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Year: 2016

[2016] 73 taxmann.com 91 (Kol – Trib.) Bombay Plaza (P.) Ltd. v. ACIT ITA Nos. 1641 & 1203 (Kol) of 2014 A.Ys.: 2006-07 and 2007-08, Dated: 02.09.2016

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S. 22 r.w.s.
27(iiib)  – The provisions of section 22
read with section 27(iiib) are not attracted in the case of an assessee who is
a licensee and not a lessee.  

FACTS: 

The assessee company, formed with the
main object of acquiring on license or by purchase, etc premises in India and
also to license or sub-license or lease or sub-lease such lands, or property or
premises, had entered into an agreement 
dated 16.4.1991 with East India Hotels Ltd. under which it got on leave
and license basis 9000 sq. feet in Hotel Oberoi Towers, Bombay for the purpose
of using it as a shopping centre.  The
tenure of the leave and license was for a period of 50 years at a fixed monthly
license fee agreed between the parties. 
After acquiring the said shopping space the assessee utilized it in
granting different portions of the shopping space to various parties who were
interested in setting up shops there with the condition that shopkeepers had to
subscribe to a specific number of shares of the assessee apart from payment of
monthly charges.  The assessee also
provided various services to the licensees like air-conditioning, telephone
services, maintenance, electricity, water, sanitary, security, etc.  The assessee was basically involved in the
business of providing the said shopping space on license along with various
services.  The consideration from this
activity was shown as business income. 
The assessee claimed license fee paid to East India Hotels as a
deduction.

While assessing the total income of the
assessee under section 143(3) of the Act, the Assessing Officer (AO), in view
of the provisions of section 22 r.w.s. 27(iiib) of the Act, charged the said
income under the head `Income from House Property’.

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

Aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD:

The Tribunal noted that the license was
not only for use of the shop area but also for the use of facilities like
air-conditioners, use of elevators, etc. 
It noted various clauses of the leave and license agreement with a view
to ascertain whether the subject matter of agreement was a lease or a
license.  It noted the definition of
`lease’ under Transfer of Property Act and the definition of `license’ under
the Indian Easements Act and keeping in mind these definitions it laid down the
distinction between the lease and the license. 
Applying the tests so laid down it came to the conclusion that the
parties intended it to be a license and the agreement did not create any
interest in the property owned by the licensor and that the licensee did not
have exclusive possession of the property. 
The assessee, as a licensee, had granted sub-license to various parties
and derived income therefrom.  It held
that once it is concluded that the assessee is only a licensee, then it can
safely be said that the provisions of section 22 read with section 27(iiib) of
the Act are not attracted.  Accordingly,
it held that the income in question cannot be assessed under the head `Income
from House Property’. 

The Tribunal also observed that keeping
in mind the objects of the assessee and the facts and circumstances of the
assessee’s case, it can be safely concluded that the assessee carried on a
systematic and regular activity in the nature of business and therefore the
income from granting the premises on sub-license was to be assessed under the
head `Income from Business’.  It observed
that the latest decision of the Apex Court in the case of Chennai Properties
and Investments Ltd. (373 ITR 673)(SC) was not available to the Tribunal when
it passed the order in case of another group company based on which decision of
the Tribunal the CIT(A) confirmed the action of the AO. 

The Tribunal held that in view of the
decision of the Apex Court in the case of Chennai Properties and Investments
Ltd. (supra) the question whether the assessee is a deemed owner under section
22 r.w.s. 27(iiib) of the Act, no longer assumes importance.

The Tribunal allowed the appeal filed by
the assessee.

Mohamed Taslim Shaikh v. Addl. CIT ITAT Mumbai `B’ Bench Before Shailendra Kumar Yadav (JM) and Rajesh Kumar (AM) ITA No. 7259/Mum/2012 A.Y.: 2009-10. Dated: 04.08.2016. Counsel for assessee / revenue: Dr. K. Shivram, Ms. Nilam Jadav / Randhir Gupta

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S. 271D – Penalty under section 271D cannot be levied in a case where assessee was prevented by reasonable cause to accept money from his close relative like father for making payment for immovable property.

FACTS:  

The assessee filed his return of income declaring total income of Rs.1,87,750.  In the course of assessment proceedings it was noticed that the assessee’s father made a payment of Rs.10,69,000 on behalf of the assessee for purchase of property which amount was treated as a loan in the books of account of the assessee.  The Assessing Officer initiated proceedings for levy of penalty under section 269SS read with section 271D of the Act.  After considering the reply of the assessee, the AO levied a penalty of Rs. 10,69,000.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD: 
The Tribunal, upon going through the material on record, observed that a similar addition was deleted by ITAT, Ahmedabad `A’ Bench in the case of ITO v. Dattuprasad Manharlal Dave in ITA No. 1816/Ahd/2013, wherein on a similar issue, relief was granted to the assessee.  It also observed that similar view has been taken by Allahabad High Court in the case of CIT v. Smt. Dimpal Yadav & Akhilesh Kumar Yadav (2015) 379 ITR 177 (All.)(HC) wherein the Hon’ble High Court upheld the order of the Tribunal interalia holding that loan transaction was genuine and there was reasonable cause for cash loan in similar situation.  The Tribunal directed the AO to delete the penalty levied under section 271D because assessee was prevented by reasonable cause to accept the money from his close relative like father for making payment for immovable property.

The appeal filed by the assessee was allowed.

[2016] 73 taxmann.com 36 (Mum – Trib.) Kamlesh M. Kanungo HUF v. DCIT- TDS ITA Nos.: 4045 & 4046 (Mum) of 2015 A.Ys.: 2011-12 and 2012-13, Dated: 19.09.2016

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S. 221 r.w.s.
201  – For the purposes of Explanation
below section 221(1) which prescribes that an assessee shall not cease to be
liable to penalty under sub-section (1) of section 221 merely by reason of the
fact that before levy of such penalty, he has paid tax a distinction has to be
made between  a case where the TDS is
deposited suo motu before any proceedings are initiated by the AO and a case
where the deposit of the TDS is made after initiation of proceedings by the AO
but before levy of penalty.  

FACTS:

The assessee HUF deducted income-tax
amounting to Rs. 1,71,88,352 under section 194A of the Act but did not deposit
it by due date which was 31.5.2011 but deposited it only on 30.6.2011 along
with interest. 

The Assessing Officer (AO) levied
penalty of Rs. 5,10,000 which was equivalent to 3% of the defaulted amount of
TDS. 

Aggrieved, the assessee preferred an
appeal to CIT(A) who upheld the action of the AO by noticing that non-deposit
of requisite TDS to the Government Treasury was an admitted position.

Aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD: 

The Tribunal observed that the proviso
to section 221(1) clearly suggests that the levy of penalty under section
221(1) is not automatic and that the AO is empowered to use his discretion not
to levy penalty if the default is for good and sufficient reasons. It noted
that the bonafides of the assessee in complying with the requirements of
depositing the tax into the Government Treasury stood established in as much as
the tax had been deposited even before the corresponding interest amounts were
paid to the respective creditors and also before any proceedings were initiated
by the AO. 

The Tribunal held that the Explanation
below section 221(1) refers to a situation where the tax has been paid “before
the levy of such penalty”, whereas in the facts of the present case the
assessee had deposited the requisite TDS along with applicable interest into
the Government Treasury even before any proceedings under section 201(1) of the
Act were initiated by the AO. 
Considering the penal nature of section 221 it would be in the fitness
of things to make a distinction between a case where the TDS is deposited suo
motu before any proceedings are initiated by the AO and a case where the
deposit of TDS is made after initiation of proceedings by the AO but before
levy of penalty.  It held that the
Explanation will not militate against the assessee because of this
distinction.   The Tribunal held that
there existed ‘good and sufficient reasons’ to mitigate the default in
question, and thus, the proviso to section 221(1) of the Act clearly comes to
the rescue of the assessee.

The Tribunal deleted the penalty levied
under section 221(1) r.w.s. 201(1) of the Act by the AO.

The Tribunal allowed the appeal filed by
the assessee.

[2016] 72 taxmann.com 91 (Kol – Trib.) Union Bank of India v. ACIT ITA Nos. 7589 (Mum) of 2014 A.Y.: 2008-09, Dated: 11.08.2016

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S. 244A  – While granting refund in pursuance to the
appeal effect order, the amount of refund granted earlier should be adjusted
first against the interest component of the earlier refund and thereafter the
balance amount should be adjusted against the principal component of tax in the
refund order granted earlier.  

FACTS:

The Assessing Officer (AO) while
computing the amount of refund arising as a result of passing an order giving
effect to the order of CIT(A) granted interest of Rs. 64,53,58,824 as against
the amount of Rs. 65,73,42,440 claimed by the assessee.  The discrepancy, according to the assessee,
arose because the AO adjusted the refund granted to the assessee first against
principal amount of tax due instead of adjusting it first against the amount of
interest and thereafter against the principal amount of tax.

Aggrieved, the assessee filed an appeal
to the CIT(A) who distinguished the order of the Tribunal, in the assessee’s
own case, for earlier year on the ground that the said order of the Tribunal
has not considered the decision of the Apex Court in the case of Gujarat Fluoro
Ltd. (358 ITR 291).

Aggrieved, the assesse preferred an
appeal to the Tribunal.

HELD: 

The Tribunal noted that the issue under
consideration was decided by the Tribunal, for AY1998-99, 2001-02 &
2005-06, in favour of the assessee.  It
noted that the earlier orders of the Tribunal were based on decision of the
Delhi High Court in the case of India Trade Promotion Organisation wherein it was
inter alia held that in a situation where only part amount is refunded by the
Department, then payment of interest on the balance amount due from the
Department to the assessee, on a particular date, does not amount to payment of
interest on interest.  The Delhi High
Court, while arriving at this decision, had taken support from the judgment of
the Supreme Court in the case of CIT v. HEG Ltd. (2010) 324 ITR 331 (SC). 

The Tribunal observed that the facts
before it were similar to the facts of the case before the Delhi High Court in
the case of India Trade Promotion Organisation (supra) since in the present
case also only part amount was refunded in the first phase by the department
and when the balance amount was paid by the department in the second phase, the
assessee was entitled for interest on the balance amount of refund due.  It held that, in view of the observations of
the Delhi High Court, it can be said that it is not a case of payment of
interest on interest.  It also noted that
the Delhi High Court has held that the department ought to follow the same
procedure and rules while collecting tax and while issuing refunds. 

The Tribunal held that since the statute
itself has already prescribed a particular method of adjustment in Explanation
to section 140A(1), then justice, fairness, equity and good conscience demands
that same method should be followed while making adjustment for refund of
taxes, especially when no contrary provision has been provided. 

Following the order of the Tribunal of earlier
years, the Tribunal directed the AO to re-compute the amount of interest under
section 244A by first adjusting the amount of refund already granted towards
interest component and balance left, if any, shall be adjusted towards the tax
component.

The Tribunal allowed the appeal filed by
the assessee.

ACIT v. K. S. Constructions ITAT Mumbai `A’ Bench Before Shailendra Kumar Yadav (JM) and Rajesh Kumar (AM) ITA No. 7660/Mum/2014 A.Y.: 2010-11. Dated: 12.08.2016. Counsel for revenue / assessee: Vijay Kumar Bora / Ms. Aarti Vissanji

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S. 28 – Addition for suppressed sale cannot be made on the ground that the flat was sold at a rate lower than the rate at which other flats in the building were sold specially when the sale was at a price above the stamp duty value.

FACTS:  

The assessee firm carried on business as builders and developers.  During the year under consideration it had declared income from business and income under the head other sources.  In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had offered profits in respect of 6 commercial units sold during the year.  Of the six units sold the sale deeds in respect of the 5 units were registered in the financial year 2009-10.

The relevant details in respect of units sold can be tabulated as under –

 

 

Unit

Rate /
sq. mt

Rupees

Date of
registration of sale agt

Date of

First

payment

303

33,333

3.3.2006

30.12.2005

301

34,871

18.12.2009

7.2.2006

101

2,94,485

18.12.2009

19.8.2009

302

78,327

4.10.2009

24.11.2009

4th
floor

2,38,576

18.11.2009

13.7.2009

5th
floor

2,38,576

18.11.2009

13.7.2009

The AO asked the assessee to explain the difference in rate charged for unit no. 302 as compared to that charged for unit no. 101.  The assessee explained that the unit no. 302 suffered from design disadvantages and therefore it could not get customers to purchase unit no. 302 whereas the unit no. 101 commanded a price higher than the other units because it had a locational advantage of entire floor suitable for car show room as compared to unit no. 302.

The AO considering the date of first payment as well as date by which total payment was received by the assessee in respect of unit no. 101 and 302 held that the two transactions are comparable. He observed that it is a prevalent practice in real estate dealings; underhand transactions of on money cannot be denied specially in view of the fact that the difference in rate was more than three times.  He applied the rate at which the first floor premises were sold for the purposes of determining the actual sale rate for unit no. 302.  He, accordingly, added Rs. 4,16,70,874 to the total income of the assessee as unaccounted income from sale of unit no. 302.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD: 

The Tribunal observed that

(i)    apart from Unit No. 302, date of agreement of unit no. 301 and that of units on 4th & 5th floors also fell in the same financial year;
(i)    the sale price of unit no. 302 is higher than its stamp duty valuation;
(ii)    the AO had accepted the variation in rates for sale of unit nos. 301, 302 and 4th & 5th floor vis-à-vis the rates for sale of unit no. 101.
(iii)    the AO has not brought any evidence on record  to show as to how the explanation of the assessee that there are locational disadvantages in case of Unit no. 302 is not correct;
(iv)    the AO has not brought any evidence to establish that there has been on money transaction for sale of said Unit no. 302;
(v)    it is not the case of the AO that the transaction is between related parties.
In the light of the above factual position, it observed that the addition made by the AO was simply on the basis of difference in booking of unit no. 101. It noted that CIT(A) had relied on the decision of Mumbai Bench of ITAT in the case of Neelkamal Realtors & Erectors India(P.) Ltd (2013) 38 taxman.com 195 (Mum-Trib) and held that AO had not controverted the explanation furnished by the assessee during the course of assessment proceedings to explain the reasons for charging lower price in respect of unit no. 302 sold vis-à-vis rate / price for unit no. 101.

The Tribunal held that the CIT(A) had rightly deleted the addition of Rs. 4,16,70,874.

The appeal filed by the revenue was dismissed.

[2016] 73 taxmann.com 68 (Mum-Trib)(SMC) Smt. Manasi Mahendra Pitkar v. ACIT ITA No. 4223 & 4224/Mum/2015 A.Y.: 2011-12, Dated: 12.08.2016

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S. 68 – The
bank pass book or bank statement cannot be construed to be a book maintained by
the assessee for any previous year as understood for the purposes of section
68.

FACTS: 

These were two appeals preferred by
husband and wife.  In both the appeals,
the common dispute was that the cash deposits made in the joint bank account to
the extent of Rs. 27,36,500 were treated as unexplained cash credits within the
meaning of section 68 of the Act. Substantive addition was made in the case of
Mahindra Chintaman Pitkar, the husband, and protective addition was made in the
case of Manasi Mahendra Pitkar, wife. The Tribunal in its order dealt with the
appeal in the case of husband as the lead appeal.

The assessee, an individual was employed
with Municipal Corporation of Greater Mumbai. The Assessing Officer (AO)
noticed that during the year under consideration cash aggregating to Rs.
29,53,500 was deposited in the joint bank account of the assessee and his wife
with Thane Janata Sahakari Bank. 

On being asked the assessee explained
that the amounts were received from his father, father-in-law, son and various
other relatives & friends and that these amounts were used by him for
treatment of his wife who was bedridden and was suffering from the disease of
multiple sclerosis which required costly medical treatment.  It was explained that expenditure of Rs. 30
lakh a year was required to be incurred for medical treatment of his wife and
since the assessee was a salaried employee with limited resources he had
received amounts from family members, relatives and friends for the medical
treatment of his wife.

The AO added the sum of Rs. 29,53,500 to
the total income of the assessee on a substantive basis and also made similar
addition on protective basis in the case of his wife.

Aggrieved, the assessee preferred an
appeal to CIT(A) who gave relief to the extent of Rs. 2,70,000 with respect to
withdrawals found in the bank account of assessee’s father and confirmed the
addition of Rs 27,36,500 as unexplained cash credit under section 68 of the
Act.

Aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD:

In the course of hearing
before the Tribunal, affidavit of the assessee narrating the factual position
about the disease of his wife and the utilization of funds for the medial
treatment was filed and the documents in support of the facts narrated in the
affidavit were also filed. The Tribunal considered the ratio of the judgment of
Bombay High Court in the case of Bhaichand N. Gandhi (1983) 141 ITR 67
(Bom).  It noted that the assessee did
not maintain any books of account and section 68 of the Act had to fail because
as per the judgment of the Hon’ Bombay High Court in the case of Shri Bhaichand
N. Gandhi (supra), the bank pass book or bank statement cannot be construed to
be a book maintained by the assessee for any previous year as understood for
the purposes of section 68 of the Act. 
It held that on this account itself the addition deserves to be deleted.

The Tribunal also observed
that the circumstances in which the cash deposits were made and the purpose for
which such monies were utilized was emerging from record and no material was
found by the AO to disprove the same.  It
noted that the assessee could not produce any formal corroborative evidence of
having received respective amounts from friends, relatives, however, it
observed that section 68 is a rule of evidence, and, the AO is expected to
consider the explanation rendered in the context of the circumstances of each
case.

The Tribunal held that the
addition is unsustainable in view of the ratio of the Bombay High Court in the
case of Shri Bhaichand N. Gandhi (supra). 

The order of CIT(A) was set
aside and the AO was directed to delete the addition of Rs. 27,36,500 made
under section 68 of the Act.

Since the substantive
addition in the case of the husband was deleted, the Tribunal held that the
protective addition in the hands of the wife was also unsustainable.

The appeals filed by the
assessee were allowed.

Lintas India Pvt. Ltd. v. ACIT(TDS) ITAT Mumbai `A’ Bench Before R. C. Sharma (AM) and Ram Lal Negi (JM) ITA No. 3504/Mum/2014 A.Y.: 2010-11. Dated: 02.08.2016. Counsel for assessee / revenue: Prakash Jotwani / Morya Pratap

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S. 194J – Internet charges for use of internet connectivity are not covered by section 194J.

S. 194J – Payment for computer software development does not qualify for deduction under section 194J.

FACTS-I:  

The assessee, during the year, paid internet charges for use of internet connectivity and deducted tax thereon under section 194C of the Act.  The Assessing Officer (AO) held that the payment so made qualifies for deduction of tax under section 194J as “fees for technical services”.  He, accordingly, held the assessee to be an assessee-in-default under section 201(1) / 201(1A) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO and held that as per the amendment, the domestic payments are now covered under section 194J and therefore the ratio of the decision relied on by the assessee in the case of Skycell Communications Ltd. (251 ITR 53)(Mad HC) is not applicable in the instant case.

Aggrieved, the assessee preferred an appeal to Tribunal.

HELD:  

The Tribunal held that the issue under consideration is squarely covered by various decisions of High Court and Tribunal.  It noted that –
(i)    the Delhi High Court had an occasion to examine a similar issue in the case of CIT v. Estel Communications (P.) Ltd. (217 CTR 102)(Del) wherein the Court held that mere payment by assessee for an internet bandwidth to a US company did not mean that technical services were rendered by the US company to the assessee and, therefore, provisions of section 9(1)(vii) did not apply so as to warrant any deduction of tax from payment made by the assessee to the US company;
(ii)    the Madras High Court in Skycell Communications Ltd and another v. DCIT & Others (2011) 251 ITR has considered the provisions fo section 9(1)(vii);
(iii)    Chandigarh Bench of ITAT in the case of HFCL Infotel Ltd. v. ITO (99 TTJ 440)(Chand. ITAT) referred to the decision of Madras High Court in Skycell Communications Ltd.;
(iv)    Mumbai Bench of ITAT has in the case of Pacific Internet (India) Pvt. Ltd. v ITO 318 ITR 179 (Mum)(AT) has relied upon the observations rendered in Estel Communications Pvt. Ltd. (supra) and Communications Ltd. (supra) and held that payment for use of internet is not covered by the provisions of section 194J;
(v)    Hyderabad Bench of the Tribunal has in the case of Ushodaya Enterprises P. Ltd. v. ACIT (2012) 53 SOT 193 (Hyd.) has held that payment made towards internet charges are similar in nature to bandwidth charges and are similar to the use of telephone lines, payments made for circuit charges to VSNL, bandwidth charges do not come under TDS provision and therefore no deduction is required under section 194J.
Relying on the ratio of the above, the Tribunal held that the assessee cannot be held to be in default for non-deduction of tax on internet charges under section 194J of the Act.

This ground of appeal filed by the assessee was allowed.

FACTS-II:

The AO held the assessee to be in default for not having deducted tax on payment of Rs. 14,96,240 towards purchase of computer software development. The AO was of the view that payment for purchase of software qualifies as a “technical service” and requires deduction of tax under section 194J of the Act.  He, accordingly, held the assessee to be an assessee-in-default under section 201(1) and levied interest under section 201(1A).

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD – II:

Explanation 2 of section 9(1)(vii) defines the words “Fees for technical services” as any consideration (including any lumpsum consideration) for rendering any managerial, technical or consultancy services.  It noted that the perusal of the aforesaid definition clarifies that the term FTS would include service of the following three types : Managerial, Technical and Consultancy.  Therefore, in order to decide whether the service will fall within FTS or not, it is necessary to determine the scope of these three terms.  Considering the scope of these terms as defined by the Mumbai Bench of the Tribunal in the case of TUV Bayren (India) Ltd. dated 6.7.2012 in ITA No. 4994/Mum/2002 it held that the computer software purchased would not fall within the definition of “Fees for technical services” and therefore the provisions of section 194J are not applicable.

The Tribunal held that tax is not required to be deducted at source in respect of payment made for purchase of computer software development.

This ground of appeal was decided in favour of the assessee.

ITO v. Uma Developers ITAT Mumbai `F’ Bench Before Jason P. Boaz (AM) and Sandeep Gosain (JM) ITA Nos.: 7718/Mum/2014 A.Y.: 2012-13. Dated: 10.08.2016. Counsel for revenue / assessee: A K Dhondial / Vijay Mehta

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Ss. 80AC, 80IB(10), 139(1), 139(4), 143(1) – In a case where the return of income is filed beyond the period stipulated under section 139(1) but within the period stipulated in section 139(4), it is beyond the scope of section 143(1) to disallow the assessee’s claim for deduction under section 80IB(10) of the Act.

FACTS:  

For assessment year 2012-13, the assessee firm filed its return of income on 31.3.2013 claiming deduction of Rs. 3,53,17,770 under section 80IB(10) of the Income-tax Act, 1961 (“the Act”). The Assessing Officer (AO) while processing the return on 10.5.2013, in view of the provisions of section 80AC of the Act disallowed the claim of deduction under section 80IB(10) for the reason that the assessee had filed its return of income beyond the time limit specified under section 139(1) of the Act.

Aggrieved with the order dated 10.5.2013, the assessee preferred a rectification appeal under section 154 of the Act contending that the disallowance of assessee’s claim for deduction under section 80IB(10) was beyond the scope of provisions of section 143(1) of the Act.  ACIT(CPC) vide order dated 16.3.2013 passed under section 154 of the Act rejected the application of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who observed that the Bombay High Court and Benches of ITAT at Mumbai, Bangalore and Ahmedabad have even in cases where return of income was filed beyond due date specified under section 139(1) of the Act, either allowed the deduction under section 80IB(10) or have set aside the issue to the file of the authorities below for consideration of the eligibility of the claim with the direction that the claim for deduction should not be denied merely on the ground that the return of income was filed beyond the time specified under section 139(1) of the Act. He also observed that the provisions of section 80AC of the Act were subject matter of discussion and interpretation in various judgments.  He, accordingly, held that the disallowance made by the AO is beyond the scope of the provisions of section 143(1) of the Act.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD:  

Considering the ratio of the decisions of the Bombay High Court in the case of Trustees of Tulsidas Gopalji Charitable & Chaleshwar Temple Trust (207 ITR 368)(Bom) and of the co-ordinate Bench in the case of Yash Developers (ITA No. 809/Mum/2011) even in cases where the return of income is filed beyond the due date stipulated under section 139(1) of the Act, the deduction should not be disallowed under section 143(1) merely in view of the provisions of section 80AC of the Act.  It held that the action of the AO in disallowing the assessee’s claim for deduction under section 80IB(10) of the Act, since the return of income was filed beyond the period stipulated under section 139(1) of the Act in view of the provisions of section 80AC is beyond the scope of section 143(1) of the Act since there is neither an arithmetical error nor an incorrect claim apparent from the record.

The Tribunal upheld the order of the CIT(A) and directed the AO to delete the disallowance made under section 143(1)(a) / 143(1) of the Act.

The Tribunal dismissed the appeal filed by the Revenue.

[2016] 159 ITD 743 (Mumbai Trib.) ITO (TDS) (OSD) vs. Fino Fintech Foundation A.Y.: 2011-12 – Dated: 22.06.2016.

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Section
194J read with Section 194C of the Income-tax Act, 1961- An assessee is
required to deduct tax under section 194J if it acquires or uses technical
knowhow which is provided by a human element. Mere use of technology by
contractors who provide services to the assessee would not make those services
technical services and hence when assessee makes payments to such contractors,
tax is required to be deducted under section 194C and not under section 194J.

FACTS:

The assessee Company was
involved in providing banking services through its network of agents in
extremely rural areas by use of a device called “Point of Transaction Machine
(POT)”.

The transactions of the
beneficiary/customers were settled at the end of the day by connecting the POT
to the Bank Server and the transactions of the beneficiary got reflected in the
beneficiary’s bank account.

In the relevant
assessment year, the assessee company had deducted tax u/s 194C on the payments
made to contractor towards the major expenses incurred under the heads – enrollment
charges, AMC charges, POT usage charges and rent for POT machines.

The AO observed that the
assessee was providing services for opening bank accounts to different banking
institutions in rural areas and that for opening bank accounts it was taking
help of other service-providers who would mobilise technical manpower for
opening the bank accounts. The service providers would prepare bio-metric and
demographic particulars of the customers and put the same in bank network for
the assessee.

The AO held that the
services of capturing photos and finger-prints by web camera and scanner
required highly technical skill and specified software and that the procedure
could not be performed by non-technical person. Hence, for such services,
payments made by the assessee under the heads enrollment expenses and AMC
charges would attract tax deduction under section 194J of the Act. Hence the AO
held that the assessee was in default under section 201(1) for the shortfall of
tax deduction and under section 201A for interest on the shorfall.

Aggrieved by the order of
the AO the assessee preferred an appeal before the First Appellate Authority
(FAA). The assessee argued that it had hired services of service provider as a
contractor and that mere use of technology and/or technical equipments by
service providers while doing the said composite work for assessee would not
make it as a technical service and hence the tax was rightly deducted u/s. 194C
of the Act.

The FAA held that
provisions of 194C were applicable as there was no acquisition / use of
technical know-how by the assessee.

On revenue’s appeal –

HELD:

In case of CIT v.
Delhi Transco Ltd. [2015] 380 ITR 398 the Hon’ble Delhi High Court has defined
the word technical services while dealing with the section 194 J of the Act, in
the following manner-

Section 194J of the Income-tax Act, 1961, provides
for deduction of tax at source from fees for technical services. Technical
services consist of services of technical nature when special skills or
knowledge relating to technical field are required for their provision,
managerial services are rendered for performing management functions and
consultancy services relate to provision of advice by someone having special
qualification that allow him to do so. What constitutes technical services
cannot be understood in a rigid formulaic manner. It will vary from industry to
industry. There will have to be a specific line of enquiry for determining what
in a particular industry would constitute rendering of a technical service.

In the case under
consideration, the FAA has rightly held that the provisions of section 194J
would not be applicable based on the following observation –

The services provided to the assessee were manual in
nature and no specific skills were required to provide the said services. The
services rendered by the parties to the assessee were neither in the nature of
fee for professional services, nor in the nature of managerial, technical or
consultancy services. Mere use of technology would not make it technical
services. For provisions of section 194J to be applicable, it is necessary that
there must either be acquisition or use of technical knowhow which is provided
by a human element. There was no acquisition of technical expertise/knowhow by
the assessee and the service providers were contractors executing contracts for
projects undertaken and hence the provisions of section 194C were applicable.

In the case under
consideration there is a use of technology, but, it does not mean that it is
not a contract. There is no legal or factual infirmity in the order of the FAA
and the assessee has rightly deducted tax as per the provisions of section 194C
of the Act.

Note – Relying on
the decision in case of CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139 it was
also held that, the expression “fees for technical services” in
section 194J of the Income-tax Act, 1961 has the same meaning as given to the
expression in Explanation 2 to section 9(1)(vii) of the Act. In the said explanation
the expression “fees for technical services” means any consideration
for rendering of any “managerial, technical or consultancy services”.
Applying the rule of noscitur a sociis, the word “technical” would
take colour from the words “managerial” and “consultancy”,
between which it is sandwiched. Since both the words “managerial” and
“consultancy” involve a human element, the word “technical”
would also have to be construed as involving a human element.

TDS- Technical services- S. 194J of I. T. Act, 1961- A. Ys. 2007-08 to 2010-11- Transmission of electricity- No technical services- Tax not deductible on payment for such transmission

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CIT Vs. Hubli Electricity Supply Co. Ltd.; 386 ITR 271 (Karn)

The assessee, an electricity supply company, was a state owned company engaged in the business of buying and selling electricity. Power was transmitted from the generation point to consumers through the transmission network of the Karnataka Power Transport Corporation Ltd. The Assessing Officer found that the assessee had not deducted tax at source on charges paid to Karnataka Power Transport Corporation Ltd. for transportation of electricity. He therefore treated the assessee as an assessee in default and raised demand u/s. 201(1) and (1A) of the Income-tax Act, 1961. Commissioner(Appeals) found that the assessee had successfully demonstrated that the taxes were already paid by the payee and accordingly cancelled the demand. This was upheld by the Tribunal.

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

“i)    There was neither an offer nor an acceptance of any “technical service”, inter se between the parties. Admittedly, the Karnataka Power Transport Corporation Ltd. was a State owned company and the only power transmitting agency. There was neither transfer of any technology nor any service attributable to a technical service offered by the Karnataka Power Transport Corporation Ltd and accepted by the assessee.

ii)    Therefore, section 194J was not applicable. Moreover, it was not in dispute that the payee the Karnataka Power Transport Corporation Ltd had offered the income to tax and paid it. In the circumstances, there was no loss of revenue.

iii)    In the result, the appeals fail and accordingly stand dismissed.”

TDS: Ss. 10(23C)(iv), 194A, 194H, 201(1),(1A) of I. T. Act, 1961- A. Y. 2012-13- Payment of interest to entities exempted from tax- No tax need be deducted at source

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CIT Vs. Canara Bank; 386 ITR 229 (P&H)

The assessee had paid interest without deduction of tax at source to Punjab Infrastructure Development Board whose income was exempt u/s. 10(23C)(iv) of the Income-tax Act, 1961. The Assessing Officer held that the assessee should have deducted tax at source and since tax was not deducted the assessee was treated as an assessee in default and raised demand u/ss. 201(1) and (1A) of the Act. The Commissioner(Appeals) deleted the demand and the same was upheld by the Tribunal.

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

“i)    The Commissioner(Appeals) and the Tribunal, on appreciation of material on record had concurrently recorded that if an organization was exempted from payment of tax there was no need for deduction of tax at source by the assessee.

ii)    The Department was not able to demonstrate that the approach of the Commissioner(Appeals) and the Tribunal was erroneous or perverse or that the findings of fact recorded were based on misreading or misappreciation of evidence on record. No question of law arose.”

[2016] 159 ITD 255 (Pune Trib.) S.R.Thorat Milk Products (P.) Ltd. vs. Asst. CIT A.Ys.: 2004-05, 2005-06, 2007-08 to 2009-10, Date of Order: 20.05.2016

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Section
37(1) read with Section 36(1)(iii) – The share application money
pending allotment per se cannot be characterized and equated with share capital
as the obligation to return the share application money is always implicit in
the event of non-allotment of shares and consequently if the assessee incurs
interest expense on the share application money pending allotment, the said
interest expense can be claimed as revenue expenditure by the assessee.

FACTS:

During the various years
under appeal, the assessee had claimed deduction of interest paid, at the rate
of 12% per annum, on share application money pending allotment, while computing
business income.

The AO was of the opinion
that conditions laid down under section 36(1)(iii) are not fulfilled because ingredients
of borrowing as a positive act of lending by one and expense thereof by the
other, coupled with an obligation of refund or repayment thereof are not
present when the interest is paid on receipts in the nature of share
application money. Further the AO held that expenditure on account of interest
paid on share application money is not revenue but capital expenditure in
nature and therefore is not allowable under section 37(1) of the Act. He
accordingly disallowed the interest claimed by the assessee.

The CIT-(A) concurred
with the view of the AO and disallowed the claim of the said interest expense by
stating that when the money had been received with the intention of allotment
of shares, it could not subsequently acquire the colour of borrowed funds even
though it might have been utilized for business purposes.

Aggrieved by the order of
the CIT-(A), the assessee filed appeal before the Tribunal.

HELD:

Even though the share
application money has been pending allotment for a substantial period of time,
the revenue has not disputed the contention of the assessee that the share
application money was utilized for business purposes.

In our opinion, the share
application money per se cannot be characterized and equated with share
capital. The obligation to return the money is always implicit in the event of
non-allotment of shares in lieu of the share application money received.
Allotment of shares is subject to certain regulations and restrictions as provided
under the Companies Act and receipt by way of share application money is not
receipt held towards share capital before its conversion. Therefore, payment of
interest on share application money cannot be treated differently in the
Income-tax Act.

Relevant extract of the
observation made in case of ACIT v. Rohit Exhaust Systems (P.) Ltd. in IT Appeal
No.686 / 687 of 2011-

The
Hon’ble ITAT, Pune in the case of Western India Forging Ltd. ITA No.
419/PN/2002 dated 24-07-2007 (PCAS journal February, 2008 Page No. 49 to 52)
has held that following the principle of commercial expediency, interest paid on
share application money pending allotment utilized for business purpose is an allowable
expense.

On
perusal of the said case of Western India Forging Ltd (supra), it has also been
noticed that as per provisions of section 69(5) of the Companies Act, 1956 a
company has to pay interest @6% per annum and as per provisions of section
73(2) of the Companies Act, 1956 the maximum interest rate prescribed is 15% on
return of share application money.

Accordingly, the claim of
interest expenditure on share application money pending allotment was allowed
as revenue expenditure.

Shipping Company- S. 172 of I. T. Act, 1961- DTAA between India and Singapore- Where freight receipts in question derived by assessee, a Singaporean shipping company, was taxable at Singapore on basis of accrual and not on basis of remittance, benefit of article 8 of DTAA between India and Singapore could not be denied to assessee on ground that fright receipts were remitted to London and not to Singapore

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M.T. Maersk Mikage & 4 Vs. DIT; [2016] 72 taxmann.com 359 (Guj):

The assessee, a Singapore shipping company, had through ships owned or chartered by it, undertaken voyages from various Indian ports and earned income from exporters and out of other such business. The assessee, through present petitioner, filed a return of income u/s. 172(3) of the Income-tax Act, 1961, declaring the gross profit calculations, but claiming Nil income by relying on Article 8 of DTAA between India and Singapore. The Assessing officer denied benefit under article 8 to the assessee on the ground that freight receipts were remitted to London and not to Singapore. In his opinion, as per Article 24 of DTAA, the funds have to be remitted where the residents of the country is claiming benefit of the agreement which conditions in the present case was not satisfied. Revision application u/s. 264 of the Act made by the petitioner was dismissed by the CIT.

The Gujarat High Court allowed the writ petition filed by the petitioner and held as under:

“i)    The certificate dated 09.01.2013 issued by the Inland Revenue Authority of Singapore certified that the income in question derived by ST Shipping(assessee) would be considered as income accruing in or derived from the business carried on in Singapore and such income therefore, would be assessable in Singapore on accrual basis. In other words, the full income would be assessable to tax on the basis of accrual and not on the basis of remittance.

ii)    This clause1 of Article 24 does not provide that in every case of non-remittance of income to the contracting state, Article 8 would not apply irrespective of tax treatment such income is given.

iii)    When in the present case, we hold that the income in question was not taxable at Singapore on the basis of remittance but on the basis of accrual, the very basis for applying clause1of Article 24 would not survive.

iv)    In the result, petition is allowed. Impugned order dated 25.03.2014 passed by the Commissioner is set aside. Resultantly, order of assessment dated 26.12.2011 is also quashed. Petition disposed of accordingly.”

[2016-TIOL-1851-CESTAT-MUM] Bny Mellon International Operations India P. Ltd vs. Commissioner of Central Excise, Pune-III

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When premium on group insurance does not vary with the number of family members covered, entire service tax charged on such premium is available as CENVAT credit.

Facts
The Appellant an exporter of services filed a refund claim of the accumulated CENVAT credit under Rule 5 of the CENVAT Credit Rules, 2004. CENVAT credit of service tax paid on premium charged on group insurance scheme was disallowed on the ground that the said insurance also covered the family members of the employee which is not related to the output service.

Held
The Tribunal noted that the premium charged does not vary with the number of dependents who are additionally covered by the same insurance scheme. Accordingly even if none of the dependents were within the coverage, the premium amount would not alter or vary. Thus no part of premium is attributable to the extension of coverage to family members. Appeal is allowed and refund granted.

A. P. (DIR Series) Circular No. 78 dated June 23, 2016

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Notification No. FEMA 365/2016-RB dated June 01, 2016

Permitting writing of options against contracted exposures by Indian Residents

This circular permits resident exporters and importers of goods and services to write (sell) standalone plain vanilla European call and put option contracts against their contracted exposure, i.e. covered call and covered put respectively, with any bank in India subject to operational guidelines, terms and conditions annexed in Annex I to this circular.

A. P. (DIR Series) Circular No. 77[2]/10[R] dated June 23, 2016

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Given below are the highlights of certain RBI Circulars & Notifications

Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015

This circular permits as under: –

1. An Indian start-up (as defined vide Notification No. GSR 180(E) dated February 17, 2016 issued by DIPP) having an overseas subsidiary can: –

a) Open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports / sales made by it or its overseas subsidiary. The balances held in such accounts, to the extent they represent exports from India, shall be repatriated to India within the period prescribed for realization of exports.

b) Credit payments received by it in foreign exchange against sales / exports made by it or its overseas subsidiaries to its EEFC account maintained in India.

2. Any insurance / reinsurance company registered with the Insurance Regulatory and Development Authority of India (IRDA) can open a foreign currency account with a bank outside India to carry out insurance / reinsurance business.

[2016-TIOL-1299-CESTAT-MUM] Commissioner of Central Excise, Aurangabad vs. Ratnaprabha Motors

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Services provided by automobile dealers to financial institutions was decided only upon issuance of Circular No. 87/06/2006-ST dated 06/11/2006. Therefore demands prior to the said date cannot be confirmed.

Facts
The Assessee receives commission from various financial institutions for introducing customers seeking loans/finances to such banks/NBFCs. The First Appellate Authority confirmed the demand only from 06/11/2006. Further the demand pertaining to sharing of profit was also set aside as such an arrangement was not liable to service tax. The Revenue appealed only against the demands set aside for the period prior to 06/11/2006.

Held
The Tribunal noted the observations of the First Appellate Authority wherein it has been provided that the classification of service was finally decided by the Board vide Circular dated 06/11/2006 as Business Auxiliary Service. Therefore extended period and penalties under section 78 of the Finance Act, 1994 are liable to be set aside. Reliance was placed on the decision of the Apex Court in the case of M/s. Jaiprakash Ind. Ltd. [2002-TIOL- 633-SC-CX] and Suchitra Components [2008 (11) STR 430 SC] to hold that extended period is not invokable.

[2016-TIOL-1408-CESTAT-MAD] GRR Logistics P. Ltd vs. Commissioner of Service Tax, Chennai

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Penalty u/s. 78 cannot be imposed when there is no discussion on the allegation of fraud, collusion, willful misstatement or suppression of facts in the Show Cause Notice.

Facts
During the course of audit it was observed by the departmental officers that there was a short payment of service tax. On being pointed out the Appellant paid up the entire demand along with interest. Thereafter a Show Cause Notice was issued proposing appropriation of amounts already paid and imposing penalty u/s. 78 of the Finance Act, 1994. It was argued that the entire demand along with interest was paid and there was no non-payment and therefore the SCN cannot survive u/s. 73(3) of the Finance Act, 1994.

Held
The Tribunal noted that the SCN is silent on the ingredients of suppression. The only allegation is that the “fact of nonpayment came to the notice of the department on account of audit” which is not sufficient for invocation of penalty u/s. 78. Penalty can be imposed only under the circumstances mentioned in section 78 which is not alleged in the SCN. Thus what is not alleged cannot be traversed at a later point of time in any proceedings. Therefore the penalty is unsustainable.

Note: Readers may note a similar decision in the case of Ishvarya Publicities P. Ltd vs. Commissioner of Service Tax [2016-TIOL-1409-CESTAT -MAD] and the decision of S. K. Poly Formulations P. Ltd vs. Commissioner of Service Tax, Mumbai-II [2016-TIOL-1407-CESTAT -MAD] where penalty imposed u/s. 76 was accordingly set aside.

2016 (42) STR 752 (Tri.-Mum.) JDSU India Pvt. Ltd. vs. Commissioner of Service Tax, Pune.

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Classification of input services cannot be changed by service recipient for availing CENVAT credit on input services. Further, works contract for repairs, renovation and modernization of the premises are not eligible for CENVAT credit.

Facts
Appellant availed CENVAT credit on services of repairs, renovation and modernization of the premises classified as “works contract service” by service provider. Works contract services are specifically excluded from the definition of “input services”. The Appellant challenged denial of CENVAT credit on the grounds that the services for renovation and modernization of the premises were specifically covered in the inclusion clause of the definition of “input services”.

Held
There cannot be different yardstick for the purpose of classification of service at the service provider’s and service recipient’s end. In other words, classification of service cannot be disputed at service recipient’s end. Works contract service is not one service but a bunch of various activities like renovation, repairs, construction, erection, installation where the material is also involved during the course of provision of service. If renovation and modernization services are provided and classified individually, they shall be eligible for credit. However, if these services are provided as bunch under works contract, they shall not be considered as input services. If CENVAT credit is allowed on the basis of nature of service by claiming that services were for renovation and modernization of premises, it would make exclusion clause of input service redundant. Accordingly, CENVAT credit was denied.

2016 (42) STR 329 (Tri.-Bang.) AMR India Ltd. vs. Commissioner of C. Ex, Cus. and S.T., Hyderabad-II.

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Free supply of items by service recipient cannot be added to the value of service.

Bonus or incentive given for good performance to service provider after the completion of service cannot be assumed to be the value of services as it was not known at the time of provision of services.

Facts
Appellants were engaged in providing site formation, clearance and excavation services and service tax was discharged on consideration for such service. As per the terms of agreement, their clients were providing specific quantities of diesel and explosives with the condition of incentives/penalties for short/excess usage of free supplies. Revenue contended that cost of free supplies and amount of incentive should be added to value of services. Commissioner did not follow the decision of Larger Bench in case of Bhayana Builders (P) Ltd vs. CST, Delhi 2013 (32) STR 49 (Tri.-LB) on the basis that the said decision was in the context of construction services in general and on the meaning of the term “gross amount charged” provided in specific notification. Further, various judgements were relied observing that bonus/incentive given to service provider for appreciating services which were not known at the time of providing services were never a ‘consideration’ received by the assessee.

Held
Following various decisions, it was held that the value of diesel and explosives supplied free of cost shall not be included in the value of services. Further, bonus/ incentives calculated after the provision of services were in the nature of prize money for good performance and cannot be linked to the value of services.

2016 (42) STR 686 (Tri.- Ahmd.) Paul Mason Consulting India (P.) Ltd. vs. C.C.E. & S.T., Vadodara.

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Relevant date for calculation of time limit of 1 year for CENVAT credit refund shall be the date of export invoice.

Facts
The Appellant filed claim for refund of accumulated CENVAT credit on account of export of services. Department rejected the claim as time barred under section 11B of the Central Excise Act, 1944 (CEA). The Appellant contended that section 11B is applicable only to the refund of duty and interest whereas refund of CENVAT credit is governed by Rule 5 of CENVAT Credit Rules which does not prescribe any such time limit. Furthermore, it was contended that they have filed the refund claims within one year of the quarter-ending, pertaining to the quarter for which refund claims were made and also claimed that relevant date shall be the date of export invoice. Respondent contested that procedure for refund of CENVAT credit has been prescribed vide notification no. 27/2012-CE(NT) dated 18/06/2012, issued under Rule 5 of CENVAT Credit Rules, 2004 wherein time limit as per section 11B is made applicable for refund of CENVAT credit.

Held
Time limit of one year is applicable to refund of CENVAT credit. Analysis of decision on the subject matter revealed that CENVAT credit though not a duty but has been equated with duty since section 11B is made applicable to refund of CENVAT credit. The relevant date for filing of refund claim would be the date of export invoice, being the date when cause for refund has arose and time limit of one year shall be reckoned from the said date.

2016 (42) STR 527 (Tri-Delhi) Maruti Suzuki India Ltd. vs. Commissioner of C. Ex. & ST. Delhi –III.

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Whether proportionate service tax paid on services used for generation of electricity at factory needs to be reversed in case of partial sale of electricity?

Facts
The appellant was engaged in manufacture of motor vehicles and parts thereof which were liable to excise duty. They have a captive power plant inside their factory. Some portion of the power generated was sold to other units for a consideration. CENVAT was availed on transportation of gas services used for manufacture of power. Adjudicating authority passed an order for reversal of CENVAT credit attributable for electricity sold outside. It was contested that ‘nexus’ test is applicable only in case of inputs and not input services. In case of input services, it should be used directly or indirectly, in or in relation to the manufacture of final products. Hence, as long as input service was used by the manufacturer, no portion of credit pertaining to such service can be reversed.

Held
The admitted fact is that electricity which is sold by the appellant is not used in or in relation to manufacture of dutiable final products. Consequently, inputs and input services which are used in production of such electricity sold outside will not be eligible for credit as they are outside the ambit of definition of input and input service as defined in CENVAT Credit Rules, 2004. Hence, demand for reversal of proportionate CENVAT credit is sustainable. It was also observed that since demand was issued on the basis of audit para, it was held that extended period was not invocable and considering repeated amendments in the Cenvat Credit Rules resulting in huge amount of litigation, it was held that no penalty shall be imposed.

2016 (42) STR 450 (Tri-Mum.) Commr. Of Ex., Goa vs. Kamat Constructions & Resorts Pvt. Ltd.

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III. Tribunal

CENVAT credit on capital goods is allowed when the assessee was registered as a service receiver (person liable to take registration under reverse charge) only which was subsequently amended as a service provider. Further full CENVAT credit of capital goods is allowed in the second or the third year when no CENVAT is taken in the first year.

Facts
The Appellants had bought duty paid capital goods and subsequently availed CENVAT credit for the same. However, it was registered as service receiver when the capital goods were bought. Therefore, the adjudicating authority disallowed the CENVAT with respect to the same. Subsequently the Appellants amended its registration as Service provider on a later date. With respect to some capital goods procured by the assessee, the assessee had not taken any CENVAT credit in its first year and had taken full CENVAT credit in the second/subsequent years. The adjudicating authorities levied interest and penalties stating that CENVAT credit was taken wrongly.

Held
It was observed that in various judgments, Tribunals have allowed CENVAT credit for those assessees who were not registered with the service tax department at all. However, in the present case, the Appellants were at least registered as a service recipient. Therefore, there is no reason why credit in the present case be not allowed. Further, it was observed that with respect to CENVAT credit of capital goods, provision of Rule 4(2) of CCR allows an assessee to avail 50% of CENVAT in the first year and balance CENVAT in the subsequent years. Hence, if no credit has been taken in the first year at all, the assessee can avail 100% CENVAT in subsequent years. Therefore appeal was allowed.

2016 (42) STR 668 (Mad.) Classic Builders (Madras) Pvt. Ltd. vs. CESTAT, Chennai.

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Tribunal has power and jurisdiction to restore the appeal on belated payment of pre-deposit on the basis of merits of the case.

Facts
The Appellant’s application for pre-deposit in installments was rejected by the Tribunal and the appeal was dismissed for non-compliance. Furthermore, restoration of appeal consequent to belated pre-deposit was also dismissed. Revenue contended that Tribunal had become “functus officio” on account of dismissal of appeal and it had no power to restore the appeal, once it is dismissed. Appellant contended that they had a very good case on merits which needs to be considered while deciding restoration of appeal.

Held
Right to appeal is a statutory right and pre-deposit requirement is procedural. Therefore, delay in making pre-deposit cannot hamper the primary right of appeal.

2016 (42) STR 425( Ori.) Maa Engineering vs. Registrar, CESTAT, Kolkata.

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Court can reduce the amount of pre-deposit as directed by the Tribunal on the grounds of financial difficulties of the assessee and direct them to pay pre-deposit equal to mandatory percentage as prescribed in section 35F of Central Excise Act, 1944 even for appeals filed during the year 2012

Facts
The petitioner had filed appeals before the CESTAT in the year 2012 wherein pre-deposit of 25% of tax amount was ordered. Due to financial hardship they were unable to comply with the directions and hence challenged the predeposit order before the High Court.

Held
Although the amended provisions of section 35F of Central Excise Act, 1944 are not retrospective yet the High Court exercised its writ jurisdiction and considering the financial difficulties of Appellant to obtain statutory remedy, directed to make pre-deposit of 7.5% of the duty amount and passed the stay order till disposal.

2016 (42) STR 420 (Del) CHL Limited vs. Commissioner of Service Tax, Delhi.

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Department cannot refuse application for adjournment on medical grounds of Chartered Accountant and pass ex-parte order when case was pending with department over six years.

Facts
A Show Cause Notice was pending since more than 6 years wherein only one hearing was held. An application for adjournment was filed before adjudicating authority accompanied by a Medical Certificate for the representative CA. However, the Adjudicating Authority passed an ex-parte order on the last date of his service period by refusing the adjournment request. Appellant filed writ before High Court challenging the ex-parte order.

Held
Reasonable request of adjournment was unjustifiably refused and the Petitioner was deprived of the opportunity of effectively participating in the adjudication proceedings which appears to be a case of violation of principles of natural justice. Therefore the High Court held that writ is maintainable in spite of availability of alternative remedy. It was observed that it would not have caused any serious prejudice to the department if the request for adjournment was accepted. It appears that the Adjudicating Authority was in a hurry to conclude the proceedings as he did not want to show the notice as pending for over six years and therefore, passed the order on the last date before his retirement. Therefore, the order was set aside with a direction to resume adjudication proceedings.

[2016] 69 taxmann.com 97 (Calcutta HC) – Simplex Infrastructures Ltd. vs. Commissioner of Service Tax, Kolkata

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When Show Cause Notice is issued on the basis of allegation of “suppression of facts”, department must specify particulars of allegedly suppressed facts, otherwise such SCN issued by invoking extended period of limitation is bad in law.

Facts
Department initiated an enquiry in the year 1998 for levy of service tax under consulting engineer service. The petitioner clearly replied that they were engaged in civil engineering construction and therefore were not consulting engineers. An enquiry was again initiated in the year 2004 which was duly attended to. Thereafter summons were issued after almost 16 months which was also duly replied to. Finally, without making any reference to the previous notices, department issued a show cause notice in the year 2006 for the period October 2000 to March 2005 by invoking extended period of limitation on the ground of suppression of facts with an intention to evade service tax. A reply was filed to the said notice. Another show cause notice was issued in the year 2009 for the period September 2004 to June 2005. This notice culminated in an order in February, 2012. Thereafter in 2013 a personal hearing notice was received for the notice pertaining to 2006. The said notice invoking extended period by alleging suppression of facts which were actually known to the department since 1998 as well as the notice of hearing which was issued after almost 7 years is challenged in the present writ.

Held
The High Court firstly noted that the question of limitation is a question of jurisdiction and therefore the writ is maintainable. As regards allegations of suppression of facts, it was noted that all the enquiries raised by the department were diligently replied and the scope of business was also explained. Further the notice itself provided that the same was issued on basis of records submitted. In the notice there is no allegation of any conscious act constituting fraud, collusion or suppression of facts but a sweeping statement is made that had investigation not been conducted material facts would not have been unearthed. Relying upon various judicial precedents, i.e. CCE vs. Chennai Petroleum Corpn. Ltd. [2007] 8 STT 168, CCE vs. Chemphar Drugs and Liniments 1989 taxmann.com 612 (SC), Anand Nishikawa Co. Ltd. vs. CCE [2005] 2 STT 226 (SC), it was held that it is well known preposition that mere failure to disclose a transaction and pay tax thereon or mere misstatement or contravention of provisions of law is not sufficient for invocation of extended period of limitation. There has to be a positive, conscious and deliberate action, viz. a deliberate misstatement/suppression, in order to evade payment of tax. Once the information is supplied to the revenue authority and the same is not questioned, a belated demand has to be held as barred by limitation [CCE vs. Punjab Laminates (P.) Ltd. 2006 (202) ELT 578 (SC) replied upon]. Further while quashing the notice, the court also held that two show cause notices cannot be issued for the same period and further the notice issued with a pre-determined mind at the instance of a CERA Audit is also not sustainable. It was also held that a quasijudicial authority must act independently and not at the dictates of some other authority. Further on merits also it was held that Civil Engineering Construction carried on by the petitioner being a composite works contract cannot be vivisected to segregate the service element as held by the Supreme Court in the case of C,CE&C vs. Larsen & Toubro Ltd [2016] 60 taxmann.com 354. Thus the writ was allowed.

Note: Readers may note that, the case involves a principle which could be of use in matters involving extended period of limitation. Recently, Hon’ble Bombay High Court, in the case of Excel Production Audio Visuals (P.) Ltd vs UOI, [2016] 69 taxmann.com 94 (Bombay), quashed the adjudication order which was passed almost 16 months after the date of hearing and directed re-adjudication.

[2016-TIOL-1077-HC-DEL-ST] Suresh Kumar Bansal vs. Union of India & ORS

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II. High Court

In absence of machinery provisions to exclude non-service elements from a composite contract of construction of residential complex service, no service tax can be levied.

Facts
The petitioner entered into an agreement with a builder to buy flats in a housing project developed by the builder. It is contended that the agreement with the builder is a composite contract for purchase of immovable property and therefore in absence of a specific provision for ascertaining the service component of the said agreement, the levy would be beyond the legislative competence of the Parliament. Thus the question before the Court is whether consideration paid by flat buyers to builder/developer for acquiring a flat in a complex which is under construction is leviable to service tax. Reliance was placed on Circular No. 108/02/2009-ST dated 29/01/2009 wherein it was provided that the initial agreement between the promoters/builders/developers and the ultimate owner is in the nature of agreement to sell and the property remains under the ownership of the seller. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of “self-service” and consequently would not attract service tax. Further levy of service tax on preferential location charges was also challenged

Held
The High Court observed that the explanation to section 65(105)(zzzh) inserted by the Finance Act, 2010 created a legal fiction, whereby a set of activities carried on by a builder for himself are deemed to be that on behalf of the buyer and the Parliament is also competent to create such a deeming fiction. Moreover it cannot be disputed that the buyer acquires an economic stake in the project and the services subsumed in construction service in relation to a construction of a complex are rendered for the benefit of the buyer. Therefore it was held that the element of service involved cannot be disputed. However it was noted that it is essential to examine the measure of tax used for the levy as it is impermissible to tax the nonservice elements involved in the transaction viz. goods and immovable property. In the present case section 67 of the Finance Act, 1994 read with the Service Tax (Determination of Value) Rules, 2006 do not provide for any machinery for ascertaining the value of services involved in relation to construction of a complex. Rule 2A of the said rules does not cater to determination of value of service which involves sale of land. Thus neither the Act nor the Rules provide the required machinery. The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract. Thus it was held that in absence of a measure of tax, the levy fails. Further the levy of service tax on service of preferential location was upheld as it represented an additional value that a customer would derive by obtaining a particular unit as per its preference and therefore involved an element of service.

Note: Readers may note a contrary decision of the Madras High Court in the case of N. Bala Baskar vs. Union of India & others [2016-TIOL-824-HC-MAD-ST] digest provided in BCAJ June 2016 wherein the Court primarily held that the writ was not maintainable as it is not open for a recipient to challenge the levy. However it is important to note that decision dealt with the case of joint development agreement and the Court merely held that such agreement for development is a service exigible to service tax without commenting on its valuation aspect.

2016 (42) STR 401 (S.C) Commissioner of Service Tax, Mumbai vs. Lark Chemicals P. Ltd.

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I. Supreme Court

Section 80 of the Finance Act, 1994 envisages a complete waiver of penalty once reasonable cause of failure is established and the same cannot be applied to reduce partially minimum penalties prescribed u/s. 76 and 78 of Finance Act, 1994

Held
On following the judgement of Union of India and Others vs. Dharamendra Textile Processors and Others’ 2008 (231) ELT 3 (SC), it has been held that penalties imposed under section 76 and section 78 cannot be reduced u/s. 80 of Finance Act, 1994.

(Note: section 80 has been omitted with effect from 14/05/2015. The judgment may be relevant to the period prior to deletion of section 80).

‘Sale’ vis-à-vis exchange/barter

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Introduction
Under Sales Tax Laws, the transactions of ‘sale’ are liable to tax. The transaction of ‘sale’ is to be understood as per Sale of Goods Act, as held by Hon’ble Supreme Court in case of Gannon Dunkerly & Co. (9 STC 353)(SC). In this case, Hon’ble Supreme Court has interpreted the term ‘sale’ and has held that the transaction to be a sale, it should fulfill the minimum criteria as laid down in Sale of Goods Act. In fact, Hon’ble Supreme Court has observed as under in relation to transaction of sale:-

“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”

From above passage it is clear that to be a ‘sale’ following criteria should be fulfilled.

(i) There should be two parties to contract i.e. seller/ purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e. transfer of ownership from seller to purchaser.

Deemed sale by way of works contract

By 46th Amendment to the constitution, the concept of deemed sales was introduced which can be taxed under sales tax laws. One of the deemed sales is ‘works contract’ which has been introduced by Article 366 (29A)(b) in the Constitution of India.

A question arose as to whether the whole works contract price is liable to tax or only value relating to the goods. While analyzing the taxability of above deemed sale category of works contract, Hon’ble Supreme Court in case of Builders Association of India (73 STC 370)(SC) stated as under:

“Hence, a transfer of property in goods under sub-clause (b) of clause (29-A) is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. The object of the new definition introduced in clause (29-A) of article 366 of the Constitution is, therefore, to enlarge the scope of “tax on the sale or purchase of goods” wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clauses (a) to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression “tax on the sale or purchase of goods” in entry 54 of the State List, therefore, includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract also. The tax leviable by virtue of sub-clause (b) of clause (29-A) of article 366 of the Constitution thus becomes subject to the same discipline to which any levy under entry 54 of the State List is made subject to under the Constitution..”

It can be seen that works contract is nothing but composite transaction for supply of goods and for supply of services. By the constitution amendment the composite transaction is notionally divided between goods and services.

It is also clear that to the extent of supply of goods the nature and character of supply is at par with normal sale of goods. In other words, all the criteria as applicable to normal sale i.e. as discussed above in Gannon Dunkerly & Co. (73 STC 370)(SC) are equally applicable to this deemed sale under works contract.

Therefore, even under works contract, the transaction should be against money consideration and if it is against any other consideration in form of goods or property etc., it cannot be a taxable transaction under sales tax laws, as it will not fall in the category of ‘sale’ but in the category of ‘barter’ or ‘exchange’.

Definition of ‘sale’ under MVAT Act, 2002
The definition of ‘sale’ in section 2(24) of MVAT Act, 2002 is as under;

“(24) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;

Explanation,-—For the purposes of this clause,—
(a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in section 4 of the Central Sales Tax Act, 1956;
(b) (i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration;
(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of’ a works contract including , an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property….”
(emphasis supplied)

It can be seen that even under MVAT Act, 2002, the works contract transaction should be against cash/deferred payment or other valuable consideration.

‘Other valuable consideration’
The term ‘other valuable consideration’, in relation to sales tax laws, is also well understood by judicial pronouncements. Reference can be made to the judgment of Kerala High Court in case of M. Jaihind vs. State of Kerala (111 STC 374)(Ker).

“The essence of a sale lies in the transfer of property “for cash or for deferred payment or for other valuable consideration”. The definition of “sale” contained in the Kerala General Sales Tax Act, 1963 cannot be construed to include within its ambit those transactions which do not fall within the definition of “sale” as contained in the Sale of Goods Act, 1930 and the definition in the Kerala General Sales Tax Act, must therefore be construed accordingly. Section 4 of the Sale of Goods Act defines “sale” as a transaction whereby there is transfer of property in goods to the buyer for a price. Section 2(10) of the Sale of Goods Act defines “price as money consideration for ‘sale of goods’”. Thus, in order that a transaction may amount to a sale in accordance with the Sale of Goods Act, the consideration has to be money. The expression “cash or deferred payment or other valuable consideration” used in the definition of “sale” in section 2(xxi) of the Kerala General Sales Tax Act has to be construed to mean cash or some other monetary payment. The words “other valuable consideration”, which occur in section 2(xxi) of the Act can be interpreted by rules of ejusdem generis, as the payment by cheque, bills of exchange or other negotiable instruments. The words “deferred payment or other valuable consideration” used in section 2(xxi) of the Kerala General Sales Tax Act merely enlarge the ambit of the consideration beyond cash, but do not carry it outside the scope of the term “money”. If, the consideration is not money, but for other valuable consideration, it cannot then be a sale.”

Thus, the ‘other valuable consideration’ should also be in money terms like Bill of Exchange or Cheque etc..

Recent judgment of MST Tribunal in relation to SRA Project Hon’ble MST Tribunal had an occasion to decide one of the important issues in relation to alleged works contract transaction. The judgment is in the case of M/s Sumer Corporation (VAT SA No. 335 of 2015 dtd 3.5.2016).

In this case, the facts noted by the Tribunal are as under; “2. Appellant contends that he is engaged in the business of construction of buildings and tenements for Slum Rehabilitation Authority (SRA). He was assessed by the Assistant Commissioner of Sales Tax, (INV- 7), Investigation-A, Mumbai for the period 2006-07 under MVAT Act vide order dated 12/05/2014. It is alleged that in the said assessment, assessing authority levied tax on a transaction which is not a sale within the meaning of MVAT Act.

Appellant states that he has constructed buildings for SRA for which he did not receive any money consideration. No contract value in terms of money was fixed. According to him, as per agreement, he has received TDR (Transferable Development Rights), which he has sold and realised money out of that. He claims that the transaction was barter and cannot be taxed under MVAT Act.

He states that assessing authority assessed him as unregistered dealer (URD). He contends that the assessing authority has committed illegality by holding the sale value of TDR and proposed value of TDR as turnover and tax is calculated on the same. He states that TDR itself is not taxable under the MVAT Act. Hence, he contended that appeal be allowed.”

Appellant had submitted that the transfer of property in the given transaction was against allotment of TDR which itself was immovable property or goods but not money consideration. Therefore, it is barter or exchange and not a sale by works contract. The department had considered the money received by sale of TDR as receipt from SRA and levied tax on the same. This was objected to on the ground that sale of TDR is separate transaction and cannot be directly linked as money consideration from SRA.

It was also submitted that if at all the TDR is to be considered as consideration, there was no mechanism given in the law to convert the same in money consideration on which tax could be levied. Relevant judgments were cited.

Hon’ble Tribunal came to the conclusion as under:
“19. Taking into consideration the definition of sale under the MVAT Act as defined in section 2(24) the word ‘other valuable consideration’ would include anything that would directly or indirectly fetch some element of money or any other consideration. In the present case, TDR which is mentioned as Transfer Development Rights can be converted into money and in the present case already appellant has en-cashed some TDR and obtained considerable amount therein and, therefore, TDR would be a valuable consideration. Under these circumstances, the contention of the appellant that the transaction is barter or free of cost or without consideration cannot be accepted.”

Thus Tribunal has departed from settled position that there should be consideration in money terms from the buyer itself. Hon. Tribunal has expanded the meaning of ‘other valuable consideration’ in relation to contracts observing that the earlier judgments are now not relevant after 46th Amendment.

Hon’ble Tribunal has also not appreciated that there is no procedure laid down for conversion of TDR in to money term to compute tax. Hon’ble Tribunal has applied its own theory and held that the monetary value can be ascertained as market value by reference to ready reckoner for stamp duty at the relevant time of agreement. Thus the Tribunal held that transaction is taxable but changed the mode of computation. Lower authorities have levied tax on amount received against sale of TDR, whereas Tribunal has shifted it to market value on the date of agreement. The tax computation is left to the lower authorities.

Conclusion
Though works contract transactions are made taxable, it is equally important that all the criteria, as required to make a transaction a sale transaction, are also applicable to works contract. Further, assuming that consideration in form of other property is also valid than there should be a procedure, prescribed by law, to convert the value of such consideration in money terms. Like, under Service Tax, there are provisions to arrive at monetary value for levy of service tax when the consideration is other than money. Unless such provisions are available under MVAT Act itself, no tax can be attracted on barter transactions. Therefore, the judgment of Hon. Tribunal cannot be said to be final. A decision by higher judicial forums will lay down the correct position.

TAXABILITY OF OCEAN FREIGHT UNDER SERVICE TAX

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Introduction:
The Finance Act, 2016 introduced service tax on services of transportation of goods by a vessel from a place outside India upto the customs station of clearance with effect from 01/06/2016. Section 66D introduced from 01/07/2012 in the Finance Act, 1994 (the Act) comprising of negative list of services i.e. the services which are outside the ambit of service tax also contained entry (p) (ii) which read as follows:

“(p) Services by way of transportation of goods –
(i) ……………
(ii) by an aircraft or a vessel from a place outside India upto the customs station of clearance in India”.

The above entry now stands omitted with effect from June 01, 2016. However, such services by an aircraft continue to be exempt vide insertion of entry 53 In Mega Exemption Notification No.25/2012-ST.

TRU letter DO.F.No.334/8/2016 – TRU dated 29/02/2016 in this regard clarified as follows:

“(C) The entry in the Negative List that covers services by way of transportation of goods by an aircraft or a vessel from a place outside India up to the customs station of clearance [section 66D (p)(ii)] is proposed to be omitted with effect from 1.06.2016. Clause 146 of Finance Bill 2016 may please be seen in this regard. However such services by an aircraft will continue to be exempted by way of exemption notification [Not. No. 25/2012-ST, as amended by notification No. 09/2016-ST dated 1st March, 2016 refers]. The domestic shipping lines registered in India will pay service tax under forward charge while the services availed from foreign shipping line by a business entity located in India will get taxed under reverse charge at the hands of the business entity. The service tax so paid will be available as credit with the Indian manufacturer or service provider availing such services (subject to fulfillment of the other existing conditions). It is clarified that service tax levied on such services shall not be part of value for custom duty purposes. In addition, Cenvat credit of eligible inputs, capital goods and input services is being allowed for providing the service by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India. Consequential amendments are being made in Cenvat Credit Rules, 2004 [Not. No. 23/2004-CE (N.T.), as amended by Sl. Nos. 2(b) and 5(h) of notification No. 13/2016-C.E. (N.T.) dated refers. ]
(Clause 146 of the Bill refers) “

In terms of the above clarification, consequential amendments are made in CENVAT Credit Rules, 2004 to allow CENVAT credit of service tax paid on various input services used by domestic shipping companies or other service providers such as freight forwarders against their earnings from export freight, which hitherto was not available to them as ocean freight was not taxable.

Earlier till 30/06/2012 also, the service of transportation of goods by ocean/waterways did not find place in notified services listed in section 65(105) of the Act. The levy thus relates to service of transportation of goods by ocean in the course of import. Transportation of goods by ocean (or even air) in the course of ‘export’ did not attract service tax in the past i.e. pre and post negative list based tax regime and continue to be outside the scope of service tax by means of operation of Place of Provision of Services Rules,2012 (PoP Rules). The relevant Rule 10 of the said PoP Rules reads as follows:

“10. Place of provision of goods transportation services”.- The place of provision of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of goods.

The above rule thus determines that when the goods are transported by vessel/ocean internationally, the destination of goods being beyond territorial jurisdiction to which the Act extends, the place of provision of the said service is outside India and therefore, no service tax is attracted.

Conventionally, when the goods are imported by vessel/ ocean, customs duty in terms of section 14 of the Customs Act, 1962 is charged on the cost of transportation from the place of shipment to the port of importation in India. Thus all applicable levies of customs including Counterveiling Duty (CVD), Cess and Special Additional Duty (SAD) are attracted on the ocean freight. Thus, there has been a view among professionals and freight forwarding fraternity that the freight is being taxed twice; viz. under the Customs Act and now also under Service Tax. In this context, it is relevant to note here, a few observations made in decided cases:

Ocean freight & service tax:
In United Shippers Ltd. vs. Commissioner of Central Excise 2015 (37) STR 1043-(Tri.-Mumbai) service tax was sought to be levied as cargo handling service wherein on transportation of goods by barges from mother vessel to the jetty onshore in the course of import of goods into India, it was held that the activity is not liable for service tax as the activity is part of import transaction liable for import duty. However, Tribunal – Delhi in Shri Atul Kaushik & others vs. Commissioner of Customs (Export) 2015 (330) ELT 417 (Tri.-Del), a case of import of packaged software held that there is no provision that warrants exclusion from assessable value for customs on the ground that service tax is charged on the license fee paid on such a software imported when such license fee is a part of condition of sale. In this case, relying on the case of Imagic Creative Pvt. Ltd. vs. Commissioner 2008 (9) STR 337 (SC) (wherein it was held that service tax and VAT are exclusive), the Appellants had urged that both service tax and customs duty cannot be demanded on the same transaction. The Tribunal in the reference held that decision is an authority for what it decides and mutuality of customs duty and service tax is not deduced from the said Supreme Court decision. Further, no constitution provisions restricting the same was brought to the notice of Tribunal. Since this decision examined includibility of license fee in assessable value for levying customs duty, the question is whether license fee paid should have suffered service tax when the same was includible for the purpose of customs duty by applying the ratio of decision in United Shippers Ltd. (supra).It is another matter though that license fee payable for a copyrighted product like software (wherein copyright remains vested in seller) would be a transaction of “deemed sale” of goods not liable for service tax as what is transferred is a right to use the copyrighted product against payment of license fees as held by Karnataka High Court in Infosys Ltd. vs. Deputy Commissioner of Commercial Taxes and Others 2015-TIOL-HC-KAR-VAT.

In a recent ruling provided by Authority for Advance Rulings in the case of Berco Undercarriages (India) Pvt. Ltd. AAR/ST/10/2016, the Applicant intended to import raw material and appoint a foreign C&F agent for all composite services of handling, arranging shipping liners, clearances at point of origin and destination at a composite fee in his respective currency and customs duty would be paid on the said composite fee invoice. The question was raised as to which portion of the same would attract service tax. Discussing both the above decisions of United Shippers Ltd. (supra) and Shri Atul Kaushik (supra), AAR observed that Tribunal was not consistent on chargeability of service tax when customs duty was levied. It was also noted that transportation service by vessel from outside India upto the customs station in India is in the negative list of services and therefore not chargeable to service tax. However, at the instance of revenue’s contention, Rule 5(1) of the Service Tax (Determination of Value) 2006 (Valuation Rules) was invoked and it was held that excluding the costs incurred by C&F agent as pure agent if conditions listed in the said Rule 5 of Valuation Rules are satisfied, service tax would be payable by the Applicant on the said invoice as recipient of service. It appears prima facie that AAR’s attention was neither drawn to the Delhi High Court having declared the said Rule 5(1) ultra vires service tax in Intercontinental Consultants & Technocrats P. Ltd. vs. UOI 2012-TIOL-966-HC-DEL-ST and moreover, importantly relevant here is that neither the principles governing bundled service are examined nor relevant PoP Rules apparently seem to have been brought to the notice of AAR to determine place of provision of service of the service provider referred to as C&F agent. For instance, as per Rule 4 of Place of Provision of Services Rules, 2012 (PoP Rules) when a service provider is in nontaxable territory provides performance based services in relation to goods outside India, no service tax is attracted or as per parameters laid in Rule 9 of the said PoP Rules, the services provided by an intermediary outside India, no reverse charge is attracted. Indeed, AAR ruling is binding only on the Applicant. However, it may cause widespread litigation on the issue involved.

Thus, in addition to the levy of duty of customs already levied while the goods are imported, service tax is levied when an Indian shipping line or a freight forwarder handles a cargo and when the freight is payable at the end of consignee. The issue here is assuming there are two separate taxable events, one under the service tax law and also under the Customs Act, whether or not there is a need for cost addition to the goods by way of service tax as in many cases such as traders, passing on of CENVAT credit is not enabled in terms of CENVAT Credit Rules, 2004 and conventionally when freight is being considered part of the cost of imported goods for the levy of customs duty, why should service tax be levied.

Further service tax levied on transportation in the course of import has different implications on different classes of persons. Factually, a large majority of shipments are handled by Foreign Service providers/freight forwarders and the current levy is not affecting them as they are located in non-taxable territory. As against this, an Indian multimodal transport operator or a freight forwarder handling import shipment would be liable for service tax and therefore they would have less competitive service rate with the incidence of service tax @ 4.5 per cent on import freight and such service providers often do not have potential to pass on the credit. The issue therefore arises is whether any level playing field is really provided to Indian shipping lines or other service providers when majority of the cargo in the course of imports to India is handled by foreign flagship vessels or freight forwarders. Lastly, a mention is necessary here as to nationwide litigation initiated by the service tax department wherein service tax is demanded from service providers earning margin on ocean freight as MTO /freight forwarder/Non- Vessel Owning Common Carrier (NVOCC) i.e. carrying out business on their “own account” akin to traders, margin earned on non-taxable ocean or airfreight is alleged as value of service chargeable to service tax. The department is on its way to file an appeal against Mumbai Tribunal’s decision in Greenwich Meridian Logistics (India) Pvt. Ltd. vs. Commissioner of Service Tax, Mumbai 2016-TIOL-869-CESTAT -MUM wherein it has been held that the margin on non-taxable ocean freight is not liable for service tax as business auxiliary service. Now the Government’s own action of levying service tax on import freight is inconsistent with their own claim in litigation of treating margin on freight as value of taxable service does not require to be elaborated further.

Conclusion:
As per internationally known practices, the activity of transportation of goods by vessel or air is not chargeable to VAT or GST implemented by several countries across the globe and is considered part of the cost of imported goods for customs duty. When the Government is so keen on implementing GST as soon as practically possible, whether the levy of service tax was necessary is a poser made by many. However, it is hoped that on implementation of GST, the dual levy will be taken care of in line with international practice.

Welcome GST – VA T (GST) in Canada

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Introduction
This story on the salient features of Canada’s GST continues BCAS’s ongoing series discussing GST concepts, and global perspectives and practices on some of the key elements. The Canada example is especially interesting because of Canada’s system of dual taxation at the Federal and Provincial levels (like our proposed dual GST design which will allow for concurrent taxing powers to the Centre and States on all taxable transactions), and because, as we will see, the Canadian GST model incorporates certain concepts that we are familiar with in the context of income tax.

Taxing powers, GST design and levy
Like India, Canada levies indirect taxes at two levels – there is a federal GST charged by the Federal Government, and retail sales taxes are imposed at the provincial level. In the early 1990s, there was a move by the Federal Government to replace the dual imposition of taxes with a single national levy called the Harmonized Sales Tax (HST). However, not all provinces are participating in the HST system, and some provinces have retained their sales tax regimes instead of switching over to the revenue- sharing model under the HST. Fortunately, in the latest Constitutional Amendment Bill that is with the Rajya Sabha, the possibility of us having two parallel systems operating has been foreclosed.

GST is imposed on the taxable supply of goods and services made in Canada, and is collected as a transaction tax at each stage of the production and distribution value chain. GST also applies to goods imported into Canada, and to certain services and intangibles acquired from outside of Canada, known as ‘imported taxable supplies’.

In Canada, the GST is administered by the Canada Revenue Authority (CRA) which also collects all other taxes imposed by the Federal Government including income tax. GST on imported goods is administered by the Canada Border Services Agency (CBSA). Provincial sales tax regimes are administered locally.

Taxable events
(i) Supply of goods / property

Interestingly, the GST Act does not generally use the term ‘goods’ and instead uses the term ‘property’ which is defined to mean any property whether real or personal, movable or immoveable, tangible or intangible, corporeal or incorporeal and to include a right, share and chose in action, but not to include money. As we will see later in this discussion, in the Canadian GST context, ‘property’ may be subdivided into real property, goods and intangibles.

A supply of goods is made when goods are provided to another person in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. It is to be noted that a supply takes place regardless of receipt of monetary consideration, and transfers for no consideration are also supplies of goods. Canada also cognizes the concept of deemed supplies of goods (somewhat similar to our “deemed sales” under article 366(29A)) for the compulsory transfer of property, hire purchase transactions etc.

Under the Canadian GST treatment of commissionaire arrangements, an agent is generally not considered the supplier of goods for GST purposes except where the principal is not required to collect GST and the supply is made through a taxable person acting in the course of a taxable activity, in which case the agent is deemed to have supplied goods. In such cases, the agent is deemed not to have supplied agency services to the principal.

Certain transactions that do not attract VAT under the present scheme of taxation in India are treated as taxable under Canadian GST. These include the withdrawal of business goods for personal use where the business is deemed to have made a supply of goods for consideration i.e. a “self-supply”, free-of-charge supplies of goods to third parties (here no GST is payable on the supply in the absence of consideration, yet the supplier can claim input tax credit if the supply is for the purpose of business promotion), situations of change of use of capital goods from taxable to non-taxable activities, cessation of the carrying on of taxable activity, and, importantly, the bringing of goods from one province to another – here, GST may be payable to the extent of the difference in rates between the provinces.

Intangible rights such as the right to use intellectual property, and memberships in clubs and organisations are treated as supply of property and not services.

Special provisions exist in the GST Act for taxing the transaction of a transfer of a business. In an acquisition of all or substantially all of the property necessary for carrying on a business or part of a business, GST does not apply on the consideration attributable to goodwill, and the transfer of each property (and the provision of each service) is deemed to be a separate supply, the tax status of which is required to be determined. However, an option is available whereby the recipient is relieved of the obligation of paying GST where the tax payable on the purchased assets would be fully recoverable through the credit provisions. There are additional relieving rules specific to M&A transactions wherein transfers of property on amalgamation or winding up do not result in a supply of property for GST purposes.

(ii) Supply of services

The term ‘service’ is defined to mean anything other than property, money or the services of an employee. Per this definition, some of the declared services under the Indian service tax law such as non-compete agreements also fall within the aforesaid definition. As mentioned earlier, leases and rentals are not services for GST purposes, as these constitute supplies of goods or real property. A selfsupply of services is generally not subject to GST.

Characterisation of supplies

Under Canadian GST, whether a supply is to be characterised as one of goods or services is to be determined on the basis of general legal principles. Transactions involving a combination of elements (across goods and services) are characterised on the basis of specific provisions and tests developed by case law per which, generally, multiple elements will be considered as a single supply if each of the elements is an integral part of the overall supply. Similarly, supplies of property or services that are incidental to another (principal) supply of property or services are treated as part of the principal supply, if all the properties and services are supplied for a single consideration. Also, a supply of property or services tagged to financial services for a single consideration are deemed to be supplies of financial services, if, among other conditions, the value of the financial services accounts for more than 50% of the consideration. In other words, property can be treated as services (and vice versa) depending upon which is the dominant principal supply. The aforesaid characterisation logic and methodology is in interesting contrast to the tax treatment accorded under the present indirect tax system in India, where we continue to grapple with the challenges of parallel taxation of transactions as sales / deemed sales as well as services.

(iii) Import of goods
Goods imported into Canada are subject to Canadian GST on importation. Complications in tax collection arise on account of the differences in tax rates from one province to another under the HST system, and where there is a separate provincial tax component. In some cases, the CBSA collects the federal and provincial components whereas in others, only the federal component is collected. It is important to note that no tax is payable when a commercial importer imports goods exclusively for use in taxable activities – this idea that that tax need not be paid when credit thereof is available is an important simplification that Canada has applied.

(iv) Imported taxable supply
GST also applies to certain personal property and services acquired from outside of Canada in certain situations, if the recipient in Canada receives the supply otherwise than for use in an exclusively taxable activity (for the reason that credit would not be available).

Place of supply
As stated above, GST is imposed on taxable supplies made in Canada. Like in the Indian scheme of indirect taxation, the taxing jurisdiction covers Canada’s landmass, internal waters, territorial sea the airspace above these, and extends to the EEZ. The rules to determine the place of supply vary according to whether the supply involves property (real property, goods and intangibles) or services.

Supply of real property

 In case of supply related to real property, the place of supply shall be deemed to be the place where such property is located. Therefore, the property must be situated in Canada for the place of supply to be in Canada.

Supply of goods

In determining the place of supply vis-à-vis supply of goods, a distinction has been made between supplies made by way of sale and otherwise. Where goods are supplied by way of sale, the place of supply is deemed to be in Canada if the goods are delivered or made available in Canada to the recipient of the supply – this is generally the place where possession is transferred to the buyer. In case of a supply otherwise than by way of sale (e.g. by way of rental), the place of supply shall be the place where possession or use of the property is given or made available to the recipient of the supply.

Supply of intangibles

A supply of intangible property is deemed to be in Canada if the property may be used in Canada or the property relates to real property or goods situated in Canada or to a service performed in Canada.

Supply of services

The general rule is that a supply of service is deemed to be Canada if the service is wholly or partly performed in Canada. Therefore, services will be deemed to be supplied outside Canada if they are performed wholly outside Canada. As an exception, the place of supply of a service in relation to real property depends upon where the property is situated. Telecommunication services have a separate rule under which the service is considered to be supplied in Canada if 2 out of the following 3 tests are met, viz. (1) the telecommunication is emitted from Canada, (2) the telecommunication is received in Canada, (3) the billing location is in Canada. It is important to note that, therefore, unlike in our service tax legislation, the place of establishment of the service provider or service recipient are not relevant.

In case of goods, intangibles, and services (except admissions to places, activities, and events), the aforesaid rules to determine place of supply are subject to an overriding provision per which despite the supply being determined to having been made in Canada thereunder, by a specific carve out, these supplies are deemed to be made outside Canada if the supplier is not resident in Canada, not registered for GST purposes, and the supply is not made in the course of business carried on in Canada. These transactions may nonetheless be liable to Canadian GST, as imported taxable supplies.

As stated above, GST also applies to goods imported into Canada.

Additional rules apply to determine whether a supply is made in or outside of a particular province. Apart from the aspect of taxing jurisdiction, this is important given that the rates of tax are not the same across the provinces.

It is important to understand the connection between place of supply and taxability in the light of the incidence of GST and the person liable for the payment of tax, which is discussed below.

Taxable person and liability to pay tax
GST applies to businesses operating in Canada. Supplies of goods and services are considered taxable only when made in the course of commercial activity, including isolated or infrequent commercial activity. For individuals, partnerships, and personal trusts, taxability requires reasonable expectation of profit. Real property transactions are deemed to be in the course of taxable activity unless specifically exempted.

Whereas small businesses may choose not to register for GST, charities, non-profit organisations and public bodies are subject to GST like all other persons. For some of these, dispensations in the form of different threshold levels and rebates are available.

The liability to remit GST generally attaches to the supplier, other than in cases where the reverse charge mechanism applies. The reverse charge is restricted to situations of commercial real estate sales, and imported taxable supplies which, as discussed earlier, pertain to supplies made by non-residents.

It is to be noted that the test to determine residential status for the purposes of GST is based on the concept of ‘permanent establishment’, similar to the DTAA concept. Accordingly, a place of management, branch, office, factory, workshop, place of extraction of natural resources, etc., from which supplies are made or head trigger resident status for Canadian GST in respect of activities carried out through the permanent establishment. It may also be noted that under some business models, non-residents making sales to customers in Canada are deemed to carry on business in Canada and are required to register for GST – otherwise, registrations by non-residents are optional.

Canadian GST law contains provisions enabling “group treatment” under which related corporations and partnerships who are resident in Canada and registered for GST can elect to deem intra-group transactions to be made for no consideration, subject to the fulfilment of certain conditions.

Time of supply
According to the time of supply provisions, generally, the GST becomes due on the earlier of the following two dates, viz. (1) the date on which consideration is paid, and (2) the date on which the consideration becomes due. Other than in case of property lease or licence transactions where consideration becomes due as per the terms of agreement, as a general rule, consideration becomes due on the earliest of the following three dates, viz. (1) the date on which supplier issues an invoice for taxable supply, (2) the date on which supplier ought to have issued an invoice (in case of delay in issuing invoice), and (3) the date on which recipient is required to make payment of consideration for taxable supply. Per the above, advance payments are liable to tax. However, deposits are not treated as consideration unless so applied by the supplier.

The aforesaid general rule is subject to certain overriding exceptions, among others, such as where in case of conditional sale or hire purchase transactions where the full GST becomes due though payments are spread over a period, and contracts for construction, renovation, etc. to real property and ships where tax cannot be deferred past the month of substantial completion of work. Where consideration is not completely ascertainable on the date GST is payable, the tax becomes payable to the extent that it is ascertainable, and the balance GST is due when only the date that the value is ascertainable.

Unlike the Indian service tax legislation, which provides for payment of taxes on receipt of consideration for certain small businesses, GST in Canada is to be deposited in accordance with the provisions of time of taxation relating thereto.

Valuation for GST
GST is payable ad valorem, and is therefore calculated on the value of consideration paid for a taxable supply. Where the consideration is not expressed in money terms, the fair market value of the consideration forms the tax base. Where there is no actual transaction, e.g. in a situation of a self- supply, the consideration is the base value of the property at the time it was originally acquired, and the tax is the amount that would have been recorded as a tax credit. In transactions between related parties which are not at arm’s length, the supply is deemed to take place at a value equal to the fair market value of the supply – however, this provision is not applied where the customer is engaged in exclusively taxable activity and is therefore eligible to claim all the tax on the transaction as tax credit.

Adjustment of the amount of tax collected (where excess tax is charged) is permitted subject to conditions including a time limit for such adjustment.

Whereas GST is payable on taxable transactions at the appropriate consideration value, where a supplier writes off all or a portion of the consideration and the tax charged, he may claim bad debt relief. There is a 4-year time limit for making such adjustment.

For import transactions, the basis of valuation is as provided for in the customs law. The inclusions and exclusions provided for are similar to the adjustments required under India’s customs valuation provisions which follow from our WTO commitments.

Tax rates, exemptions and zerorating
The tax rates range from 5% to 15%, depending upon the province in which the supply is deemed to have been made. The standard rate of the federal GST is 5% for all taxable supplies made in Canada other than those that are zero-rated, and the balance pertains to the provincial tax component where HST applies.

Export transactions and transactions concluded in Canada which pertain to export transactions are zero-rated. This tax treatment is conditional and also requires fulfilment of certain documentation criteria. It may be noted that there is no GST refund or rebate to travellers who export taxpaid goods out of Canada in their luggage.

In addition to exports, certain supplies under the following categories are also accorded the zero-rate, viz. (1) prescription drugs, (2) medical devices, (3) basic groceries, (4) agriculture and fishing, (5) travel, (6) transportation services, (7) supplies to international organisations, (8) financial services.

Like in the case of zero-rated transactions, no GST is also due on exempted transactions – in case of the latter, the supplier cannot claim input tax credits. Exempted transactions include (1) financial services, (2) healthcare services, (3) welfare and socials security services, and (4) education.

Certain transactions of imports of goods into Canada are exempt from the import GST. These include import of (1) crude oil for use in manufacture of exported refined products, (2) precious metals, and (3) imports for repairs.

Input tax credit, and rebates
One of the inherent benefits of a GST system is the noncascading of taxes in the value chain. Following this principle, Canada’s GST provides that a registrant who acquires or imports a property or a service, may claim an input tax credit for the GST paid thereon as a deduction in the calculation of the tax payable on supplies made by him. As follows, if the amount of input tax credit exceeds the GST payable on the supplies made, the registrant is entitled to a refund.

Sufficient documentation is required to be maintained in order to claim input tax credit as stipulated in the regulations formed for this purpose. However, interestingly, the issuance of an invoice is not mandatory and alternatives for evidencing the tax amount are acceptable.

Under the GST Act, a registered person can generally claim input tax credits within 4 years from the reporting in which such person was entitled to claim credit, but in certain circumstances a shorter time period applies.

As stated above, suppliers of exempted supplies are not eligible to take input tax credit of GST paid by them. Even where tax credits are available, the Canadian GST law proscribes full utilisation of input tax in respect of certain transactions. These include the application of property or services for personal use by employees. A “reasonableness” test applies to limit the amount of credit benefit available. Also, similar to our CENVAT credit provisions, there is a separate methodology for credits pertaining to capital goods.

Rebates of GST are granted to various organizations carrying out operations in the interest of the public, such as hospitals, charities, schools, municipalities etc. The rebate ranges from 50% to 100% of the tax borne by such entities.

Special scheme for small businesses
Small businesses have the option to account for GST on a simplified basis, wherein under a “Quick Method”, they can pay GST at a lower rate (ranging between 0% and 12%) without availing input tax credit. There is another option of a “Simplified Method” to calculate input tax credits under which credit may be determined on the basis of a calculation, as opposed to the tracking the GST paid on each purchase invoice. Similar schemes are also available to charities and public bodies.

Anti-avoidance measures and supplies within group entities
Another income tax concept that the Canadian GST law contains is that of GAAR provisions. The most commonly applied provision pertains to supplies being made at prices not at arm’s length. Under the GAAR provision, the fair market value of the transaction is to be applied, unless the receiver is entitled to full input tax credit. There are two defences against the invocation of GAAR – these are showing that the transaction was undertaken primarily for a purpose other than reduction of the amount of tax due, and demonstrating that it may be reasonable considered that the transaction would not result in misuse or abuse.

Concluding thoughts
The foregoing paragraphs provide just a brief overview of the Canadian GST provisions. As may be evident therefrom, there is significant detailing for specific situations, which is oriented toward effective and efficient tax collection. There are also several provisions that ease assessee compliance and assist in cash flow conservation. These are important ideas for us to keep in mind in the drafting of Indian GST law.

Evidence – Electronic records – Secondary evidence of electronic records inadmissible unless requirements of section 65B are satisfied. [Evidence Act, 1872, Section 65B]

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Anvar P.V. vs. P. K. Basheer & Ors AIR 2015 SC 180.

The Supreme Court was dealing with an appeal filed against order whereby High Court had dismissed election petition holding that corrupt practices pleaded in the petition were not proved and hence, election could not be set aside u/s. 100(1)(b) of the Representation of People Act, 1951. The corrupt practice alleged were use of objectionable speeches, songs and announcements which were recorded using other instruments and by feeding them into computer, CDs were made therefrom which were produced in the court. However, the same were produced without due certification in terms of section 65B of the Evidence Act 1872. It was held that in case of CD, VCD, chip, etc., same shall be accompanied by certificate in terms of section 65B of the Evidence Act obtained at the time of taking the document, without which, secondary evidence pertaining to electronic record is inadmissible in respect of CDs. Thus, whole case set up regarding corrupt practice using songs, announcements and speeches fall to ground.

Co-operative Society – Transfer of membership to flat by nomination or inheritance – Co-operative society bound to transfer to nominee where valid nomination made. [West Bengal co-operative Societies Act,1983, Section 80,79]

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Indrani Wahi vs. Registrar of Co-operative Societies and ors AIR 2016 SC 1969.

Nomination was made by the deceased father in the name of married daughter. Co-operative society implemented the nomination. Other legal heirs challenged the same before Dy. Registrar and succeeded. The single bench of the high court reversed the order of the Dy. Registrar. The division bench substantially set aside the order of the single bench. Hence, married daughter filed appeal to the Supreme Court.

The Supreme Court held as under :

(1) In view of section 79, where a member of a cooperative society nominates a person in consonance with the provisions of the Rules, on the death of such member, the cooperative society is mandated to transfer all the share or interest of such member in the name of the nominee. (2) Rule 128 provides that only in the absence of a nominee, the transfer of the share or interest of the erstwhile member, would be made on the basis of a claim supported by an order of probate, a letter of administration or a succession certificate (issued by a Court of competent jurisdiction).

(4) Transfer of share or interest, based on a nomination u/s. 79 in favour of the nominee, is with reference to the concerned cooperative society, and is binding on the said society. The cooperative society has no option whatsoever, except to transfer the membership in the name of the nominee, in consonance with sections 79 and 80 of the 1983 Act (read with Rules 127 and 128 of the 1987 Rules). However, that would have no relevance to the issue of title between the inheritors or successors to the property of the deceased.

[2016-TIOL-1974-CESTAT-MUM] Raymond Ltd vs. Commissioner of Central Excise & Customs, Nashik

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Section 11BB of Central Excise Act, 1944 is intended to ensure accountability on the part of revenue officials and therefore withholding of interest will only serve to encourage irresponsibility and non-responsiveness on part of tax authorities.

Facts
The Appellant paid service tax following a show cause notice issued. The adjudicating authority dropped the demand and after protracted recourse to appeal and review, the Tribunal also accorded finality to non-taxability. The refund claim filed was allowed but the amount sanctioned was transferred to the fund on the ground of “unjust enrichment”. On appeal the first appellate authority allowed the refund to be paid but claim for interest was rejected. Accordingly the present appeal is filed.

Held
The Tribunal noted that section 11BB of Central Excise Act, 1944 is unambiguously clear that non-sanction of refund within three months of filing of claim will set the “interest clock” ticking. Mere pendency of any appellate/ revisionary proceedings cannot justify non-sanction of such refunds. The law does not acknowledge recoveries to any such excuse or loopholes. Section 11BB is intended to ensure accountability on the part of revenue officials and if interest legally provided for in the law is not granted, it tantamounts to defying legislative intent. It was observed that wrongful collection of tax was known since the date of adjudication order and therefore there is no justification to hold back the wrongly credited amount. Accordingly appeal was allowed with a direction to immediately release the interest due on receipt of the order.

Note: Readers may also the note the decision in the case of CCE & ST vs. Ghatge Patil Industries Ltd [2016-TIOL-1970- CESTAT-MUM] holding that even though the amount became refundable after Tribunal order, the interest shall be payable for the period from three months of the date of application till the date of sanction of refund. Reference can also be made to a similar decision of the Bombay High Court in the case of Tahnee Heights Co-op Housing Society Ltd vs. The Union of India & ORS [2015-TIOL-1828-HC-MUM-ST] digest reported in the October 2015 issue of BCAJ.

2016 (43) STR 166 (Guj.) New Asian Engineers & Amp. vs. Union of India

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Application for condonation of delay shall be decided liberally.

Facts
Petitioner prayed for condonation of delay of 300 days on the ground of financial distress, his daughter’s suicide, scarcity of staff and unfamiliarity with legal procedures. CESTAT rejected the application since the grounds were related to the earlier period and not to the period of delay.

Held
Substantial justice shall be preferred as against technical requirements. Unless delay is inordinate or not explained at all or is due to mala fide intentions or neglect and lethargy, condonation shall be granted liberally. Having regard to the facts of the case, delay was condoned subject to payment of cost.

[2016-TIOL-2072-CESTAT-MUM] Jet Airways India Ltd vs. Commissioner of Service Tax, Mumbai

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II. Tribunal

Tax paid under reverse charge mechanism which is available as CENVAT credit results in a revenue neutral situation and is a good ground to set aside demands, interest and penalties.

Facts
The Appellant is engaged in running airlines all over India as well as outside India. They have entered into agreements with the providers of computer reservation system (CRS) services outside India to display real time availability of flights, reservation of flights etc. on the basis of data collected from the main server of the Appellant for a consideration to be paid on the basis of each ticket issued by the travel agent.

A show cause notice was issued demanding service tax, interest and penalties on such payments made outside India u/s. 66A of the Finance Act, 1994 under reverse charge mechanism falling under “online information and database access or retrieval service”. It was argued that to be covered under the said service category, the person who renders that service should be the owner or should have exclusive right over the relevant information/data so as to put him in a position to charge the recipient for access/retrieval of that data/information.

However in the present case the data/information was owned by the Appellant itself. Further revenue neutrality was claimed to set aside the demands.

Held
The Tribunal relying on the decision of British Airways [2014-TIOL-979-CESTAT-DEL] held that the classification of the activity is correctly determined by the revenue and therefore the demand stands correct. However, it was noted that the tax paid under reverse charge mechanism would be available as CENVAT credit against the output service tax liability of “transport by air and other services” resulting in a revenue neutral situation. It was held that it is trite law that question of revenue neutrality is a good ground, more so when the tax liability is being discharged under reverse charge mechanism and therefore demands, interest and penalties imposed are set aside.

2016 (43) STR 57(Kar.) Commr. of ST, Bangalore vs. Tavant Technologies India Pvt. Ltd.

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Refund of unutilised CENVAT credit be claimed without even having any service tax registration.

Facts
The respondent was engaged in export of services and is not registered under the Service Tax Law. However a refund claim of unutilised CENVAT credit under Rule 5 of CENVAT Credit Rules, 2004 was filed. In absence of registration, the claim was rejected. Tribunal relied on the decision of M/s. mPortal India Wireless Solutions Private Limited 2011 (16) taxmann.com 353 (Kar) of Hon’ble Karnataka High Court and held that there is no such precondition under the CENVAT Credit Rules for the assessee to take any registration. Also, one to one co-relation with respect to the input services used for providing output services was established and accordingly refund was allowed. Being aggrieved by the decision of the Tribunal, department has filed an appeal.

Held

The High Court dismissed the appeal due to absence of substantial question of law.

[2016-TIOL-1730-HC-Del-ST] Federation of Hotels and Restaurants Association of India and ORS vs. Union of India and ORS

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I. High Court

Constitutional validity of restaurant service along with Rule 2(C) of the Service Tax (Determination of Value) Rules, 2006 is upheld and entry 65(105)(zzzzw) pertaining to levy of service tax on short term accommodation is held unconstitutional and invalid.

Facts:
The petitioner challenges the constitutional validity of section 65(105)(zzzzv) viz. restaurant service and section 66E(i) of the Finance Act, 1994 seeking to constitute service portion in an activity of supply of food as a declared service. Further it is claimed that Rule 2C of the Service Tax (Determination of Value) Rules, 2006 arbitrarily determining 40% as the value of service is invalid. Further the constitutional validity of section 65(105)(zzzzw) viz. Hotel, Inn, Club and Guest House service is also challenged. It was stated that with the insertion of clause 29(f) in Article 366 of the constitution, the state legislatures have the exclusive competence to legislate in respect of levy of tax on sale or purchase of goods and no part of the transaction of supply of food in a restaurant is amenable to service tax. Further in respect of hotel accommodation it was submitted that Entry 62 of the State List imposes tax on entertainment, amusement, betting and gambling and moreover state legislatures have enacted statutes for levy of luxury tax on hotel accommodation and therefore levy of service tax lacks legislative competence.

Held:
The High Court relied on the decision of Larsen and Toubro [2015-TIOL-187-SC-ST] and BSNL vs. Union of India [2006-TIOL-15-SC-CT-LB] wherein it has been observed that the taxation powers of the Centre and States are mutually exclusive under the constitution and therefore the moment a levy enters into a prohibited exclusive field it is liable to be struck down. Accordingly Parliament can only tax the service element and the states can only tax the transfer of property in goods. Therefore the Court noted that in the present writ it is essential to examine whether the composite catering contract is capable of being segregated into a portion pertaining to supply of goods and that pertaining to services provided. Relying on the decision of Larsen and Toubro vs. State of Karnataka [2013-TIOL-46-SC-CT-LB] it was held that even if some part of the composite transaction involves rendering of service, there should be no difficulty in recognizing the power of the Union to bring to tax that portion. Since the Parliament has made the legal position explicit by taxing the service portion of a composite contract of supply of food and drinks the same has sound constitutional basis and therefore section 65(105)(zzzzv) and section 66E(i) are constitutionally valid. In the matter of Rule 2C the Court relying on the decision of Association of Leasing and Financial Services Companies vs. Union of India [2010-TIOL-87-SC-ST-LB] observed that the grant of abatement has the approval by the Supreme Court more so when the assessee does not maintain accounts to determine the service portion. However it was pointed out that if an assessee is able to demonstrate on the basis of accounts and records that the value of service is different than that provided in the Rule, the assessing authority is obliged to consider such submission and give a decision thereto. In respect of Hotel accommodation, however the Court noted that the “Delhi Tax on Luxuries Act, 1996” which provides for levy of luxury tax on provision of service of hotel accommodation is traceable to entry 62 of the State list and therefore the State is competent to levy tax on such taxable event. Thus, this is a case of encroachment by the Union in the domain of the State and therefore the Court strikes down section 65(105)(zzzzw) of the Finance Act 1994 pertaining to levy of service tax on provision of short-term accommodation.

“Transfer of right to use” vis-à-vis “Permissible Use”

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Introduction
The controversy about nature of a transaction as to whether it is ‘transfer of right to use’ or nothas been debated for long.. Intermittently there are judgments from different forums giving different views and at times conflicting views. Asituation has also arisen that both VAT and Service Tax are being levied on same amount. It was long felt that the issue, whether service tax is attracted or VAT is attracted, should be decided by the Hon. High Court by making both authorities VAT and Service tax authorities parties to the dispute. Mahayco Monsanto Biotech (India) Pvt. Ltd. (W.P. No.9175 of 2015) & Subway Systems India Pvt. Ltd. (W.P.No.497 of 2015) dated 11.8.2016.

Recently Hon. Bombay High Court had an occasion to deal with the above delicate issue once more in above matters. The important aspect of the Writ Petitions is that along with VAT department of State Government, Service Tax Department of Central Government was also made party to the Writ Petition. Both writ petitions are decided by common judgment. However, facts in both cases are different.

It will be useful to refer to judgment in each case separately.

Mahayco Monsanto Biotech (India) Pvt. Ltd. (W.P. No.9175 of 2015 dated 11.8.2016).

The facts as noted by Hon. High Court in above case are as under:

“11. The Petitioner in Writ Petition No. 9175 of 2015, Monsanto India, is a joint venture company of Monsanto Investment India Private Limited (“MIIPL”) and the Maharashtra Hybrid Seeds Co. Monsanto India develops and commercializes insect-resistant hybrid cottonseeds using a proprietary “Bollgard technology”, one that is licensed to Monsanto India by Monsanto USA through its wholly-owned subsidiary, Monsanto Holdings Private Limited (“MHPL”). This technology is further sublicensed by Monsanto India to various seed companies on a non-exclusive and nontransferable basis to use, test, produce and sell genetically modified hybrid cotton planting seeds. In return for this technology, Monsanto India receives trait fees based on the number of packets of seeds sold by the sub-licensees. These sub-licensing agreements, with almost 40 seed companies, are the transactions in question. Respondent Nos.1 and 2 in the Monsanto Writ Petition are the Union of India and the State of Maharashtra respectively. Respondent No.3 is the Principal Commissioner of Service Tax. Respondent No. 4 is the Commissioner of Sales Tax.”

The arguments were from various angles including the argument that the allowance touse is non exclusive and not covered by ‘transfer of right to use’ category in view of judgment in case of Bharat Sanchar Nigam Ltd.(145 STC 91)(SC). Payment of service tax on same amount was also pointed out in the arguments made. Judgment in case of Tata Sons Ltd. vs. State of Maharashtra (80 VST 173)(Bom) of Hon. Bombay High Court was argued to be distinguishable as well as otherwise argued to be per incurium. It was urged that no distinction can be made between tangible and intangible goods and therefore, the law laid down in BSNL equally applies to intangible goods also.

However, Hon. High Court did not concur with above submission and justified levy of VAT . Hon. High Court concluded as under:

“37. We have considered most carefully this submission. It is indeed sophisticated in its construction, and, at first blush, appears most appealing. On reflection and a closer examination, we find ourselves unable to subscribe to the interpretation Mr. Venkatraman so eloquently commends, viz., that his transaction is one of a merely permissive use. We find this interpretation not to be supported by law, and we have the most serious reservations about the universal applicability of his propositions, which seem to us to be overbroad and to cast the net too widely. The first question is whether there is a ‘transfer’ within the meaning of Article 366(29A)(d). We believe there is. It is true that the essence of a ‘transfer’ is the divesting of a right or goods from transferor and the investing of the same in the transferee, and this is what Salmond on Jurisprudence and Corpus Juris Secundum both say. In our opinion, the seeds embedded with the technology are, in fact, transferred. Monsanto India is divested of that portion of the technology embedded in these fifty seeds and these are fully vested in the sub-licensee. Mr. Venkatraman is not correct when he says that the effective control of the ‘goods’ is with Monsanto India. In RINL, the Supreme Court concluded that the contractor (transferee) did not have effective control over the machinery, despite the fact that he was using it, since he could not make such use of it as he liked. He could not use the machinery for any project other than that of the transferor’s, nor could he move it out during the period of the project. We do not see how we can draw a parallel from that case to the one at hand. The effective control over the seeds, and, therefore that portion of the technology that is embedded in the seeds, is entirely with the sub-licensee. That sub licensee is not bound to use the seeds (and the embedded technology) in accordance with Monsanto India’s wishes. Monsanto India cannot further dictate to the sub-licensee what he or it may do with these technology-infused seeds. The sub-licensee can do as it wishes with them. It may not use them at all. It may even destroy the seeds. Once the transaction is complete, i.e., once possession of the technology-imbued seeds is effected, and those seeds are delivered, Monsanto India has nothing at all to do with the technology embedded in those fifty seeds given to the sub-licensee.

At no point does Monsanto India have access to this portion of the technology. In other words, the transfer is to the exclusion of Monsanto India. This clearly satisfies the so-called BSNL “twin test” that Mr. Venkatraman is at pains to propound. Mr. Venkatraman’s argument that the seeds are “merely the media” and therefore irrelevant is, in our opinion, erroneous. They are relevant for the simple reason that the technology could not have been given to the sub-licensee without them; and there is no other method demonstrated anywhere of effecting any such transfer.”

Thus, Hon. High Court rejected all arguments about transfer of technology within scope of permissible use but held it as complete transfer of right, to constitute deemed sale liable under VAT . Hon. High Court has also cited various examples about what constitutes goods in relation to intangible goods.

The alternative argument that it is sale of seeds, hence exempt under Schedule Entry A-41 of MVAT Act was also rejected.

The other main argument about non attraction of VAT as Service Tax is paid did not impress the court. The further plea to direct transfer of service tax paid to VAT department was also not considered by Hon. Court by observing as under:

“53. Mr. Venkatraman makes one more, without prejudice argument, in case neither of his previous arguments succeeds. He submits that even if the agreement in question is held to be a transfer of the right to use (deemed sale) and that it does not fall under the exemption for seeds in the MVAT Act, then the levy and collection of Service Tax by the Union of India would be without the authority of law since VAT can only be levied and collected by the States. As argued earlier, the same transaction cannot be taxed as both a sale and a service. Monsanto India has already paid service tax for the entire period at a rate significantly higher than what is provided under the MVAT Act and therefore he says that it is not liable to pay further tax. For the period between May 2007 and February 2009, it has paid service tax at a rate of 12.36%, for March 2009 to March 2012 at a rate of 10.3%, for April 2012 to May 2015 at 12.36%, and for the period beginning June 2015 at a rate of 14%.

Under Entry 39 of Schedule C of the MVAT Act, the applicable rate of sales tax is only 5% since April 2010, prior to which it was 4%. He therefore seeks a Writ of Mandamus directing Union of India to transfer the amount paid as service tax from the Consolidated Fund of India to the Consolidated Fund of State of Maharashtra. He argues that such a transfer would not amount to unjust enrichment. We decline to enter into this debate. We leave it to Monsanto India to adopt suitable proceedings in this behalf, and leave their contentions open to the necessary extent.”

There will thus be a looming question of double tax payment.

Subway Systems India Pvt. Ltd. (W.P.No.497 of 2015 dated 11.8.2016)

The facts in this case are noted by High Court as under:

“55. A brief description of Subway’s business is this. Subway was granted a non-exclusive sub-license by Subway International B.V. (“SIBV”), a Dutch limited liability corporation to establish, operate and franchise others to operate SUBWAY -branded restaurants in India. This non-exclusive license was granted to SIBV itself by Subway Systems International Ansalt, which in turn was granted such a license by Doctor’s Associates Inc., an entity that owns the proprietary system for setting up and operating these restaurants.

These restaurants serve sandwiches and salads under the service mark SUBWAY. The agreement includes not only the trade mark SUBWAY , but also associated confidential information and goodwill, such as policies, forms, recipes, trade secrets and the like.

Typically, Subway enters into franchise agreements with third parties, under which it provides specified services to the franchisee. In return, the franchisee undertakes to carry on the business of operating sandwich shops in Subway’s name. The agreement only provides for a very limited representational or display right, and the franchisee cannot transfer or assign these exclusive rights to any third person. Subway also reserves the right to compete with these franchisees in the agreement. Under this agreement, Subway receives two kinds of consideration, one being a one-time franchisee fee which is paid when the agreement is signed; and the second is a royalty fee paid weekly by the franchisee on the basis of its weekly turnover. A sample franchise agreement is annexed. Under these agreements, the franchisees have no more than a right to display Subway’s intellectual property in the form of marks and logos, and a mere right to use such confidential information as Subway discloses and as prescribed by the franchise agreement.”

Based on above facts, the issue was examined by the Court. In this case also the ratio of BSNL relied upon. Hon. High Court ultimately held as under:

“69. We believe that Mr. Shroff is correct when he says that the agreement between Subway and its franchisees is not a sale, but is in fact a bare permission to use. It is, therefore, subject only to service tax. In our opinion, the fact that the agreement between Subway and its franchisee is limited to the precise period of time stipulated in the agreement is vital to Subway’s case. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark ‘Subway’ and its trade dress, and all other permissions would also end. This is what sets this agreement apart from the case of Monsanto and its sublicensee. There, the seed companies could do as they pleased with the seeds; they could alienate or even destroy them. In Subway’s case, there are set terms provided by the agreement which have to be followed. A breach of these would result in termination of the agreement.

We believe that there is no passage of any kind of control or exclusivity to the franchisees. In fact, this agreement is a classic example of permissive use. It can be nothing else. For all the reasons in law and fact that the sub-licensing of technology in Monsanto is held to be a transfer of right to use, this franchising agreement must be held to be permissive use.”

Thus on ground that the agreement is for permissible use, it is held that it is not a sale by transfer of right to use but a ‘service agreement’.

One more issue dealt with by Hon. High Court is that for situs of sale by transfer of right to use, the place of agreement, as decided by Supreme Court in case of 20th Century Finance Corp. Ltd. ( 119 STC 182)(SC), is relevant.

In this case, the agreement was signed in Delhi and hence High Court held that otherwise also the transaction cannot be taxed in Maharashtra, inspite that the users are in Maharashtra.

Conclusion
The issue about sale by transfer of right to use or service transaction has become vexed and requires decision on facts of each case. Even in above judgment, Hon High Court has observed that each agreement, whether titled as franchise or something else, will be required to be decided on the basis of actual terms and scope of agreement. The dealers will thus be under threat of uncertainity taxation and most probably by both departments, till the issue gets resolved at a higher forum. Some undisputable criteria for deciding nature of transaction is required to be specified to avoid such uncertain situation.

Issue of limitation, an issue of jurisdiction

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In a recent judgment of Calcutta High Court in Simplex Infrastructure Ltd. vs. Commissioner of Service Tax, Kolkata (2016) 42 STR 634 (Calcutta), the doctrine, the question of limitation is a question of jurisdiction, although an established law has been examined at great length with reference to show cause notices issued for recovery of service tax. Therefore a brief analysis of observations of the Hon. High Court in the said case is provided below:

Petitioner’s case in brief:
The petitioners in the instant case were engaged in civil construction activity. They obtained registration under construction service in October, 2004. Prior to this, the department had initiated inquiry in June 1998 regarding applicability of service tax as consulting engineer. This was replied to by the petitioner promptly stating that they were engaged in civil construction and were not liable to pay service tax as consulting engineer. Since the matter was not pursued further for six years it was understood as concluded by the petitioner. Again in April, 2004, the petitioners on receipt of the inquiry, denied their liability to pay service tax as consulting engineer. Again, there was no communication for 16 months till the department issued summons in September 2005. This was followed by a show cause notice in April, 2006 invoking longer period of limitation alleging suppression and demanding service tax for the period October 2000 to March 2005. The petitioner filed a reply to this show cause notice reiterating that they did not act as consulting engineer etc. Until three years there was complete silence at the end of which another show cause notice was issued in September 2009 involving period of September 2004 to June 15, 2005. The said second show cause notice culminated in an order confirming demand of service tax with interest and imposing equal amount of penalty. Subsequent to this, the petitioner received intimation for hearing for the earlier show cause notice issued in 2006. The petitioner replied to this stating that no hearing could take place 7 years after issuing show cause notice as they did not have record of the same and that under the law, the assessee is required to maintain records for five years only. Further already adjudicated subsequent show cause notice included part of the period covered in the earlier show cause notice. Hence there could not be dual assessment for the same period under the law. Petitioner’s grievance among others was that though there may be no time limit for adjudication of show cause notices by the department, it should be done in a reasonable time frame. For this reliance was placed on Supreme Court’s decisions in State of Punjab vs. Bhatinda District Co-op. Milk P Union Ltd. (2007) 11 SC 363 and in Government of India vs. Citetdal Fine Pharmaceuticals 1989 (42) ELT 515. In both the cases, it was observed by the Apex Court that in absence of any period of limitation, the statutory authority must exercise its power within a reasonable period. Similarly, Bombay High Court in Hindustan Lever Ltd. vs. Union of India (2012) 22 taxman.com 367(Bom), observed that it is well settled that adjudication proceedings have to be concluded in reasonable time and if not done, they stand vitiated on the said ground. Also in Bhagwandas S. Tolani vs. B C Aggarwal 1983 (12) ELT 44 (Bom), Universal Generics (P) Ltd. vs. Union of India 1993 taxmann.com 30 (Bom) and in Biswanath & Co. V. Union of India 2010 (257) ELT 30 (Cal), the Courts have set aside either the show cause notice or the order, as the case may be. Sum and substance of the petitioner’s pleadings was to hold the hearing notice and the show cause notice as non-est and invalid. Reliance was placed by the petitioner also on the decisions in CCE vs. Mohan Bakers (P) Ltd. 2009 (241) ELT A23 and Giriraj Industries vs. CCE 2009 (242) ELT A84 wherein the Courts held/affirmed respectively that show cause notice issued after two years/15 months from the date of inspection/cause of action, the proceedings initiated were without following the due process of law.

Revenue’s contentions in brief:
On behalf of revenue, relying on the decision in Surya Alloy Industries Ltd. vs. Union of India 2014 (305) ELT 340 (Cal) it was contended that High Court’s interference on classification issues challenged through writs was not maintainable and the petitioners should be directed to agitate their grievance before the revenue authorities. The revenue further pointed out that in Indian Cardboard Industries vs. Collector of Central Excise 1991 taxmann.com 847 (Cal) it was observed that ordinarily, High Court should not embark to decide the factual disputes but relegate the party to submit the reply before authority concerned who is obliged to decide the same. The said rule however is not free from exceptions which are quoted below:

1 When the show cause notice is ex facie or on the basis of admitted facts does not disclose the offence alleged to be committed;

2 When the show cause notice is otherwise without jurisdiction;

3 When the show cause notice suffers from an incurable infirmity;

4 When the show cause notice is contrary to judicial decisions or decisions of the Tribunal;

5 When there is no material justifying the issuance of the show cause notice.

According to revenue, none of the above applied to the petitioner’s case. Reliance by revenue was also placed on the decision of ACST vs. P. Kesavan & Co. 1996 taxmann. com 1512 and it was contended that the rule must apply even to cases where sufficient evidence is placed before the writ Court for an unambiguous conclusion upon technical matters and made reference to Apcotex Industries vs. Union of India 2011 (271) ELT 46. The revenue among others also contended that issuing notice for personal hearing after a delay of seven years did not vitiate the case of the department against the petitioner as the Finance Act, 1994 contains no bar to continue adjudication proceedings and relied on the decision of Hon. Supreme Court in the case of CCE vs. Bhagsons Paints Industries (India) 2003 taxmann. com 315 (SC) wherein the Supreme Court overruled the decision of the Tribunal and allowed adjudication proceedings to be completed nine years after issuance of show cause notice as the statute did not prescribe any time limit. The revenue contended further that show cause notice of 2006 was issued within seven months of the summons dated September 2005 whereas inspection made in 1998 was for the period not covered by the 2006 show cause notice. Only after subsequent inquiries in 2004 and 2005, the impugned show cause notice was issued within seven months.

Court’s view:
The Court’s observations based on rival submissions are summarized as follows:

On the maintainability of the writ petition, it was held that extended period of limitation was wrongly invoked and the logical conclusion would be that the show cause notice was issued without jurisdiction. In such event, the Court is justified in interfering with the show cause notice in exercise of its Writ Jurisdiction. The court observed,

“It is trite law that an authority cannot confer on itself to do a particular thing by wrongly assuming the existence of certain set of facts, existence whereof is a sine qua non for exercise of jurisdiction by such authority. An authority cannot assume jurisdiction to do a particular thing by erroneously deciding a point of fact or law.”

“There cannot be dispute that the question of limitation is a question of jurisdiction and the Commissioner has no authority and/or jurisdiction to issue notice after the period of limitation prescribed in the Finance Act, 1994.”

The Court in this frame of reference relied on Raza Textiles Ltd vs,. ITO AIR 1973 SC 1362 and Shrisht Dhawan vs. Shaw Brother (1992) 1 SCC 534 wherein the proposition of Raza Textriles (supra) was reiterated that a Court or a Tribunal cannot confer jurisdiction on itself by deciding a jurisdictional fact wrongly. Also citing Calcutta Discount Co. Ltd. vs. ITO AIR 1961 SC 372, the Court held that preliminary issue of maintainability of the writ petition is decided in favour of the petitioner and the writ cannot be dismissed in limine as unmaintainable.

On merits, after examining provisions of section 73 of the Finance Act 1994 under which the show cause notice was issued vis-à-vis the facts of the case, it was observed that the show cause notice was issued much beyond 18 months from the date when according to the department service tax was found payable. The Court expressed a clear view that a mere mechanical reproduction of the language of the proviso to section 73(1) of the Act does not per se justify invocation of the extended period of limitation. A mere ipse dixit that the Noticee willfully suppressed the material facts with intent to evade payment of service tax is not sufficient and that the department should be able to substantiate its allegation of suppression even if it is not included in the notice. The Court categorically found that to its mind, the instant case was not of suppression by the petitioner as they had provided copies of balance sheets and specimen contracts in 1996 & were found diligent in their response to all the notices. The impugned show cause notice merely contained a sweeping statement that had investigation not been conducted, material facts would not have been unearthed. There is no whisper as to the fact that was alleged as suppressed. The Court found that once the information called for was supplied and was not questioned, a belated demand has to be held to be barred by limitation.

For this, Punjab Laminates P. Ltd. 2006 (202) ELT 578 and CCE vs. Chennai Petroleum Corpn. Ltd. (2007) 8 STT 168 were relied upon among various other such as CCE vs. Bajaj Auto Ltd. (2010) 29 STT 39 and Anand Nishikawa Co. Ltd. vs. CCE (2005) 2 STT 226 (SC).

The Court found the show cause notice to be hopelessly barred by limitation and noted that even if the Court was to decide the issue of limitation in favour of the department, there were other grounds on which would be compelled to quash the impugned show cause notice. The Bench in this reference indicated the ‘overlapped’ period and consequent double assessment and observed that such dual assessment is impermissible in law. Reliance was placed in case of Dankan Industries Ltd. vs. CCE 2006 (201) ELT 517 (SC) and found that the demand was rather predetermined. Further citing the case of Siemens Ltd. vs. State of Maharashtra 2007 (207) ELT 168 (SC), it was observed that ordinarily a writ Court may not exercise its discretionary jurisdiction in entertaining a writ petition questioning a Noticee to show cause unless the same inter alia appears to have been issued without jurisdiction, the question has to be considered from a different angle when a notice is issued with pre-meditation.

The Court finally also observed that as pleaded by revenue, the case in no way involved justifiability of classification but of sustainability of a show cause notice and allowed the assessee’s writ quashing the show cause notice of 2006 and dismissed all appeals filed by revenue in this regard.

Conclusion:
When alternate remedy is available and as categorically provided by Hon. High Court in the case of Indian Cardboard Industries (supra), the High Court interferes with the adjudication process in exceptional cases and in particular when there is a clear questionability of jurisdiction involved is proven to the Court. Service tax department in a number of cases may have exceeded its jurisdictional authority. However, considering cost and / or time factor or for want of adequate evidence, not many approach Courts to interfere in the matter. The analysis in the case above serves a good guidance to determine viability depending on facts of each case.

MODEL GST ACT – DICEY ISSUES

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I. BROAD STRUCTURE
1) Model law on Goods
and Service Tax, 2016 [GST] broadly consists of three legislations
Central Goods and Service Tax Act [CGST], State Goods and Service Tax
Act [SGST] covering intra state transactions and Integrated Goods and
Service Tax [IGST] touching upon inter-state transactions. CGST and IGST
will administered by Central Government, whereas SGST by respective
State Governments. Model Act borrows heavily from existing excise,
service tax and VAT statutes. Model GST law encompasses common law for
CGST/SGST to be adopted by Centre/States with necessary changes/
suggestions as also separate IGST to be framed only by Centre
respectively.

2) CGST mainly subsumes central levies such as
service tax, excise duty, countervailing duty [CVD] and special CVD and
the like because, generally speaking, Union possesses jurisdiction under
Constitution of India to levy excise duty on goods up to stage of
manufacture and service tax on services respectively. On the other hand,
SGST absorbs state value added tax [VAT], central sales tax, octroi,
entry tax, entertainment tax, luxury tax, lottery tax etc; since under
Constitution of India as commonly understood competency to exact tax on
post manufacturing activities lies with the states. However, under new
regime, both CGST and SGST are payable simultaneously on supplies
falling within charging section. In the result, there will be 36 state
level SGST Acts, one CGST Act and one IGST Act resulting in 38
legislations. Some critics have also made known their displeasure about
stamp duty at state level not being merged with GST. In my opinion,
there is no meeting point/synergy between a tax based on instrument i.e.
stamp duty and that oriented on concept of supply i.e. GST and thus
such apprehensions are misconceived.

II . CHARGEABILITY VIS-A-VIS TAXABLE EVENT

3)
Charging section 7 of Model CG/SG GST Act, 2016 [Act] brings within its
purview all intra state supplies of goods and/or services payable by
every taxable person. In turn, section 3 defines “supply” in a
comprehensive manner as including all form of supply of goods and/or
services such as sale, transfer, barter, exchange, license, rental,
lease or disposal made or agreed to be made for a consideration by a
person in the course or furtherance of business. It is well settled that
when an inclusive connotation is employed in the definition clause of
an enactment it expands and enlarges the normal meaning of the words and
phrases occurring in body of statute and consequently, takes within its
sweep not only things which they usually signify, but also those which
interpretation clause declares that they all include [CIT vs. TAJ MAHAL
82 ITR 44, 47 (SC)]. Nonetheless, there is another parallel, but equally
strong if not less, rule of construction that an interpretation clause
which extends the meaning of the word does not take away its ordinary
meaning or prevent from receiving its popular and natural sense wherever
that would be properly applicable [CGT vs. GETTI CHETTIAR 82 ITR 599,
605 (SC). Legislature always tries to rope in all possible and
conceivable activities/transactions/ actions/occurrences and the like
[known as “taxable events”] to widen net of the charging provision. Yet a
discerning lawyer with a eagle’s eye will not let this happen within
the framework of interpretation and I have my cogent reservations as to
whether aforesaid charging section 7 of Act is foolproof depending upon
the facts and circumstances of each case. Let us dissect charging
section 7 read with section 3 of Act.

4) Section 3(1)(a) of Act
generally elucidates “supply” as “all forms of supply of any goods
and/or services made or agreed to be made for a consideration by a
person in the course or furtherance of business. In P. Ramanatha Aiyar’s
Advanced Law Lexicon, Volume 4 (Q-Z), page 4565, 2005, 3rd Edition,
word “supply” is described as “that which is or can be supplied;
available aggregate of things needed or demanded; an amount sufficient
for given use or purpose”. In the Imperial Dictionary, “that which is
supplied; sufficiency of things for use or want; a quantity of something
furnished or on hand”. The word “supply’ means to give”, or “to provide
or to afford something that is necessary” [page 4566]. Further, in
Advanced Law Lexicon, 3rd Edition, 2005, Ramanatha Aiyar, Book 2 [D-I],
page 1997 expression “give” is depicted clinchingly as “make another the
recipient of something, bestow..………..,, grant”. Similarly, in Advanced
Law Lexicon, 3rd Edition, 2005, Ramanatha Aiyar, Book 3, page 3813 the
expression “provide” has been described as “to furnish, to supply; one
provides a dinner in the contemplation that some persons are coming to
partake of it; one supplies a family with articles of daily use.” In my
opinion, on a conspectus of aforesaid purport of various terms, to
attract generic clause (a) of Section 3 two separate and distinct
persons must exist. In my opinion, therefore, mutual associations will
not only not fall foul of substantive definition of the term “supply”,
but also gain benefit of the GST Act not containing a deeming fiction to
rope in such entities and consequently, mutuality tenet, in my opinion,
will also prevail and sustain under GST. Principle of mutuality is
consistently countenanced and upheld in the context of service tax in
SATURDAY CLUB LTD vs. ACST (2006) 3 STR 305, 311 (CAL); (2005) 180 ELT
437 (CAL); DALHOUSIE INSTITUTE vs. ACST (2006) 3 STR 311, 314 TO 316
(CAL); (2005) 180 ELT 18 (CAL); SPORTS CLUB OF GUJARAT vs. UOI 20 STR 17
(GUJ); KARNAVATI CLUB vs. UOI 20 STR 169 (GUJ); SPORTS CLUB OF GUJARAT
vs. UOI 31 STR 645 (GUJ); RANCHI CLUB vs. CCE AND ST 26 ITR 401
(JHARKHAND); GREEN ENVIORNMENT vs. UOI 49 GST 563 (GUJ); CCE AND C vs.
SURAT TENNIS CLUB 50 GST 25 (GUJ); NATIONA L ASSOCIATION vs. CST 51 GST
301 (DEL); FICCI vs. CST 38 STR 529, 547 TO 549 (TRI-DEL-PRINCIPA L
BENCH); MATUN GA GYMKHANA vs. CST 38 ITR 407 (TRI-MUM); NASSCOM vs. CST
51 GST 301 TRI-DEL); DELHI CHIT FUND ASSOCIATION vs. UOI 30 STR 347, 352
(DEL)]. Similar approach is espoused under excise and sales tax laws,
for instance, the decision of the Supreme Court in CTO vs. YOUNG MEN’S
INDIAN ASSOCIATION 36 STC 241 pertaining to chargeability of sales tax
in relation to supply of various preparations by the club to its
members. In the same vein are judicial rulings reported in PRESCOT MILLS
LTD vs. CCE (2006) 5 STT 35 (CESTAT -BANG); SPORTS CLUB OF GUJARAT vs.
CST (1975) 36 STC 511 (GUJ) [SALES TAX] and BAJAJ AUTO LTD vs. CCE
(2005) 1 STT 83, 87 (MUM).

5) A charging Section must be
construed strictly and must integrate with and complement machinery and
collection provisions [CIT vs. SRINIVASA SETTY 128 ITR 294, 299 (SC)].
Besides, intra state supply is as such not explained in definition
clause of Act, but expounded in Section 3A of Integrated Goods and
Services Tax Act, 2016 [IGST] as “any supply where the location of the
supplier and place of supply are in the same state”. Branch transfers
are not expressly exempt from IGST, but, in my opinion, they do not fall
within ken of charging Section 3 of IGST. In my opinion, Sections 7
read with 3 of Act are bedrock of serious and fundamental litigation.
All the foregoing propositions of law are not from of doubt and may
entail protracted litigation.

III.COLLECTION OF GST

6)
Time for collection GST would depend upon time of supply of
goods/services as postulated in Sections 12 and 13 of Act respectively.
In respect of goods, broadly, time of supply will be earliest of either
date on which goods are removed by supplier for supply to recipient
where goods are required to be removed or where not required to be
removed when goods are made available to the recipient or date on which
supplier issues invoice in relation to supply or date on which supplier
receives payment or date on which recipient shows receipt of goods in
his books of accounts. In connection with services, liability to pay GST
will generally arise at time of supply of services being either date of
invoice or date of receipt of payment whichever is earlier or date of
completion of the provision of service or the date of receipt of
payment, whichever is earlier or date on which the recipient shows the
receipt of services in his books of accounts. I do not quite understand
as how supplier’s liability under the Act can be fixed on the foundation
of exhibition of the transaction in recipient’s books of accounts as
stated above in light of trite law that Assessee cannot be expected to
perform the impossible [LIC vs. CIT 219 ITR 410, 418 (SC) or still
Assessee cannot be saddled or blamed for what recipient third party does
in its books [CIT vs. BASANT 238 ITR 680 (CAL); CIT vs. OASIS 333 ITR
119 (DEL)].

IV. REGISTRATION

7) Section 19 of Act
contemplates every person liable to be registered shall apply for
registration in every such state in which he is exigible. In other
words, multiple registrations are envisaged by virtue of registration in
each of the states resulting in cumbersome and unwieldy administration,
management and maintenance. Mechanism must be devised by software
professionals comprised in Technology Advisory Group constituted earlier
by harnessing advanced information technology so that single
registration of same person with Unique Identity Number is sufficient to
carry out business in each of the states avoiding need for multiple
registrations. Sub-section (7) of section 19 of Act confers discretion
on the proper officer to reject application for registration which is
objected to by section of the GST stakeholders and hence a suggestion is
doing the rounds that it be made obligatory. In my opinion, there is
nothing fundamentally wrong with said provision inasmuch as sub-section
(8) of section 19 incorporates principles of natural justice to be
adhered to before dismissing application as also sub-section (9)
provides that if no deficiency is communicated to the applicant by
proper officer within time limit prescribed, registration shall be
deemed to have been granted. Moreover, section 79(1) of Act stipulates
that any person aggrieved by any decision or order under Act can file
appeal before first appellate authority. In my opinion, adequate
safeguards are engrafted to protect interests of applicant and no change
in his regard is warranted.

V. RETURNS

8)
Assessees have also launched scathing attack on the number of
details/returns mandated to be filed under model GST law vide sections
25, 26, 27 and 30. Assessee must not be oblivious of the fact that
presently he is dealing with multiple tax legislations [which are now
proposed to be consolidated] where he is required to file as many
returns, face large number of assessments, appeals, penalties and the
like and therefore, in my opinion, there is absolutely no justification
in the protest against multiple returns under GST, more particularly
because data of inward and outward supplies is indispensable for
cross-checking claims of Assessee concerning input tax credit by
matching them. Detection of false and bogus claims must be in-built into
the system itself in order that revenue is not deprived of its
legitimate taxes. Lack of either physical or electronic as also want of
implementation of existing corroborative systems and processes on
account of ulterior and oblique motives has been bane of Indian
assessment system and a section of delinquent Assessees through all
these years taken full advantage of and capitalized on the same and
consequently, caused a lot of heartburn to honest Assessees suffering in
frustration and disgust.

VI. APPEALS

9) Appeals
provisions are laid down in two sets of Sections 79 to 83 under two
different Chapters XVIII. First Chapter XVIII is applicable to CGST law,
whereas second Chapter XVIII is invokable under SGST law. Sections 84
to 93 are common to both. I shall deal with second Chapter XVIII apropos
SGST in ensuing paragraph.

10) First appeal from any “decision”
or “order” u/s. 79 (Second Chapter XVIII) of the Act shall lie before
prescribed first appellate authority within three months [with
condonation further one month] from date of communication of decision or
order to person preferring the appeal subject to inter alia payment of
10% pre-deposit of disputed amount arising out of order. I wonder
whether no predeposit is payable if any demand emanates from a
“decision”. Albeit, in serious cases involving disputed tax liability of
25 crore or more and considered as such by Commissioner vide order in
writing that the department has a very good case on merits, departmental
authorities can apply to first appellate authority urging that a higher
predeposit not exceeding 50% of disputed amount be ordered. Appellant
may raise additional grounds provided omission to take that ground in
original grounds of appeal was not wilful or unreasonable. First
appellate authority has no specific power to set aside any matter to
lower authorities although this issue is not free from doubt as there is
cleavage of opinion on this controversy though nothing prevents him
from calling a remand report inasmuch as under sub-section (8) of
section 79 he may make further inquiry as may be necessary to pass
order. Appellant by way of appropriate framed rules may also be allowed
to adduce additional evidences. Second appeal u/s. 82 of Act lies to
National Goods and Service Tax Appellate Tribunal (Tribunal) against
appellate order framed u/s. 79 or revision order passed u/s. 80 within 3
months of date of communication of order sought to be appealed against
with unlimited power appertaining to period of condonation subject to
sufficient cause and predeposit as discussed hereinabove. Adjournments
shall be granted by first appellate authority/Tribunal subject to a
maximum limit of three times, but consequences of same party seeking
adjournment for fourth time is not stated implying that first appellate
authority/Tribunal will proceed to decide matter on merits. Further on a
bare reading of proviso to sub-section (6)/(2) of section 79/83, each
of the parties to litigation get a chance to apply for adjournment 3
times each; meaning if parties are two, I suppose, appeal itself can be
adjourned six times subject to maximum cap of three occasions per party.
Tribunal through section 83(1) possesses specific powers to admit
additional evidence and set aside issues for fresh adjudication to lower
authorities. Every Tribunal shall consists of as many members of
Technical (CGST), Judicial and Technical (SGST) as may be prescribed.
Appeal from order of Tribunal lies to the High Court on a substantial
question of law within 180 days of date of receipt of order appealed
against subject to condonation application for an unspecified period
with sufficient cause. Notwithstanding appeal vide section 87(2) shall
directly lie to Supreme Court from Tribunal’s order u/s. 83 if disputes
relates to treatment of transactions being intra state or inter state or
place of supply provided there is divergence of views between two or
more states or a state and Centre. Orders of High Court shall be
appealable to Apex Court vide section 88(1).

VII. MISCELLANEOUS

11)
Section 123 cast initial presumptive burden on any person to
demonstrate that he is not liable to tax under the Act in respect of any
supply of goods and/or services or that he is eligible for input credit
u/s. 16. In my opinion, first part of the section throwing primary onus
on person to show he is not covered by the charging provisions is
draconian inasmuch it is well entrenched by way of judge made law that
burden is on revenue to exhibit that a particular person is hit by the
charging provisions [PARIMISETTI SEETHARAMAMMA vs. CIT 57 ITR 532, 536
(SC)]. Indeed entire assumption of jurisdiction to assess is contingent
upon subject being brought within the tentacles of the charging section
and thus by common sense test revenue must first unload this
responsibility. In my opinion, a person cannot do the impossible, that
is, establish the negative fact that he does not fall within the
charging section [VARGHESE vs. ITO 131 ITR 597, 615 (SC)], but
department must positively demonstrate that subject is exigible to tax
by virtue of the substantive charge created by statute. In any case,
statutory presumption u/s. 123 is rebuttable and on clinching legal
arguments onus can shift on revenue to displace arguments of Assessee.
However, last segment of section 123 putting burden on the person
claiming input credit tax is in conformity with settled premise that
person claiming relief must prove that he satisfies conditions precedent
surrounding such concession [PARIMISETTI SEETHARAMAMMA vs. CIT 57 ITR
532, 537 (SC)]. Electronic commerce transactions [digital economy] are
bundled up under Chapter XIB captioned “Electronic Commerce” comprising
sections 43B and 43C of Act mainly on the lines of equalization levy
introduced under Income Tax Act, 1961 vide Chapter VIII of Finance Act,
2016 encompassing sections 163 to 180 thereof. In my opinion, in light
of the fact that these transactions take place in vague and hazy area of
“cyberspace” there is no particular specific identifiable territorial
jurisdiction to which these digital transactions can be traced and
attached and thus to tap potential revenue loss, one of the options
exercised by revenue founded on concept of Base Erosion and Profit
Shifting [BEPS] coined by The Organization for Economic Co-operation and
Development (OECD) is to impose an obligation on “electronic commerce
operator” (operator) to collect an amount at a prescribed rate as may be
notified out of the consideration payable towards supply of goods and/
or services made through such operator. Success of GST story will
primarily depend upon uniform and consistent adoption of model GST
legislation by various states with minimum localization, smooth,
efficient and competent working of logistics provided by Goods and
Service Tax Network [GSTN] to plug leakage of revenue through seamless
matching of input and output supplies, coordinated and unified operation
of the Goods and Service Tax Council (GST Council), education and
training of revenue officers and staff as also Assessees about new GST
law thereby leading to a development of robust common market across the
country reducing cascading effect of taxes affecting pricing of goods
and services.

Bastimal K Jain vs. ITO ITAT “B” Bench, Mumbai Before Mahavir Singh (J. M.) and Rajesh Kumar (A. M) ITA No.: 2896/Mum/2014 A.Y.: 2010-11. Date of order: 8th June, 2016 Counsel for Assessee / Revenue: Dr. K. Shivaram / Sachidanand Dube

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Section 54 – Date of purchase of a new flat is the date of possession and not the date of agreement.

FACTS
During the year under consideration, the assessee had sold his flat for a consideration of Rs.55 lakh on 24.02.2010 resulting into long term capital gain of Rs.50.95 lakh. The assessee claimed deduction u/s. 54 contending that he had purchased a new flat in earlier year, the possession of which was received on 11.09.2009. The AO noted that the agreement for purchase of the new flat was entered into on 28.12.2007 and registered on 28.02.2008. Thus, according to him, the purchase of new flat by the assessee was made one year before the date of the sale of the property. Hence, he denied the deduction claimed u/s 54. The CIT(A) on appeal, relying on the Madras High Court decision in the case of Late R Krishnaswamy (ITA No.697 & 698 of 2013 dated 26.11.2013), held that the date of registration of sale deed was material for the purpose of determining the date of purchase of a flat. Accordingly, the CIT(A) concurred with the views of the AO and held that the assessee had not acquired the new flat within one year before the sale of the Long Term Capital Asset and thus denied the benefit u/s 54 claimed by the assessee.

Before the Tribunal in support of the orders of the lower authorities, the revenue relied on the decision of the Gujarat High Court in the case of CIV s. Jindas Panachand Gandhi [2005] 279 ITR 552.

HELD
The Tribunal noted that the flat intended to be purchased by the assessee was not at all constructed on 28.12.2007 when the agreement for purchase was entered into. Eventually property’s possession was given to the assessee by the builder only on 11.09.2009. According to the Tribunal, the agreement for purchase was just a right for purchase of a flat in the proposed construction. The Tribunal also agreed with the assessee that the acquisition of the property is to be considered only when the possession of the flat was given to the assessee by the builder and that date was on 11.09.2009. Thus, the vital conditions of section 54 of the Act were fulfilled when the property’s possession was handed over to the assessee by the builder on 11.09.2009 i.e. within the time limit prescribed u/s. 54 of the Act for claiming deduction u/s 54 of the Act. In arriving at the above conclusion, the Tribunal also relied on the decision of the Mumbai tribunal in the case of V M Dujodwala vs. ITO (36 ITD 130) and of the Bombay High Court in the case of CIT vs. Smt. Beena K Jain (217 ITR 363).

Shivam Steel & Tubes Pvt. Ltd. vs. ACIT Income Tax Appellate Tribunal “E” Bench, Mumbai Before Rajendra (A. M.) and C. N. Prasad (J. M) ITA No.: 4691/Mum/2014 A.Y.: 2009-10. Date of order: 5th August, 2016 Counsel for Assessee / Revenue: Sanjeev Kashyap / Jayesh Dadia

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Section 271(1)(c) – Non-filing of appeal against the additions made cannot be a ground for justifying levy of penalty.

FACTS
During the assessment proceedings the AO made two disallowances viz., Rs. 0.17 lakh u/s. 14A and Rs. 10.71 lakh u/s.80IB. Penalty proceedings u/s.27l(1)(c) were also initiated at the time of assessment. In its reply to penalty notice, the assessee submitted that it had furnished all details of expenditure. However, according to the AO, the assessee by not filing any appeal against the additions has admitted its fault and hence, he levied a penalty of Rs. 3.7 lakh. On appeal, the first appellate authority confirmed the order of the AO.

Before the Tribunal the revenue justified the orders of the lower authorities on the ground that the assessee filed the revised computation after the AO made enquiries. Assessee is a corporate entity, that it had made a patently wrong claim. It relied upon the cases of Mak Data (350 ITR 593) and Zoom communications (327 ITR 590).

HELD
According to the Tribunal, penalty cannot be levied just because additions are made during assessment proceedings and the assessee did not agitate the additions before the Appellate Authorities. As per the settled principles of taxation jurisprudence penalty proceeding and assessment proceedings are totally separate and distinct. Addition made during assessment cannot and should not result in automatic levy of penalty. Penalty has to be levied considering the explanation of assessee filed during penalty proceedings. According to the Tribunal, disallowance u/s 14A does not prove filing of inaccurate particulars of income. As regards the claim u/s 80IB, according to the Tribunal, the assessee had reasonable cause in as much as the claims – original as well as revised, both were made as per the advice of the chartered accountant. Further, relying on the Bombay high court decision in the case of CIT vs. Somany Evergreen Knits Ltd. (352 ITR 592) and considering the peculiar facts and circumstances of the case, the Tribunal was of the opinion that the assesse had not furnished inaccurate particulars of income and reversed the order of the lower authorities.

[2016] 72 taxmann.com 147 (Delhi – Trib.) Sanjeev Puri vs. DCIT A.Y.: 2010-11 Date of order: 11th July, 2016

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Section 54F – For the purposes of section 54F, the question whether the assessee owns more than one residential house other than the new asset is to be determined based on the actual user of the property and not on the basis of what is shown in municipal record and therefore, ownership of a flat which is shown as a residential house in municipal records but is actually used as an office is not to be regarded as ownership of a “residential house”.

FACTS
During the previous year relevant to the assessment year 2010-11, the assessee, a senior advocate, sold his rights in his Gurgaon Flat and earned long term capital gain of Rs. 1,48,23,645. This long term capital gain was invested in a residential property within the specified time and exemption claimed u/s. 54F of the Act. This claim for exemption u/s. 54F was denied by the Assessing Officer (AO) on the ground that the assessee was owner of more than one residential house.

The contention of the assessee that the property belonging to the assessee being property at E-575A, Ground floor, Gr. Kailash-II, New Delhi was used by the assessee as his office and therefore the same is not regarded as a residential house owned by the assessee for the purposes of section 54F of the Act was not accepted by the AO on the ground that as per the municipal records and the sale deed this property was a residential property.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that there was no dispute about the fact that the property E-575A, GK-II, New Delhi, owned by the assessee was being used by him as his office during the relevant period but the only dispute between the assessee and the Revenue remained on the entitlement of the deduction u/s. 54F of the Act on the basis of actual user of the property i.e. office use and not merely on the basis of the municipal record showing the property meant for residential use or in the sale deed shown as residential type.

The Tribunal noted that the ratio of the following decisions

(i) CIT vs. Geeta Duggal (357 ITR 153)(Del);

(ii) ITO vs. Ouseph Chacko (271 ITR 29 (Ker);

(iii) Smt. P. K. Vasanthi Rangarajan vs. CIT (23 taxmann. com 229)(Mad);

(iv) ITO vs.. Rasiklal & Satra (98 ITD 335)(Mum Trib); and

(v) ITO vs.. Smt. Rohini Reddy (122 TTJ 423)(Hyd.)

support the stand of the assessee that for availing the deduction u/s. 54F of the Act, the property though shown as residential on the record of the municipality but the test will be actual user of the premises by the assessee during the relevant period. It held that the actual user thereof by the assessee will be considered while adjudicating upon the eligibility of deduction u/s. 54F of the Act and the fact that the property has been shown as residential house on the record of the government authority does not make a difference.

The Tribunal held that the AO should not have considered the property E-575A, GK-II, New Delhi to be residential property on the basis of municipal record by ignoring the actual use thereof as office of the assessee. The authorities below were held to be not justified in denying the claim of deduction u/s. 54F on the basis that the assessee was owning more than one residential house by including the said house used as office to be a residential house.

The Tribunal allowed the appeal filed by the assessee.

[2016] 159 ITD 165 (Pune Trib.) Cooper Corporation (P.) Ltd. vs. Deputy CIT A.Y.: 2008-09. Date of order: 29th April, 2016.

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Section 37(1) – When the assessee converts Indian rupee loan borrowed for purchasing assets from India into foreign currency loan for taking benefit of lower interest rates and thereafter as per AS – 11 translates foreign currency loan into Indian Rupees by applying the foreign exchange rate as on the closing day of reporting period and such translation results in business loss, then the resultant loss is allowed as deduction u/s 37(1) as such loss is dictated by revenue considerations of saving interest costs.

FACTS
The assessee had initially availed various term loans in Indian rupees from banks for acquisition of assets and for expansion of project, etc. Subsequently, said loans were converted into foreign currency loans to take benefit of lower rate of interest on such foreign currency loans visa- vis loans in Indian rupee.

The assessee, following Accounting Standard – 11 (AS- 11) issued by Institute of Chartered Accountants of India (ICAI), translated foreign currency loan into Indian Rupees by applying the foreign exchange rate as on the closing day of reporting period and the same resulted in exchange loss. The said translation loss resulted in business loss which was disallowed by the AO.

The assessee argued before the AO that there is no provision in the Income-tax Act to reject the loss incurred on fluctuation in exchange as revenue expense except section 43A which provides for capitalization of such loss where the loan was taken on acquisition of any capital asset outside India. Since the assessee had not acquired assets from a country outside India section 43A was not applicable.

However, the AO held that the so-called loss was merely a notional loss and not an actual loss incurred by the company. The Assessing Officer further observed that even presuming that increased liability for repayment of foreign currency loans had been saddled on the assessee, still the same would be a payment of capital nature since impugned loans were obtained for acquiring the capital asset. The AO, thus, held that the loss claimed on account of fluctuation in the foreign exchange rate could not be allowed as revenue expenditure.

On appeal, the CIT-(A) granted partial relief to assessee on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items such as bill discounting, debtors, etc. However, in respect of other loans, the CIT-(A) observed that such loans were taken for capital purposes such as acquisition of assets and expansion of the projects and, therefore, the assessee was not entitled to losses from fluctuation in currency as revenue expenditure.

On second appeal:

HELD
It may be pertinent to examine whether the increased liability due to fluctuation loss can be added to the carrying costs of corresponding capital assets with reference to section 43(1). Section 43(1) defines the expression ‘actual cost’. As per section 43(1), actual cost means actual cost of the assets of the assessee, reduced by that portion of the costs as has been met directly or indirectly by any other person or authority. Several Explanations have been appended to section 43(1). However, the section nowhere specifies that any gain or loss on foreign currency loan acquired for purchase of indigenous assets will have to be reduced or added to the costs of the assets.

The issue is also tested in the light of provision of section 36(1)(iii) governing deduction of interest costs on borrowings. Section 36(1)(iii) states that utilization of loan for capital account or revenue account purpose has nothing to do with allowing deduction of corresponding interest expenditure. A proviso inserted thereto by Finance Act, 2003, also prohibits claim of interest expenditure in revenue account only upto the date on which capital asset is put to use. Once the capital asset is put to use, the interest expenditure on money borrowed for acquisition of capital asset is also treated as revenue expenditure.

Thus, viewed from the perspective of section 43(1) and section 36(1)(iii), such increased liability cannot be bracketed with cost of acquisition of capital assets save and except in terms of overriding provisions of section 43A.

CBDT notification S.O. 892(E) dated 31-3-2015 also inter alia deals with recognition of exchange differences. The notification also sets out that the exchange differences arising on foreign currency transactions have to be recognized as income or business expense in the period in which they arise subject to exception as set out in section 43A or rule 115 of the Income Tax Rules, 1962 as the case may be.

A bare reading of section 43A, which opens with a non obstante and overriding clause, would show that it comes into play only when the assets are acquired from a country outside India and does not apply to acquisition of indigenous assets. Another notable feature is that section 43A provides for making corresponding adjustments to the costs of assets only in relation to exchange gains/ losses arising at the time of making payment. It, therefore, deals with realised exchange gain/loss. The treatment of unrealised exchange gain/loss is not covered under the scope of section 43A. It is, thus, apparent that special provision of section 43A has no application to the facts of the case. Therefore, the issue whether the loss is on revenue account or a capital one is required to be tested in the light of generally accepted accounting principles, pronouncements and guidelines, etc.

The Supreme Court in the case of CIT vs. Tata Iron and Steel Co. Ltd. [1998] 231 ITR 285 held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions. Therefore, fluctuations in foreign exchange rate while repaying instalments of foreign loan raised to acquire asset cannot alter actual cost of assets. The assessee may have raised funds to purchase the asset by borrowing but what the assessee has paid to acquire asset is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset.

The assessee has inter alia applied AS-11 dealing with effects of the changes in the exchange rate to record the losses incurred owing to fluctuation in the foreign exchange. AS-11 enjoins reporting of monetary items denominated foreign currency using the closing rate at the end of the accounting year. It also requires that any difference, loss or gain, arising from such conversion of the liability at the closing rate should be recognized in the profit & loss account for the reporting period.

As per section 209 of the Companies Act, 1956, the assessee being a company is required to compulsorily follow mercantile system of accounting. Section 211 of the Companies Act, 1956 also mandates that accounting standards as applicable are required to be followed while drawing statement of affairs. Section 145 of the Income Tax Act, 1961 similarly casts obligation to compute business income either by cash or mercantile system of accounting. The Supreme Court in the case of CIT vs. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 has observed that AS-11 is mandatory in nature. Thus, in view of the various provisions of the Companies Act and the Income-tax Act, it was mandatory for the assessee to draw accounts as per AS-11. Thus, the loss recognized on account of foreign exchange fluctuation as per notified accounting standard AS 11 is an accrued and subsisting liability and not merely a contingent or a hypothetical liability. A legal liability also exists against the assessee due to fluctuation and loss arising there from. Actual payment of expense is an irrelevant consideration to ascertain the point of accrual of liability. As a corollary, the revenue has committed error in holding the liability as notional or contingent.

Besides AS-11, the claim of exchange fluctuation loss as revenue account is also founded on the argument that the aforesaid action was taken to save interest costs and, consequently, to augment the profitability or reduce revenue losses of the assessee. The impugned fluctuation loss therefore, has a direct nexus to the saving in interest costs without bringing any new capital assets into existence. Thus, the business exigencies are implicit as well explicit in the action of the assessee. The argument that the act of conversion has served a hedging mechanism against revenue receipts from export also portrays commercial expediency. Thus, the plea of the assessee that claim of expenditure is attributable to revenue account has considerable merits.

For the aforesaid reasons and in the light of the fact that the conversion in foreign currency loans which led to impugned loss were dictated by revenue considerations towards saving interest costs, etc., the said loss is considered as being on revenue account and is an allowable expenditure u/s. 37(1). The order of the CIT-(A) sustaining the disallowance is thus reversed.

[2016] 71 taxmann.com 136 (Delhi-Trib)(SMC) Sushil Kumar Jain vs. ACIT A.Y.: 2006-07 Date of order: 24th June, 2016

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Section 147 r.w.s. 154 – Initiation of two parallel proceedings on a similar subject matter, cannot sustain. If first proceedings have been validly initiated, then such proceedings must come to an end for making a way for the initiation of another proceedings on the same subject matter. Unless the earlier proceedings are buried, either by way of an order on merits or by dropping the same, no fresh subsequent proceedings on the same subject matter can be initiated.

FACTS
The assessee, a senior advocate by profession, filed his return of income for assessment year 2006-07 declaring total income of Rs. 8,39,253. The Assessing Officer (AO) vide order dated 26.3.2008, assessed the total income of the assessee to be Rs. 8,56,753.

The AO issued notice u/s. 154 of the Act dated 23.2.2011 intimating the assessee that he proposes to rectify the order passed u/s. 143(3) of the Act to include in his total income receipts of Rs. 4,47,600 which were received by the assessee, as per TDS certificates, but which were not included in total income.

Subsequently, the AO reopened the assessment on the ground that assessee has claimed credit for TDS against current years income on receipts of Rs. 4,47,600 but the same have not been offered for taxation. The assessment was completed u/s. 147 r.w.s. 143(3) of the Act by making a total addition of Rs. 2,37,500.

Aggrieved, the assessee preferred an appeal to CIT(A) and interalia argued that since the AO had issued notice u/s. 154 of the Act initiation of reassessment proceedings was not valid.The CIT(A) upheld the initiation of reassessment proceedings and the additions made.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal on perusal of copy of notice u/s. 154 along with the reasons recorded for reopening observed that the subject matter of both the notices was the same viz. receipts of Rs. 4,47,600 which in the opinion of the AO had escaped taxation. The Tribunal observed that during the continuation of the proceedings u/s. 154, the AO embarked upon the same issue by means of a separate reassessment proceedings without concluding the earlier proceedings initiated u/s. 154. It goes without saying that initiation of two parallel proceedings on a similar subject matter, cannot be sustained. If first proceedings have been validly initiated, then such proceedings must come to an end for making a way for the initiation of another proceedings on the same subject matter. Unless the earlier proceedings are buried, either by way of an order on merits or by dropping the same, no fresh subsequent proceedings on the same subject matter can be sustained. The Tribunal held that since the rectification proceedings u/s. 154 were initiated in 2011 and these were still on in the year 2013, when the proceedings u/s. 147 were initiated on the same subject matter, the proceedings u/s. 147 cannot stand during the continuation of proceedings u/s. 154. The Tribunal set aside the initiation of reassessment proceedings by means of a notice u/s. 148 and the proceedings flowing therefrom.

The appeal filed by the assessee was allowed.

[2016] 159 ITD 199 (Ahmedabad – Trib.) Urvi Chirag Sheth vs. ITO A.Y.: 2012-13. Date of order: 31st May, 2016.

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Sections. 2 and 4, read with sections 45, 56(2) (viii) and 145A – If the assessee receives interest, to compensate for the time value of money, on account of delay in payment of the motor accident compensation, then such interest takes the same character as that of the accident compensation and since the said accident compensation, being capital receipt, is not taxable, consequently receipt of interest on such compensation is also not taxable.

FACTS
The assessee had met with a serious motor car accident which had left her permanently disabled. The competent authority termed the disability at ninety per cent level.

She had claimed compensation of Rs.15,00,000/- for this tragic loss of her physical abilities. She was, finally after 21 years, awarded the said compensation along with the interest of Rs.14,94,286/- by Hon’ble Supreme Court. The said interest was computed using 8% interest rate, on the enhanced compensation, from the date of filing the claim petition before MACT (Motor Accidents Claims Tribunal) till the date of realization.

The assessee had not offered the said interest income to tax. The main contention of the assessee was that the interest which is received by any person under any statute is taxable under the Act, however, if the interest is awarded by courts of higher authorities as part of fair and equitable compensation, the same is capital receipt and hence not taxable in the hands of the assessee.

The AO was of the opinion that the interest received on the said compensation came within the purview of section 145A(b) read with section 56(2)(viii) and hence, after allowing deduction of Rs.7,47,143/- as per provisions of section 57(iv) of the Act, taxed the balance Rs.7,47,143/- as income from other source.

The CIT-(A) upheld order of the AO.

On second appeal before the Tribunal.

HELD
Section 145A provides that interest received on compensation or enhanced compensation shall be deemed to be income of the year in which it is received. This provision was enacted with a view to mitigate hardship to taxpayers, where interested was awarded by judicial forums but on account of the decision being challenged the same was not received.Clause (viii) in sub-section (2) of section 56 provides that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as ‘income from other sources’ in the year in which it is received.’

Section 145A deals with the method of accounting i.e. cash or mercantile and has its focus on the point of time when an income is taxable rather than taxability of income itself. Thus, when an income is not taxable, section 145A has no relevance. Nothing else needs to be read in this provision.

Section 56(2)(viii), is only an enabling provision, to bring interest income to tax in the year of receipt rather than in the year of accrual.

Thus only when interest received by the assessee is in the nature of income, such interest can be taxed u/s. 56(2)(viii). Section 56(1) makes this aspect even more clear when it states that income of every kind, which is not to be excluded from the total income under the Incometax Act, shall be chargeable to income tax under the head income from other sources, if it is not chargeable to income tax under any of the heads, and then, in the subsequent provision, i.e., section 56(2), proceeds to set out an illustrative, rather than exhaustive list of, such ‘incomes’. Clearly, section 56 does not decide what constitutes income. What section 56 holds is that if there is an income, which is not taxable under any of the other heads u/s. 14, then it is taxable under the head ‘income from other sources’.

To suggest that since an item is listed u/s. 56(2), even without there being anything to show that it is of income nature, it can be brought to tax is like putting the cart before the horse.

The payment made to the assessee is in the nature of compensation for the loss of her mobility and physical damages. Clearly, such a receipt, in principle, is a capital receipt and beyond the ambit of taxability of income, since only such capital receipts can be brought to tax which are specifically taxable u/s. 45. As it is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of a revenue receipt or is specifically brought within ambit of income by way of specific provisions. The accident compensation is thus not taxable as income of the assessee.

What is termed as interest takes the same character as that of the accident compensation and it seeks to compensate the time value of money on account of delay in payment of the compensation. Such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate of interest. In this case, the interest is awarded by the Supreme Court in its complete and somewhat unfettered discretion. An interest of this nature is essentially a compensation in the sense it accounts for a fall in value of money itself at the point of time when compensation became payable vis-a-vis the point of time when it was actually paid, or, for the shrinkage of, what can be termed as, a measuring rod of value of compensation. If the money was given on the date of presenting the claim before the Motor Accident Claims Tribunal, it would have been principal sum but since there is an inordinate, though partial, delay in payment of this amount, interest payment is to factor for fall in value of money in the meantime. The transaction thus remains the same, i.e., compensation for disability, and the interest rate, on a rather notional basis, is taken into account to compute the present value of the compensation which was lawfully due to the assessee in a somewhat distant past.

If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. Essentially, this conclusion supports the school of thought that when principal transaction itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction as well.

The authorities below were thus completely in error in bringing the interest awarded by the Supreme Court to tax. The question of deduction u/s. 57(iii), given the above conclusion, is wholly irrelevant. The order of the AO taxing the interest on accident compensation and the order of the

CIT-(A) confirming AO’s order is disapproved.

In result, the appeal of the assessee is allowed.

Condonation of delay – Appeal filed in wrong jurisdiction – An unintentional lapse on the part of the litigant – Liable to be condoned :

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Prashanth Projects Ltd vs. The Deputy Commissioner of Income Tax10(3), tax Appeal no – 192 of 2014 dt – 19/07/2016 (Bombay High Court).

[Prashanth Projects Ltd vs. The Deputy Commissioner of Income Tax10(3),; ITA No. 7167/Mum/2011 Bench: C ; dt: 04/09/2013 ; (A Y: 2005-06 )]

Assessee company, engaged in the business of construction of storage handling Terminal of Petroleum Products, filed its return of income on 31.10.2005 . The AO finalised the assessment order u/s.143(3) determining the total income at Rs.1,11,17.010/-. Assessment order was received by the assessee on 25.01.2008 and accordingly appeal was to be filed by 24.02.2008, however, by mistake instead of the appeal being filed in the office of the CIT(A), it was filed on 8th February, 2008 (within the period of limitation) with the office of the Assessing Officer i.e. Deputy Commissioner of Income Tax10( 3), who accepted the same. Later on in May,2011,when it came to know that appeal was to be filed before the CIT(A), an application was moved by it to the AO for transferring the appeal to the office of the CIT(A). However same was refused. This resulted in the appellant having to file a fresh appeal on 9th June, 2011 to the CIT(A) from the order of the Assessing Officer dated 31st December, 2007. This appeal was accompanied alongwith an application for condonation of delay . Thus, there was delay of more than 3 years. The reason for the delay as explained by the assessee, was that by mistake it filed appeal in the office of the ACIT. After considering the submissions of the assessee,CIT(A) dismissed the appeal filed by it.

Effective Ground of appeal before ITAT was about not admitting the appeal by the CIT(A) on the ground of delay. Being aggrieved, the appellant filed a further appeal to the Tribunal. The Tribunal after citing various decisions of the Courts indicating the manner in which the application for condonation of delay has to be dealt with proceeded to reject the appeal.

The Assessee filed an appeal before the High court challenging the order of ITAT . The High Court held that it is an undisputed position that the appeal from order dated 31st December, 2007 of the Assessing Officer was prepared and filed in the prescribed Proforma viz. Form No.35. It was addressed to CIT(A). However, by mistake the same was tendered to the office of the Assessing Officer and the office of the Assessing Officer also accepted the same. In fact, as the appeal pertained to the CIT(A) and not its office, the Assessing Officer ought to have immediately returned the appeal which was filed in the office of the Assessing Officer. This would have enabled the appellant to take appropriate steps and file the appeal with the office of the CIT(A). It is not the case of the Revenue that the appeal addressed to the CIT(A) was not filed with the Office of the Assessing Officer on 8th February, 2008 i.e. within the period of limitation. In case, the Assessing Officer had returned the appeal immediately to the appellant or had forwarded it to the office of the CIT(A) as would be expected of the State no delay would have taken place. This would have resulted in the appeal being considered on merits.

Further, from the application made for stay in the same proceeding , it is very clear that the appellant as well as the department bonafide proceeded on the basis that its appeal before the CIT(A) was pending. The lapse on the part of the assessee was unintentional. Further, the analogy made in the impugned order with nature is inappropriate. Human interaction is influenced by human nature. Inherent in human nature is the likelihood of error. Therefore, the adage “to err is human”. Thus, the power to condone delay while applying the law of limitation. This power of condonation is only in view of human fallibility. The laws of nature are not subject to human error, thus beyond human correction. In fact, the Apex Court in State of Madhya Pradesh vs. Pradip Kumar 2000(7) SCC 372 has observed to the effect that although the law assists the vigilant, an unintentional lapse on the part of the litigant would not normally close the doors of adjudication so as to be permanently closed, as it is human to err. The High Court held that it was an unintentional lapse on the part of the appellant.

The appeal was restored to the file of the CIT(A) for fresh disposal in accordance with law, on payment of costs of Rs.10,000/- by a pay order drawn in the name of “The Principal Commissioner of Income Tax15, Mumbai”.

Estimate – on money – It is a settled principle of statistics that principle of averaging provides results of reliable nature – Such average minimizes the errors and brings out reasonable and reliable results.:

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The CIT- III vs. Prime Developers. [Income tax Appeal no 2452 of 2013 dt -18/07/2016 , AY 2004-05 (Bombay High Court)].

[Prime Developers. vs. DCIT, CC-33,; I.T.A. NO.323/M/2010, 321/M/2010, 322/M/2010, 324/M/2010 Bh – C, dt : 22/03/2013, AY: 2004-05 to 2007-08,]

Assessee was engaged in the business of construction. During the subject assessment year the assessee undertook construction of a project called ‘Prime Mall’. However in its return of income filed for the subject assessment year the assessee did not disclose any profits on its above project as it was following the Project Completion Method. There was a search on the assessee under Section 1 32 of the Act.

During the course of the search it was found that during the previous year relevant to assessment year under consideration it was found that the assessee had sold 14 units in its Prime Mall Project and received 65% of the total sales consideration as ‘on money’. Consequent to the search, the assessee contended that in the subject assessment year no income is chargeable to tax as it is following the Project Completion Method of Accounting . Therefore the profit, if any, would be subject to tax on completion of the project which takes place only for the A.Y. 2006- 07( 90%) and A.Y. 2007- 08.

The Assessing Officer did not accept the assessee’s contention of Project Completion Method and brought to tax, the entire amount received as ‘on money’ consideration i.e. 65% of total sales value (35% recorded plus 65% ‘on money’) of the 14 unit sold.

In appeal, the CIT(A) modified the order of the Assessing Officer to the extent it held that the total consideration received in respect of sales of 14 unit during the subject assessment year would be taxed at 40% as net profit of the total consideration in place of 65% in respect of sales of 14 units. The CIT(A) did not accept the assessee’s contention that only 8% should be taken as net profit of the unaccounted turnover. This was in view of the fact that annexure L found during the course of the search indicated the net profit at 28.18%.

Being aggrieved, both the Revenue as well as the assessee carried the issue in appeal to the Tribunal. The Tribunal after considering the facts and the NP of assessee held that the reasonable percentage of profits of the project – Prime Mall was somewhere in the range of said NPs ie 13.735% – 23.99% . It was a settled principle of statistics that principle of averaging provides results of reliable nature. Such average minimizes the errors and brings out reasonable and reliable results. The average of the 13.735% and 23.99% would give rise to a reasonable percentage of NP ie 17.08%. The issue was restored to the Assessing Officer to work out the taxable profits after adopting a reasonable net profit of 17.08% on its gross sales turnover of Rs.11.60 crore in the subject AY .

The Revenue challenged before High Court the adoption of net profit of 17.08% as determined by the Tribunal was not correct . The High Court observed that the Revenue sought to substitute the estimated net profit arrived at by the Tribunal with a new figure of net profit . This was without showing that the estimate arrived at by the Tribunal in the impugned order was perverse. It was a settled position of law that in estimated net profit arrived at by the authorities is a question of fact and if the material on record supported the estimate arrived at by the Tribunal then it didnot give rise to any substantial question of law (see CIT v/s. Piramal Spinning and Weaving Mills Ltd. 124 ITR 408). In this case, High Court held that the net profit estimated at 17.08% was a very possible view on the facts found and dismissed revenue appeal.

PART A: Decision of Supreme Court

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CBSE asked to provided answer sheets and scrupulously observe the directions of Supreme Court in C.A. No. 6454 of 2011

Even after the historic 2011 judgment of the Supreme Court, where procuring copies of answer sheets by students came under the Right to Information (RTI) Act, the Central Board of Secondary Education (CBSE) continued to defy it. In a reply to a RTI query, posed by Whistle for Public Interest (WHIP), comprising of a group of law students, the CBSE replied on 28 December 2015, that, it charges Rs700 per subject for providing copy of answer sheets. In addition, students were compulsorily required to go through the process of ‘Verification of Marks’ for which the CBSE has prescribed fee of Rs.300 per subject. This meant that a student had to pay Rs1,000 per subject, if she applied for a copy of the answer sheet.
This was in gross violation of the SC order of 2011, which held that “Answer-Sheet is an Information and therefore, examinees shall have the right to inspect their Answer-Sheets under RTI Act, 2005 and its Rules made there under which prescribes Rs10 as application fee for getting the information and Rs2 per page for the copies of such information.”
 
The Supreme Court directed the CBSE to “scrupulously observe” the directions made by the Court in 2011. The CBSE has been asked to provide evaluated answer-sheets to candidates under RTI Act in compliance with the Supreme Court’s Ruling in the matter of CBSE & Anr. Vs. Aditya Bandopadhyay & Ors – Civil Appeal No. 6454/2011.

All the state run institutions falling under the meaning of Public Authority defined under section 2(h) of the RTI Act are also obliged to provide answer-sheets under this transparency law.

E-Waste Disposal

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Introduction
There’s a new smart phone in the market and we buy it. A new laptop is introduced and we grab it. Ever wondered what happens to the old models which we sell, scrap or simply trash (in cases where they are no longer working)? How do these electronic items ultimately get disposed off? E-Waste or electronic waste is one of the largest sources of waste being generated in today’s waste. With newer models and variants of all gadgets being launched every day, the useful life of a technological gadget has reduced drastically thereby significantly increasing the e-waste generated everyday. For instance, did you know that a study states that India is the 5th largest producer of e-waste internationally. According to the Ministry of Environment, Forest and Climate Change, Government of India, India generates over 17 lakh tonnes of e-waste very year with an annual growth rate of 5% every year. India has over a billion mobile phones  and over 25% end up in e-waste every year.  Recognising this, the Central Government has recently framed the E-Waste (Management) Rules, 2016.  

Act
The mother statute for all things connected with the environment is the Environment (Protection) Act, 1986.  It is a Central Act for the protection and the improvement of the environment. It defines environment pollution  as the presence of any solid, liquid  or gaseous substance in the environment in such concentration as may be injurious to the environment.  Under s.3 of this Act, the Government has power to take all such measures as is necessary for protecting and improving the quality of the environment and for preventing environment pollution. This includes laying down Rules, procedures and safeguards for the handling of hazardous substances, i.e., any substance which by reason of its chemical properties is liable to cause harm to humans /  living  beings / environment, etc. Consequently, the  Central Government has notified the amended  E-Waste (Management) Rules, 2016(“the EWM Rules”) which shall come into force from the 1st October, 2016. The EWM Rules define e-waste to mean electrical and electronic equipment, in whole or in part discarded as waste by the consumer or bulk consumer as well as rejects from manufacturing, refurbishment and repair processes.

Coverage
The EWM Rules apply to various types of entities involved in the  manufacture, sale, transfer, purchase, collection, storage and processing of e-waste or specified electrical and electronic equipment, including their components, consumables, parts and spares which make the product operational. Some of these entities are as follows:

(a)Manufacturer – a manufacturer of electrical and electronic equipment
(b)Producer – any person who sells (in any manner) manufactured / assembled / imported electrical and electronic equipment
(c)Bulk Consumer – Bulk users of electrical and electronic equipment, e.g., Governments departments, Public Sector Undertakings, banks, educational institutions, MNCs, partnership firms and companies that are registered under the Factories Act, 1948 and the Companies Act, 2013 and health care facilities which have a turnover of more than Rs. 1 crore or employ more than 20 employees.  Althoughthis definition is not very happily worded, it appears that in order to be covered, firms and companies must satisfy the turnover or employee threshold. Registration under both Factories Act and Companies Act is not possible because in that case all firms would be excluded. Further, all IT companies which are the biggest generator of e-waste would be excluded, which cannot be the intention. This is an important definition since it casts certain reporting requirements on all bulk  consumers.
(d)Dealer – buyer or seller of specified electrical and electronic equipment. The definition is wide enough to include offline and online dealers.
(e)Recycler – any person engaged in recycling and reprocessing of e-waste as per guidelines  laid down by the Central Pollution Control Board.
(f)Consumer – one of the more important entities covered by the EWM Rules is a consumer which is defined to mean any person using any (and not just specified) electrical and electronic equipment but excludes bulk consumers. Hence, any individual or small office would also be covered if he/it is involved in manufacture, sale, transfer, processing or storage of specified electrical and electronic equipment. This is a very important step toward environment protection since it spreads the net very wide.  

However, the Rules do not apply to a micro enterprise as defined in the Micro, Small and Medium Enterprises Development Act, 2006. This is interesting since while a micro enterprise is exempted, an individual end user is not!

The specified electrical and electronic equipment enlisted in the EWM Rules are computers, laptops, mobile phones, refrigerators, washing machines, air conditioners, televisions, printers, lamps containing fluorescent and other mercury.  It even covers their components, consumables, parts and spares. Conspicuous by their absent from this list are several popular consumer electronic / electric equipment, such as,  music systems, heating systems, irons, DVD players, cameras, etc. Whether this omission is intentional or an oversight is something which time will tell?

Responsibilities of various entities
The Rules lay down responsibilities for different entities in relation to e-waste:

(a)Manufacturer – must collect e-waste generated during manufacturing of any electronic / electrical equipment and channelise it for recycling or disposal.  It must also maintain and file prescribed information returns. The Return includes information on category and quantity of e-waste generated / stored/ recycled/transported /refurbished /dismantled /treated and disposed.   The channelisation could be to authorised dismantlers or recyclers.
(b)Producers – must provide an Extended Producer Responsibility (EPR) for  equipment produced by them covering the channelisation of e-waste generated by their products. This could also be through dealers, collection centres, buyback arrangements, etc. EPR means a responsibility of any producer of electrical or electronic equipment, for channelisation of e-waste to ensure environmentally sound management of such waste. EPR may comprise of implementing take back system or setting up of collection centres or both and having agreed arrangements with authorised dismantler or recycler either individually or collectively through a Producer Responsibility Organisation. The Central Pollution Control Board will grant an EPR Authorisation for managing EPR with implementation plans and targets outlined therein.

Every producer must make an application to the Central Pollution Control Board for EPR Authorisation within a period of 90 days from 1st October, 2016.  Any producer who has been refused an EPR cannot sell any electronic or electric equipment.  This is a very important requirement for producers.

The producer must also create mass awareness of recycling. The Deposit Refund Scheme is another way of doing so in which the producer charges an additional deposit at the time of sale and returns the money back with interest when the product is returned for recycling. Various returns are to be filed by a producer also.
(c)Dealers – they can act as collection centres for producers’ products. They must ensure that e-waste generated is safely transported to recyclers or dismantlers. 
(d)Refurbishers / Dismantlers / Recyclers – Their facilities must be in accordance with guidelines laid down by the Central Pollution Control Board. They must maintain records and also obtain an authorisation from the State Pollution Control Board.
(e)Bulk Consumers –  bulkconsumers of specified electrical and electronic equipment shall ensurethat e-waste generated by them is channelised through collection centre or dealers of authorised producer or dismantler or recycler  and they shallmaintain specified records of e-waste generated by them. Further,  they must ensure  that such end-of-life electrical and electronic equipmentare not admixed with e-waste containing radioactive material as are covered under theprovisions of the Atomic Energy Act, 1962.
(f)Consumers – the responsibilities for consumers of specified electrical and electronic equipment are the same as those enlisted above for bulk consumers, except that they do not have to maintain any records.
(g)Storage Responsibility – Every manufacturer, producer, bulkconsumer, collection centre, dealer, refurbisher, dismantler and recycler may store thee-waste for a maximum of 182 days and shall maintain arecord of collection, sale, transfer and storage of e-wastes and make these recordsavailable for inspection. The State Pollution Control Board can extend this period to 365 days if the waste needs to be stored for recycling or reuse. Transportation of e-waste must be carried out after maintaining the prescribed documentation.

Penalties
No specific penalties are provided under the Rules but they do provide that the manufacturer, producer, importer, transporter, refurbisher, dismantler and recycler shall be liable for all damages caused to the environment or third party due to improper handling and management of the e-waste. They further provide that the manufacturer, producer, importer, transporter, refurbisher, dismantler and recycler shall be liable to pay financial penalties as levied for any violation of the provisions under these rules by the State Pollution Control Board with the prior approval of the Central Pollution Control Board.

The Environment (Protection) Act, 1986 provides a general penalty for anyone who fails to comply with or contravenes any of the provisions of the Act, or its rules. The penalty is, in respect of each failure or contravention, an imprisonment of up to 5 years and / or a fine of up to Rs. 1 lakh. In case the failure or contravention continues, then there would be an additional fine which may extend to Rs. 5,000 / day during which such failure or contravention continues after the conviction for the first such failure or contravention. If the failure or contravention continues beyond a period of 1 year after the date of conviction, the offender shall be punishable with imprisonment for a term which may extend to 7 years.

Responsibilities of Companies
Companies would be either bulk consumers or consumers. Depending upon their classification they need to comply with the provisions of the Rules.  

Conclusion
This is one more Regulation which businesses need to comply with. However, this is a welcome legislation which would help reduce the environmental pollution. One only hopes that this does not turn out into another means of red tapism and corruption.

Importance of Unity

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Arjun (A)

Shrikrishna Bhagwan, in Bhagwad Geeta,
you had told me about re-birth.

 

Shrikrishna
(S)

Yes dear.  I had mentioned that so far, you and I, and
all these people have taken innumerable rebirths.

 

Arjun

And whatever good or bad we do, we get
the fruit in the same birth or in next birth.

 

Shrikrishna

Yes. 
That is true.  But what makes
you ask this question?

 

Arjun

My friend is very innocent person,
very God-fearing.  Now practising in a
rural area.

 

Shrikrishna

What about him?

 

Arjun

He had done the audit of some company
5-6 years ago.  He left that work since
the company shifted elsewhere.

 

Shrikrishna

Ok. Then?

 

Arjun

A few months ago, all of a sudden,
survey party from income tax came to his office.  They harassed him for 3 days – asking
questions about that old client.

 

Shrikrishna

Oh! Why?

 

Arjun

They said they found two different
balance sheets signed by him for the 
same year – the last year of his audit.

 

Shrikrishna

Surprising!  But you said he is very innocent!

 

Arjun

Yes. 
I have no doubt about his innocence. 
Gentleman to the core!

 

Shrikrishna

What did they find?

 

Arjun

Actually, in village places, most of
the professionals work from residence only. 
They keep some room for office. 
So they searched the records in his house also.

 

Shrikrishna

But what did they get?

 

Arjun

Absolutely nothing.  Not even the remotest evidence.

 

Shrikrishna

So what did they finally do?

 

Arjun

They were completely satisfied.  But they said they had instructions to
investigate thoroughly.  They regretted
inconvenience caused to him!

 

Shrikrishna

Good. 
But there must be something else in the story.

 

Arjun

Yes. 
He showed them that he signed the same and the only balance-sheet that
was submitted to ROC and IT!  And the
alleged balance sheet which they got somewhere else was only photocopy.

 

Shrikrishna

They have to produce original.  But what was their grievance – when correct
balance sheet was filed with ITR?

 

Arjun

That’s precisely why I mentioned about
re-birth.  He must have committed some
sin in last birth.

 

Shrikrishna

Why?

 

Arjun

Actually, for subsequent years, there
were multiple financial statements for every year.  Different for ROC, different for IT and
something else to the Bank!

 

Shrikrishna

It was then a blatant fraud!

 

Arjun

Yes; true.  So subsequent years’ auditor is also in
trouble.

 

Shrikrishna

But where is the client?  What does he say?

 

Arjun

That’s another story.  The main director of that company is now
absconding.  That prompted them to go
to the CA’s office! He is the real culprit.

 

Shrikrishna

They must have recorded the statements
of both of them.

 

Arjun

Yes, obviously.  My friend flatly denied the
allegation.  But the subsequent auditor
succumbed to the pressure of survey people. 
But then immediately retracted it.

 

Shrikrishna

You mean to say your friend suffered
unnecessarily.  There was no fault on
his part.

 

Arjun

Exactly.  In the hospital, we see many small innocent
children suffering from terminal diseases. 
What sin they have committed?

 

Shrikrishna

You are right.  Your friend did not perhaps do anything
wrong; but somebody did it and the poor fellow suffered because of someone
else’s wrong deeds!

 

Arjun

And the irony is that the client is
very resourceful and influential.  He
will settle it with IT.  But the IT
people have forwarded the information to our Institute and my friend will
have to face the music for a few years!

 

Shrikrishna

I have sympathy for your friend.  But I had also explained to you the role of
fate or destiny in Bhagwad Geeta. Even Lord Shree Ram had to undergo hardship
for no fault on his part!

 

Arjun

I am more worried because in our
profession, there is hardly any opportunity to do a straight thing!  Everything is manipulation.  So what will happen in our next birth.

 

Shrikrishna

Dear Paartha, don’t be so negative.

 

Arjun

What shall we do?  Neither the clients whom we serve are clean
nor the authorities before whom we represent the clients are straight!

 

Shrikrishna

The only solution is the unity amongst
you all.  If you act collectively with
positive thinking and good leadership, you can improve the things.  You are educated professionals.  You should provide leadership to the
society.

 

Arjun

But what exactly we can do
collectively?

 

Shrikrishna

You can be more assertive.  You can afford to say ‘No’ to wrong
things.  Today, you have a fear that if
you refuse to oblige a client, some other CA will do it.  He will compromise on the standards.

Arjun

That’s true.  We can even develop good culture and
discipline iin the finance sector.

Shrikrishna

And you can establish the image and
credibility of the profession, so that no once can point a finger at you.

Arjun

I see a point in what you are
saying.  Since we are not united, no
one heeds to our feelings and suggestions. 
I think, all of us should seriously think on these lines.

 

Shrikrishna

I had already said in puranas that in Kaliyug, the real strength
lies in unity.  Please act unitedly and
you can change the world.

 

Arjun

Yes, My Lord!

Om Shanti.

Note:

The above
dialogue emphasises on importance of collective strength and how it is lacking
in our profession. The only solution to remain clean in the profession is to
have a good unity.

Precedent – Judicial Discipline – Departmental authorities bound by the judicial pronouncements of the Statutory Tribunals even if the decision of the Tribunal was not carried further in appeal on account of low tax effect [Central Excise Act, 1944 S. 35 and 35E].

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Lubi Industries LLP vs. Union of India (2016) 337 E.L.T. 179 (Guj.)(HC)

The petitioner manufactures and supplies submersible pumps to Government agencies. The contracts envisage pre-delivery inspection charges by third party agency at the cost of the buyer . However, initially the payment would be made by the petitioner and would be claimed from the Government. The contest between the petitioner and the Department is with respect to the inclusion of these charges towards the assessable value of the goods. This precise question in identical circumstances in case of this very petitioner came to be decided by CESTAT by judgement dated 16/06/2014, ruled in favour of the assessee.

When such a question arose again, the AO issued a show cause notice as to why the pre-delivery inspection charges should not be included in the assessable value and resultantly unpaid dues of Rs.1.37 lacs not be recovered. The petitioner heavily relied on its case decided in the Tribunal. The AO however confirmed the additions and relied on the judgement of the Supreme Court in the case of Commissioner of Central Excise, Tamil Nadu vs. Southern Structures Ltd. 2008 (229) E.L.T. 487.
The High Court held that, the Assistant Commissioner committed a serious error in ignoring the binding judgement of the superior Court that too in case of the same assessee. Even if the decision of the Tribunal in the present case was not carried further in appeal on account of low tax effect, it was not open for the adjudicating authority to ignore the ratio of such decision. An order that the adjucating authority may pass is appealable, even at the hands of the department. This is clearly provided in Section 35 read with section 35E of the Central Excise Act. Therefore, even if the adjucating authority passes an order in favour of the assessee on the basis of the decision of the Tribunal, it is always open to the Department to file appeal against such judgement of the adjucating authority.

Family Arrangement – Panchayat Resolution reduced in writing – Resulting in relinquishment of rights – could be taken as Family Arrangement – though not registered can be used as a piece of evidence for showing or explaining the conduct of the parties. [Registration Act, 1908, S. 49, 17; Evidence Act, 1872, S.91]

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Subraya M.N. v. Vittala M.N. & Others AIR 2016 Supreme Court 3236.

A suit for partition was filed. The defendants opposed the same on the ground that plaintiffs had relinquished their rights for consideration and this was recorded in Panchayat Resolution. The Trial Court as well as the High Court held that Panchayat Resolution cannot be construed as a Family Arrangement and was inadmissible in evidence as the same was not registered. On appeal, the Supreme Court held that, the Trial Court and the High Court were not right in brushing aside the oral and documentary evidence adduced by the defendant to prove that the plaintiffs had relinquished their right in the immovable property. There is no provision of Law requiring family settlements to be reduced to writing and registered though when reduced to writing the question of registration may arise. Binding family arrangements dealing with immovable property worth more than rupees hundred can be made orally and when so made, no question of registration arises. If, however, it is reduced to writing with the purpose that the terms should be evidenced by it, it requires registration and without registration it is inadmissible; but the said family arrangement can be used as corroborative piece of evidence for showing or explaining the conduct of the parties.

Accident claim – Can be filed by non-dependant legal representative of the deceased. [Motor Vehicles Act, 1988, S.166, 140]

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Dr. Gangaraju Sowmini v. Alavala Sudhakar Reddy & Another, 2016 AIR Hyderbad 162 (FB)

The reference was filed by the claimant (non-dependent of the deceased) seeking enhancement of compensation awarded by the chairman, Motor Vehicles Accidents Claims Tribunal. The said reference was opposed by the Insurance Company on the ground that amount of compensation would not be granted to a claimant who is not dependant on the deceased.  

It was held by the Full Bench of the Hyderabad High Court that in view of the plain language under Section 166 of the Motor Vehicles Act, 1988, which is a substantive provision for making application for compensation, it is clear that either the injured person or the legal representatives of the deceased are entitled to make an application for award of compensation. Dependency is a matter, which will have a bearing on the issue with regard to fixation of compensation and apportionment of compensation if there are more than one claimant, but at the same time, in view of the plain and unambiguous language used under Section 166 of the Motor Vehicles Act, the term ‘legal representative’ does not mean only a dependant. It is fairly well settled that the legal representative is one who can represent the estate of the deceased.

In the judgment of Hon’ble Supreme Court in Montford Brothers of ST. Gabriel and Another v. United India Insurance & Another, (2014) 3 SCC 394, it was held that it is common in the Indian society, where, the members of the family who are not even dependant also can extend their support monetarily and otherwise to the victims of accidents to meet the immediate expenditure for hospitalisation etc., in such cases, unless the legal representatives are allowed to continue the proceedings initiated by the person who succumbs to injuries subsequently, such claims will be defeated and that will also defeat the very object and intent of the Act. Any such measure would be wholly unequitable and unjust. Plainly, that would never be the intent of any piece of legislation. For the aforesaid reasons and in view of the language under Section 166 of the Motor Vehicles Act, 1988 r/w. Rule 2(g) of the A.P. Motor Vehicles Rules, 1989, we are of the view that even the legal representatives who are non-dependants can also lay a claim for payment of compensation by making application under Section 166 of the Motor Vehicles Act.

Appellate Tribunal – Registrar cannot refuse to accept the appeal though not maintainable – Order of Non-Maintainability to be passed by the Tribunal itself and not the registrar even if the petition was prima facie not maintainable. [Tripura Value Added Tax Act 2004, S.71]

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New Medical (Agartala) Pvt. Ltd. vs. Superintendent of Taxes, Charge-VI, Agartala & Ors. (2015) 82 VST 238 (Tripura) (HC).

The petitioner had filed 2 separate appeals before the Tripura Value Added Tax Tribunal, Agartala, Tripura, but these appeals were returned to the petitioner without passing an order by the Registrar of the Tripura Value Added Tax Tribunal on the ground that since the appeals filed before the Commissioner were dismissed in limine without issuing notice, no revision was maintainable before the Tribunal.

It was held that, the Registrar of the Tribunal may form a prima facie view and raise an objection that an appeal is maintainable or not and it will be for the assessee or the counsel to satisfy the Registrar that such revision is maintainable. Even if the Registrar holds against the assessee, the assessee will still have the right to claim it in the Tribunal which should decide that issue in accordance with Law.
Any Judicial or Quasi-Judicial action has to be based on reasons therefore whenever in future any such order has to be passed even by the Registrar or his subordinates, that order must be in writing and must be conveyed to the assessee so that the assessee knows why the appeal or revision is being returned by the Tribunal.

Can a trust be a beneficiary in another trust?

Sometime back a CA friend of mine
specializing in tax planning, who normally consults me on legal issues before
formulating any tax saving plan, casually asked me whether I had an occasion to
consider the question as to whether a trust can be named to be one of the
beneficiaries of another trust.


My friend being conscientious and
thorough does not recommend to any client of his any tax saving plan unless he
is fully satisfied with all applicable legal and other issues.  He had some reservation on this question and
added that a particular Big Four CA firm was 
using this idea in its tax saving recommendations.  As I needed research to answer the point, I
could not respond to the inquiry spontaneously. 
The result of the research undertaken by me was quite interesting.  The purpose of this article is to share with
the readers of your esteemed journal the result of my research on the issue.


Section 9 to the Indian Trusts Act,
1882 provides that every person capable of holding property may be a
beneficiary.  Therefore, the two basic
requirements of being a beneficiary is that (i) the beneficiary should be a
person and (ii) should also be capable of holding property.


The term “person” is not defined in the
Indian Trusts Act.  It is therefore,
necessary to look at the definition of the term under the General Clauses Act,
1897.  The said Act defines a large
number of words and expression and such definitions apply to all Central Acts
and Regulations thereunder. The said Act defines the term ‘a person’ to include
any company or association or body of individuals, whether incorporated or
not.  Even the Indian Penal Code, 1860
which also defines the term “person” gives same definition of the term to
include any company or association or a body of persons whether incorporated or
not.  It may be noted that both these
definitions are inclusive definitions and not exclusive. 

Therefore, to answer the question it is
necessary to determine whether a trust can be considered a “person”.


In the case of Abraham Memorial
Educational Trust  vs. C. Suresh Babu
reported in [2012] 175 Comp Cas 361 (Mad) the Madras High Court had occasion to
consider the meaning of the term “person”. 
It was a criminal case arising under Section 138 of the Negotiable
Instruments Act, 1881 and the court was required to interpret the meaning of
the term ‘company’ used in the Act. 
Section 141 of the said Act defines the word to mean ‘any body corporate
and includes a firm or other association of individuals’.   In that case the Court has held that
applying the doctrine of “ejusdem generis” and going by the purpose and
context, while interpreting the definition clause, a Public Charitable Trust
falls within the definition of the term “company”.  This definition will also apply in the
interpretation of the term ‘person’ in Section 11 of the Indian Penal Code and
Section 3(42) of the General Clauses Act.


In that case, the Hon’ble Court, inter alia, referred to
a passage from the decision of the Supreme Court in case of Shiromani Gurdwara
Prabandhak Committee  vs. Som Nath Dass
(reported in (2000) 4 SCL 146 para 19) as under:

“19.     Thus,
it is well settled and confirmed by the authorities on jurisprudence and courts
of various countries that for a bigger thrust of socio-political-scientific
development evolution of a fictional personality to be a juristic person became
inevitable.  This may be any entity,
living, inanimate, objects or things.  It
may be a religious institution or any such useful unit which may impel the
courts to recognise it.  This recognition
is for subserving the needs and faith of the society.  A juristic person, like any other natural
person is in law also conferred with rights and obligations and is dealt with
in accordance with law.  In other words,
the entity acts like a natural person but only through a designated person,
whose acts are processed within the ambit of law.”


After considering some other Supreme Court case law, the
Hon’ble Court held as follows:

“26.     From
the foregoing discussions, it is manifestly clear that the moment a Trust
(organisation) is formed with an obligation attached to the same, an artificial
person is born and because such artificial person is recognised by law,
conferring upon such artificial person right to own property, to enjoy certain
other rights and also to discharge certain obligations, it attains the status
of a “juristic person”.  Thus, a Trust,
whether private or public, is a juristic person who can sue / be sued or
prosecute / be prosecuted.”



The Court further considered the point whether omission
of the word ‘trust’ within the meaning of term ‘company’ had any effect and
held that:

“64.     When
there is omission to expressly mention the expression ‘Trust’ within the
meaning of the term ‘company’, by applying the principle of casus omissus,
whether this Court could fill up the said gap by reading the expression ‘Trust’
into the interpretation clause of Section 141 of the Act.  In this regard, I may refer to the
Constitution Bench Judgment of the Hon’ble Supreme Court in Punjab Land
Development and Reclamation Corporation Ltd., Chandigarh  Vs. 
Presiding Officer, Labour Court, Chandigarh reported in 1990 (3) SCC 682,
wherein the Hon’ble Supreme Court has held as follows:-

            However,
a judge facing such a problem of interpretation cannot simply fold his hands
and blame the draftsman.  Lord Denning in
his Discipline of Law says at p.12: “Whenever a statute comes up for
consideration it must be remembered that it is not within human powers to foresee
the manifold sets of facts which may arise, and, even if it were, it is not
possible to provide for them in terms free from all ambiguity.  The English language is not an instrument of
mathematical precision.  Our literature
would be much the poorer if it were. 
This is where the draftsman of Acts of Parliament have often been
unfairly criticised.  A judge, believing
himself to be lettered by the supposed rule that he must look to the language
and nothing else, laments that the draftsmen have not provided for this or
that, or have been guilty of some or other ambiguity.  It would certainly save the judges trouble if
Acts of Parliament were drafted with divine prescience and perfect clarity.  In the absence of it, when a defect appears a
judge cannot simply fold his hands and blame the draftsman.   He must set to work on the constructive task
of finding the intention of Parliament, and he must do this not only from the
language of the statute, but also from a consideration of the social conditions
which gave rise to it, and of the mischief which it was passed to remedy, and
then he must supplement the written word so as to give ‘force and life’ to the
intention of the legislature.”



Based on this discussion the Court held that:

“65.     Applying
the above law laid down by the Constitution Bench of the Hon’ble Supreme Court,
as I have already concluded, considering the intention of the Legislature while
bringing in Chapter – XVII of the Negotiable Instruments Act and the fact that
a Trust having two or more trustees will squarely fall within the ambit of
‘association of individuals’ which in turn will fall within the meaning of the
term ‘company’, I am of the view that a Trust having a single trustee should
also be brought within the definition of the term ‘company’.” 


Thus, based on the decision, a trust
(public or private) held to be a person and the first requirement condition of
being a beneficiary as required under Section 9 of the Indian Trusts Act is
satisfied.

Even otherwise, the Supreme Court had
many occasions to consider the meaning of the term ‘person’ under a number of
Central and State laws and has given very wide and extended meaning to the term
‘person’.  Illustratively, in Agarwal
Trading Corporation  v. Collector of
Customs, the word ‘person’ is held to include a company or association or body
of individuals whether incorporated or not. 
(See (1972) 1 SCC 553).  Again in
M M Ipoh v. CIT (1968) ISCR 65, it is held to include a firm so also in CIT v.
S.C. Angidi Chettiar (AIR 1962 S.C. 970). 
Moreover, while interpreting the word ‘person’ in Section 154(1) of U.P.
Zamindari Abolition and Land Reforming Act, 1950 the Supreme Court has held
that keeping in view the object of legislation and by applying the rule of
contextual interpretation it becomes clear that the same would include human
being and a body of individuals which have juridical or non-juridical status. (
See Oswal Fats & Oils Ltd. v. Commr. (Admn.), (2010)4SCC728. )


Therefore, the first requirement of the
legal provision being satisfied, we have to consider the second condition.  As far as the second requirement is
concerned, it does not need any elaboration to say that a trust is capable of
holding property.


Therefore, both the requirements to be
a beneficiary under Section 9 of the Indian Trusts Act are satisfied and a
trust can be a beneficiary in another trust.


Our trust laws mostly follow the
principles of English trust laws. 
Interestingly, however, the English Law does not recognise this
principle.  The general rule under
English Law is that a trust must have a ‘cestui que trust’.  A (private) trust to be valid must be for the
benefit of individuals …. or must be in that class of trusts for the benefit of
the public which the courts recognise as charitable in the legal sense of the
term (see Lewin on Trusts, 2008 edition, page 102 para 4.38).  The term ‘cestui que trust’ is defined to
mean ‘a beneficiary under / of a trust; one entitled to the income and profits
of trust funds; a person in whose favour the trust is created’ (see P. Ramanathan
Aiyar’s Law Lexicon 4th Edition Volume 2  page 1079). 
Halsbury’s Laws of England also provides that a trust may be created in
favour of any person to whom a gift can legally be made and a trust may also be
created for charitable purposes but not in general for a non-charitable purpose
or object or a non-human beneficiary … in general equity will refuse to
recognise a trust other than a charitable trust unless it is for benefit of
ascertained or ascertainable beneficiaries. 
Therefore, it is clear that under English Law a private trust has to be
for the benefit of individuals and that another trust cannot be named as a
beneficiary under a trust.


Accordingly, it is established that under Indian Law a
trust can be named as a beneficiary under another trust.

 

Acquisition date v Appointed date

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Acquisition
date v Appointed date

In India, merger and acquisition schemes that require a court/ tribunal
approval will have an appointed date, mentioned in the scheme, which is the
date from which the merger and acquisition is accounted.  The scheme becomes effective when the court
order is passed and the order is filed with the Registrar of Companies.  The appointed date is a very important date,
since from an income-tax legislation perspective, that is the date when the
amalgamation or acquisition accounting is done and the carry forward of any
business losses is allowed to the transferee.

The Indian GAAP accounting standards were also aligned to this
concept.  AS-14, Accounting for Amalgamations, itself did not expressly contain any
discussion around the difference between the appointed date and effective
date.  However, an EAC opinion required
the accounting of the combination from the appointed date mentioned in the
court scheme, once the court approval was received.  From an income-tax perspective, the company
would need to file revised returns to reflect the combination from the
appointed date.

With the introduction of Ind AS, the Indian GAAP position is no longer
valid for companies that apply Ind AS. 
As per paragraph 8 of Ind AS 103 Business
Combinations, the acquirer shall identify the acquisition date, which is
the date on which it obtains control of the acquiree.

An investor controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee.  An investor shall consider all facts and
circumstances when assessing whether it controls an investee and the date of
obtaining control.

The date on which the acquirer
obtains control of the acquiree is generally the date on which the acquirer
legally transfers the consideration, acquires the assets and assumes the liabilities
of the acquiree—the closing date. However, the acquirer might obtain
control on a date that is either earlier or later than the closing date. For
example, the acquisition date precedes the closing date if a written agreement
provides that the acquirer obtains control of the acquiree on a date before the
closing date.  An acquirer shall consider
all pertinent facts and circumstances in identifying the acquisition date.

Determination of acquisition date
under Ind AS may not always be straight-forward, particularly in a transaction
that involves a court scheme.  Such court
schemes may involve common control transactions involving entities under common
control or acquisition that involves independent or non-related parties.  Careful analysis of the facts and
circumstances and judgement would be necessary to determine the date of
acquisition.

When an independent party is
acquired, determining the acquisition date is important because at that date
the assets and liabilities are fair valued and goodwill and minority interest
is determined.  From the acquisition date
the acquired entity results are included in the financial statements of the
acquirer.

Business combinations
involving entities or businesses under common control shall be accounted for
using the pooling of interests method. The pooling of interest method is carried
out as follows:

i.  The
assets and liabilities of the combining entities are reflected at their
carrying amounts.
 ii. No
adjustments are made to reflect fair values, or recognise any new assets or liabilities.
The only adjustments that are made are to harmonise accounting policies.   

iii. The
financial information in the financial statements in respect of prior periods
should be restated as if the business combination had occurred from the
beginning of the preceding period in the financial statements, irrespective of
the actual date of the combination.

When a business
combination is effected after the balance sheet but before the approval of the
financial statements for issue by either party to the business combination,
disclosure is made in accordance with Ind AS 10 Events after the Reporting
Period, but the business combination is not incorporated in the financial
statements.

 From an Ind AS perspective,
the business combination date in a common control transaction determines two
things:

i.      The
year in which the combination is accounted. 
Therefore, assuming the combination date is financial year 17-18, the
accounting will be done in the financial year 17-18.  However, the financial information for the
financial year 16-17, will be restated as if the business combination had
occurred from the beginning of the financial year 16-17.
 ii.      
If
the business combination date falls after the balance sheet but before the
approval of the financial statements for issue by either party to the business
combination, disclosure is made in accordance with Ind AS 10 Events after
the Reporting Period, but the business combination is not incorporated in
the financial statements.

Agreements or court schemes may
provide a retrospective date of business combination.  Irrespective of such date, the date for
business combination under Ind AS 103 is the date on which the control is
actually obtained.  This may or may not
correspond to the date specified in the agreement or the appointed date in a
court scheme.

Some business
combinations cannot be finalized without a regulatory approval or a court
approval.  An investor controls an investee when it is exposed,
or has rights, to variable returns from its involvement with the investee and
has the ability to affect those returns through its power over the
investee.  It is necessary to consider
the nature of regulatory approval in each case, to determine the date when
control is passed.

 To illustrate, consider a business
combination involving three telecom companies, under a court scheme.  Though the court may approve the scheme, it
does not become effective till the transaction is approved by the Department of
Telecom (DOT)/ TRAI and the Competition Commission and the final order is filed
with ROC.  In this scenario, the last of
the date of final approval from DOT/ TRAI and the Competition Commission may be
the acquisition date.  Consider another business
combination, involving entities under common control.  Essentially two 100% subsidiaries of the
parent are merging to form one company. 
The shareholder of the companies, which is the parent company, has
approved the merger in the annual general meetings.  There are no creditors and no minority
shareholders.  No approval is required of
the Competition Commission or any other regulator, and there are no
complexities in the transaction. 
Essentially in such circumstances, the court order may be deemed to be a
formality, and the date of shareholders resolution approving the combination
may be the date of business combination. 

In a transaction between two
independent parties, the date the control passes is the date when the
unconditional offer is accepted.  When
the agreement is subject to substantive preconditions, the date of acquisition
will be the date when the last of the substantive precondition is fulfilled.

The Madras High Court by way of its
order dated 6 June, 2016 in the case of Equitas
passed a very interesting order.  In
the said case, the holding company had applied to the RBI for in-principle
approval to establish a Small Finance Bank (SFB).  The RBI granted an in-principle approval
subject to the transfer of the two transferor companies into the transferee
company, prior to the commencement of the SFB business. 

The Regional Director (RD) raised a
concern that the scheme did not mention an appointed date, and that the
appointed date was tied to the effective date. 
Further, even the effective date was not mentioned and it was defined to
be the date immediately preceding the date of commencement of the SFB
business.  The court observed that under
section 394 of the Companies Act such a leeway was provided to the
Company.  Further, section 394 did not
fetter the court from delaying the date of actual amalgamation/merger.  This judgement would provide a leeway to the
Company to file scheme of mergers/amalgamation with an appointed date/effective
date conditional upon happening or non-happening of certain events.

The two examples below explain how
the requirements of Ind AS and the court scheme can be aligned.

Acquisition of an
Independent Party

 Company
A (Acquisitive) wants to acquire Company B (Willing).  Acquisitive and Willing are involved in
running some business.  The acquisition
requires several important formalities to be completed including the approval
of the court.  One of the pre-condition
of the acquisition is the completion of all formalities and the receipt of
court approval.  Acquisitive follows
the financial year.  Acquisitive and
Willing enter into a binding agreement (subject to the above pre-condition) on
1 April 2016.  The appointed date
mentioned in the court scheme is 1 April 2016.  The formalities and the final court approval
for Willing to be subsumed in Acquisitive are received on 1 September 2016.

 Under
Ind AS 103, the acquisition date is 1 September 2016.  This is the date when Acquisitive will do a
fair value accounting and determine goodwill and minority interest.  Acquisitive will fair value the assets and
liabilities of Willing at 1 September 2016. 
Legally, for normal income tax computation, Acquisitive will consider
the profits of Willing for the full financial year 16-17.  However, in Ind AS financial statements,
Acquisitive will not account for Willings profits from 1 April 2016 to 31
August 2016 as its own profits; rather the profits for that period would
increase the fair value of net assets of Willings and reduce the amount of goodwill
recognized by Acquisitive.

 In
order to comply with the requirements of Ind AS, Acquisitive may consider the
following two options:

  •  Acquisitive
    relies on the Madras High Court judgement in Equitas.  Consequently, the
    appointed date and the effective date could be set out in the court scheme,
    as the date when the court passes the final order approving the acquisition,
    1 September 2016. The appointed date cannot be 1 April, 2016, because it
    would not be in compliance with Ind AS.
  •  Appointed
    date for tax purposes and tax financial statements can be 1 April 2016.
    However, the scheme should clearly provide that for accounting purposes in
    Ind AS financial statements, date determined under Ind AS 103 will be used.  In this fact pattern, the said date would
    be 1 September, 2016.  Some legal
    luminaries have opined that it is possible to follow this path and that the
    courts have an unfettered power to do so.

The
author believes that in general, the first alternative should be preferred as
it ensures consistency between tax and accounting treatment. Also, there will
be no need to file revised tax return for past periods or maintain two set of
financial statements, one for tax purposes and another for Ind AS purposes.

It
may be noted that for MAT purposes, the financial statements are required to
be in compliance with accounting standards. 
Therefore, for MAT purposes the financial statements should be
prepared with 1 September 2016 as the date of acquisition.  In other words, the Ind AS compliant
financial statements will be the relevant financial statements for the
purposes of MAT.  From an income tax
computation perspective for the carry forward of losses or acquisition
accounting, the tax financial statements prepared with an appointed date 1
April, 2016 may be acceptable. 

For
normal income tax computation purposes, legal merger is from 1 April 2016.
Profits from 1 April 16 to 31 August 16 has to be offered to tax in hands of Acquisitive
even though it reflects as goodwill in Acquisitives’ Ind AS financial
statements. Specific provisions of the Income tax Act will govern tax
treatment of items like tax WDV of assets, allowance of certain expenses on
actual payment basis, disallowance for TDS default, etc. Transition of
business loss/unabsorbed depreciation will be of amounts as determined till
31 March 16. Normal income tax computation is generally not impacted by
accounting treatment in Ind AS financial statements.

However,
if the court scheme contains any unusual adjustments that are not consistent
with tax policies, those may not be acceptable.  For example, if the court scheme allows
derivative profits to be recognized by Acquisitive directly into reserves in
the tax financial statements, and the auditor has modified the audit report,
the derivative profits will be taxable under income-tax laws.

Business Combination
between Common Control Entities

 Company
A (Acquisitive) and Company B (Willing) are in the business of manufacturing
and selling cement.  Both Acquisitive
and Willing have a common parent.  The combination
of Acquisitive and Willing requires several important formalities to be
completed such as approval from the competition commission, clearance from
minority shareholders and creditors, other regulatory approvals, and the
final approval of the court. 
Acquisitive follows the financial year.  Acquisitive and Willing enter into a
binding agreement on 1 April 2016, subject to completion of all
formalities.  A resolution has been
passed by shareholders of both the companies, prior to that date, for
approving the transaction.  The
appointed date mentioned in the court scheme is 1 April 2016.  The formalities are completed and the final
court approval is received on 1 April 2017.

 Under Ind AS 103, the combination
date is 1 April, 2017.  This is the
date when Willing will merge into Acquisitive.  The combination is accounted by Acquisitive
in the financial year 2017-18, using the pooling of interest method.  However, the financial information of
Acquisitive for the financial year 16-17, will be restated as if the business
combination had occurred from the beginning of the financial year 16-17, ie
from 1 April 2016.

 If the formalities are
completed and the final court approval is received on 1 April 2018, the
combination is accounted by Acquisitive in the financial year 2018-19.
However, the financial information of Acquisitive for the financial year 17-18,
will be restated as if the business combination had occurred from the beginning
of the financial year 17-18, ie from 1 April 2017.

 In
order to comply with the requirements of Ind AS and ensure tax consistency as
discussed in previous example, Acquisitive would need to rely on the Madras
High Court judgement in Equitas.  Essentially the appointed date and the
effective date could be set out in the court scheme, as the date when the
court passes the final order approving the combination transaction.  The appointed date may not be 1 April,
2016, because it would not be in compliance with Ind AS.

 However,
Acquisitive may consider an option whereby it prepares separate accounts for tax purposes with an appointed
date of 1 April, 2016.  For MAT
purposes, Ind AS compliant financial statements will be the relevant
financial statements.  These aspects
are discussed in the previous example.

 Conclusion

The ICAI should
provide appropriate clarification on the above subject.  However, in the meanwhile, the principles
established in this article may be used to ensure compliance with Ind AS and
also fulfill the requirements of section 394 of the Companies Act.

TS-479-AAR-2016 Mahindra-BT Investment Company (Mauritius) Limited, In re Dated: 08.08.2016

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Section 6(3) of the Act; Article 13 of India Mauritius DTAA – since Mauritius company had commercial purpose and the nature of decisions taken by the Board of Directors in Mauritius showed that the control and management was not situated wholly in India, it qualified as treaty resident of Mauritius – Consequently capital gain from transfer of shares of Indian company was exempt under Article 13 of the DTAA.

Facts:
The Taxpayer, a Mauritius company, was held by another Mauritius company (Mau Holding Co) and a UK company (UK Co). The Taxpayer’s board of Directors (BoD) comprised five directors, of which three directors were resident in Mauritius, one was a resident of the UK and one was a resident of India. The Taxpayer’s control and management was exercised by its BoD whose meetings were conducted in and chaired from Mauritius. The Taxpayer acquired certain shares (approximately 8.12%) in I Co, an Indian listed company through the stock exchange. I Co was a joint venture between Taxpayer, other promoters (Indian company and a UK company).

Taxpayer entered into an option agreement (Agreement) with a US Company (US Co), I Co and other promoters, as per which US Co was granted options over the Taxpayer’s shares in ICo representing 8.12 % of the total share capital, if US Co provided a certain level of business to I Co, which was set as a milestone.
In the year under consideration, US Co achieved the specified milestone and exercised its option to purchase shares of I Co from the Taxpayer in March 2010.
The Taxpayer approached the AAR to adjudicate on the issue of whether capital gains arising to the Taxpayer on transfer of I Co’s shares were exempt from tax in India under the capital gains article of the DTAA.

Held:
•The purpose of the arrangement was to motivate US Co, to give a certain level of business to I Co, by giving US Co an opportunity to acquire shares of ICo. Such conditions are not unusual or abnormal in the business agreement. Thus, contention that the Taxpayer had no commercial purpose but to transfer shares to US Co, and the real transaction was between I Co and US Co, was rejected by AAR.

•For a company to be treated as being resident in India as per the then applicable S. 6(3) the control or management was required to be wholly situated in India.

•However, in the facts of the case, having regard to the facts of the case, control and management of the Taxpayer was situated wholly in Mauritius.

  •      The minutes of the BoD meetings reflected that decisions related to financial matters, such as budgets, dividend declaration, buy-back of shares, approval of the Agreement etc., were taken by the BoD in Mauritius.

  •      The SC’s rulings, in the cases of Nandlal Gandalal  and V.V.R.N.M. Subbayya Chettiar , support that the expression “control and management” means de facto control and management, and not merely the right or power to control and manage. The BoD also included representatives from UK Co. The board meetings and the nature of decisions taken clearly indicate that control and management of the affairs of the Taxpayer, particularly financial affairs, were situated only in Mauritius.

  •     No additional facts were submitted to substantiate that any important affairs of the Taxpayer, for the purpose of the Act, were being controlled or managed  from India.

•Thus Taxpayer was a resident of Mauritius, and, accordingly in terms of Article 13(4), the capital gains arising to the Taxpayer was not taxable in India.

[2016] 72 taxmann.com 198 (Delhi – Trib.) New Delhi Television Ltd v ACIT A.Y. 2007-08, Dated: 17.08.2016

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S.- 92B of the Act – (i) Managerial services provided prior to incorporation of proposed overseas subsidiary cannot be classified as an international transaction under section 92B despite the fact that the overseas subsidiary made reimbursement for the same post-incorporation. (ii) Fact that in the transfer pricing study submitted, transaction was classified as an international transaction is not determinative.

Facts:   

The Taxpayer was engaged in the business of television broadcasting. To expand its business internationally, it proposed to establish a subsidiary in UK (UK Subsidiary). During the relevant assessment year, the Taxpayer performed certain management services in relation to its establishment of the UK subsidiary. Such services were undertaken prior to its incorporation in the capacity of a shareholder. Post incorporation of the UK subsidiary, the Taxpayer received reimbursement for the management services (including salary and other expenses incurred on its managerial personnel) from the UK subsidiary.
In the transfer pricing study submitted by the Taxpayer such reimbursed amount was classified as international transaction. AO made transfer pricing adjustments in respect of the reimbursed amount.
Taxpayer contended that the management services were provided prior to incorporation in order to conceptualise and give effect to an efficient group structure and hence such services cannot be considered as an international transaction.

Held:


•As per the OECD Transfer Pricing Guidelines, shareholder activity means an activity which is performed by a Member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more group members i.e. in its capacity as a shareholder.
•Since the UK subsidiary had not come into existence at the time of rendering of services, the expenditure incurred on such services could be classified as expenditure for shareholder activity. Moreover, the Taxpayer had incurred the expenditure solely because of its ownership interest.
•The pre-incorporation provision of managerial services is a different transaction from the post-incorporation provision of managerial services since expenditure incurred when an AE was not in existence, cannot be classified as an international transaction.
•Merely because the UK subsidiary reimbursed expenditure post-incorporation, it cannot be the ground for triggering transfer pricing provisions.
•This holds good, notwithstanding that the Taxpayer itself had classified it as an international transaction in transfer pricing study.

[2016] 73 taxmann.com 14 (Mumbai – Trib.) Praful Chandaria v ADIT A.Y.: 2002-03, Dated: 26.08.2016

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Article 13 of India-Singapore DTAA – (i) while a call option simplicitor is not a capital asset, a perpetual call option coupled with grant of enjoyment of shareholder rights under a Power of Attorney results in transfer of capital asset in form of valuable right, which is distinct from shares; (ii) Capital gain arising on transfer of such asset is not chargeable to tax in India by virtue of Article 13(6) of India-Singapore DTAA.

Facts:    
The Taxpayer, a non-resident Indian and a tax resident of Singapore, held majority of shares in ICo. The Taxpayer entered into an agreement, whereby the Taxpayer granted option to MauCo to buy the shares in ICo at a strike price of USD1 within a period of 150 years. Furthermore, the Taxpayer executed an irrevocable Power of Attorney (PoA) in favor of a bank, confirming that he would not revoke the same. Taxpayer also gave an undertaking that he would not transfer the shares in any other manner.

The Taxpayer received certain consideration for grant of call option under the agreement during the relevant year. The Taxpayer did not offer such income to tax in India. The AO contended that the Taxpayer had effectively alienated his shares in ICo by way of an irrevocable PoA. Accordingly, the AO held that the income from grant of call option resulted in income through or from a capital asset in India and hence sought to tax the same as income from other sources under the Act.
Upon appeal, the CIT(A) confirmed the order of the AO . Aggrieved by the order of CIT(A), the Taxpayer preferred an appeal before the Tribunal.

Held:

•Rights arising pursuant to grant of call option may not be treated as a ‘capital asset’ because, without exercising the option, no actual asset is acquired by the option holder. However, in the present case, the period of option in the agreement was fixed for an incredibly large period of 150 years. Also, an irrevocable PoA, in respect of ICo shares, was executed in favor of a bank, confirming that the Taxpayer would not, at any time, revoke the same. This suggests that the call option was granted for perpetuity. Further the rights which were enjoyed by the Taxpayer as a shareholder were exercised by the PoA holders to participate in the affairs of the company.
•Such a bundle of substantive rights would generally not be given under normal call option agreements. Thus taxpayer has in effect alienated a substantive and valuable right as an owner of the shares without alienating the shares itself.
•Such valuable rights/interest in shares qualifies as a “capital asset” and transfer of such results in “capital gain” chargeable to tax in India under the Act. However, as per Article 13 of the India-Singapore DTAA applicable for the relevant year, such gains are taxable only in Singapore.

[2016] 72 taxmann.com 360 (AAR – New Delhi) Banca Sella S.P.A., In re Dated: 17.08.2016

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Section 47(vi) of the Act; Articles 14 and 25 of India-Italy DTAA – (i) In absence of consideration flowing to the amalgamating company, no capital gains in India; (ii) S. 47(vi) of the Act, exempting capital gains in the hands of amalgamating company is also applicable on amalgamation of Italian companies by applying the nationality non-discrimination clause of the DTAA; (iii) Capital gains on transfer of Italian company shares is taxable only in Italy under the India- Italy DTAA

Facts:
The Applicant was a banking company incorporated in Italy (“BSS”) and a member of a banking group in Italy. BSS, held 15% shares in an Italian company, SSBS while the balance shares were held by other Group entities.

In 2010, one of the group entities transferred the information technology business to the Indian branch of SSBS, for a fair consideration and on a going concern basis. Subsequently, SSBS merged into BSS. Consequently, SSBS ceased to exist and the Indian branch of SSBS vested in BSS. BSS paid the consideration to other shareholders of SSBS by way of fresh issue of shares, while shares which BSS held in SSBS were extinguished.
The pictorial representation of facts is as follows:

The Applicant sought ruling from AAR on the following questions.

•Upon amalgamation, whether SSBS would be taxable in India, as there is transfer of a capital asset, being the branch in India.
•If the above is answered in the affirmative, whether Article 25(3) of the DTAA on Nationality Non Discrimination Clause (NNDC) can be invoked to claim the exemption on amalgamation under S. 47(vi) of the Act, which is available only if the amalgamated company is an Indian company.
•Whether BSS and other shareholders would be liable to capital gains on extinguishment of its shareholding in SSBS.
•Whether amalgamation attracts transfer pricing (TP) provisions of the Act.

Held:
•In the absence of any consideration flowing to the amalgamating company i.e., SSBS, the computation mechanism would fail and hence income from “transfer” cannot be taxed as capital gains. Reliance in this regard was placed on SC decision in CIT v. B. C. Srinivasa Setty.

•Although, there is a transfer of shares by BSS, in absence of consideration, no capital gains accrued to BSS.
•Article 25(3) of the DTAA on NNDC provides  that there  should be no  discrimination  between  locals and  foreigners  in  the  matter  of taxation. The only exception to Article 25(3) is grant of personal allowances, reliefs, reductions etc. The word ”personal”  denotes that the allowances are those that are available to individuals only. Thus the exception is not applicable to companies.

S. 47(vi) of the Act provides exemption to a local amalgamating company, on transfer of assets on amalgamation. By virtue of NNDC of DTAA, similar exemption is available to SSBS. 

•Transfer of shares by other shareholders of SSBS results in capital gains. However, such capital gain is taxable only in Italy by virtue of Article 14(5) of India-Italy DTAA.

•TP provisions are not applicable in the absence of any charge of tax in India

Transfer Pricing Documentation – Country by Country Reporting – An Overview

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To
address the problems of Base
Erosion and Profit Shifting [BEPS] in the context of international taxation of
MNE Groups, the OECD had in response to the G20 countries adoption of a
15-point Action Plan, released its 15 final reports on the Action Plans in
October 2015.

One
of the most important report is Action 13 – Transfer Pricing Documentation and
Country-by-Country Reporting, which in the process of implementation requires
suitable legislative changes in the domestic law of various countries. In
addition, final report on Action 8-10
Aligning Transfer pricing Outcomes with Value Creation, is equally important in
this regard.

India
has been one of the active members of BEPS initiative and part of international
consensus and accordingly has acted very swiftly in this matter by inserting
section 286 and 271GB and making suitable amendments in section 92D, 271AA
& 273B of the Income-tax Act, 1961 [the Act] by the Finance Act, 2016 which
are effective from 1-4-2017 i.e. AY 2017-18.

The
purpose of this article is to bring awareness amongst the tax payers and their
consultants about the changes which are taking place in this regard in the global
and domestic front.

The
reader would be well advised to study final report on ‘Action 13 –
Transfer Pricing Documentation and Country-by-Country Reporting’ and ‘Guidance on the
Implementation of Country-by-Country Reporting’ issued by OECD in August,
2016, for an in depth study of understanding of the subject.

Synopsis
1. Introduction
2. Objectives of transfer pricing documentation requirements
3. A three-tiered approach to transfer pricing documentation
4. Country-by-Country Reporting Implementation Package
5. Recent Developments in India
6. Conclusion

1.       Introduction

1.1 International tax issues have never been as high on the political agenda as they are today. The integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules, which were designed more than a century ago. Weaknesses in the current international taxation rules create opportunities for BEPS, requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created.

Following the release of the report Addressing Base Erosion and Profit Shifting in February 2013, OECD and G20 countries adopted a 15-point Action Plan to address BEPS in September 2013. The Action Plan identified 15 actions along three key pillars:

a) introducing coherence in the domestic rules that affect cross-border activities,

b) reinforcing substance requirements in the existing international standards, and

c) improving transparency as well as certainty.

1.2 So far, prior to the release of reports on Action 8-10 Aligning Transfer pricing Outcomes with Value Creation and Action 13 – TP Documentation and Country-by-Country, the OECD TP Guidelines for MNEs and Tax Administrations issued in July 2010, has been a major source of guidance on the TP issues to the MNEs and Tax Administrations.

1.3 Significant changes are proposed in OECD TP Guidelines, 2010, by Action 8-10 Aligning Transfer pricing Outcomes with Value Creation and Action 13 – TP Documentation and Country-by-Country Reporting, the summarised details of which are as follows:

Chapter of OECD TP

Description

I

Deletion of Section D of Chapter I in entirety and
replacement by new para 1.33 to 1.173 respect of Guidance for Applying Arm’s
Length Principle

II

Additions to Chapter II of the TP Guidelines by addition
of new para 2.16A to 2.16E in respect of Commodity Transactions

Elaboration of Scope of revisions of the guidance on the
transactional profit split method

Additional Guidance in Chapter II of the TP Guidelines
resulting from the Revisions of Chapter VI by insertion of para 2.9A

V

Deletion of text of Chapter V of the TP Guidelines in entirety
and replacement by new para 1 to 62 and Annexes I to IV in respect of TP
Documentation and Country-by-Country Reporting

VI

Deletion of current provisions of Chapter VI in entirety
and replacement by new para 6.1 to 6.212 in respect of intangibles

Deletion of current provisions of Annex to Chapter VI in
entirety and replacement by new Examples 1 to 29 in para 1 to 111 in respect
of intangibles

VII

Deletion of current provisions of Chapter VII in entirety
and replacement by new para 7.1 to 7.65 in respect of Low value-adding
Intra-Group Services

VIII

Deletion of current provisions of Chapter VIII in entirety
and replacement by new para 8.1 to 8.53 in respect of Cost Contribution
Arrangements

Insertion of Annex to Chapter VIII – Examples 1 to 5, to
illustrate the guidance on cost contribution arrangements

 

It is expected that a new version of OECD TP Guidelines for MNEs and Tax Administrations would be issued by
OED before the end of the year 2016, incorporating the changes suggested in the
BEPS Reports on Action 8-10 Aligning Transfer pricing Outcomes with Value
Creation and Action 13 – TP Documentation and Country-by-Country Reporting.

1.4  
Implementation
therefore becomes key at this stage. The BEPS package is designed to be implemented
via changes in domestic law and practices, and via treaty provisions, with negotiations
for a multilateral instrument are under way and expected to be finalised in 2016.
OECD and G20 countries have also agreed to continue to work together to ensure a
consistent and co-ordinated implementation of the BEPS recommendations. Globalisation
requires that global solutions and a global dialogue be established which go beyond
OECD and G20 countries. To further this objective, in 2016 OECD and G20 countries
are preparing an inclusive framework for monitoring, with all interested countries
participating on an equal footing.

A better understanding
of how the BEPS recommendations are implemented in practice could reduce misunderstandings
and disputes between governments. Greater focus on implementation and tax administration
should therefore be mutually beneficial to governments and business. Proposed improvements
to data and analysis will help support ongoing evaluation of the quantitative impact
of BEPS, as well as evaluating the impact of the countermeasures developed under
the BEPS Project.

BEPS Action 13 report
contains revised standards for TP documentation and a template for Country-by-Country
[CbC] Reporting of income, taxes paid and certain measures of economic activity.

1.5 Action
13 of the Action Plan on Base Erosion and Profit Shifting requires the development of “rules
regarding TP documentation to enhance transparency for tax administration, taking
into consideration the compliance costs for business. The rules to be developed
will include a requirement that MNEs provide all relevant governments with needed
information on their global allocation of the income, economic activity and taxes
paid among countries according to a common template”. In
response to this requirement, a three-tiered standardised approach to TP
documentation has been developed.

First, the
guidance on TP documentation requires MNEs to provide tax administrations with high-level
information regarding their global business operations and TP policies in a “master file” that is to be available to
all relevant tax administrations.

Second, it
requires that detailed transactional TP documentation be provided in a “local file” specific to each country, identifying
material related party transactions, the amounts involved in those transactions,
and the company’s analysis of the transfer pricing determinations they have made
with regard to those transactions.

Third,
large MNEs are required to file a CbC Report
that will provide annually and for each tax jurisdiction in which they do business
the amount of revenue, profit before income tax and income tax paid and accrued.
It also requires MNEs to report their number of employees, stated capital, retained
earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs
to identify each entity within the group doing business in a particular tax jurisdiction
and to provide an indication of the business activities each entity engages in.

Taken together, these
three documents (master file, local file and CbC Report) will require taxpayers
to articulate consistent transfer pricing positions and will provide tax administrations
with useful information to assess TP risks, make determinations about where audit
resources can most effectively be deployed, and, in the event audits are called
for, provide information to commence and target audit enquiries.

1.6  This
information should make it easier for tax administrations to identify whether companies
have engaged in transfer pricing and other practices that have the effect of artificially
shifting substantial amounts of income into tax-advantaged environments. The countries
participating in the BEPS project agree that these new reporting provisions, and
the transparency they will encourage, will contribute to the objective of understanding,
controlling, and tackling BEPS behaviours.

The specific content
of the various documents reflects an effort to balance tax administration information
needs, concerns about inappropriate use of the information, and the compliance costs
and burdens imposed on business. Some countries would strike that balance in a different
way by requiring reporting in the CbC Report of additional transactional data (beyond
that available in the master file and local file for transactions of entities operating
in their jurisdictions) regarding related party interest payments, royalty payments
and especially related party service fees. Countries expressing this view are primarily
those from emerging markets (Argentina, Brazil, People’s Republic of China, Colombia,
India, Mexico, South Africa, and Turkey) who state they need such information to
perform risk assessment and who find it challenging to obtain information on the
global operations of an MNE group headquartered elsewhere. Other countries expressed
support for the way in which the balance has been struck in BEPS Action 13
report. Taking all these views into account, it is mandated that countries participating
in the BEPS project will carefully review the implementation of these new standards
and will reassess no later than the end of 2020 whether modifications to the content
of these reports should be made to require reporting of additional or different
data.

1.7  
Consistent and effective implementation of the TP documentation standards
and in particular of the CbC Report is essential. Therefore, countries participating
in the OECD/G20 BEPS Project agreed on the core elements of the implementation of
TP documentation and CbC Reporting. This agreement calls for the master file and
the local file to be delivered by MNEs directly to local tax administrations. CbC
Reports should be filed in the jurisdiction of tax residence of the ultimate parent
entity and shared between jurisdictions through automatic exchange of information,
pursuant to government-to-government mechanisms such as the multilateral Convention
on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties or tax
information exchange agreements (TIEAs). In limited circumstances, secondary mechanisms,
including local filing can be used as a backup.

These new CbC Reporting
requirements are to be implemented for fiscal years beginning on or after 1 January
2016 and apply, subject to the 2020 review, to MNEs with annual consolidated group
revenue equal to or exceeding EUR 750 million. It is acknowledged that some jurisdictions
may need time to follow their particular domestic legislative process in order to
make necessary adjustments to their local law.

1.8 In
order to facilitate the implementation of the new reporting standards, an implementation
package has been developed consisting of model legislation which could be used by
countries to require MNE groups to file the CbC Report and competent authority agreements
that are to be used to facilitate implementation of the exchange of those reports
among tax administrations. As a next step, it is intended that an XML Schema and
a related User Guide will be developed with a view to accommodating the electronic
exchange of CbC Reports.

It is recognised that
the need for more effective dispute resolution may increase as a result of the enhanced
risk assessment capability following the adoption and implementation of a CbC Reporting
requirement. This need has been addressed when designing government-to-government
mechanisms to be used to facilitate the automatic exchange of CbC Reports.

Jurisdictions endeavour
to introduce, as necessary, domestic legislation in a timely manner. They are also
encouraged to expand the coverage of their international agreements for exchange
of information. Mechanisms will be developed to monitor jurisdictions’ compliance
with their commitments and to monitor the effectiveness of the filing and dissemination
mechanisms. The outcomes of this monitoring will be taken into consideration in
the 2020 review.

2.       Objectives
of transfer pricing documentation requirements

2.1 Three objectives of TP documentation are:
1. to ensure that taxpayers give appropriate consideration to TP requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns;

2. to provide tax administrations with the information necessary to conduct an informed TP risk assessment; and

3. to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the TP practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses.

2.2 Each of these objectives should be considered in designing appropriate domestic TP documentation requirements. It is important that taxpayers be required to carefully evaluate, at or before the time of filing a tax return, their own compliance with the applicable TP rules. It is also important that tax administrations be able to access the information they need to conduct a TP risk assessment to make an informed decision about whether to perform an audit. In addition, it is important that tax administrations be able to access or demand, on a timely basis, all additional information necessary to conduct a comprehensive audit once the decision to conduct such an audit is made.

3.       A
three-tiered approach to transfer pricing documentation

3.1   This approach to TP
documentation will provide tax administrations with relevant and reliable information
to perform an efficient and robust TP risk assessment analysis. It will also provide
a platform on which the information necessary for an audit can be developed and
provide taxpayers with a means and an incentive to meaningfully consider and describe
their compliance with the arm’s length principle in material transactions.

    
(i)           
Master file

The master file should
provide an overview of the MNE group business, including the nature of its global
business operations, its overall TP policies, and its global allocation of income
and economic activity in order to assist tax administrations in evaluating the presence
of significant TP risk. In general, the master file is intended to provide a high-level
overview in order to place the MNE group’s TP practices in their global economic,
legal, financial and tax context. It is not intended to require exhaustive listings
of minutiae (e.g. a listing of every patent owned by members of the MNE group) as
this would be both unnecessarily burdensome and inconsistent with the objectives
of the master file. In producing the master file, including lists of important agreements,
intangibles and transactions, taxpayers should use prudent business judgment in
determining the appropriate level of detail for the information supplied, keeping
in mind the objective of the master file to provide tax administrations a high-level
overview of the MNE’s global operations and policies. When the requirements of the
master file can be fully satisfied by specific cross-references to other existing
documents, such cross references, together with copies of the relevant documents,
should be deemed to satisfy the relevant requirement. For purposes of producing
the master file, information is considered important if its omission would affect
the reliability of the TP outcomes.

The information required
in the master file provides a “blueprint” of the MNE group and contains relevant
information that can be grouped in five categories:

            a)   The
MNE group’s organisational structure;

            b)  A
description of the MNE’s business or businesses;

            c)  The
MNE’s intangibles;

            d)  The
MNE’s intercompany financial activities; and

            e)  The
MNE’s financial and tax positions.

Taxpayers should present
the information in the master file for the MNE as a whole. However, organisation
of the information presented by line of business is permitted where well justified
by the facts, e.g. where the structure of the MNE group is such that some significant
business lines operate largely independently or are recently acquired. Where line
of business presentation is used, care should be taken to assure that centralised
group functions and transactions between business lines are properly described in
the master file. Even where line of business presentation is selected, the entire
master file consisting of all business lines should be available to each country
in order to assure that an appropriate overview of the MNE group’s global business
is provided.

  
(ii)           
Local file

In contrast to the master
file, which provides a high-level overview, the local file provides more detailed
information relating to specific intercompany transactions. The information required
in the local file supplements the master file and helps to meet the objective of
assuring that the taxpayer has complied with the arm’s length principle in its material
TP positions affecting a specific jurisdiction. The local file focuses on information
relevant to the TP analysis related to transactions taking place between a local
country affiliate and associated enterprises in different countries and which are
material in the context of the local country’s tax system. Such information would
include relevant financial information regarding those specific transactions, a
comparability analysis, and the selection and application of the most appropriate
TP method. Where a requirement of the local file can be fully satisfied by a specific
cross-reference to information contained in the master file, such a cross-reference
should suffice.

 (iii)           
Country-by-Country Report

The CbC Report requires
aggregate tax jurisdiction-wide information relating to the global allocation of
the income, the taxes paid, and certain indicators of the location of economic activity
among tax jurisdictions in which the MNE group operates. The report also requires
a listing of all the Constituent Entities for which financial information is reported,
including the tax jurisdiction of incorporation, where different from the tax jurisdiction
of residence, as well as the nature of the main business activities carried out
by that Constituent Entity.

3.2  
The
CbC Report will be helpful for high-level TP risk assessment purposes. It may also
be used by tax administrations in evaluating other BEPS related risks and where
appropriate for economic and statistical analysis. However, the information in the
CbC Report should not be used as a substitute for a detailed TP analysis of individual
transactions and prices based on a full functional analysis and a full comparability
analysis. The information in the Country-by- Country Report on its own does not
constitute conclusive evidence that transfer prices are or are not appropriate.
It should not be used by tax administrations
to propose TP adjustments based on a global formulary apportionment of income.

4.       Country-by-Country
Reporting Implementation Package

4.1   Countries participating in the
OECD/G20 BEPS Project have therefore developed an implementation package for
government-to-government exchange of CbC Reports.

More specifically:

Model legislation requiring the ultimate parent entity of an MNE group to file the CbC Report in its jurisdiction of residence has been developed. Jurisdictions will be able to adapt this model legislation to their own legal systems, where changes to current legislation are required. Key elements of secondary mechanisms have also been developed.

Implementing arrangements for the automatic exchange of the CbC Reports under international agreements have been developed, incorporating the suggested conditions. Such implementing arrangements include competent authority agreements (“CAAs”) based on existing international agreements (the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties and TIEAs) and inspired by the existing models developed by the OECD working with G20 countries for the automatic exchange of financial account information.

4.2  
Participating
jurisdictions endeavour to introduce as necessary domestic legislation in a
timely manner. They are also encouraged to expand the coverage of their
international agreements for exchange of information. The implementation of the
package will be monitored on an ongoing basis. The outcomes of this monitoring
will be taken into consideration in the 2020 review.

5.       Recent Developments in India –
Amendments by the Finance Act, 2016

5.1   The Finance
Act, 2016 has inserted section 286 relating to furnishing of report in respect
of international group by every parent entity or the alternate reporting entity
resident in India, on or before the due date specified u/s 139(1) of the
income-tax act, 1961, in the Form and manner, yet to be prescribed. This
section is effective from 1-4-17 i.e. assessment year 2017-18 and subsequent
years.

Further, new section 271GB has
been inserted wef 1-4-17 i.e. assessment year 2017-18 and subsequent years
relating to penalty for failure to furnish report or for furnishing inaccurate
report u/s 286.

In addition, section 271AA of the
Act relating to penalty for failure to keep and maintain information and document
etc. has been amended to provide that if any
person being constituent entity of an international group referred to in
section 286 fails to furnish the information and document in accordance with
provisions of section 92D, then, the prescribed authority may direct that such
person shall be liable to pay a penalty of Rs. 5,00,000/-.

5.2   Background as
explained in Explanatory memorandum explaining provisions of the Finance Bill,
2016, is as follows:

“BEPS action plan –
Country-By-Country Report and Master file

Sections
92 to 92F of the Act contain provisions relating to transfer pricing regime.
Under provision of section 92D, there is requirement for maintenance of
prescribed information and document relating to the international transaction
and specified domestic transaction.

The OECD report on Action 13 of
BEPS Action plan provides for revised standards for transfer pricing
documentation and
a template for country-by-country reporting of income, earnings, taxes paid and
certain measure of economic activity. India
has been one of the active members of BEPS initiative and part of international
consensus. It is recommended in the BEPS report that the countries should
adopt a standardised approach to transfer pricing documentation. A three-tiered
structure has been mandated consisting of:-

(i)     a master file containing
standardised information relevant for all multinational enterprises (MNE) group
members;

(ii)    a local file referring
specifically to material transactions of the local taxpayer; and

(iii)   a country-by-country report
containing certain information relating to the global allocation of the MNE’s
income and taxes paid together with certain indicators of the location of
economic activity within the MNE group.

The
report mentions that taken together, these three documents (country-by-country
report, master file and local file) will require taxpayers to articulate
consistent transfer pricing positions and will provide tax administrations with
useful information to assess transfer pricing risks. It will facilitate tax administrations
to make determinations about where their resources can most effectively be
deployed, and, in the event audits are called for, provide information to
commence and target audit enquiries.

The
country-by-country report requires multinational enterprises (MNEs) to report
annually and for each tax jurisdiction in which they do business; the amount of
revenue, profit before income tax and income tax paid and accrued. It also
requires MNEs to report their total employment, capital, accumulated earnings
and tangible assets in each tax jurisdiction. Finally, it requires MNEs to
identify each entity within the group doing business in a particular tax
jurisdiction and to provide an indication of the business activities each
entity engages in. The Country-by-Country (CbC) report has to be submitted by
parent entity of an international group to the prescribed authority in its
country of residence. This report is to be based on consolidated financial
statement of the group.

The
master file is intended to provide an overview of the MNE groups business,
including the nature of its global business operations, its overall transfer
pricing policies, and its global allocation of income and economic activity in
order to assist tax administrations in evaluating the presence of significant
transfer pricing risk. In general, the master file is intended to provide a
high-level overview in order to place the MNE group’s transfer pricing
practices in their global economic, legal, financial and tax context. The
master file shall contain information which may not be restricted to
transaction undertaken by a particular entity situated in particular country.
In that aspect, information in master file would be more comprehensive than the
existing regular transfer pricing documentation. The master file shall be
furnished by each entity to the tax authority of the country in which it
operates.

In order to implement the
international consensus, it is proposed to provide a specific reporting regime
in respect of CbC reporting and also the master file. It is proposed to include
essential elements in the Act while remaining aspects can be detailed in rules.
The elements relating to CbC
reporting requirement and matters related to it proposed to be included through
amendment of the Act are:

          (i) the
reporting provision shall apply in respect of an international group havingconsolidated revenue above a threshold to be prescribed.

            (ii) the
parent entity of an international group, if it is resident in India shall berequired to furnish the report in respect of the group to the prescribed
authority on or before the due date of furnishing of return of income for the
Assessment Year relevant to the Financial Year (previous year) for which the
report is being furnished;

               (iii)  the
parent entity shall be an entity which is required to prepare consolidated
financial statement under the applicable laws or would have been required to
prepare such a statement, had equity share of any entity of the group been
listed on a recognized stock exchange in India;

              
(iv) 
every
constituent entity in India, of an international group having parent entity
that is not resident in India, shall provide information regarding the country
or territory of residence of the parent of the international group to which it
belongs. This information shall be furnished to the prescribed authority on or
before the prescribed date;

               
(v) the
report shall be furnished in prescribed manner and in the prescribed form and
would contain aggregate information in respect of revenue, profit & loss
before Income-tax, amount of Income-tax paid and accrued, details of capital,
accumulated earnings, number of employees, tangible assets other than cash or
cash equivalent in respect of each country or territory along with details of
each constituent’s residential status, nature and detail of main business
activity and any other information as may be prescribed. This shall be based on the template provided in the OECD BEPS report on
Action Plan 13;

             
(vi)  an
entity in India belonging to an international group shall be required to furnish
CbC report to the prescribed authority if the parent entity of the group is
resident;-

(a)   in a country with which India does
not have an arrangement for exchange of the CbC report; or

(b)   such country is not exchanging
information with India even though there is an agreement; and

(c)    this fact has been intimated to
the entity by the prescribed authority;

            
(vii)  If
there are more than one entities of the same group in India, then the group can
nominate (under intimation in writing to the prescribed authority) the entity
that shall furnish the report on behalf of the group. This entity would then
furnish the report;

          
(viii) If
an international group, having parent entity which is not resident in India,
had designated an alternate entity for filing its report with the tax jurisdiction
in which the alternate entity is resident, then the entities of such group
operating in India would not be obliged to furnish report if the report can be
obtained under the agreement of exchange of such reports by Indian tax
authorities;

             
(ix) 
The
prescribed authority may call for such document and information from the entity
furnishing the report for the purpose of verifying the accuracy as it may
specify in notice. The entity shall be required to make submission within
thirty days of receipt of notice or further period if extended by the
prescribed authority, but extension shall not be beyond 30 days;

               
(x)  For non-furnishing of the report
by an entity which is obligated to furnish it, a graded penalty structure would
apply:-

(a)   if default is not more than a
month, penalty of Rs. 5000/- per day
applies;

(b)   if default is beyond one month, penalty of Rs. 15000/- per day for the
period exceeding one month applies;

(c)    for any default that continues
even after service of order levying penalty either under (a) or under (b), then
the penalty for any continuing default beyond
the date of service of order shall be @ Rs.
50,000/- per day;

             
(xi)
In case of timely non-submission
of information before prescribed authority when called for, a penalty of Rs.
5,000/- per day applies. Similar to the above, if default continues even
after service of penalty order, then penalty of Rs. 50,000/- per day applies for default beyond date of service of
penalty order;

             
(xii)
If
the entity has provided any inaccurate information in the report and,-

(a)   the entity knows of the inaccuracy
at the time of furnishing the report but does not inform the prescribed
authority; or

(b)   the entity discovers the
inaccuracy after the report is furnished and fails to inform the prescribed
authority and furnish correct report within a period of fifteen days of such
discovery; or

(c)    the entity furnishes inaccurate information or document in response to notice
of the prescribed authority, then penalty
of Rs. 500,000/- applies;

         (xiii)The
entity can offer reasonable cause defence for non-levy of penalties mentioned
above.

The proposed amendment in the Act
in respect of maintenance of master file and furnishing it are: –

(i)   
the
entities being constituent of an international group shall, in addition to the
information related to the international transactions, also maintain such
information and document as is prescribed in the rules. The rules shall
thereafter prescribe the information and document as mandated for master file
under OECD BEPS Action 13 report;

(ii)  
the
information and document shall also be furnished to the prescribed authority
within such period as may be prescribed and the manner of furnishing may also
be provided for in the rules;

(iii)  for non-furnishing of the
information and document to the prescribed authority, a penalty of Rs. 5 lakh
shall be leviable. However, reasonable cause defence against levy of penalty
shall be available to the entity.

As indicated above, the CbC
reporting requirement for a reporting year does not apply unless the
consolidated revenues of the preceding year of the group, based on consolidated
financial statement, exceeds a threshold to be prescribed. The current international
consensus is for a threshold of € 750 million equivalent in local currency.
This threshold in Indian currency would be equivalent to Rs. 5395 crores (at
current rates). Therefore, CbC reporting for an international group having
Indian parent, for the previous year 2016-17, shall apply only if the
consolidated revenue of the international group in previous year 2015-16
exceeds Rs. 5395 crore (the equivalent would be determinable based on exchange
rate as on the last day of previous year 2015-16). …..”

5.3   Section
286 of the Act relating to furnishing of report in respect of international
group provides for furnishing of a report in respect of an international group,
if the parent entity of the group is resident in India.

Sub-section (1)
provides that constituent entity in India of an international group, not
having a parent entity resident in India shall notify the prescribed authority
regarding the parent entity of the group to which it belongs or an alternate
reporting entity which shall furnish the report on behalf of the group in the
prescribed manner.

Sub-section (2)
provides that the parent entity of an international group, which is
resident in India, shall furnish a report in respect of the international group
on or before due date specified under sub-section (1) of section 139 for
furnishing of return of income of the relevant accounting year.

Sub-section (3)
provides for the details to be contained in the report to be furnished. It,
inter alia, provides that the report shall contain aggregate information
in respect of amount of revenues, profit and loss, taxes accrued and paid,
number of employees, details of constituent entities and the country or
territory in which such entities are resident or located.

Sub-section (4) provides
for furnishing report by entities resident in India and belonging to an
international group not headed by Indian resident entity.

Sub-section (5) provides
for circumstances under which the constituent entities referred to in
sub-section (4) shall not be required to furnish the report.

Sub-section (6) provides that the prescribed
authority may, by issuance of notice for the purpose of verifying the accuracy
of the report furnished by any entity, require submission of information and
document as specified in the notice.

Sub-section (7) provides
that the reporting requirement under this section shall not apply to an
accounting year, if the total consolidated group revenue for the accounting
year preceding it, does not exceed the prescribed threshold.

Sub-section (8) provides
for application of the section in accordance with such guidelines and subject
to such conditions as may be prescribed.

Sub-section (9) of the
proposed new section, inter alia, defines various terms for the purposes
of the new section.

5.4  
The new section at 5 places makes
reference to ‘as may be prescribed’ in respect of form, manner and date of
notification, form and manner of report to be submitted, other information to
be included in the report, threshold limit of total consolidated group revenue
for application of section and other guidelines and conditions for application
of section. However, so far no rules have been prescribed in respect of section
286.

5.5   However, as
mentioned in the Explanatory Memorandum, CbC reporting for an international group having Indian parent, for the
previous year 2016-17, shall apply only if the consolidated revenue of the
international group in previous year 2015-16 exceeds Rs. 5,395 crore (the
equivalent would be determinable based on exchange rate as on the last day of
previous year 2015-16).

6.       Conclusion

6.1  
So
far 44 countries have signed the Multilateral Competent Authority Agreement (MCAA) on CbC
reporting including India.

In addition, on
16 August 2016 OECD has issued further Guidance on the Implementation of
Country-by-Country reporting. This guidance covers the following issues:

               (i)  Transitional
filing options for MNEs (“parent surrogate filing”).

             
(ii) The
application of CbC reporting to investment funds.

              (iii)The
application of CbC reporting to partnerships.

             
(iv) The
impact of currency fluctuations on the agreed EUR 750 million filing threshold.

6.2  
Countries have agreed that implementing CbC
reporting is a key priority in addressing BEPS risks, and the Action 13 Report
recommended that reporting take place with respect to fiscal periods commencing
from 1 January 2016. Swift progress is being made in order to meet this
timeline, including the introduction of domestic legal frameworks and the entry
into competent authority agreements for the international exchange of CbC reports.
MNE Groups are likewise making preparations for CbC reporting, and dialogue
between governments and business is a critical aspect of ensuring that CbC
reporting is implemented consistently across the globe. Consistent
implementation will not only ensure a level playing field, but also provide
certainty for taxpayers and improve the ability of tax administrations to use
CbC reports in their risk assessment work.

[We have extensively relied upon final
report on ‘Action 13 – Transfer Pricing Documentation and
Country-by-Country Reporting’ and ‘Guidance on the Implementation of Country-by-Country
Reporting’ issued by OECD in August, 2016, and the Memorandum
Explaining the Finance Bill, 2016, in preparing the above article giving an
overview of the subject.]

***

FRAUD : Investigation techniques and other aspects –Part 1

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Variety in fraud investigation techniques: application of Vedic Mathematics
It is variety that makes life interesting and enjoyable. Virtually in every walk of life, we crave for variety. Take for instance our daily meals. Each meal we try to eat something different to make each meal more enjoyable. We try different kinds of breads, soups, vegetables, and fruits. We can actually survive just as well even if we have exactly the same items to eat everyday, but that would make our meals monotonous. Film makers make different kinds of films only because we would get bored of the same story over and over again. A cricket match would become absolutely boring if a batsman were to play each shot in the same identical manner. A popular batsman is one who has a range of different strokes and shots. Thus it has been correctly stated that variety is the spice of life.

Audit, investigation and forensic accounting are no exception to this maxim. It is very possible that if an auditor or an investigator approached every investigation with the same routine steps in a lackadaisical manner, a wrongdoer would be able to take suitable counter measures to ensure that he is protected and safe. Therefore it is absolutely essential to keep trying new methods, hitherto untried techniques and tools, and use a surprise element to get the best results. Research of algorithms, vedic scriptures can be extremely useful in this context. Many audits and investigations end at a dead end, or sometimes reach wrong conclusions, only because of the lack of application of imaginative and innovative methods.

The following is a case study where a chartered accountant was an advisor in an acquisition by a fruit juice manufacturing company. Initially by applying the standard auditing techniques, he felt that there was nothing serious to stop his client from acquiring a company owning a couple of mango farms based on details and information given. It was only after he looked at data differently, using ‘visual mathematics’ and an application of vedic mathematics that he was able to detect a sinister fraud.

Case Study: Fraud in mango farm sale
A fruit juice manufacturing company ABC was looking for more and more orchards and fruit plantations for expansion. In this hunt, they came across a proposal from a mango grower PQR in Maharashtra for sale of two mango farms. PQR had been growing mangoes and exporting them and seemed to have had a fairly good crop in the last season. The substantial part of the acquisition value was for the two fertile farms. The two mango farms commanded a rich premium because of their fertility and huge potential for growing mangoes in bulk. ABC had asked its CA to conduct a review of its financials and operating results for the last couple of years. Some extracts of the financial information given to him were as follows:

1. Farm A had 4 acres and Farm B was 6.3 acres in size. The potential for much greater crop of mangoes was huge and PQR had not been able to tap it because of its lack of resources. ABC realized that with more resources and better techniques the mango crop could be tripled.

2. Plucking and packing activity was performed over two days. The mangoes would be plucked and packed on the last two days of each month. On day 1, there would only be plucking activity and the mangoes would be stacked neatly. On day 2, the mangoes plucked the previous day would be washed and cleaned of all pesticide and then packed in boxes of one dozen each.

3. The packed mangoes from both the farms would be sent to the main godown where they would be counted and kept ready for export.

4. Costs of plucking and packaging for farm B were greater than farm A because it was further in the interior part of the district and labourers charged more to work at farm B

5. Costs of plucking and packaging during each month also varied based on demand supply of skilled labour in season time. Usually in May the cost would be the highest

The details of plucking and packaging costs per dozen are given in the table below

Conventional Audit checks did not throw up any adverse results.
The number of mangoes packed for each farm individually were not available, but the total mangoes packed for both farms for each month were physically verified by the management, as follows: March 720 mangoes, April, 2400 mangoes, and May 4800 mangoes. Though the CA was not conducting any investigation, he did have the responsibility of carrying out a special penetrative audit of the financial information given by PQR because ABC was going to invest a huge amount only based on the CA’s assessment. Therefore the CA applied all the conventional audit checks and tests. The bills for labourer’s payments were available in the form of wage sheets which prima facie looked satisfactory and his audit did have some routine queries but nothing serious.

The sales and collections audits and verifications using walk through tests also did not raise any alarm bells. These were also well documented. A decent price was earned by PQR for the sale of mangoes per reasonable market inquiries. In most respects, based on his routine audit techniques, the CA seemed to have derived a comfort in the financial information given. Under normal circumstances he would have given a ‘go ahead’ green signal to his client for acquisition of PQR.

How vedic mathematics helped the CA to spot a fraud by a mere visual look at the numbers.

The information given by PQR was incomplete in one important respect. The numbers of mangoes plucked and packaged in each farm for each month. This was important to determine the crop size and fertility of each farm. How could one find this? Actually applying mathematics using knowledge of algebra by solving simultaneous equations for each month it is possible. But that is a tedious task.

To illustrate, for the month of March, to find out how many mangoes were plucked and packaged, one would have to use algebra by using variables ‘x’ and ‘y’ to represent mangoes plucked and packed in farms A and B respectively. Then the cost information given above can be simply converted into a simultaneous equation in the conventional form as follows.

20x + 40y = 1200
70x + 85y = 4200

But solving such equations would be slightly tedious. However, through vedic mathematics, in one look, the viewer will be able to state that y = 0 in the above equations. How is this possible? Actually it is very simple.

A sutra of vedic mathematics called Anurupye Shunyamanayat’ states that if the co-efficients of one of the variables in a simultaneous equation are in the same ratio as the resulting values of each equation, then the other variable MUST BE ZERO

Thus in our above simultaneous equation of mangoes plucked and packaged in March

20x + 40y = 1200
70x + 85y = 4200

The coefficients of x are 20 and 70. Their ratio is therefore 2/7. The resulting values of each equation are 1200 and 4200. Their ratio is also 2/7. Since these two ratios are the same, the other variable, ‘y’ as per sutra 6 of vedic mathematics, anuraupye shunyamanayat, MUST be zero.

THUS THERE WERE ‘0’ MANGOES GROWN IN MARCH IN FARM B. BY USING THE SAME VEDIC MATHEMATICS APPROACH THERE WERE ‘0’ MANGOES GROWN IN FARM B FOR THE OTHER MONTHS AS WELL. THE COST FIGURES WERE IMAGINARY AND FICTITIOUS FOR FARM B.

In other words, Farm B was not producing any mangoes at all.

The fraud was a simple deception by PQR by claiming that mangoes were indeed being grown on farm B, even though it had no fertility to grow any mango at all.

Though it was the larger farm, since it was not a fertile plot, the price being demanded by PQR was an atrocious exponential value of its actual worth. ABC would obviously never be interested in purchasing such a farm. PQR’s labour costs were therefore nil for farm B and PQR was deceiving ABC by stating that mangoes were being plucked and packed in farm B. The CA then advised the client ABC not to go ahead with this acquisition.

What is important in this case study is that the CA always strived to upgrade his knowledge and he was always eager to learn new techniques and methods useful in his profession. He had recently been studying vedic mathematics. Vedic mathematics has some amazing solutions for certain types of mathematical problems. As we all know India discovered ‘0’ and a lot of vedic mathematics sutras are based on, or revolve around ‘0’. Among them, one of the sutras, sutra no 6 is ‘Anurupye Shunyamanayat’.

Vedic mathematics itself may be useful in a rare assignment, but what counted was the fact the CA was trying new things and different things every time to get better results. That, friends is the measure of life and true success.

Editor’s note: Fraud investigation and detection are an important area of practice for a chartered accountant. This involves acquisition of specialised knowledge. The law now casts an important duty in regard to reporting fraud on the auditor. Public expectations have now found statutory recognition. We have therefore thought it necessary to carry a series of articles by Mr. Chetan Dalal an expert on the subject. These will appear in the journal at intervals, that is probably in each alternate month. We hope readers will find this series useful.

[2016] 71 taxmann.com 172 (Bangalore – Trib.) Page Industries Ltd. vs. DCIT A.Y.: 2010-11, Date of order: 24th June, 2016

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Sections 92A(1), 92A(2)(g) of the Act – Section 92A(2) cannot be read independent of Section 92A(1) for determining whether enterprises are associated.

Facts
The Taxpayer, an Indian company was engaged in the business of manufacture and sale of ready-made garments. The Taxpayer was a licensee of the brandname owned by an USA Company (FCo).

The brand name was used by the Taxpayer for the purpose of exclusive manufacturing and marketing of the garments under the brand name of FCo. For grant of license, the Taxpayer was required to pay royalty at the rate of 5% of its sales to FCo. The Taxpayer owned the entire manufacturing facility, capital investment, employees and there was no participation of FCo in the capital and management of the Taxpayer. Taxpayer argued that the transfer pricing (TP) provisions do not apply as there is no ‘Associated Enterprise’ (AE) relationship between the Taxpayer and FCo. Nevertheless, Taxpayer disclosed the transaction in Form 3CEB.

Assessing officer (AO) referred the matter to Transfer pricing officer (TPO) for determination of arm’s length price (ALP) of the transaction. As per the TPO, the transaction was not at ALP and consequently he proposed an adjustment to the income of the Taxpayer. The Taxpayer filed objection before Dispute resolution panel (DRP), which rejected the objections of the Taxpayer.

Aggrieved, Taxpayer appealed before the Tribunal.

Held
Section 92A(1) defines AE based on the parameters of management, control or capital. Section 92A(2) is a deeming provision and enumerates circumstances in which the enterprise can be deemed to be an AE.

Thus the conditions of both Sections 92A(1) and 92A(2) are to be satisfied in order to constitute an AE relationship.

The contra view that, satisfaction of the conditions of section 92A(2) alone is sufficient for creation of an AE relationship would render section 92A(1) otiose. While interpreting a provision in a taxing statute, the construction should preserve the purpose of the provision. If more than one interpretation is possible, that which preserves its workability and efficacy is to be preferred to the one which would render a part of it otiose or sterile.

Thus even though the conditions of section 92A(2)(g) are satisfied, in absence of any right with FCo to control and manage Taxpayer, Taxpayer and FCo cannot be considered as AEs, and consequently TP provisions will not apply to transactions undertaken between them.

(Unreported) ITA. Nos. 1548 and 1549/Kol/2009 Instrumentarium Corporation Limited, Finland vs. ADIT A.Y.: 2003-04 and 2004-05, Date of order: 15th July, 2016

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Section 92 of the Act – Tribunal upholds interest imputed on interest free loan; TP provisions, being anti-abuse provisions can tax notional income.

Facts
The Taxpayer, a company incorporated in Finland, was engaged in the business of manufacturing and selling medical equipment. A wholly owned Indian subsidiary (ICo) of Taxpayer, acted as its marketing arm in India. In 2002, the Taxpayer entered into an agreement to grant interest free loan to ICo which was duly approved by RBI. Transfer pricing Officer (TPO) sought to impute interest on such loan.

For the relevant year, ICo had incurred losses. Had Taxpayer granted loan charging ALP, losses of ICo would have increased while Taxpayer would have suffered source taxation on interest @10 %.

The Taxpayer argued that there is no erosion of tax base in India on giving an interest free loan to its wholly owned Indian subsidiary and hence, transfer pricing provisions cannot be invoked. Further it was contended that for evaluating section 92(3) one must consider the tax implications of a transaction as a whole rather than tax implications in the hands of the Taxpayer alone and hence charging of higher service fees by the Taxpayer to ICo would have resulted in an erosion of tax base in India as it would increase losses of ICo. Additionally, where the Taxpayer has advanced interest free loan, the Assessing Officer (AO) cannot disregard the commercial expediency of the interest free loan and impute interest thereon.

Held
For the following reasons, Tribunal held that TPO was correct in imputing interest on the interest free loan given by the Taxpayer

Section 92(1) requires that any income from international transaction has to be computed at ALP. It is not in dispute that grant of interest free loan by the Taxpayer to its India AE was an international transaction. However, section 92(3) provides that, if on computation of ALP u/s 92(1), either the income of the Taxpayer is decreased or losses are increased, section 92(1) will not be pressed into service.

Moreover, section 92(3) refers to the Taxpayer in respect of whom computation of income is being done under section 92(1). Thus Taxpayer’s contention that while evaluating the impact of section 92(3), overall impact on profits and losses of not only the taxpayer but also the impact on its AEs should be considered, cannot be accepted.

It was further contended by Taxpayer that u/s. 92(3) one needs to not only consider the actual tax impact but also possible tax advantage de hors the time value of money. These contentions of the taxpayer cannot be accepted. The impact has to be seen only in respect of the previous year in which the international transaction was entered into and not for the subsequent years. Besides, mere possibility of a tax shield which may be available to AE as a result of accumulated losses, if any, can only affect the income of the subsequent years, which as stated above is not relevant for section 92(3).

If the transaction structure is to be accepted without ALP adjustment, while India will lose the taxability of interest in the hands of the Taxpayer @10%, it will have nothing to lose in the respect of taxability of the ICo because admittedly ICo was incurring losses.

In the present case, as a result of TP adjustment, there is neither any lowering of profit of AE nor increase in losses of AE, even while income of the Taxpayer is increased. Thus there is no base erosion by the ALP adjustments in the hands of Taxpayer. The base erosion could have, if at all, taken place at best in a situation in which ICo was actually allowed a deduction.

Further, there is no provision enabling corresponding deduction for ALP adjustments in the hands of ICo merely because TP adjustment is made in the hands of Taxpayer

Under the Indian TP provisions, the use of ALP is mandatory for computation of income arising from international transactions between the AEs. The only exception is that these provisions are not to be applied only in the event where section 92(3) is satisfied.

If the intent of legislature was that TP provisions are not to be invoked in the cases where there is lowering of the overall profits of all the AEs connected with the transactions, the words of the statutory provision would have been so provided so. In absence of the same, it is incorrect to say that, TP provisions are not to be invoked when, there is no erosion of Indian tax base.

Commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining ALP of such a loan. Once a transaction is treated as international transaction between AEs, section 92 mandates that income from such transaction be computed as per ALP. Transfer pricing provisions, being anti-abuse provisions with the sanction of the statute, come into play in specific situation of certain transactions with the associated enterprise and the same can tax notional income too.

While notional interest income cannot indeed be brought to tax in general, the arm’s length principle requires that income be computed, in certain situations, on the basis of certain parameters which inherently lead to notional taxation. When the legal provisions are not pari materia, (i.e the provision of normal computation of income and the provision of computation of income in the case of international transactions between the AEs), what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions.

M/S Kataria Automobiles Limited&Anr.V. State of Gujarat, Appeal No. 535 of 2010, dated 18th July, 2016, (Guj).

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Central Sales Tax- Exemptionfrom Payment of Tax -In Excess of 4%-Without C Form -UnderNotification Dated 12.09.1995- Issued U/S 8(5) of The Act– Even After Amendment to Section 8(5) from 11.05.2002- Is valid, S. 8(5)of The Central Sales Tax Act, 1956.

Facts:
The appellant is an authorized distributor of Maruti cars and is a registered under the Gujarat Sales Tax Act and the CST Act. The Gujarat Government had issued a notification dated 12.09.1995 under section 8(5) of the CST Act to exempt from payment of tax in excess of 4% in respect of all inter-state sales effected from the State of Gujarat which was later on rescinded from 31.03.2006.

Accordingly, the appellant had paid tax @ 4% on its inter-state sales affected without C forms. The revenue did not accept the claim in view of the amendment to section 8(5) of the CST Act from 11.05.2002. The Tribunal also dismissed the claim and the appellant filed appeal before the Gujarat High Court against the said decision of Tribunal.

Held:
For applying the rate of tax on inter-State sales, two conditions have been laid down in Section 8. Section 8(1) lays down the condition that if sales are supported by ‘C Forms’, then concessional rate is supposed to be applied and Section 8(2) lays down that if sales are not supported by ‘C Forms’, then higher rate is applicable.

The amendment dated 11.05.2002 has inserted the condition in Section 8(5) that the State Government can exercise the powers vested in them subject to conditions laid down in Section 8(4). Section 8(4) states that benefit of concessional rate as provided for u/s 8(1) is allowable subject to the submission of ‘C Forms’.

In other words, the conditions laid down in Section 8(4) are in relation to Section 8(1) meaning thereby that on fulfillment of conditions, laid down in Section 8(4), the sale would be accepted and treated as sale under Section 8(1) otherwise, it would be considered as sale covered and governed by Section 8(2). Thus, the amendment in anyway, does not affect Section 8(2) as it is in connection with Section 8(1). The State Government had issued several Notifications u/s 8(5) with respect to Section 8(1) until 11.05.2002, which is the date on which the amendment was brought in. By the said amendment, the Legislature intended to restrict the issuance of Notifications with respect to conditions laid down in Section 8(1) and 8(4). If the amendment is treated to be affecting Section 8(2) then the said section would become redundant, which is not the intention of the Legislature.The amendment dated11.05.2002 does not affect or restrict the powers of State Government to issue Notifications u/s 8(5) with respect to Section 8(2).
Therefore, the State Governments can issue Notifications u/s 8(5) reducing the rate of tax with respect to transactions falling u/s 8(2) even after this amendment. In any case, the amendment does not affect the Notifications issued prior to amendment. It is settled position of law that Notifications hold the field unless they are specifically rescinded and the Notification in question, has been rescinded w.e.f. 31.03.2006 and so, it holds the field till then.
Hence, the authorities are bound to follow the same.

Accordingly, the High Court allowed the appeal and held that the rate of CST would be 4% in respect of all inter-state sales affected without C forms under the said notification till it was rescinded.

Commissioner of Commercial Taxes V. M/S A.R. Thermosets (Pvt.) Ltd., Civil Appeal No. 2650 of 2016, dated 6th September, 2016, SC

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VAT- Classification of Goods – Bitumen Emulsion- Is Bitumen- Taxable at 4%, Entry 22 of Part A of Schedule II of the Uttar Pradesh Value Added Tax Act, 2008.

Facts:
Respondent company manufactures “bitumen emulsion”. It filed an application before the Commissioner, Commercial Taxes, Lucknow, U.P., under Section 59 of the VAT Act seeking a clarification about the rate of tax applicable to the sale of bitumen emulsion. The Commissioner of Commercial Taxes, vide order dated 23.1.1999, opined that bitumen emulsion is an unclassified commodity and, therefore, is excisable to tax at the rate of 12.5% as it would fall under the residuary Entry. The Company filed appeal before the Tribunal where it was dismissed. The High Court, in appeal filed by the company, allowed the appeal. The revenue filed appeal before the SC against the decision of High Court allowing appeal of the respondent company.

Held:
The principal controversy, involved is “whether “bitumen emulsion” is covered within Entry 22 of Schedule II of the VAT Act which only refers to “bitumen”.

The bitumen, in its original form, is solid but melts when heated, for it is used in molten stage. There is no difficulty to appreciate that bitumen emulsion comes into existence when bitumen is treated with emulsifiers and other chemicals to attain a liquid form. It has a huge advantage and added benefit because it is not to be heated and detained in its liquid form and has better stability and thus, saves time and cost components. That apart, it ensures its use at the stage of application. Needless to say it is comparatively less hazardous. Bitumen consists of four forms of variants namely solid bitumen, polymer bitumen, crumble rubber modified bitumen and bitumen emulsion. The stand of the Revenue is that the word “bitumen” must be conferred a narrow meaning for the reason that the legislature has not thought it appropriate to use the prefix or suffix like “all”, in all forms or of all kinds. To this the SC clarified that bitumen is a generic expression which would include different types of bitumen. Revenue, however, intends to apply it restrictively. The said submission has a fundamental fallacy. Entry 22 does not exclude or specify that it would not include bitumen of all types    and varieties. This is not the principle or precept applied to interpret the entries under the Schedule of the Act.
The nature and composition of the product or the goods and the particular entry in the classification table is important. Matching of the goods with the Entry or Entries in the Schedules is tested on the basis of identity of the goods in question with the Entry or the contesting entries and by applying the common parlance test, i.e., whether the goods as understood in commercial or business parlance are identical or similar to the description of the Entry. Where such similarity in popular sense of meaning exists, the generic entity would be construed as including the goods in question. Sometimes on certain circumstances the end use test, i.e., use of the goods and its comparison with the Entry is applied.
The Entry in question uses the word “bitumen” without any further stipulation or qualification. Therefore, it would include any product which shares the composition identity, and in common and commercial parlance is treated as bitumen and can be used as bitumen. Applying the three tests, namely, identity, common parlance and end use of the goods and the Entry in question, bitumen emulsion would be covered by the Entry bitumen. It is worthy to note that bitumen emulsion matches the Entry as it is only one of the varieties of bitumen. Bitumen emulsion is processed bitumen, but the process has not changed its composition, commercial identity or its use. Bitumen emulsion is regarded and performs the same function as bitumen. As a result of processing, neither the primary character nor the composition is lost. Emulsification only eases and provides proficiency to the use of application of bitumen. Hence, in popular and commercial sense, bitumen emulsion is nothing but bitumen, which is in liquid form and is user friendly.
It is perceivable that the legislature has used the word “bitumen” and treated it as a separate entity. It has not indicated that this was done with the intention and purpose to exclude some type or variety of bitumen. All bitumen products, which share and have common composition and commercial entity, and meet the popular parlance test, is, therefore, meant to be covered by the said Entry. In the instant case, even the end use test is satisfied. There is nothing in the Entry to suggest and show that the Entry is required to be given a restrictive and a narrow meaning.The two varieties and types carry the same composition, do not differ in character and have the same commercial identity i.e. bitumen. That apart, the use or end use test is also satisfied.
Accordingly, the SC dismissed the appeal filed by the revenue and up held the judgment of High Court holding bitumen emulsifier is bitumen within the meaning of the entry 22 of part A of Schedule II of the act and taxable at 4%.

M/S|Larsen & Toubro Limited V. Additional Deputy Commissioner of Commercial Taxes &Anr., Civil Appeal No. 2956 of 2007, 2318 OF 2013 and 7241 of 2016, dated 5th September, 2016 (SC)

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Sales Tax- Works Contract- Total Turnover- Does Not Include Turnover of Sub Contract, S. 6B of The Karnataka Sales Tax Act, 1957.

Facts:
The petitioner company, registered under the Karnataka Sales Tax Act and engaged in works contract had executed works contract and part of it or whole of it was given to another contractor as sub-contract and claimed deduction from total turnover for the purpose of levy of tax under section 6B of the Act in respect of value of contracts executed by sub-contractors. The department did not accept the claim of the company. The High Court in two periods denied the claim but in another appeal allowed the claim. The company filed appeal before the SC against the High Court judgment disallowing the claim and department filed appeal before the SC against the judgment of High Court allowing the claim. The SC by common judgment decided all three appeals involving identical issue for deduction of sub-contract value for levy of tax.

Held:
What is significant is that total amount paid or payable to the dealer as a consideration for ‘transfer of property in goods’, which is involved in execution of the works contract, is to be treated as ‘total turnover’.The Rule, thus, specifically restricts the total turnover in respect of those goods alone, where the property has been transferred. Thus, transfer of property in goods, becomes necessary event and unless there is a transfer of property, the amount paid is not to be included in the total turnover. The amount paid to the sub-contractor is not for transfer of property in goods. Accordingly, the SC held that the value of thework entrusted to the sub-contractors or payments made to them shall not be taken into consideration while computing total turnover for the purposes of Section6-B of the Karnataka Act. As a consequence, the two appeals which were filed by the company were allowed and the appeal preferred by the Revenue was dismissed by the SC.

[2016-TIOL-26-ARA-ST] M/s Steps Therapeutics Ltd

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Clinical pharmacology and Clinical research undertaken of the formulations viz. tablets, capsules etc. on the volunteers is covered by Rule 4(a) of the Place of Provision of Service Rules, 2012.

Facts:
The Applicant is in the process of establishing, developing and carrying on research in basic and applied sciences in relation to all kinds of drugs, pharmaceuticals and formulations, health care and bio-technology. The services to be provided include Clinical Pharmacology which is a study carried out for generic drugs. The study is proposed to be undertaken using formulations in the form of tablets, capsules, syrups, inhalers etc. Further they would undertake clinical research which involves project management, monitoring, medical writing etc. In terms of a sample agreement, clinical trials are to be undertaken for the drugs of the customers situated outside India on volunteers in India. These volunteers are kept under observation and their blood samples are tested for identification of various parameters as required by the customer and a consideration is charged on a project to project basis. This is the main activity of providing research assistance services to its customers. The question before the authority is whether the services provided are covered by Rule 3 of the Place of Provision of Services Rules, 2012.

Held:
The Authority noted that the issue to be decided is whether the services of clinical pharmacology and clinical research are covered by Rule 3 viz. location of service recipient or Rule 4 viz. the location where the services are actually performed of the Place of Provision of Services Rules 2012. The service is covered by Rule 4(a) if the service is provided in respect of goods which are required to be made physically available by the recipient of service to the provider of service. In the present case, the study is undertaken using formulations, tablets, inhalers etc. provided by customers outside India on eligible volunteers in India. Therefore it is clear that the goods are required to be made physically available by the customers located outside India to the applicant and therefore the service of clinical pharmacology is covered by Rule 4(a) of the Rules. It was argued that the Education Guide issued by the CBEC categorically mentions that the service of market research is not covered by the said Rule 4. The authority noted that the guide at para 1.2 categorically provides that it is neither a departmental circular nor a manual of instructions and does not command the required legal backing to be binding on either side and in any case the provisions of Rule 4 are clear and therefore the Education Guide cannot take precedence over it. Further if the service of clinical pharmacology is not provided and only the service of clinical research is provided, the said service being in the nature of monitoring, project management etc. the authority held then it will not be in relation to the formulations provided by the service receiver and nor will it require physical presence of any representative of the drug company and therefore such service will not fall in the ambit of Rule 4 and will be covered by Rule 3 of the Place of Provision of Service Rules, 2012.
Note: Readers may note, that Rule 4 of the Place of Provision of Service Rules, 2012 requires the services to be provided in respect of goods. Examples provided in the Education Guide at para 5.4.1. include repairs, reconditioning, cargo handling etc. Accordingly the service is essentially any physical service carried out on another person’s goods. However in the present case the drugs are the object of research whereas the service involves various aspects of research viz. study of the blood samples, the minute observation of the physical changes in the volunteers consuming the drugs, its analysis and then drawing an inference on the basis of their skill/knowledge/expertise etc. on the basis of which a report is sent outside India which is directly consumed outside India.  There is no physical service or manipulation performed on the drugs of the service receiver and therefore its inclusion in the said Rule 4 appears questionable.

[2016-TIOL-20-ARA-ST] M/s Global Transportation Services P. Ltd.

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III   Authority of Advance Ruling (AAR)

Facts:
The Applicant a provider of logistic solutions provides a number of services which are mutually exclusively viz. transportation of goods by road, loading/unloading of goods, air/ocean freight etc. on various outbound and inbound shipments. They enter into a contract with the airline for transportation of consignment who issues an Airway Bill which governs the terms of contract between them on a principal-to-principal basis. The Applicant in turn in a majority of cases issues a House Airway Bill upon its customers. The earning for all the services rendered is the difference between the amount charged to the customer and paid to the airlines/shipping lines/transporters etc. They also enter into reciprocal freight business arrangements with freight forwarders in other jurisdictions. The questions raised before the authority were whether the freight margin recovered from their customer/freight partner in case of outbound shipments is not taxable in light of Rule 10 of the Place of Provision of Service Rules, 2012 and whether in case of inbound shipments the same is covered under section 66D(p)(ii) of the Finance Act, 1994-Negative list which provides an exemption to transportation of goods by aircraft/vessel from a place outside India upto the customs station. Further questions of valuation and CENVAT availability were also raised in case the above transactions were held to be taxable.

Held: 
The Authority noted that the relationship between the airline/shipping line and applicant is separate and distinct from the relationship between the applicant and its customer. The contract with the customer is to provide the service of transportation of cargo. In case of any damage or destruction, the applicant has an independent right against the airline/shipping line and the customer also has a right to recover damages from the applicant independently.  Therefore they are acting on a principal-to-principal basis providing the main service and are thus excluded from the definition of intermediary provided in Rule 2(f) of the Place of Provision of Services Rules, 2012 . Accordingly the place of provision of the said service will not be location of the service provider. The place of provision of transportation of goods is the destination of goods as per Rule 10 of the said rules and therefore in case of an outbound shipment the destination is outside India and accordingly the freight margin is not liable for service tax. Similarly in case of inbound shipments the service is covered by the Negative List – section 66D(p)(ii) and therefore is not exigible to service tax. However with effect from 01/06/2016, the said section has been omitted and therefore the said service of transportation is made taxable. However the exemption to transportation of goods by aircraft continues under the mega exemption notification vide notification 9/2016-ST dated 01/03/2016.
[Note: Readers may note the decision of Greenwich Meridian Logistics (India) P. Ltd [2016-TIOL-869-CESTAT-MUM] on similar facts reported in the May 2016 issue of BCAJ dealing with the period prior to July 12. Reference can also be made to the decision of Phoenix International Freight Services P. Ltd vs. Commissioner of Service Tax, Mumbai-II [2016-TIOL-2353-CESTAT-MUM] wherein the Tribunal relying on the decision of Greenwich Meridian (supra) has dropped the demand prior to July 2012.]

2016] 71 taxmann.com 92 (New Delhi – CESTAT) – Swastik Wires vs. CCE

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Rule 6(3)(b) of CENVAT Credit Rules is not applicable if there is no levy of duty on goods cleared on account of absence of manufacture. Hence, where assessee availed the entire CENVAT credit and paid 8% at the time of clearance of such goods, the procedure was held to be in contravention of the law. However, demand is reduced to the extent of amount of 8% already paid by way of utilizing CENVAT credit.     

Facts:
The appellant a manufacturer of wires falling under chapter 72 and 85 of the first Schedule to the Central Excise Tariff Act registered with the Central Excise and cleared final product on payment of duty after availing Cenvat Credit of duty paid on inputs. The appellant was also doing galvanization on H B wire procured from other manufacturers. Since the process did not amount to manufacture there was no duty incidence on such product. For the period under consideration, the appellants availed cenvat credit on the entire common inputs used in the manufacture of dutiable products as also the products which did not attract duty. Such non-dutiable products were being cleared by them on payment of 8% of the value of the same in terms of provisions of Rule 6(3)(b) of Cenvat Credit Rules. Revenue, denied the CENVAT credit on the ground that, in as much as the appellants final product i.e. galvanized wire and the other wires which emerges by the process of wire drawing are not process amounting to manufacture and hence not liable to excise duty, the provisions of Rule 6(3) (b) of Cenvat Credit Rules is not applicable to them. Appellant contended that, the fact that the said goods are specified in the schedule to the Central Excise Tariff, they are required to be held as excisable goods, and although emerging as a result of non-manufacturing activity, the provisions of Rule 6(3)(b) would fully apply.

Held:
Tribunal observed that, said goods are admittedly specified in the tariff and in terms of Rule 2(d) and hence they have to be held excisable goods. The same attract duty at the rate of 16% ad valoram and there is no exemption notification in respect of said goods. It was further observed that admittedly, the said product did not attract duty at all on account of being a non-manufactured product. It was observed that on one hand, the appellant is taking a stand that no duty is required to be paid on the galvanized wire inasmuch as there was no manufacturing activity involved and thus reason that he is not paying full rate of duty of 16% on the said goods at the time of clearance of the same and on the other he is claiming the applicability of Rule 6(3)(b) on the ground that said goods are dutiable but exempted. Referring to the definition of “exempted goods” under rule 2(d) of Central Excise Rules, Tribunal held that if no duty of excise is leviable on account of non-manufacture, the question of exemption of same does not arise. As such, goods cannot held to be exempted goods, thus making the applicability of Rule 6(3)(b) as nil. It further held that, Rule 3 of Central Credit Rules allows a manufacturer or producer of final product to avail the credit of duty paid on the inputs, which are to be used by them in the manufacture of final product. If there is no manufacturing activity involved, the said Rule debars the availment of credit at the ab initio stage itself. It was however held that the Appellant has already reversed 8% of the cenvat credit for the purpose of payment of 8% of duty and hence to that extent payable duty demand has to be neutralized against the same.

[2016] 71 taxmann.com 133 (Bangalore-CESTAT) Dell India (P) Ltd. vs. Commissioner of Service Tax

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When excess payment is made due to charging service tax at higher rate, by way of credit note adjustment of such excess payment is allowed against liability of subsequent period as per Rule 6 of Service Tax Rules, 1994.

Facts:
The Appellant continued to pay service tax at old rate although there was reduction in service tax rate.  This resulted in excess payment of service tax. Later, appellant issued credit notes to customers and issued fresh invoices by applying correct rate of service tax. However, the Appellant revised their ST-3 returns for the said period by showing this adjustment by way of reduction in valuation, though strictly speaking, this was not reduction in value, but applicability of correct rate of tax. Revenue did not allow the suo motu adjustment of excess payment of service tax as it was contended that this was neither strictly covered under Rule 6(3) of the Service Tax Rules 1994 (Rules) nor under Rule 6(1A) of the Rules. Therefore, issue involved was whether appellant could claim refund of excess payment by following procedure governing refund claim or whether they could claim the credit of excess payment by way of adjustment as per Rule 6 of the Rules.

Held:
Liberal interpretation and generous view of provisions of service tax rules was required to be adopted. Though the appellant’s case was not strictly covered by provisions of different sub-rules of Rule 6 of Service Tax Rules, 1994, admittedly appellant was entitled to benefit of adjustment of excess service tax paid by them. Reliance was placed upon decision in the case of General Manager (CMTS) v. CCE [Final Order No. ST/A/52446/2014-CU (DB), dated 8-5-2014], wherein it was held that when an assessee during certain months, for reasons other than interpretation of law, taxability, classification, valuation or applicability of exemption, has paid service tax in excess of his actual tax liability, the Government cannot retain the excess tax paid by the assessee by refusing its adjustment against his tax liability during other months and refusing adjustment of such excess tax payment during a month against tax liability during other months and appropriation and retention of the same would amount to collection of tax without the authority of law which is contrary for the provisions of Article 265 of the Constitution of India.  
[Note: Readers may note that in case of Schwing Stetter India (P.) Ltd. vs. Commissioner of Central Excise, LTU, Chennai [2016] 71 taxmann.com 228, Chennai Tribunal held that in terms of Rule 6(4A) of STR, 1994, assessee is entitled to adjust excess payment against any of the subsequent months/quarters and department is not permitted to retain such excess payment by stating a reason of mere procedural lapse.]

[2016] 71 taxmann.com 68 (Hyderabad CESTAT) Xilinx India Technology Services (P) Ltd. vs. Commissioner

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Refund of CENVAT Credit –Tribunal allowed refund of CENVAT Credit in respect of various services received by the Appellant in the light of definition of ‘input service’ amended w.e.f. 01.04.2011 – Rent paid for ‘fit out’ was held as part of the renting of immovable property service applying principles of  bundled services contained in section 66F.

Facts:
The Appellant a 100% EOU and provider of information technology and software service filed refund application under Rule 5 of Cenvat Credit Rules, 2004 r/w Notification No.5/2006 CE(NT) dated 14-03-2006 for the period October, 2011 to December, 2011 in respect of various input services. Department denied the refund claimed relying upon decision of Maruti Suzuki Ltd. v. CCE [2009] 22 STT 54 (SC) observing that appellant has failed to establish that the input service has direct nexus with output services provided by appellant. The Appellant submitted that all the services in respect of which refund claim is denied are very much essential for providing the output services. It was also submitted that the view taken in the said case was doubted and referred to larger Bench of Supreme court in Ramala Sahkari Chini Mills Ltd. v. CCE [Civil Appeal No. 3976/2007, dated 19-2-2016] and further that the said decision dealt with interpretation of inputs and not input services, and therefore not applicable.    

Held:
Hon’ble Tribunal allowed refund claim in respect of each of the services by holding as under:


Air Travel Agent:  These services were used for booking air ticket for the employees to travel abroad to attend seminar and other meetings. Tribunal noted that, the invoices are accompanied by other documents (e-mail communications) which evidence that the employee has travelled to attend seminar.

Club or Association Services – Services is in respect of the membership fee paid to the Chamber of Commerce. Services were availed for augmenting business and it is the organization which acquires the membership in such associations. It is not for personal consumption or use of employee and therefore is not excluded.

Renting of ‘fit-out’ – The original Authority had partly allowed the credit on renting and disallowed credit on fit out. However considering the components of rent, maintenance and fit out as part of the same agreement for rent, it was considered naturally bundled and full credit was allowed.
Other than the above services, credit in respect of banking and financial services, support services for Xeroxing documents CA service, courier service, custom house agents service, IT Software and Telecommunication service, manpower recruitment service, management and business consultant, commercial coaching and training service also has been allowed fully considering them essential for providing output services.
[Note: Readers may note that decision is important in view of the fact that it takes a view on eligibility of various input services in the light of amended definition of input services w.e.f.01.04.2011.]

[2016] 71 taxmann.com 293 (Mumbai-CESTAT) Decos Software Development Pvt. Ltd. vs. Commissioner of Central Excise, Customs & Service Tax, Pune-III

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“Net CENVAT credit” under Rule 5 of CENVAT Credit Rules means the CENVAT credit availed during the relevant period irrespective of the date of invoice or when services were received or used for the purpose of export. Further, when records maintained by assessee clearly shows the actual date of availment of CENVAT credit, denial thereof on sole basis of clerical error in ST-3 returns is not valid.

Facts:
While filing ST-3 return, appellant mistakenly showed CENVAT credit in respect of certain invoices against April-June 2012 period although such credits were actually availed during July 2012–September 2012. The credit pertained to invoices dated prior to July 2012. By the time appellant realized this mistake in ST-3 return, time limit for filing revised return for “April-September 2012” had elapsed. However, from CENVAT account details maintained by the appellant, it was amply clear that the CENVAT credit (mistakenly shown in ST-3) was actually availed by the appellant during “July 2012-September 2012”. Accordingly, while filing refund claim for period “July 2012-September 2012” in terms of Rule 5 of CCR, 2004, the CENVAT credit in respect of the said invoices issued prior to 01/07/2012 was also included in “Net Cenvat Credit”. In spite of appellant informing the authorities about the mistake in filing ST-3 returns, refund claim to the extent of above component of CENVAT credit, was rejected by the revenue on the ground that invoices pertained to period prior to 01/07/2012 and appellant declared the same in ST-3 return for period “April 2012-June 2012” and ST-3 return, being statutory return should be taken as correct position of availment of CENVAT credit and in absence of revised return, the original return cannot be ignored.

Held:
Referring to Rule 5 of CENVAT Credit Rules, the Tribunal held that while deciding the claim for July – September 2012, whatever CENVAT credit is ‘availed’ in the quarter July to September, 2012 shall be taken as Net CENVAT credit. If the CENVAT credit is availed in any period prior to 01/07/2012, the same cannot be taken into Net CENVAT credit for the quarter July to September, 2012. In other words, even if services which were received and ENVAT credit taken prior to 01/07/2012, were used for export of service for the quarter July to September 2012, the same cannot be included in the net credit for the quarter July to September 2012. While arriving at such conclusion, Tribunal placed reliance on decision of Gujarat High Court in case of Commissioner vs. Man Industries (I) Ltd. 2015 (321) ELT 442 wherein it was held that when inputs were received in different period and credit was availed in subsequent period, the relevant period would be the one in which credit was availed and not the period in which input/input services were received.
As regards the facts of the case, Tribunal held that, just because the appellant has filed ST-3 return and shown the CENVAT credit availed in the April to June 2012 quarter cannot be the sole basis to conclude that the CENVAT credit was availed in that quarter. Appellant made categorical statement in their submissions that the CENVAT credit shown in the quarter April to June, 2012 is due to clerical error and in support of this statement they also produced the CENVAT credit account maintained on the computer which shows that the CENVAT credit was availed in the quarter July 2012 to September, 2012. Tribunal therefore remanded the matter with a specific direction that appellant’s claim be verified on the basis of CENVAT credit account produced by them as well as any other corroborative evidences, if required and if it is found that the CENVAT credit was availed in July to September 2012, even though on the invoices pertaining to the period prior to 01/07/2012, the refund shall be admissible.

[2016] 71 taxmann.com 69 (Hyderabad CESTAT) GE India Exports (P) Ltd. vs. Commissioner of Customs, Central Excise & Service Tax, Hyderabad-II

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Invoice issued to unregistered premises of service recipient is valid for claiming input tax credit as Rule 4A of Service Tax Rules does not require to issue invoice only at registered premises.   

Facts:
Appellant obtained a centralized registration and filed a refund claim of CENAVT credit which included certain input services for which service provider issued invoices to the unregistered premises under service tax. Refund claim in respect of such invoices was rejected by revenue. It was argued that in terms of Rule 4A of Service Tax Rules, 1994, invoice bearing service tax registration number of service provider and disclosing the name, address and details of service recipient is valid enough to claim input tax credit and there is no such requirement of stating registered address of service recipient on the invoice.

Held:
Hon’ble Tribunal noted that when the invoice gives detailed description of services performed, when service tax is correctly paid by the service provider and in absence of any express requirement in Rule 4A of Service Tax Rules, 1994 stating that premises of service recipient has to be registered, department’s act of denying CENVAT credit was invalid and accordingly, appeal was allowed.

[Note: Readers may note that while deciding on similar issue, in case of [2016] 71 taxmann.com 251 Prasad Corporation Ltd. vs. Commissioner of Service Tax-II, Hon’ble Chennai Tribunal held that CENVAT credit cannot be denied merely on the ground that service provider has mentioned incorrect address of service recipient on the invoice.]

[2016] 71 taxmann.com 188 (New Delhi-CESTAT) – Commissioner of Central Excise, Bhopal vs. Diamond Cement

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Where assesse filed refund claim in the year 2002 within one month of the rejection of Revenue’s appeal to the Tribunal, in respect of amount debited to Cenvat account in 1996, refund claim not time-barred.

Facts:
Prior to adjudication proceedings, the assessee debited their CENVAT credit account on various dates, by following Revenue’s view. However, proceedings were initiated resulting in confirmation of demand by the Adjudicating Authority. The said order was set aside by Commissioner (Appeals). Revenue’s appeal against the order of Commissioner (Appeals) was rejected by the Tribunal and resultantly, the assessee was entitled to refund of amount debited from CENVAT account. A refund claim was filed within a period of one month of the rejection of Revenue’s appeal by the Tribunal. This refund claim was rejected on the ground of time-bar. Commissioner (Appeals) allowed assessee’s appeal relying upon CCE vs. BCL Forgings Ltd. 2005 (192) E.L.T. 922 (Tri. – Mumbai), Hutchisom Max Telecom Pvt. Ltd. vs. CCE, Mumbai 2004 (165) E.L.T. 175 (Tri. – Del) and Shree Ram Food Industries vs. Union of India 2003 (152) E.L.T. 285 (Guj) wherein it was held that payments made pursuant to department’s threats are not voluntary payment and hence limitation under section 11B is not applicable in that case. Further, the appeal against an assessment order or demand order amounts to protest and a formal letter of protest is not necessary.

Held:
Tribunal held that apart from reiterating that debit entries were made by assessee without any threat or coercion, the revenue has only contended that the decisions relied upon by the Commissioner (Appeals) are not applicable, without giving any details as to how the said decisions involving the same legal issue, are not applicable to the facts of the case. Merely because department has filed appeal against Tribunal’s judgment in the case of  BCL Forgings Ltd. (supra), before Bombay High Court, Tribunal’s decision do not become inapplicable. It was noticed that Commissioner (Appeals) recorded observations and findings that the debit entry was countersigned by Superintendent (Preventive) and the show cause notice itself mentions that the debit was made on pursuance of the officers of the Central Excise. Accordingly, the Revenue’s appeal was dismissed.

2016 (43) STR 634 (Tri. –Mum.) Rent Works India Pvt. Ltd. vs. CCE, Mumbai V

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Different departments of Government of India cannot take different stands on same transactions.

Facts:  
Appellants paid salary to a foreign national person being the director of the company. Service tax was demanded under reverse charge mechanism on such payments. Relevant agreement, minutes of board meetings, records available at the website of Ministry of Company Affairs as well as income tax decision were produced holding that the amount paid was nothing but salary to director. Revenue stated that these evidences were not produced before lower authorities and argued that though the person was director, invoices indicated that the payment was made towards consultancy charges.

Held:
The agreement was for providing services for monthly remuneration and additional amount at the discretion of board of directors. The director had signed the Balance Sheet of the period under consideration. Therefore, the amount paid was towards remuneration. If the amount is considered as salary by income tax department, one branch of Ministry of Finance, the other branch viz. service tax department cannot hold it to be consultancy charges. The same department of Government of India cannot take different stand on the amount paid to the very same person and treat it differently.

2016 (43) STR 601 (Tri. –Hyd.) Amara Raja Electronics Ltd. vs. CCE, Tirupathi

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If service tax is paid on sharing of common expenses which is not objected by department, CENVAT credit thereof cannot be denied to service receiver.

Facts:
Appellants received invoices from its group company relating to common expenses incurred at branch. CENVAT credit was denied on the ground that it was merely sharing of common expenses. Relying on various judicial pronouncements, it was contested that the requisites for running a branch office was provided by group company which had nexus with manufacture of final product. However, department contended that it was not a case of rendition of services and in order to distribute common credits, the Appellants ought to be “Input Service Distributor”.

Held:
Since department was collecting service tax from group companies which was never objected, allegation cannot be made against service receiver that no services were rendered. In absence of any evidence by revenue that services were not rendered, appeal was allowed.

[Note:- Readers may note the decision in the case of Commr. Of ST vs. Arvind Mills Ltd. 2014 (35) STR 496 (Guj.), wherein the activity of deputation of employees to subsidiary company and recovery of cost thereon was held as not liable to service tax. Reference can also be made to a similar decision of the Delhi CESTAT in the case of ONGC vs. Comm. Of ST, Delhi 2016 (8) TMI 500 – CESTAT Delhi. In sum and substance, in cases of sharing of common expenses, in absence of service, service tax shall not be paid. However, if paid, CENVAT credit thereof shall not be denied.]

[2016-TIOL-2171-CESTAT-MUM] Tata Quality Management Services vs. Commissioner of Central Excise, Pune-III

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Actual expenditure incurred for rendering services can be taxed only as per the provisions of Rule 5(1) of the Service Tax Valuation Rules but the said rules are struck down as ultra vires by the Hon’ble High Court of Delhi in the case of Intercontinental Consultants and Technocrats Pvt. Ltd.

Facts:
Appellant engaged services of foreign service providers and paid service tax under reverse charge mechanism on the amounts paid to them. Further, amount on their stay and other out of pocket expenses during their visit in India was also paid.  The department contended that these expenses are required to be included in the value of the service rendered by the foreign party as the same is incurred in relation thereto. It was argued that these amounts were paid to various service providers who have charged service tax on the bills raised by them and therefore adding these amounts for payment of service tax under reverse charge mechanism will result in double taxation. Further the decision of Intercontinental Consultants and Technocrats Pvt. Ltd. vs. Union of India & Anr. – 2012-TIOL-966-HC-DEL-ST was relied upon.

Held:
The Tribunal noted that due service tax is discharged on the entire amount paid to the foreigners. The amount paid for stay and travel are incidental expenses paid directly to the vendors who have paid applicable service tax and cannot be considered as amounts paid or payable to the foreigners. Further it was held that the said amount can be taxed only as per Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 which is struck down as ultra vires by the Hon’ble High Court of Delhi in the case mentioned above and therefore is not liable for service tax under reverse charge mechanism and the appeal was allowed.

TS-428-ITAT-2016(Mum) DDIT vs. Taj TV Ltd A.Y.: 2003-04 to 2005-06, Date of order: 5th July, 2016

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Section 9 of the Act, Article 5, 12 of India Mauritius DTAA – (i) in absence of principalagent relationship and authority to habitually conclude contract in India, Indian advertising agent did not create a Dependent Agency PE in India; (ii) transponder charges and uplinking charges did not constitute royalty under the DTAA , and retrospective amendment to the royalty definition under the Act cannot be read into the DTAA ; (iii) programming charges for acquiring telecasting rights of live events conducted outside India did not represent income accruing or arising in India.

Facts 1
The Taxpayer was incorporated as a company in British Virgin Islands (BVI) in the year 2000. However, it was subsequently registered as a company in Mauritius in July 2002.

The Taxpayer was engaged in the business of telecasting a sports channel across the globe including India. The Taxpayer had entered into following two contracts with its Indian subsidiary (“ICo”), with the prior approval of Reserve Bank of India (RBI).

Advertising Sales agreement for sale of commercial slot or spot to the prospective advertisers and other parties in India for which a commission at a flat rate of 10% was paid to ICo

Distribution agreement for distribution of the channel to cable operators who ultimately distribute to consumers in India. The distribution revenue collected by ICo was to be shared between the Taxpayer and ICo in the ratio of 60:40.

The Taxpayer contended that advertising and distribution revenue earned by it is not taxable in India because income is business income and is not taxable in absence of Permanent Establishment (PE) in India.

However, Assessing Officer (AO) considered that ICo constituted a ‘dependent agent PE’ (DAPE) of the Taxpayer in India. Also, the distribution income was characterised as ‘Royalty’ u/s. 9(1)(vi) of the Act.

For F.Y. 2002, Taxpayer was registered in BVI as a company for part of the year and in Mauritius for the residuary period. Hence, it was suggested that Taxpayer was not eligible to claim treaty benefits for such part of the year during which it was registered in BVI. As a consequence, it was held that distribution income for that part of the year was taxable as royalty income under the Act, while for the balance period where the Taxpayer was registered in Mauritius, as the royalty income was attributable to the DAPE of Taxpayer, it would be taxable in India as per Article 7 of India Mauritius DTAA .

Held 1
Taking note of the terms of the distribution agreement and the actual conduct of the parties, it was held that ICo was not acting as an agent of Taxpayer in India. ICo merely obtained the right of distribution of channel for itself and subsequently entered into contract with other parties (sub-distributors) in its own name. Thus it was held that the transactions between the Taxpayer and ICo were on principal-to-principal basis.

As per Article 5(4) of the India Mauritius DTAA, an agent is considered to be creating a PE of a foreign enterprise in India if he is a dependent agent and habitually exercises any authority to conclude contract or habitually maintains stock of goods or merchandise in India on behalf of such foreign enterprise. Moreover, an agent is treated as dependent only if it is subject to instructions or comprehensive control of the foreign enterprise and no entrepreneurial risk is borne by the agent.

Thus, even if ICo is considered as an agent of the Taxpayer, since ICo did not satisfy any of the above conditions, it did not constitute DAPE of the Taxpayer in India.

The Taxpayer had not granted any license to use any copyright to the distributor or to the cable operators but merely made available the content to the cable operator which was transmitted to the ultimate viewer. In fact, the rights over the content were always held by the Taxpayer and were never made available to distributors or cable operators. Thus, the income from such arrangement would not constitute royalty.

Also, the contention of the AO that the income from distribution agreement be considered as royalty for some part of the year and as business income for the balance year was not acceptable.

Facts 2
Taxpayer made payments to a US Co for providing facility of transponder for telecasting its sports channel. Additionally certain ‘up-linking’ charges were paid to USCo for up-linking the signals of live events from the venue of the events to USCo’s satellite.

Taxpayer did not withhold taxes on such payments. AO contended that the payments made to USCo qualified as royalty under the Act as well as the India-USA DTAA and hence, were subject to withholding tax in India. Accordingly, AO disallowed such expenses for failure to withhold taxes.

Held 2
Article 12 of the India – USA DTAA exhaustively defines the term ‘royalty’ and therefore, the definition and scope of ‘royalty’ should be as provided in the DTAA not the Act. Hence, the definition of royalty as enlarged by Finance Act 2012 with retrospective effect cannot be read into the DTAA . Reliance in this regard was placed on the Delhi HC ruling in DIT vs. New Skies Satellite [2016] 95 CCH 0032 (Del).

Payment for transponder charges and up linking charges were not in the nature of any consideration in the nature of “use” or “right to use” any copyright of a literary or artistic or scientific work, patent, trademark or process etc., as referred to in Article 12 nor is it for the use of or right to use any industrial, commercial or scientific equipment. Hence, they did not qualify as royalty under the DTAA .

Even otherwise, applying the maxim of “lex non cogit ad impossplia”, since the retrospective amendment was not in place when the payment was made by the Taxpayer, the Taxpayer cannot be held liable for failure to withhold taxes.

In absence of PE of the NR in India, the payment made to a NR outside India for availing service of equipment in relation to transponder and up-linking activity outside India cannot be taxed in India.

Facts 3
Taxpayer paid certain programming cost to various NR cricket boards and other sports associations for acquiring live telecast rights in relation to sport events taking place outside India.

AO contended that such payments were in the nature of acquiring copyrights and hence qualified as royalty under the Act. Taxpayer, however, contended that telecasting such live events did not constitute royalty as it did not involve any copyright.

Held 3
Programming cost was paid by Taxpayer to various nonresidents outside India for acquiring rights of sports events taking place outside India.

Further as liability to pay programming cost is assumed by the Taxpayer outside India and is not borne by any PE of NRs in India, such programming cost cannot be deemed to arise in India.

[2016-TIOL-2223-CESTAT-HYD] M/s. Hindustan Coca Cola Beverages Pvt. Ltd. vs. CCE, Hyderabad-I

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II.   Tribunal
Catering services provided in terms of the requirement under the Factories Act, 1948 is allowable as CENVAT credit post April 2011.

Facts:
The Appellant manufacturer availed CENVAT credit on outdoor catering services post April 2011. The department contended that post the said date these services are excluded from the definition of input service and therefore the credit is inadmissible. It was argued that only services which are used primarily for personal use or consumption of any employee are excluded whereas in the present case the services are provided within the factory premises as per the statutory requirement imposed by the Factories Act, 1948 and further the unit is located away from the city and therefore non-provision of food will directly impact the production.
         
Held:
The Tribunal observed the term ‘primarily’ in the exclusion clause and noted that the word means most proximate or important. However in the present case the service is most importantly used to comply with the requirements under the factories act failing which they will not be able to engage in production/manufacture of final products. Accordingly it was held that services are used in relation to the business of manufacture and not for any personal use or consumption of the employee and therefore the credit is allowed.  

[Note: Readers may note a similar decision in the case of Gateway Terminals (I) P. Ltd vs. Commissioner of Central Excise, Raigad [2015-TIOL-1471-CESTAT-MUM] digest provided in August 2015 wherein the Tribunal noted that provision of canteen facilities being a statutory obligation is a part of the business need and accordingly credit was allowed.]

2016 (43) STR 249 (Tri. Ahmd.) L& T Sargent & Lundy Limited vs. CCE & ST, Vadodara

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Non-intimation to department regarding adjustment of service tax suo motu is a curable defect.

Facts
Excess payment of service tax was adjusted by the Appellants suo motu without intimation to department. The adjustment was denied. It was contended that no intimation was required under Rule 6 (3) of Service tax Rules, 1994. Even if intimation was required, it was a minor procedural defect and therefore, penalties were not warranted. Department argued that penalties shall be imposed on such big industrial group who must be well aware of these laws.

Held
Since there was no short payment of service tax and the defect was not so serious, adjustment was allowed and penalties were set aside.

Note: Readers may note a similar decision in the case of State Bank of Hyderabad [2016-TIOL-1105-CESTAT-HYD] reported in the June 2016 issue of BCAJ. Further please note the decision in the case of ONGC vs. CCE, Cus. & ST., Surat-II [2016 (43) STR 317 (Tri. – Ahmd.)] where on similar facts, the Tribunal had directed the appellant to follow prescribed procedure in future.

2016 (43) STR 234 (Tri. – Chan.) Jindal Water Infrastructure Ltd. vs. CCE, Rohtak

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In cases of centralized registration, appeal may be transferred to jurisdictional CESTAT even if adjudicated at some other place.

Facts
Appellant obtained centralized registration at Delhi. However, adjudication was made at Rohtak. Appeals relating to such adjudication were assigned to Chandigarh Bench on the basis of territorial jurisdiction.

Held
In view of centralized registration and since the cause of action had arisen in Delhi, appeal was directed to be transferred to Delhi CESTAT .

2016 (43) STR 110 (Tri-Mum.) Sumeet C. Tholle and Prathima S. Tholle vs. C.C.E.&C., Aurangabad

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Service Tax collected and deposited without authority of law by the service provider can be refunded to service receiver.

Facts
The appellants jointly purchased a house wherein service tax as well as VAT was collected from them. Even though the transaction between the appellants and its vendor was of transfer of immovable property, the vendor charged service tax. On understanding the facts, the appellants filed a refund claim with the department since tax was levied and collected without authority of law. The refund claim got rejected on the grounds that the appellants had not provided any proof of deposit of service tax by the service provider with the Government.

Held
Since the transaction of transfer of immovable property is squarely covered in the exclusion part of the definition, the activity of transfer of immovable property is not a taxable activity. Service recipient cannot be made liable to prove that the service tax paid by him to the service provider has been credited to the Government or not. Refund can be granted to the recipient on the basis of invoices held by them wherein service tax has been charged. Whether service tax has been deposited to the Government or not is to be looked by the department and not the service recipient. Service recipient having borne the incidence of tax can challenge taxability by claiming refund.

[2016-TIOL-1982-CESTAT-ALL] M/s. Shiel Autos vs. Commissioner of Central Excise, Kanpur

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Extended period cannot be invoked and penalties cannot be imposed on matters involving interpretational issues referred to the larger bench.

Facts
The Appellant is an automobile dealer. On the basis of information obtained from various banks it was observed that they were in receipt of commission on which no service tax was paid. A show cause notice was issued proposing demand of service tax along with interest and penalties on the commission received as a direct selling agent. It was argued that they have only let the financing agency to use their premises in order to promote the sale of vehicles and there is no principal agent relationship with the finance company and that they merely act as a channel between the customer and the finance company. On confirmation of demand by the adjudicating authority, the first appellate authority observed that the receipt of commission from the bank is not on the basis of space occupied in the premises but is on the basis of quantum of finance sanctioned to the customers who purchased vehicle. Therefore demand as a direct selling agent of the bank/institution was confirmed. Accordingly the present appeal is filed.

Held
The Tribunal noted that no agreement with the banks was placed on record regarding provision of any space and further the commission amount varied from month to month. Therefore undoubtedly the activity falls under the category of “business auxiliary service” for promotion and marketing of services provided by banks. However considering the fact that there was an interpretational issue and the matter was decided by the larger bench in the case of Pagariya Auto Centre vs. Commissioner of Central Excise, Aurangabad [2014-TIOL-141- CESTAT-DEL-LB, extended period is not invokable and penalties are set aside. Demand is upheld only for the normal period.

Infrastructure Facility – Deduction u/s 80-IA(4) whether admissible to inland container depots and inland freight stations – SLP Granted-

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CIT. vs. Continental Warehousing Corporation (Nhava Sheva) Ltd, (2016) 380 ITR (St) 80 ; (Affirmed CIT vs. Continental Warehousing Corporation (Nhava Sheva) Ltd [2013] 374 ITR 645(Bom))

The assessee company is engaged in the operation of a Container Freight Station (CFS) and claimed that the activities therein qualify as a port. That is one of the infrastructure facilities for the purpose of section 80- IA(4) of the IT Act. The assessee produced a certificate dated 13th July, 2006, from the Jawaharlal Nehru Port Trust (JNPT) Nhava Sheva declaring that the assessee is considered as an extended arm of port related services. However, on enquiry u/s. 133(6) of the IT Act, it was revealed that this certificate was withdrawn by JNPT on 5th October, 2007. That is how the deduction claimed came to be disallowed.

Being aggrieved by this order of the Assessing Officer, the assessee preferred an appeal before the First Appellate Authority. He dismissed the assessee’s appeal and confirmed the view of the Assessing Officer.

Being aggrieved by the order passed by the CIT(A) , the assessee approached the Tribunal, the Tribunal allowed its appeal. On the issue of deduction under section 80- IA(4) it was concluded that the CFS is a inland port and its income is entitled to deduction under section 80-IA(4) of the IT Act.

Aggrieved by the ITAT order, Revenue filed an appeal before High Court.

The other appeal being Income Tax Appeal No.1969 of 2013 (All Cargo Global Logistics Ltd.), was also heard alongwith the present appeal before High Court. A special Bench of the Tribunal was constituted to hear the this appeal and the same was proposed for purposes of deciding two questions, namely, what is the scope of assessment u/s. 153A of the IT Act. Whether that encompasses additions not based on any incriminating material found during the search and whether the Commissioner of Income-tax (Appeals) was justified in upholding the disallowance of deduction under section 80-IA(4) of the IT Act, 1961.

The High Court held that an ICD is not a port but it is an inland port. The case of CFS is similar situated in the sense that both carry out similar functions, i.e. ware housing, customs clearance, and transport of goods from its location to the seaports and vice-versa by railway or by trucks in containers. Thus, the issue is no longer res-integra. Respectfully following this decision, it is held that a CFS is an inland port whose income is entitled to deduction u/s 80IA(4).Therefore, dismiss the Revenue appeals and answer the substantial questions of law against the Revenue and in favour of the assessee.

The Revenue filed SLP before Supreme Court which was granted

Techinical services – transmission of electricity – Without any human intervention – No TDS u/s 194J – SLP Dismissed

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SLP CIT (TDS). vs. Delhi Transco Ltd,(2016) 380 ITR (St) 79 ; (Affirmed CIT vs. Delhi Transco Ltd [2015] 380 ITR 398(Del))

The assessee Delhi Transco Ltd. (DTL) entered into Bulk Power Transmission Agreement (BPTA ) with the Power Grid Corporation India Ltd. (PGCIL). In one of the preamble clauses of the BPTA , it was recorded that DTL “is desirous of receiving energy through power grid transmission system on mutually agreed terms and conditions”. The BPTA defined several terms including the term wheeling as under: “The operation whereby the distribution system and associated facilities of a transmission licensee or distribution licensee, as the case may be, are used by another person for the conveyance of electricity on payment of charges to be determined under Section of Section 62 (sic) of the Electricity Act, 2003 and its subsequent amendments.” Under Clause 8 of the BPTA , it was agreed that the transmission charges would be paid to PGCIL by DTL for transmitting private sector power through PGCIL lines as per the guidelines of the Central Electricity Regulatory Commission (CERC). Clause 10 stated that the transmission tariff and terms and conditions for the power to be transferred by PGCIL would be in terms of the notification to be issued by CERC from time to time. On the commissioning of the new transmission system DTL was to pay “the provisional transmission tariff in line with the tariff norms issued by CERC”. The tariff was subject to adjustment in terms of CERC notification. The wheeling for the transmission power was to be in terms of the CERC guidelines.

A survey was carried out in the business premises of DTL under Section 133-A of the Act. It was noticed that DTL had deducted tax at source (TDS) at 2% under Section 194C of the Act on the wheeling charges paid to PGCIL. The AO held that DTL was not only using the transmission system set up of PGCIL but also availing of other services from PGCIL “such as maintaining the delivery voltage, economic transmission, minimum loss of electricity in transmission of regular and uninterrupted supply etc., which are technical services”. According to the AO, “the value of these services cannot be bifurcated from the total value paid by the assessee to PGCIL for transmission services in the name of wheeling charges. The transmission lines could not be of any use in isolation and without other associated services the transmission of electricity could not have been possible”. Accordingly, the AO held that wheeling charges paid by DTL were fees for technical services liable for TDS u/s. 194J of the Act. The AO held that in terms of the CBDT circular the demand u/s. 201(1) would not be enforced but that would not affect the liability of DTL regarding interest under Section 201(1A) of the Act

Aggrieved by the AO’s order, DTL filed an appeal before CIT(A). The CIT (A), confirmed the said order of the AO. DTL then carried the matter further in appeal to the ITAT . The ITAT agreed with the DTL that what had been availed by it from PGCIL was not a technical service. It was held that DTL was not liable to be saddled with higher liability of TDS. The appeal was accordingly allowed. The ITAT based its opinion on the decision of this Court in CIT vs. Bharti Cellular Ltd. (2008) 220 CTR (Del) 258 and of the Madras High Court in Skycell Communications Ltd. vs. DCIT (2001) 251 ITR 53 (Mad). The ITAT noted that both the decisions laid emphasis on the involvement of a ‘human element’ for rendering technical services and imparting of technical knowledge. The ITAT held that none of those conditions were satisfied in the present case. While there might be supervision of transmission work by the technical personnel of the payee “there is no human intervention in so far as the assessee is concerned regarding the transmission”. It was further held that even if technical knowledge could be upgraded without “presence of human beings by way of handing over drawings and designs or a technical service can be rendered by robot (machines) without intervention of human element, the classification of the services rendered by the assessee as technical service is not free from doubt”.

The Hon’ble High Court observed that by virtue of the BPTA agreement between DTL and PGCIL there is transportation of the electricity from PGCIL to DTL, through the equipment and network required statutorily to be maintained by PGCIL through its technical personnel using technical expertise. This, however, does not result in PGCIL providing technical services to DTL. Therefore the wheeling charges paid by DTL to PGCIL for such transportation of electricity cannot be characterized as fee for technical service. The ultimate conclusion of the ITAT is therefore not erroneous. Accordingly the question framed by the Court was answered in the negative i.e., against the Revenue and in favour of the Assessee. The appeals were dismissed affirming the order of the ITAT.

The Revenue filed SLP before Supreme Court which was dismissed.

Additional Evidence – Sub-rule (3) of Rule 46AOpportunity of hearing should be provided, to the Assessing Officer to examine the additional documents – SLP Dismissed

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Trimline Vyapaar Pvt. Ltd. vs. CIT (2015) 378 ITR ( St) 34 ; [Affirmed CIT, Kolkata-III. vs. Trimline Vyapaar Pvt. Ltd.[2013] 370 ITR 373(Cal)]

The Assessing Officer completed the assessment u/s. 147/143(3) of the Act, principally, on the basis of information received about cash deposit. The AO had issued notice u/s. 133(6) of the Act to various parties however the same were returned with postal remark “ Not known”.

The assessee challenged the aforesaid orders, and preferred an appeal. The assessee contented that all the parties to whom notices u/s 133(6) were issued complied to the same and confirmed the transactions with the appellant company. The inspector also verified the transactions with their books of accounts. Thereafter, again the ITO issued notices u/s. 131 asking for the same details as were asked for in the notices issued u/s. 133(6) of the Act. Once again all the companies furnished replies giving full details of the transactions with the Assessee company.

The assessee in support of his aforesaid contention raised before the CIT (A) and the learned Tribunal filed various documents in order to show that each of the parties to whom notices under section 133(6) of the Act were issued by the Assessing Officer had duly replied to his queries and had also confirmed that they had purchased shares from the assessee and paid for the same in cash and also contended that these documents were also before the Assessing Officer.

The Revenue submitted before High Court that these documents were not before the Assessing Officer. They were documents relied upon and adduced by way of additional evidence by the assessee before the CIT (A) which he allowed to be taken on record without affording any opportunity, far less a reasonable opportunity, to the Assessing Officer to examine them and thereby violated sub-rule (3) of Rule 46A of the Income Tax Rules.

The assessee submitted that there is no question of any violation of sub-rule (3) because his client did not adduce any additional evidence. He added that, in any event, alleged violation of sub-rule (3) can only be made provided any additional evidence has been adduced. Additional evidence, according to him, cannot be adduced unless subrule (1) of Rule 46A of the Income Tax Rules is complied.

The High Court observed that the documents relied upon by the assessee before the appellate authority are not documents of the assessee. The findings recorded by the Assessing Officer could not have been upset by the CIT (A) without giving an opportunity to the former to explain, merely because the assessee took the stand that “all the parties to whom notices under section 133 (6) were issued complied to the same and confirmed the transaction”. The submission that there could be no violation of sub-rule (3) except in a case covered by sub-rule (1) of Rule 46A would make the situation worse. Sub-rule (1) of Rule 46A contemplates a case where the assessee himself wants to adduce evidence at the appellate stage. The assessee in the case before us wanted to rely, at the appellate stage, upon documents allegedly submitted by the noticees under sections 133(6) and 131 of the Act. All these noticees were third parties who according to the Assessing Officer did not respond and could not also be served. The alleged replies allegedly made by the third parties are not and could not have been in the possession or control of the assessee.

The High court held that the finding of the Tribunal was based on the inadmissible additional evidence adduced by the assessee before the CIT (A) and was perverse .

The appeal was thus allowed by the High Court. The Assessee filed SLP before Supreme Court which was dismissed.

Trust – forfeiture of exemption for breach of section 13(1)(d) – proviso to section 164(2) – levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption – It does not refer to the entire income being subjected to maximum marginal rate of tax – SLP Dismissed

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DIT. vs. Working Women’s Forum (2015) 378 ITR (St) 35 ; [Affirmed CIT vs. Working Women’s Forum [2014] 365 ITR 353(Madras)]

The assessee is a trust registered under section 12AA of the Income -tax Act, 1961, and is providing employment to poor women, assisting weaker sections of the society for personal development, maintaining destitute homes, rehabilitation of victim of national calamities, etc. Evidently, the assessee had invested a sum of Rs. 20,000 in the share of MIOT Hospitals Ltd. Since section 13(1)(d) recognises investment only in specified assets. Failure to invest in such specified business would disentitle the assessee for exemption. Consequently, the Assessing Officer passed an order denying the exemption under sections 11 and 12 of the Act. Aggrieved by this, the assessee went on appeal before the CIT(A) , who followed the decision of the Tribunal and decision of CIT vs. Tuluva Vellala Association in T.C. No. 477 of 1989, dated March 16, 1999, that only such part of the income which was violative of section 13(1)(d) could be brought to tax at the maximum marginal rate. Thus, the first appellate authority allowed the assessee’s appeals that the entirety of the income of the assessee could not be denied of exemption.

Aggrieved by this, the Revenue went on appeal before the Tribunal. The Tribunal rejected the Revenue’s appeals.

The Hon’ble High Court held that violation of section 11(5) read with section 13(1)(d) by the assessee would result in the maximum marginal rate of tax only on the dividend income on shares, which was not the recognised mode of investment and that the assessee would not be vested with marginal rate of tax on the entire income. Therefore, the income other than dividend income has to be taxed only to the extent to which the violation was found by the Assessing Officer. Under section 161(1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, then tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases show that the Legislature has clearly indicated its mind in the proviso to section 164(2) when it categorically refers to forfeiture of exemption for breach of section 13(1)(d), resulting in levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. The High court followed the decision of Bombay High Court in DIT (Exemptions) vs. Sheth Mafatlal Gagalbhai Foundation Trust : [2001] 249 ITR 533 (Bom.) and confirmed the order of the Tribunal, thereby rejected the Revenue’s appeals.

The Revenue filed SLP before Supreme Court which was dismissed.

Krupa D. Doshi vs. ACIT ITAT Mumbai `A’ Bench Before R. C. Sharma (AM) and Amarjit Singh (JM) ITA No. 2983/Mum/2013 A.Y.: 2009-10. Date of order: 10 May, 2016. Counsel for assessee / revenue: Vijay Mehta / Ms. Arju Goradia

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Section 22 – Charges for amenities which flow from the rental rent agreement itself and which amenities are an integral part of the property rented are to be charged under the head `Income from House Property’ and not `Income from Other Sources’.

FACTS
The assessee had let out office premises. He had entered into two separate agreements i.e. one for license fee and other for amenities. Rent was Rs. 50,25,000 and amenities charges as per amenities agreement dated 5.6.2006 were Rs. 36,00,000.

The amenities provided as per Annexure `A’ to the amenities agreement were – (1) to help in obtaining all the necessary licenses and the premises from BMC and other Government authorities; (2) liaison with local government authorities, BMC for smooth running of business of user; (3) liaison with electrical and water authorities for uninterrupted and smooth supply of water and electricity; (4) perform and carry out all the above listed work in a good workmanlike manner and to the best of amenities provider’s abilities; (5) separate entrance gate; and (6) open parking provision”.

The total of rent plus amenities charges i.e. Rs. 86,25,000 was offered by the assessee for taxation under the head `Income from House Property.

The Assessing Officer (AO) asked the assessee to show cause why receipts as per the amenities agreement should not be charged to tax under the head `Income from Other Sources’. The assessee submitted that since the premises could not be let without the amenities and therefore, the receipts under amenities agreement also are chargeable to tax under the head `income from house property’. The AO held that since the receipts under the amenities agreement were for specifically providing certain services to the tenant but not for letting out the premises, the same were taxable under the head `Income from Other Sources’. The AO taxed the sum of Rs. 36,00,000 under the head `Income from Other Sources’. Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal found that the nature of amenities provided flew out of the rent agreement itself. All the amenities were integral part of the property rented. It is not uncommon to provide these amenities along with the rented premises and it is not the case that these are provided as per the specific requirements of the tenants business. The Tribunal observed that keeping in view the nature of the rent agreement, the amenities provided by the assessee were to exploit the property in most profitable manner, and as the agreement itself states that they were provided for smooth running of the business of the user. The amenities provided were very basic and without which it would be impossible to use the premises, which are, supply of continuous water and electrical supply, parking, entrance and liasoning of the same. The fact that amenities were provided under a separate agreement would not make a difference. The Tribunal noted the ratio of the decision of co-ordinate Bench in the case of Narendra Gupta (ITA No. 3269/Mum/2013, order dated 3.2.2016). It also noted that the Bombay High Court has in the case of J K Investors (Bom) Ltd., 25 taxmann.com 12 held that where service charges are found to be profit under service agreement in respect of staircase of building, lift, common entrance and where these services were not separately provided but went along with occupation of the property, the amount received as service charges was a part of rent received and subjected to tax under the head `Income from House Property’. Since the amenities, in the present case, were an integral part of the rent, the Tribunal following the order of the co-ordinate bench and the Hon’ble jurisdictional High Court, held that the receipts under the amenities agreement are to be charged under the head `Income from House Property’.

The Tribunal allowed the appeal filed by the assessee.

Subhi Construction Pvt. Ltd. vs. ACIT ITAT Mumbai `E’ Bench Before B. R. Baskaran (AM) and Amit Shukla (JM) ITA No. 2318/Mum/2014 A.Y.: 2010-11. Date of order: 4 May, 2016. Counsel for assessee / revenue: Vimal Punmiya / A. K. Nayak

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Section 23 – While computing annual value of the property, municipal taxes of the property are to be deducted even though a part of the property has been let out.

FACTS
The assessee was owner of a commercial tower known as “Blue Wave”. The said property consisted of 8 floors of which 3 were let out to three different persons under different leave and license agreements. The assessee had shown rental income of Rs. 3,22,73,900 on letting of these floors. The municipal tax levied by the local authority in respect of the building was Rs. 1,10,30,098 which was paid by the assessee during the previous year. The assessee had recovered from tenants Rs. 55,77,635 towards municipal taxes. While computing the annual value the assessee deducted Rs. 54,22,365 (Rs. 1,10,30,098 minus Rs. 55,77,635 recovered from tenants and Rs. 30,098 being municipal tax not paid during the year).

The Assessing Officer (AO) observed that while only 3 floors were let out, property tax in respect of the entire building was claimed as a deduction. The AO asked the assessee to show cause why proportionate property tax attributable to the portion not let out should not be disallowed. The assessee submitted that all the floors of the building collectively constituted one single building and hence theory of slicing or proportion is not at all warranted and requested that the deduction claimed be allowed. The assessee, without prejudice to its contention that property tax of the entire building is allowable, submitted working showing property tax attributable to each floor in the building.

The AO noted that the assessee has entered into 3 different agreements with 3 different parties and the license fees is different in respect of each of the floors let out and also because assessee has rented the office premises by slicing it into different floors to different parties, property tax in respect of floors lying vacant cannot be claimed against floors let out. He held that the working filed by the assessee was not proper. Therefore, he held property tax allowable to be 3/8th of the property tax of the entire building. He disallowed the claim of property tax to the extent of Rs. 33,88,879.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the proportionate disallowance has to be worked out as per details of municipal tax actually levied in respect of each of the floors. He directed the AO to restrict the disallowance to Rs. 10,12,604 in place of Rs. 33,88,979.

Aggrieved by the order of CIT(A), both the parties preferred an appeal to the Tribunal.

HELD
The Tribunal observed that a perusal of provisions of section 23 show that while determining the annual letting value of the property, the fact as to whether it is wholly let or partially let is to be considered. However, proviso to section 23 of the Act provides for deduction of taxes levied by any local authority “in respect of the property” shall be deducted in determining the annual value of the property of that previous year in which taxes are “actually paid”. It noted that the reference is to “the property” and not to “whole or any part of the property”. It also noticed that the municipal taxes have to be deducted in the year of payment, even though, it may relate to any of the years. Thus, the importance is given to the “year of payment”, whether or not it pertains to the year in which the property income is assessed.It observed that even though the provisions of section 23(b) and 23(c) make a reference to “any part of property”, yet what is relevant is whether the amount of actual rent received or receivable by the owner is in excess of the sum referred to in section 23(a) of the Act.

The Tribunal held that the question of apportionment of rent / municipal taxes may arise only if it is shown that each floor of the property is a distinct and separate property which it observed was not the case in the facts before it. The copies of municipal tax receipts showed that BMC had given a single number to the impugned property and hence BMC also was considering the entire building as a single property. The Tribunal found merit in the contention of the assessee and held that the authorities were not justified in making proportionate disallowance of municipal taxes actually paid by the assessee.

The Tribunal allowed the appeal filed by the assessee and dismissed the appeal filed by the Revenue.

Shyam Mandir Committee, Khatushyamji vs. ACIT ITAT Jaipur Bench Before T. R. Meena (AM) and Lalit Kumar (JM) ITA No. 651/Jp/2013 A.Y.: 2007-08. Date of order: 2 June, 2016. Counsel for assessee / revenue: Mahendra Gargieya / S. K. Jain

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Section 12A – The proviso to section 12A(2) has retrospective application and has been inserted in the Act to remove the hardship of the charitable trusts / institutions.

FACTS
On 4.3.1986, the assessee trust was registered and started doing its activities. The primary activity of the trust was to look after, manage and admister the affairs of the famous temple of Lord Shyamji at Khatushyamji. Various gulaks/hundies were kept in the temple for collecting the donations, etc. The Trust applied for exemption under section 12AA vide its application dated 16.3.2009. Vide order dated 28.1.2010, the Tribunal in ITA No. 789/ Jp/2009 directed grant of registration to the assessee trust w.e.f. 1.4.2008.

For AY 2007-08, the assessee filed its return of income on 28.1.2008, in response to notice u/s. 148. The return was processed on 12.3.2010 and assessment was completed under section 143(3) r.w.s. 147 on 26.12.2011. The AO taxed a sum of Rs. 2,08,00,000 and rejected the contention of the assessee that it was a capital receipt not chargeable to tax since it was an unregistered trust.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that the receipts of Rs. 2,08,00,000 represented income of the assessee trust u/s. 2(24) and 115BBC of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal where it took an additional ground viz. that the action taken under section 147/148 is bad in law and without jurisdiction and being void ab-initio the assessment be quashed which was admitted by the Tribunal.

HELD
The Tribunal noted that the Finance Act No. 2 of 2014 has inserted the proviso to sub-section (2) of section 12A w.e.f. 1.10.2014. A reading of the said proviso provides that if at the time of grant of registration u/s. 12A, the assessment proceedings are pending before the AO and the object and activities of the trust remain the same for such preceding years, then the benefit of registration for sections 11 & 12 are required to be given to the trust on the income derived from the property held in the trust.

The Tribunal noted that the assessee had filed application for grant of registration on 16.3.2009 and registration was directed to be granted by the order of the Tribunal w.e.f. 1.4.2008. The return of income was processed u/s. 143(1) on 13.3.2010 and the assessment order was passed on 26.12.2011 u/s. 143(3) read with section 147 of the Act. Thus, when the order was passed by the Tribunal on 28.1.2010 the assessment proceedings were pending before the AO. Therefore, it held that the benefit of registration is required to be given for the preceding assessment year i.e. AY 2007-08.

The Tribunal held that the proviso to sub-section (2) of section 12A has retrospective application and has been inserted in the Act to remove the hardship of charitable trusts / institutions. It held that in the present case when registration was granted on 5.3.2010 w.e.f. 1.4.2008, the assessment proceedings for AY 2007-08 were pending before the AO. Therefore, the assessee cannot be treated as an AOP and was required to be treated as a registered trust under section 12A of the Act. The Tribunal concurred with the decision of the co-ordinate bench in the case of SNDP Yogam vs. ADIT(Exemption) in ITO NO. 503 to 506 & 569/Coch/2014 where the co-ordinate Bench had given benefit of registration of trust for AY 2006-07 though the application for registration was granted on 29.7.2013. Following the said judgment it held that the assessee was to be treated as a registered trust for AY 2007-08 dehors the direction issued by the Tribunal to grant the registration w.e.f. 1.4.2008, in the light of the new amendment.

The Tribunal observed that since it has held that the assessee is required to be treated as registered trust w.e.f. 1.4.2007, the second proviso to section 12A(2) applies and the reopening u/s. 147/148 is not permissible. The Tribunal held that reopening made was ill founded and not in accordance with law. It decided the ground in favor of the assessee.

The appeal filed by the assessee was allowed.

J M Financial & Investment Consultants Pvt. Ltd. vs. DCIT ITAT Mumbai `J’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No.: 92/Mum/2012 A.Y.: 2008-09. Date of order: 11 May, 2016. Counsel for assessee / revenue : Dr. K. Shivram / Shabana Parveen

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Section 14A, Rule 8D – While computing amount of
average investment as per rule 8D, strategic investment is not to be
taken into account.

Section 48 – Interest on borrowings
utilized for application of shares is allowable as deduction while
computing capital gains if the same has not been claimed as revenue
expenditure.

FACTS I
The assessee in its return
of income had offered a sum of Rs. 40,000 as disallowance in respect of
expenditure incurred for earning tax free income. In the course of
assessment proceedings, on being asked by the Assessing Officer (AO) to
furnish a computation, the assessee furnished working of disallowance as
per rule 8D. The AO did not reject the amount of disallowance offered
by the assessee. The AO while computing the amount of disallowance under
section 14A did not exclude investment of Rs. 46,86,46,983 in the group
concerns being strategic investments since the said concerns were
subsidiaries or group concerns of the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD I
The
Tribunal noted that while computing the disallowance under Rule 8D, the
AO has not excluded amount of strategic investment while computing
average investment as per Rule 8D. It observed that as per the ratio of
the decision of Delhi Bench of ITAT in the case of Interglobe
Enterprises Ltd. (ITA NO. 1362 & 1032/Del/2013, order dated
4.4.2014) and the decision of Mumbai Bench of the Tribunal in the case
of Garware Wall Ropes Ltd., strategic investment is not to be taken into
account. Following the ratio of these decisions, the Tribunal restored
the matter to the file of the AO and directed the AO to recompute the
disallowance under rule 8D after excluding strategic investment out of
average investment so made by the assessee.

The Tribunal allowed this ground of appeal filed by the assessee.

FACTS II
The
assessee applied for allotment of shares of Cairn India Ltd by
utilizing monies raised by way of borrowings from DSP Mutual Fund. It
paid interest of Rs. 2,57,97,463 on the borrowings utilized for the
purpose of allotment of shares of Cairn India Ltd. Upon allotment, the
shares were sold and short term capital gain was computed. While
computing the short term capital gain the assessee claimed interest as
part of cost of shares sold and therefore, reduced it from sale
consideration to arrive at capital gains. In the tax audit report, the
auditor had classified this expenditure as capital expenditure. This
expenditure was not claimed by the assessee either as business
expenditure or u/s. 57 but was added to the cost of shares allotted.

The
AO rejected the claim of the assessee by holding that the said
expenditure can be claimed only u/s. 57 but it is disallowable since
dividend income is exempt. He held that the said expenditure is not
allowable while computing short term capital gain.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal. Before the Tribunal,
the assessee relied upon the ratio of the following decisions –

a) DCIT vs. Finav Securities Pvt. Ltd. (ITA No. 1010/ Mum/2011; Bench `F’, Order dated 3rd April, 2013);

b) ITO vs. Global Assets Holding Corporation Ltd. (ITA No. 4738/Mum/2010; Bench `G’, order dated 27th July, 2011);

c) Pratibha Paliwal vs. ACIT 11 ITR (Trib) 586 (Del);

d) S. Balan alias Shanmugam vs. DCIT (2009) 120 ITD 469 (Pune);

e)
DCIT vs. KRA Holding & Trading (P.) Ltd. 54 SOT 493 (Pune) –
Portfolio management fees paid by the assessee was to be allowed as
deduction while computing capital gains arising from sale of shares;

f) CIT vs. Sri Hariram Hotels P. Ltd. (2010) 325 ITR 136 (Karn);

g) Smt. Neera Jain vs. ACIT (ITA No. 1861/Mum/2009; decided on 22.2.2010).

HELD II
The
Tribunal upon consideration of the facts and having deliberated on the
judicial pronouncements relied upon by the assessee found that the
assessee has not claimed interest as revenue expenditure but the same
has been capitalized. It held that in view of the judicial
pronouncements relied upon by the assessee, interest expenditure is to
be considered as cost of acquisition of shares / cost of improvement,
therefore, allowable while computing capital gain under section 48 of
the Act. The Tribunal directed the AO to allow assessee’s claim of
interest u/s. 48 of the Act.

The Tribunal allowed this ground of appeal filed by the assessee.

[2016] 158 ITD 480 (Mumbai Trib.) Siemens Nixdorf Informationssysteme GmbH vs. DDIT (International Taxation) A.Y.: 2002-03 Date of order: 31 March, 2016

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Section 2(14) – a non-resident company, gavea loan to its wholly owned subsidiary which constituted property – in sense it is was an assetwhich a person could hold and enjoyand not covered by exclusion clauses set out in section 2(14), it was required to be treated as a ‘capital asset’ and consequently any loss arising on sale of said asset, would be treated as short term capital loss.

FACTS
The assessee, a non-resident company, had given loan to its wholly owned subsidiary in India as its subsidiary had run into serious financial troubles and there was also a proposal to wind up the said subsidiary. The assessee sold the debt, that it had given to its subsidiary, Siemens AG, for a less consideration and claimed the short term capital loss on this transaction of sale of book debt.

The AO disallowed the deduction of capital loss on the basis of the reasoning that

a. the assessee’s right to recover the loan of Euro 90,00,000 from its subsidiary was not a capital asset u/s. 2(14);

b. the assignment of this debt, or the right to recover the money from subsidiary, was not a transfer u/s. 2(47);

c. even going by the valuation report, what was recoverable was part of said sum i.e. Euro 7,31,000 only and what was not recoverable could not be transferred either; and

d. it was a sham transaction only with the tax motives since the advance to the subsidiary was in the capital field and a capital loss was not allowed as deduction.

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

On second appeal before the Tribunal.

HELD
The advance given by the assessee to its subsidiary was a property, in the sense it was an interest which a person could hold and enjoy. Section 2(14) defines a ‘capital asset’ as ‘property of any kind held by an assessee, whether or not connected with his business or profession’ except as specifically excluded in the said section. So far as business assets are concerned, the exclusion is only for ‘(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession’.

Thus the said advance was required to be treated as a ‘capital asset’.

Unless the amount due is treated as a capital asset, there was obviously no question of the short term capital loss. As a matter of fact, it was not even the case of the revenue, and rightly so, that the debt was not a capital asset. As regards CIT-(A)’s observation to the effect that ‘a loan is a current asset and not a capital asset’, it was pointed out that the concept of ‘current asset’ is alien to the law on taxation of capital gains, or, for that purpose, to the law on taxation of income. The expression ‘capital asset’ is a defined expression u/s. 2(14) and, even though it may be more appropriate to describe an advance, a debt or a recoverable amount as a ‘current asset’ from an accountant’s perspective or from any other perspective, as long as such an advance, debt or recoverable amount satisfies the requirements of section 2(14), it will have to be treated as a ‘capital asset’ for the purposes of computation of capital gains.

As regards the CIT-(A)’s observations that the assessee did not have a PE in India, that the assessee was not carrying out any business in India and that the assessee was not required to file a return of income in India, there is no relevance or basis in these observations. The capital asset was the money recoverable from an Indian entity which was thus essentially required to be treated as in India, and, as was mandate of section 9(1)(i) any income, inter alia, ‘through the capital asset situated in India’ is deemed to accrue or arise in India. As a corollary to this taxability of income, the loss through the capital asset situated in India is also required to be taken into account. The authorities below were, in determining whether or not the amount recoverable from an Indian entity was a capital asset u/s. (14), swayed by the considerations which were not germane in this context

Section 2(47)(i) provides that ‘transfer, in relation to a capital asset, includes: sale, exchange or relinquishment of the asset’. Therewas no dispute that all the rights to recover the money from the Indian entity, which was what the capital asset was in this case, was sold to Siemens AG for a consideration of Euro 7,31,000. The sale of trade debts, or even loans, is a part of day to day trade and commerce. The CIT-(A) has not even raised any issues on this aspect of the matter.

As for the vague allegations about the tax evasion motive, nothing cogent has been brought on record at all. The authorities below were in error in fighting shy of the tax corollaries of a legally valid commercial transaction, without bringing on record any material to disprove its bona fides or to show that it’s a sham transaction, just because of their apprehensions about tax motives of the transaction. Just because a transaction results in a tax benefit, unless it is a sham transaction, it cannot be ignored.

There is also no dispute that if the capital loss was to be allowed, the loss had to be short-term capital loss.

In view of the above discussions, as also bearing in mind entirety of the case, the AO was directed to allow the shortterm capital loss.

[2016] 70 taxmann.com 265 (Chandigarh – Trib.) Sanjeev Aggarwal vs. DCIT A.Y.: 2011-12 Date of order: 25 May, 2016

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Sub-section 143(2), 147, 292BB – Failure to
issue notice u/s. 143(2) could not be cured by resorting to deeming
fiction under section 292BB.

FACTS
The assessee had
filed its return of income on 14.8.2011 declaring total income of Rs.
30,10,400 which was processed u/s. 143(1) on 12.10.2011 and subsequently
the case was reopened after recording reasons on 18.3.2014 and notice
u/s. 148 was issued and duly served on the assessee on 25.3.2014. In
response, the assessee vide his letter dated 25.6.2014 submitted that
the original return of income filed by him may be treated as a return
filed in response to notice issued u/s. 148 and requested for reasons
recorded for reopening the assessment which were provided to the
assessee vide letter dated 27.6.2014. Notice dated 25.9.2014 was issued
u/s. 142(1) of the Act along with detailed questionnaire. After a
detailed discussion the Assessing Officer (AO) passed an order dated
31.12.2014 u/s. 147 r.w.s. 143(3) of the Act assessing the total income
to be Rs. 1,42,64,299.

Aggrieved, the assessee preferred an
appeal to the CIT(A) where it took a legal ground that assessment
completed by the AO needs to be quashed and declared to be null and void
since no notice u/s. 143(2) of the Act was issued. The CIT(A) held that
since the assessee had appeared in the assessment proceedings, by
virtue of provisions of section 292BB it is deemed that the notice
required to be served on the assessee was duly served on him in time.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The
Tribunal noted that it is undisputed that the notice under section
143(2) of the Act was not issued by the AO. Therefore, the only issue
before it was whether in the absence of issue of notice under section
143(2) of the Act, the assessment framed u/s.147 r.w.s. 143(2) of the
Act is valid in the background of provisions of section 292BB of the
Act.

The Tribunal on perusal of section 292BB concluded that
section 292BB talks about only the situation where the assessee raises
the issue of non-service of a notice and still co-operates with the
Department. Otherwise also, it stated that the issuance of statutory
notice cannot be dispensed with by the co-operation of the assessee. It
concurred with the assessee that the judgment of Punjab & Haryana
High Court has in the case of CIT vs. Cebon India Ltd. (2012) 347 ITR
583 (Punj. & Har.) has held that the absence of a statutory notice
cannot be cured u/s. 292BB of the Act.

As regards the contention
of the revenue that the provisions of section 148 constitute a complete
code by itself, the Tribunal held that the provisions of section 148 of
the Act itself negate the view taken by the revenue. It observed that
once the assessee files return in pursuance of notice u/s. 148 of the
Act, which is deemed to be filed u/s. 139 of the Act and in case the AO
wants to proceed with the return filed by the assessee, he has to issue a
notice u/s. 143(2) of the Act. Any assessment framed without issue of
notice u/s. 143(2) of the Act, suffers from jurisdictional error. This
position of law has also been clarified by the Delhi High Court in the
case of Alpine Electronics Asia Pte Ltd. vs. DGIT (2012) 341 ITR 247
(Delhi).

In view of the above, the Tribunal quashed the order of
the AO since it was made without issue of notice u/s. 143(2) of the
Act.

This ground of appeal filed by the assessee was allowed.

[2016] 70 taxmann.com 261 (Pune- Trib.) S. R. Thorat Milk Products (P.) Ltd. vs. ACIT A.Ys.: 2004-05, 2005-06, 2007-08 to 2009-10 Date of order: 20 May, 2016

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Sub-section 36(1)(iii), 37 – Interest paid on share application money pending allotment would be allowable as a revenue expenditure. Share application money per se cannot be characterized and equated with share capital. Obligation to return the money is always implicit in the event of non-allotment of shares in lieu of share application money received.

FACTS
The assessee, a closely held company, engaged in the business of processing of milk and manufacturing of milk products, had in its return of income for assessment year 2004-05 claimed interest expense of Rs. 23,04,273 on account of interest paid on share application money received from existing shareholders pending allotment. Similar expense was claimed in other assessment years.

The Assessing Officer (AO) was of the view that the expenditure cannot be allowed under section 37 since it is a capital expenditure and it cannot be allowed u/s. 36(1) (iii) since the ingredients of borrowing by the assessee as also a positive act of lending by one and expense thereof by the other, coupled with an obligation of refund or repayment thereof were not present when the interest is paid on receipts in the nature of share application money. The AO disallowed the interest claimed to have been paid at the rate of 12% per annum.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Rohit Exhaust Systems (P.) Ltd. in ITA No. 686/PN/2011 and others, order dated 5.10.2012. In view of the decision of the co-ordinate bench, the Tribunal held that the share application money per se cannot be characterized and equated with share capital. The obligation to return the money is always implicit in the event of non-allotment of shares in lieu of the share application money received. Allotment of a share is subject to certain regulations and restrictions as provided under the Companies Act. Therefore, receipt by way of share application money is not receipt held towards share capital before its conversion (sic allotment). Therefore, payment of interest on share application money cannot be treated differently in the Income-tax Act. Once the contention of the assessee that the money has been utilized for the purpose of business remains uncontroverted, there is no justification to hold the issue against the assessee. The Tribunal directed the AO to delete the addition on merits.

The Tribunal allowed the appeals filed by the assessee.

[2016] 70 taxmann.com 389 (Raipur) ACIT vs. Jindal Power Ltd. A.Y.: 2008-09 Date of order: 23 June, 2016

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Section 37, Explanation 2 to section 37 – Voluntary expenses incurred, prior to 1.4.2015, on corporate social responsibility are deductible. Explanation 2 to section 37(1) inserted with effect from 1.4.2015 providing that expenditure incurred on corporate social responsibility referred to in Companies Act, 2013 shall not be deemed to be an expenditure incurred for purpose of business or profession does not have retrospective effect.

FACTS
The assessee had in its return of income claimed a sum of Rs. 24,45,435 on account of expenses incurred on discharging corporate social responsibility. This expenditure mainly related to expenses incurred on construction of school building, devasthan / temple, drainage, barbed wire fencing, educational schemes and distribution of clothes, etc voluntarily. The Assessing Officer (AO) disallowed this expenditure on the ground that it was incurred voluntarily, and was not for business purpose.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
As regards the contention of the AO that the expenditure is voluntary and not mandatory, the Tribunal held that as long as the expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature.

As regards the contention on behalf of the revenue that the provisions of Explanation 2 to Section 37(1) be regarded as clarificatary in nature, the Tribunal held that the Explanation refers only to such corporate social responsibility expenses which fall under section 135 of the Companies Act, 2013, and as such, it cannot have any application for the period not covered by this statutory provision which itself came into existence in 2013. Explanation 2 to section 37(1) was held to be inherently incapable of retrospective application any further. The Tribunal also noted that the amendment in the scheme of section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1.4.2015 and in this view of the matter also, there is no reason to hold this provision to be retrospective in application.

The Tribunal observed that the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed as deduction in computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of the Companies Act, 2013 and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be “wholly and exclusively for the purposes of business”. The Tribunal observed that there is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also the basic reason that the Explanation 2 to section 37(1) comes into play with effect from 1st April, 2015, the Tribunal held that the disabling provision of Explanation 2 to section 37(1) does not apply to the facts of the case.

This ground of appeal of the revenue was dismissed.

Deduction u/s. 10A- Export turnover – Allowable Expenditure- telecommunication and insurance expenses have been incurred in local currency in India and not with regard to providing software services outside India: Explanation (2) to Section 10A

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CIT vs. 3D PLM Software Solutions Ltd. [ Income tax Appeal no 46 of 2014, 110 of 2014 & 112 of 2014 dt : 09/06/2016 (Bombay High Court)].

[3D PLM Software Solutions Ltd vs. ITO, Range-10(2) (1). [ITA Nos. 4538/MUM/2010, 5839/MUM/2010, 123/ MUM/2011, 178/MUM/2012 ; Bench : D; dated 03/07/2013; A Y: 2005- 2006, 2006-2007, 2007-2008. Mum. ITAT ]

The assessee was engaged in the business of software development and filed the return of income declaring the total income of Rs. 18,65,361/-. As a result of scrutiny assessment assessed income of the assessee was determined at Rs.39,05,180/-.

The AO invoked the provisions of Explanation (2) to section 10A of the Act and proposed to adjust the Export Turnover (ETO ) qua the insurance and telecommunication expenses for the purpose of computing the deduction u/s 10A of the Act. The AO held that the insurance expenses of Rs. 14,37,288/- and communication expenses of Rs. 41,96,206/- were not to be reduced from the Export Turnover for computing the deduction u/s 10A of the Act.

The assessee submitted that for downward revision of the ETO , the expenses are in the nature of freight telecommunication charges or insurance must be attributable to the export of computer software and only then such expenditure can be reduced from the export turnover.

Further, he explained that no such expenditure is required to be reduced in this case for the reason that expense on telecommunication and insurance expenses incurred for software development were not incurred in foreign exchange attributable to the delivery of stocks outside India. Assessee also explained that the said expenditure was incurred in local currency for carrying on day-to-day software development work from the locations within India. As per the assessee, these expenses are not attributable to export of computer software outside India. Therefore, the export turnover need not be adjusted qua telecommunication expenses.

On considering the submissions of the assessee, CIT(A) appreciated that the impugned expenses were not incurred outside India and they are attributable to the delivery of articles within India. He also appreciated the fact that while making disallowance, AO should have come to a clear finding as to why the telecommunication and insurance expenses were attributable to the said computer software outside India. On the above said facts, CIT (A) granted relief to the assessee.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal . The Tribunal observed that the issue for adjudication relates to the applicability of the provisions of clause-(iv) to the Explanation-2 to section 10A of the Act. Clause (iv) provides for definition of “export turnover”.

The Tribunal held that the export turnover means consideration in respect of the export received by the assessee in convertible foreign exchange. But it does not include freight telecommunication charges or insurance attributable to the delivery of the stocks outside India or expenses incurred in foreign exchange in providing technical services outside India. Thus, the expenses incurred in local currency in India on account of telecommunications and insurance are outside the scope of the above said definition given in clause-(iv). . Therefore, grounds raised by the Revenue was dismissed.

The Revenue filed an appeal before High Court. The Hon. High court found that the Assessing Officer has in the order not given any finding with regard to assessee’s contention that this expenditure had been incurred only in India and not with regard to export of software outside India. The CIT (A) as well as the Tribunal have rendered finding of fact that this telecommunication and insurance expenses have been incurred in local currency in India and not with regard to providing software services outside India. This concurrent finding of fact has not been shown to be perverse in any manner. On the above finding of fact, it is evident that exclusion part of Explanation 2(iv) of section 10A of the Act will not apply to the present facts. Therefore , the question raised by revenue does not give rise to any substantial question of law. Accordingly appeal was dismissed.