Admittedly, the acquisition in that case was under the rights issue route, but the findings of SEBI were categorical enough to mean that such acquisitions through issue of new shares will be counted as a group.

However, in this particular case, SEBI took a stand and relied on a much earlier decision of the Supreme Court in Swedish Match AB’s case (Appeal No. 2361 dated 25th August 2004). In that case, there were two Promoters – an incoming foreign promoter who already held a substantial quantity of shares and the existing promoter. The incoming promoter acquired most of the remaining shares of the existing promoter and such shares were substantial in number. While deciding on the issue whether this resulted in an open offer or not, the Supreme Court analysed the provisions of Regulations 11 of the 1997 Regulations and held that the increase in holding can take place in three ways only. The acquirer may himself acquire or he may acquire through some other person or he may acquire alongwith other persons.

SEBI took a stand that this principle will have to be applied in the present case in the manner explained as follows. As soon as a person within a group acquires more than 5% shares, he will have to make an open offer even if the holding of the other person, solely on account of this mathematical peculiarity reduces and overall increase in holding remains within the limits. SEBI not only discarded its own decision and interpretation which were much later in date and consistent too, but also applied the above decision of the Supreme Court in perhaps what were different facts at least to a degree and peculiarity. SEBI levied a huge penalty of Rs. 1.87 crores on the party.

Aggrieved, the party appealed to SAT. Strangely, SAT focussed only on the decision of the Supreme Court and applying it, held that the legal position as now canvassed by SEBI was correct. It did not criticise SEBI’s stand of arbitrarily reversing its stand and then – to top it – levying severe penalty. However, SAT did reduce the penalty and while reducing it, it did take into account as part of the consideration, though not sole one, the mitigating factor being SEBI’s earlier decisions and stand. Though the penalty was reduced substantially to Rs. 10 lakhs, it is submitted that it sounds low only in comparison to the original amount. Otherwise, it still remains a substantial penalty considering, in my submission, the blameless act of the acquirer.

This decision and stand of SEBI places persons concerned with applying securities laws in a dilemma particularly since securities laws are often interpreted consistent with SEBI’s stand in practice. If SEBI takes a particular stand and also gives an interpretive circular in writing, it ought to honour it in future cases. And if it wishes to change the stand, a better view may be to give a clarification and in cases where other parties have followed the earlier stand, no action ought to have been taken. This is more so when no harm whatsoever could conceivably have been caused in the present facts.

The author has also observed in numerous other cases of acquisitions by way of issue of new shares, a similar position has existed though none of these cases were acted against. This would show that a particular practice was widely followed and the appellant had every reason to adopt it and could not be faulted particularly since no harm whatsoever could have conceivably been caused to any person.

It is also submitted that the decision of the Supreme Court could have been distinguished. That was a case of inter se transfer of shares between two distinct groups and the holding of acquirer as well as of the acquirer group both increased substantially and by more than 5%. Even the control of the company changed hands from joint control to sole control. The present case was not a case of inter se transfer of shares even if in theory one person in the group increased his holding and holding of the remaining, purely on account of dilution, decreased.

It may be mentioned that this decision is in respect of the earlier law, viz., the 1997 Regulations. Recently, the new Takeover Regulations, 2011 have been notified. Under the 2011 Regulations, it is now expressly stated that the increase in individual shareholding shall also be considered and even if the holding of the remaining shareholders in the group decreases, still, if the limits are exceeded qua a single shareholder, the open offer requirements would apply. However, it is submitted that this in fact would go to show that earlier this was not the case since otherwise, such an express provision was not required.

All in all, this represents an unhealthy trend by SEBI where persons concerned with compliance will always remain on edge as to whether SEBI would change its stand. The importance of interpretive letters – which officially of course is limited to the facts of the case and not binding interpretation of law – will further get diluted. SEBI’s stand appears almost vindictive and arbitrary, since this was a case where even if the matter was taken up for consideration, it was a fit case of not levying any penalty whatsoever while at same time laying down the law for guidance in the future for other persons. Let us hope that this decision is an exceptional decision influenced solely by the binding precedent of the Supreme Court and such arbitrary stand is not repeated in the future.

Whether penalty is discretionary or automatic? – Held, discretionary – What is reasonable cause? – Held, bonafide dispute whether tax is payable or not is a reasonable cause for waiver u/s. 80 – Penalties to be interpreted strictly – penalty cannot be imposed u/s. 76 and 78 simultaneously etc. – Further, if the penalty is levied within the range prescribed, the Revisional authority could not enhance it.

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2. 2012 (27) STR 225 (Kar) CST – Bangalore v. Motor World
    
Whether penalty is discretionary or automatic? – Held, discretionary – What is reasonable cause?
–    Held, bonafide dispute whether tax is payable or not is a reasonable cause for waiver u/s. 80
–    Penalties to be interpreted strictly – penalty cannot be imposed u/s. 76 and 78 simultaneously etc. – Further, if the penalty is levied within the range prescribed, the Revisional authority could not enhance it.

Facts:

It was a batch of cases on an identical issue wherein Respondents had paid penalties levied by adjudicating authorities, inspite of having proved that there was a reasonable cause for non payment/ short payment of taxes. The Commissioner exercising powers under the then section 84, revised the orders of lower authorities to enhance the penalties.

Held:

 The imposition of penalty is not automatic. Not only the ingredients of the penal sections should exist but also there should be absence of reasonable cause for the failure to comply with the law. The adjudicating authority has the discretion to levy penalty within the limits prescribed under the law. Penalty sections to be construed strictly and if there are two views possible, the one which is favourable to the assessee should be preferred. If the penalty levied is not less than the minimum limit prescribed, the revisional authority has no power to enhance the same on the ground that it is less. If the adjudicating authority exercising powers conferred u/s. 80 has held that there was a reasonable cause for non levy of penalty, revisional authority can’t take a contrary stand and levy penalty. No penalty can be imposed u/s. 76 as well as section 78 for the same offence.

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Wrong availment of CENVAT Credit – Assessee not paid tax on roaming charges received from other operators but availing CENVAT Credit on output services in excess of prescribed limit of 35% – Availment of CENVAT Credit on exempted services not disclosed – Deliberate suppression and not mere omission – Held – Extended period applicable – Penalty levied u/s. 76 and 78 held valid.

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1. 2012 (53) VST 139 (Raj) – Vodafone Digilink Ltd. v. Commissioner of Central Excise, Jaipur-II

Wrong availment of CENVAT Credit – Assessee not paid tax on roaming charges received from other operators but availing CENVAT Credit on output services in excess of prescribed limit of 35% – Availment of CENVAT Credit on exempted services not disclosed – Deliberate suppression and not mere omission – Held – Extended period applicable – Penalty levied u/s. 76 and 78 held valid.


Facts:

The appellant was engaged in the business of providing cellular telephone service. Apart from charges received from its own subscribers, it also received roaming charges from other operators towards roaming facility provided by the appellant to the subscribers of the latter. The appellant did not pay any tax on the amount so received towards roaming charges and utilised the entire service tax credit availed of on various input services for payment of service tax without any restriction of 35% as required under Rule 3(5) of the Service Tax Credit Rules, 2002 and nowhere disclosed the said excess amount so utilised.

Held:

The appellant wilfully suppressed the facts of availment of input credit in respect of exempted services in excess of the prescribed limit of 35%. When the limit is prescribed, facts ought to have been mentioned clearly. When exempted service was availed of in excess of the prescribed limit, it was incumbent upon the appellant to disclose it. Thus, the case being covered under the proviso to s/s (1) of section 73 of the Act, the case is not one of mere omission to give correct information but was devised deliberately to evade tax liability. Not finding any involvement of substantial question of law, the Court dismissed the appeal.

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IS IT FAIR TO ISSUE CERTIFICATES U/S. 197 WITH UNNECESSARY CONDITIONS?

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Introduction

There are many non-resident Indians having long term capital assets, particularly residential house properties in India. After the sale of such assets, many of them further propose to reinvest requisite amounts either in house property or in eligible bonds to avail benefits of section 54/54EC/54F of the Income tax Act, 1961 (‘the Act’) . Since it is a transaction with a nonresident, the issue of withholding tax arises. Ideally, since the assessee seller is going to reinvest in eligible assets u/s 54/54EC/54F, no tax should arise. However, the buyer (being the payer of the sale consideration) would be under an obligation to deduct tax for payment being made to a non resident in terms of section 195 of the Act.

In such cases, most of the non-residents opt to apply under section 197 for NIL/lower deduction certificates. An affidavit that requisite amounts would be invested in eligible assets u/s 54/54EC/54F is also submitted alongwith other documents (like sale deed, proof of being a non-resident, computation of capital gains etc.). On the basis of the same, it can be fairly decided that the buyer need not deduct any tax or deduct tax at lower rate. It has been observed that it is a normal practice within the Department to issue such certificate but with a direction to the buyer to issue a cheque of requisite amount directly in favour of REC/NHAI Bonds or Capital Gains Account Scheme (‘CGAS’).

The unfairness:

 The facility of obtaining NIL/lower deduction certificates in case of non-residents is to make matters easier for them and not to subject them to unnecessary conditions. Such directions frustrate the very purpose of applying for NIL withholding certificate. C.N.Vaze Chartered Accountant is it fair? The fact that the assessee is submitting an affidavit should be sufficient proof that he wishes to comply with the necessary provisions.

Further, where it is proposed to reinvest in house property, the direction of issuing cheques directly in favour of CGAS account is not fair as the assessee has got time upto due date of filing return of income and may like to deposit his funds in fixed deposit for the time being, to reap the benefit of higher interest rates. In an extreme illustration, sale may be effected in the month of April so that the seller has an option of making investment within six months (for section 54EC of the Act) and upto 30th September of the following year (for CGAS Scheme) as the case may be. This option is unduly curtailed by such conditions.

In many of the cases, it may really put the assessee (i.e. the non-resident seller) and the buyer in a dilemma where part payment is to be made by the bank (being housing loan obtained by the buyer) directly to the seller and part payment is made by the buyer himself. Further, it may also give rise to serious practical problems if the payment is deferred/ made in instalments. At the most, the assessee may be directed to submit the proof of such investment before the due date of filing return. Needless to state that since all documentary evidences are on record, the tax department always has power and access to catch hold of the concerned persons, if they commit any default.

Conclusion:

Such direct instruction to the buyer to issue a cheque of requisite amount directly in favour of REC/NHAI Bonds or CGAS Account would be encroaching upon assessee’s right to plan his investments. This also brings us to the question as to whether the assessing officer has the power to issue such directions to the payer.

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Transfer of property – Deed of dissolution of partnership – Receipt of assets of firm on dissolution would not construe transfer – Conveyance: Section 2(10) Stamp Act 1899:

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[Balbir Singh vs. State of U.P. and Ors. AIR 2012 Allahabad 113]

A partnership firm in the name and style of M/s Guru Govind Singh Rice Mills was constituted on 25.3.1975 consisting of petitioner and six others partners. The said partnership stood dissolved on 29.10.1984. A fresh partnership deed was executed by the petitioner with one of his ex-partners and three other partners of the dissolved firm in the name and style of M/s UP National & General Rice Mills.

One of the partners died, as a consequence of which the firm was dissolved. In this behalf, a deed of dissolution was executed between the petitioner and four partners and legal heirs of the deceased person. Two partners received a sum of Rs.1.80 and Rs.1 lakh respectively towards their share in the capital of the dissolved firm. The other two partners namely Balbir Singh and Rajesh Kumar received their shares in the shape of assets i.e. land, building, plant, machinery. After dissolution of the firm, petitioners and other partners, Rajesh Kumar entered into a fresh partnership in the name and style of the earlier dissolved firm namely UP National & General Rice Mills, which is in existence.

Report of the Deputy Registrar (Stamp) suggested that there was shortage of levy of stamp of 84,990/- and shortage in the registration fee amounting to Rs. 14,660/-. Notice was issued by Addl. Collector. A detailed reply was filed by the petitioner indicating that there was no transfer of movable or immovable property while effecting the dissolution of the firm. It was purely a share received by the petitioner upon the dissolution of the partnership and as such did not constitute ‘Conveyance’ as defined u/s 2(10) of the Indian Stamp Act. The plea of the petitioner was rejected by the Addl. Commissioner, Stamp. The appeal was also dismissed.

On further appeal, the High Court observed that in order to attract provision of explanation to section 2(10) of Stamp Act, an essential feature is that a person who is transferring his right in the property, should have a definite and assigned share in the property before its transfer to other partners. There is no assigned or definite share of the partners in the movable or immovable assets and assigning of shares on dissolution is done on the basis of the shares which the partners hold in the firm. By no stretch of imagination, does it fall within the explanation of section 2(10) of the Stamp Act.

Receipt of the assets of the firm on dissolution would not be construed as conveyance as contemplated u/s 2(10) of the Stamp Act, as the error in construing the same as conveyance/transfer is based upon the premise of treating the status of member of the partnership firm with that of a person holding joint property with definite shares. The finding that on account of dissolution of firm the assets which are distributed by the partners amongst themselves or in favour of some person who has retired from the partnership would constitute the transfer as defined in the Transfer of Property Act, is wrong.

Where the immovable properties had been allotted in the deed of dissolution to the releasees and therefore, the consequential deed of release was only based on the dissolution and in such circumstances, the document could never be treated as a conveyance. The immovable properties had been allotted in the deed of dissolution to the partners. The deed of release was only a sort of acknowledgement of the title of the partners to the immovable properties which was conferred on them by the deed of dissolution. It could not, by any stretch of imagination, be treated as a conveyance of the properties, because the releasors had no right to the properties at the time of the release. In that view, the document could not be treated as a conveyance and stamp duty cannot be demanded on that basis.

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Avshesh Mercantile P. Ltd. and 15 others v. Dy. Commissioner of Income-tax In the Income Tax Appellate Tribunal “F” Bench: Mumbai Before P.M. Jagtap (A. M.) and R.S. Padvekar (J. M.) ITA Nos. 5779, 5780, 5821, 6032, 6033, 6194, 6196, 6198, 6266 & 6611/Mum/2006, ITA Nos. 1427, 6742 & 7318 /Mum/2008 and ITA No.208, 210 & 1748/Mum/2009 Assessment Years: 2003-04 & 2004-05. Decided on 13.06.2012 Counsel for Assessees/Revenue: J.D. Mistry/ Subacham Ram

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Section 14A – No disallowance can be made (i) in the absence of any exempt income earned during the year; or (ii) if investment is also capable of generating taxable income.

Facts:
All the assessees in the present case were investment and trading companies. They issued unsecured optionally convertible premium notes of Rs. 1 lakh each. As per the terms of the said issue, the premium note holders could convert the said premium notes into equity shares of the company at the end of maturity period or redeem the same at any time after the end of three years from the date of allotment. In case of early redemption, the premium note holders were entitled to a proportionate premium. During the year under consideration, the premium so paid was claimed by the assessee as deduction being allowable as business expenditure.

The AO found that the amount received by the assessee on issue of premium notes was utilised for making investment in the purchase of shares of Reliance Utilities and Power Ltd. (‘RUPL’) the income arising there from was exempt u/s 10(23G). As the expenditure incurred was for the purpose of earning exempt income, the AO held that the premium paid on redemption of premium notes was liable to be disallowed u/s 14A. He further held that the fact that no exempt income in the form of dividend was actually earned by the assessee in the year under consideration was not relevant. In this regard, he placed reliance on the decision of the Supreme Court in the case of CIT v. Rajendra Prasad Moody 115 ITR 519. As regards the assessee’s contention that the premium paid on redemption of premium notes was the expenditure incurred for the purpose of its business which should be allowed u/s 36(1)(iii), the AO observed that even though making of investment in shares was the object contained in the Memorandum and Articles of Association of the assessee companies, the same alone was not a conclusive yardstick to ascertain the nature of business activity carried on by the assessee in the year under consideration. Further, he noted that there was no cogent material to support and substantiate the case of the assessees that making of investments in the shares of RUPL was a part of their business activities.

On appeal, the CIT(A) upheld the disallowance made by the AO. He noted that the entire income credited to Profit and Loss account was assessable to tax under the head “Income from other sources” by virtue of section 56(2)(i). Accordingly, he held that the investments in securities made by the assessees were held by them as investment and not as a trading asset. Hence, the expenditure incurred on payment of premium on redemption was not the expenditure incurred for the purpose of business. He held that the premium paid on redemption of premium notes, which had been utilised by the assessee for making investment in shares/ debentures of RUPL was allowable as deduction only against interest/dividend income received from RUPL and such income being totally exempt from tax u/s 10(23G), the premium paid was rightly disallowed u/s 14A by the AO.

Before the tribunal, the revenue supported the orders of the lower authorities and contended that the assessee was not in the business of investment and the investment made in RUPL was only to earn dividend and for no other consideration. It was further contended that even otherwise, it makes no difference as far as disallowance of redemption premium u/s 14A was concerned, as the same was the expenditure incurred in relation to earning of exempt income. As regards the argument of the learned counsel for the assessee that the investment in shares had the potential of earning taxable income also, it was submitted that this aspect will not preclude the applicability of law u/s 14A as has been held by the Mumbai tribunal in the case of ITO v. Daga Capital Management (P) Ltd. (2008) 119 TTJ (Mum) (SB) 289. Regarding the argument of assessee that there being no exempt income earned by the assessees in the year under consideration, no disallowance of expenditure u/s 14A could be made, the revenue contended that it was wrong to claim that there should be tax free income in the same year for invoking the provisions of section 14A. In support of this contention, it placed reliance on the following decisions :

1. Everplus Securities & Finance Ltd. v. DCIT 102 TTJ (Del) 120.

2. Harsh Krishnakant Bhatt v. ITO 85 TTJ (Ahd.) 872.

3. ITO v. Daga Capital Management Pvt. Ltd. 117 ITD 169.

4. M/s Cheminvest Ltd. v. ITO and Others ITA No.87/ Del/2008 & ITA No.4788/Del/2007.

5. Godrej & Boyce Mfg. Co. Ltd. v. DCIT 328 ITR 81(Bom.).

Held:
The tribunal noted that the proceeds of premium notes on which the impugned redemption premium was paid by the assessee had been invested in the shares/debentures of RUPL and although the dividend income and income from long term capital gain from the said investment was exempt from tax u/s 10(23G), perusal of the Notification issued u/s 10(23G) showed that such exemption was initially granted only for the specific period i.e. assessment year 1999-2000 to 2001-2002 which was further extended upto assessment year 2004-05 subject to satisfaction of certain conditions. Keeping in view all these uncertainties and contingencies, the tribunal agreed with the contention of the assessee that the premium paid by the assessee on redemption of premium notes utilised for making investment in the shares/debentures of RUPL cannot be regarded as expenditure incurred, exclusively in relation to earning of exempt income so as to invoke the provisions of section 14A. It further noted that the said investment had the potential of generating taxable income also in the form of short term capital gains etc.

As the issue involved in the present cases as well as all the material facts relevant thereto were similar to that of the case of Delite Enterprises Pvt. Ltd. ((ITA No.2983/M/2005)), which was confirmed by the Bombay high court, the tribunal followed the said decision and deleted the disallowance made by the AO and confirmed by the learned CIT(A). As regards the case laws cited by the revenue, it observed that in none of those cases, the facts involved were similar to the case of the present assessees in as much as the investment made therein was not found to be capable of earning taxable as well as exempt income which was actually not earned by the assessee in the relevant period as were the facts of the case of the assessees.

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