Category: Direct Taxes

The applicant was an Indian
company (‘IndCo’) engaged in general insurance business. IndCo entered into
agreement with a Singaporean company (‘SingCo’) for receiving assistance such as
business support, marketing information technology support services and strategy
support, etc. Although services were to be provided on continuous basis, no
employee of SingCo was to visit India for providing the services. SingCo did not
have any business establishment in India. SingCo was to be paid a fee equivalent
to the actual cost incurred by it and a markup of 5% thereon.

The applicant sought ruling
of AAR on the following questions :

(i) Whether the payments
for providing services were FTS in terms of Article 12 of India-Singapore DTAA
?

(ii) Whether payments for
providing access to hardware and software hosted in Singapore, and related
support services, were ‘royalty’ in terms of Article 12 of India-Singapore
DTAA ?

(iii) As SingCo did not
have PE in India in terms of Article 5 of India-Singapore DTAA, whether its
receipts were chargeable to tax in India ?

The AAR concluded as follows
:

(i) Neither clause (a) nor
clause (c) of Article 12(4) of India-Singapore DTAA, which defines FTS, was
attracted. Although some service could be categorised as technical services,
for treating them as FTS, the DTAA required these to be ‘made available’.
Relying on the clarification of ‘make available’ in MOU to India-USA DTAA and
AAR’s ruling in Intertek Testing Services India P Ltd, In re (2008) 307 ITR
418 (AAR) and in Ernst & Young P Ltd, In re (2010) 323 ITR 184 (AAR), the
services fell short of the requirement of ‘make available’. Hence, the
payments for those services were not FTS under Article 12(4) of
India-Singapore DTAA.

(ii) Provision of access
to hardware and software did not result in ‘use of’, or ‘right to use’,
copyright of literary/scientific work. Hence, payments for those services were
not ‘royalty’ under Article 12(3) of India-Singapore DTAA.

(iii) On facts, as SingCo did not have PE
in India, its receipts cannot be taxed as ‘business profits’ under DTAA.

The assessee was an American
company. The assessee had a branch in India for carrying out the following two
distinct activities :

The assessee also had a
joint venture company in India. The branch developed and produced hybrid breeder
seeds which were used for producing and multiplying parent seeds. The branch
sold the parent seeds to the joint venture company.

The data collected by the
assessee while developing breeder seeds formed part of the reach pool of the
head office. This data was used by the head office and other branches of the
assessee globally.

The Tribunal held as follows
:

The assessee was a Cypriot
company, which was registered in Mauritius. The Mauritius tax authority had
issued a tax residency certificate to the assessee, based on which the assessee
claimed benefits under India-Mauritius DTAA.

The assesse owned a rig used
for offshore oil exploration, which it had chartered to an Indian company. While
computing its income, the assessee had claimed depreciation on the rig.

On 24th April 1997, the
assessee executed agreement to sell the rig. The assessee issued sale bill dated
19th September 1997 and finally delivered the rig to the buyer on 6th October
1997. The agreement was executed outside India and the rig was also delivered
outside India.

The assessee intimated to
the Tax Authority that its charter agreement was terminated on 3rd October 1997
and it had moved its rig from Indian waters to international waters and it would
continue doing business in international waters.

However, the fact of sale of
rig was not disclosed by the assessee to the Tax Authority. Upon the Tax
Authority reopening the assessment u/s.147 of Income-tax Act for charging to tax
the capital gains arising from the sale, the assessee challenged the reopening.

Apart from the issue of
reopening, the Tribunal also considered the issue : the assessee being a
non-resident; the operations of PE having come to an end; sale having been
effected outside Indian territory (beyond 200 nautical miles), whether the
capital gain arising from the sale was chargeable to tax in India ?

On the issue of
chargeability of capital gains arising from sale of assets of a PE, the Tribunal
held as follows :

(i) The rig was owned by
the assessee. It was used for business of the assesee in India. The assessee
had claimed depreciation thereon. Therefore, gains on sale of rig were also
deemed to have accrued or arisen in India u/s.9(1)(i) of the Income-tax Act.

(ii) In terms of Article
13(2) of India-Mauritius DTAA, gains from alienation of movable property of PE
are taxable in the country in which PE is situated. Hence, gains on the sale
of rig were taxable in India in terms of Article 13(2).

(iii) Mere deferral of
either receipt of sale consideration or even the sale transaction itself would
have no bearing on the taxability of the transaction. Further, on facts, the
contract was terminated as a result of the sale and not otherwise as claimed
by the assessee.

The assessee was a French
company. The assessee had a PE in India. The PE had, broadly, two kinds of
activities — marine services and certification services. Marine services
included inspection, testing and survey of ships. The certification services
included ISO certification and occupational, heath and safety certification.

The PE had made provision in
respect of technical fees payable to the head office. The assessee had claimed
that the amount provided was towards reimbursement of actual expenses incurred
by the head office. The Tax Authority contended that the amount represented FTS
earned by head office from PE and since tax was not deducted by PE at the time
of credit of the amount, it should be disallowed u/s.40(a)(i) of the Income-tax
Act and added back to the income.

The Tribunal held as follows
:

ITAT ‘G’ Bench, Mumbai

ITA No. 3390/Mum./2009

A.Y. : 2004-05. Decided on :
30-9-2010

Counsel for assessee/revenue
:

Gajendra Golchha/A. K. Nayak

Per Pramod Kumar :

The assessee was a foreign
bank operating in India through a branch office. During the year under appeal,
it had shown a profit of Rs.78,32,594 as per profit and loss account. After
making necessary adjustments as per normal provisions of the Act, including the
setting off of brought forward loss of A.Y. 2003-04, the assessee had returned
nil income. The original assessment u/s.143(3) was completed on 19th September
2006, without making any adjustments to the income returned by the assessee.
According to the AO, the income of the assessee had escaped assessment as it had
not computed book profit u/s.115JB. Accordingly, the notice u/s.147 was issued.
The assessee objected to the reassessment proceedings on the ground that the
provisions of S. 115JB were not applicable to the assessee. However, the CIT(A)
upheld the action of the AO.

Before the Tribunal the
Revenue contended that there was no specific exclusion clause for the banking
companies, and in the absence thereof, it was not open to infer the same. It
further added that the submission of the assessee was clearly contrary to the
legislative intent and plain wordings of the statute.

The Tribunal agreed with the
contention of the assessee that the provisions of S. 115JB were not applicable
to the case of the assessee. According to it, the provisions of S. 115JB can
only come into play when the assessee was required to prepare its profit and
loss account in accordance with the provisions of Part II and III of Schedule VI
to the Companies Act. In the case of the assessee being a banking company,
however, the provisions of Schedule VI are not applicable in view of the
exemption given under proviso to S. 211(2) of the Companies Act. The final
accounts of the banking companies are required to be prepared in accordance with
the provisions of the Banking Regulation Act. Further, relying on the Mumbai
Tribunal decision in the case of Maharashtra State Electricity Board v. JCIT,
(82 ITD 422), it held that the provisions of S. 115JB do not apply to the
assessee, and, therefore, the Assessing Officer was in error in concluding that
income had escaped assessment in the hands of the assessee.

ITAT ‘H’ Bench, Mumbai

A.Y. : 2004-05. Decided on :
31-3-2010

Counsel for assessee/revenue
: Tarun Ghia/

S. K. Pahwa

Vide development agreement
dated 15-2-2004 entered into between the assessee society, its members and the
developer, the assessee society allowed the developer to construct an additional
area aggregating to 30,000 sq.ft for a consideration of Rs. 10.41 crores. Of
this sum of Rs. 10.41 crores an amount of Rs. 15 lakhs was retained by the
assessee and the balance amount was distributed amongst its members in
proportion to area of the flat. The assessee in its revised return of income
declared amount received from developers as ‘Income from Other Sources’.

The Assessing Officer (AO)
was of the view that the assessee was the rightful owner of the land and the
legal ownership vested with it. Since the assessee was held to be the legal
owner, the capital gain was assessed as income of the assessee. The AO
considered the consideration of Rs. 10.26 crores received by flat owners to be
income of the assessee.

Aggrieved the assessee
preferred an appeal to the Commissioner of Income-tax (Appeals) who upheld the
assessment done by the AO.

Aggrieved the assessee
preferred an appeal to the Tribunal.

The Tribunal noted that the
assessee, co-operative housing society, was registered under the Maharashtra
Co-operative Societies Act, 1960 as a Tenant Co-partnership Hsg. Society under
Rule 10(1) Clause 5(b). It also noted that the flat owner members have
transferred their individual entitlement/right to TDR/FSI in favour of the
developers and were entitled to receive directly from the developers aggregate
compensation of Rs. 10.26 crores. All the individual flat owners offered for
taxation their share of compensation, in their respective return of income. The
Tribunal held as under :

“According to CBDT Circular
No. 9, dated 25-3-1969, the legal ownership in flats is vested in individual
members and not in the co-operative society. Further, the flat owners have
proportionate interest in the land and building. The society is only ostensible
owner and in reality and truth, the flat owners own the land and building for
which they have paid full consideration and amount received from the developer
by the flat owner in their individual capacity is the income of the individual
flat owner. The flat owners have relinquished their interest in the property.
The society has no right or control over such income of the individual owners.”

The Tribunal observed that
the benefit of additional TDR was derived and enjoyed by the members of the
assessee-society and no income has accrued to the society. Following the
decision of the Mumbai Bench of ITAT in the case of Jethalal D. Mehta v. DCIT,
which held that such rights do not have any cost of acquisition, the Tribunal
held that there is no merit in computing any capital gains on the sale of the
said TDR in the hands of the assessee society.

The appeal filed by the
assessee was allowed.

ITAT ‘G’ Bench, Mumbai

(Arising out of ITA No.
4019/mm/2007)

A.Y. : 1998-99. Decided on :
10-3-2010

Counsel for revenue/assessee
:

Mohd. Usman/K. Shivram and
Paras S. Savla

The assessee had filed a
return of income for the A.Y. 1998-99 declaring the total income at Rs.11.62
crore u/s.115JA of the Act. The AO assessed the total income at Rs.34.63 crore.
Later on, it was noticed by the AO that the provision of doubtful debts of
Rs.18.99 lacs was not added back to the profit & loss account while computing
income u/s.115JA of the Act. Therefore, the AO passed an order u/s.154 of the
Act on 30-12-2004 adding back the provision for doubtful debts u/s.115JA of the
Act. On appeal the CIT(A) allowed the same relying upon the decision of the
Bombay High Court in the case of CIT v. Echjay Forgins (P) Ltd., (251 ITR 15).
The Tribunal vide order dated 17-3-2009 confirmed the order of the CIT(A).

Thereafter, by the Finance
Act, 2009 clause (g) was inserted in Explanation to S. 115JA(2) of the Act w.e.f.
A.Y. 1998-99 providing that provisions for doubtful debts and advances are
disallowable while calculating book profit u/s.115JA of the Act. Relying on the
decision of the Karnataka High Court reported in the case of M. Srinivasalu v.
UOI, (239 ITR 282), the Revenue contended that an order which is not in
accordance with the retrospective law can be rectified u/s.154 of the Act.

The Tribunal noted that in
respect of the year under appeal the Tribunal had already decided the case in
favour of the assessee by its order dated 17th March, 2009, whereas the
retrospective amendment of the provisions received the assent of the President
of India on 19-8-2009 i.e., after the order of the Tribunal was passed. Further
relying on the Bombay High Court decision in the case of Sudha S. Mehta, it held
that the assessment proceedings got concluded before the Tribunal under the then
existing law and, therefore, there was no mistake apparent from record in the
order of the Tribunal. Accordingly, the Revenue’s miscellaneous application was
dismissed.

ITAT ‘G’ Bench, Mumbai

A.Y. : 2005-06. Decided on :
30-9-2010

Counsel for assessee/revenue
: Anil Sathe/

Abani Kanta Nayar

The Assessing Officer (AO)
disallowed amounts aggregating to `29,52,389 u/s.40(a)(ia) on the ground that
assessee had deposited TDS late in the Government Account. Aggrieved the
assessee preferred an appeal to the CIT(A).

The CIT(A) rejected the
contention made on behalf of the assessee that S. 40(a)(ia) as amended with
retrospective effect by the Finance Act, 2008 and Explanatory Notes to the
Finance Bill, 2004 issued by the CBDT vide Circular No. 5/2005, dated 15-7-2005
were brought in to existence after the end of the financial year 2004-05. He
also rejected the contention that the assessee had complied with the very
intention of introduction of S. 40(a)(ia) i.e., compliance of TDS provisions in
case of residents and curbing bogus payments.

Aggrieved the assessee
preferred an appeal to the Tribunal.

The Tribunal noted that the
CBDT has in its Circular No. 1 of 2009, dated 27-3-2009 clarified the amendment
made to S. 40(a)(ia) by the Finance Act, 2008 with retrospective effect from
1-4-2005 was to mitigate hardship caused by the above provisions of S. 40(a)(ia)
while maintaining TDS discipline. The Tribunal also noted that there has been a
further amendment to this Section by the Finance Act, 2010 whereby time limit
for payment of TDS deducted/deductible during the year has been extended till
the due date of filing return of income. The Tribunal observed that this is
similar to provisions of S. 43B. The Supreme Court has in the case of CIT v.
Alom Extrusions Ltd., (319 ITR 306) held the amendment to S. 43B to be
retrospective in operation. The amendment made by the Finance Act, 2008 to the
provisions of S. 40(a)(ia) being with retrospective effect shows that it was
curative in nature and was brought in to ameliorate the hardship caused on
account of nominal delay in payment of TDS. Applying the ratio of the decision
of the Apex Court, the Tribunal held the amendment brought in by Finance Act,
2010 to be curative in nature and therefore applicable to all earlier years
also. The Tribunal directed the AO not to disallow the expenditure (i) which has
accrued prior to 10-9-2004 when the Finance Act (No. 2) 2004 got the
presidential approval, up to which date the provisions of S. 40(a)(ia) will not
be applicable and (ii) expenditure in respect of which TDS has been paid by the
assessee before the due date of filing of the return.

The ground of appeal filed
by the assessee was allowed.

The AO has issued notice
u/s.147, in response to which, the assessee informed by way of letter that the
return already filed may be treated as return in response to notice u/s.148. He
also requested for providing the reasons for reopening of the assessment.
However, the reasons for reopening of assessment were not supplied to the
assessee. During continuation of assessment proceedings, again the assessee
pointed out that the reason recorded for reopening of assessment has not been
intimated to him which may be provided at the earliest. However, the AO, without
supplying the copy of the reasons recorded, completed the assessment
u/s.143(3)/147 of the Income-tax Act. In response to which, the assessee filed
the appeal before the learned CIT(A), in which ground was taken against the
validity of reopening of assessment u/s.147. However, the learned CIT(A) upheld
the validity of reopening of assessment. Against which, the assessee filed the
appeal before the Tribunal.

The learned Judicial Member,
following the decision of Apex Court in the case of GKN Driveshafts (India) Ltd.
v. ITO, set aside the matter and restored the same back to the file of the AO
with a direction to follow the procedure as laid down by the Apex Court.
However, the learned Accountant Member differed with the learned Judicial Member
as he was of the opinion that on the facts of the assessee’s case, the decision
of the Apex Court was not applicable for the following reasons :

(i) In the case of GKN
Driveshafts (India) Ltd., the assessee did not furnish a return of income,
while in the case of the assessee, not only the return of income is furnished,
but also the assessment was completed.

(ii) Before the CIT(A),
the assessee did not take the ground that the assessment was wrongly made as
the AO did not supply the reasons recorded for reopening the assessment.

(iii) In the case of GKN
Driveshafts (India) Ltd., the notices u/s.148 and u/s.143(2) were challenged
in a writ.

Upon such difference of
opinion between the Members, the matter was referred to the Third Member.

The Apex Court has laid down
a general procedure which is to be followed by the assessee as well as the AO in
each and every case wherever notice u/s.148 is issued. The view of the learned
Accountant Member as well as the Departmental Representative that the above
decision of the Apex Court would be applicable only when the assessee files the
writ petition challenging the notice u/s.148, before the High Court or Supreme
Court is not acceptable.

As per the procedure laid
down by the Apex Court, filing of return by the assessee is a necessary
condition for getting the copy of reasons recorded. Therefore, the argument that
since the assessee has filed the return of income, the above decision of the
Apex Court would not be applicable, is not acceptable.

The assessee has challenged the reopening of
assessment u/s.147 before CIT(A). Once the assessee challenges the validity of
reopening an assessment, he may advance several arguments to support his
contention that assessment is not validly reopened. Non-supplying of the reasons
recorded is one of such arguments.

The facts in brief leading
to the controversy were that unaccounted commission earned by the assessee was
unearthed during the search. In his return of income, the assessee claimed
expenditure incurred to earn the said income which the AO disallowed u/s.69C of
the Act. The CIT(A) deleted this disallowance by observing that S. 69C along
with the proviso thereto cannot be made applicable to the facts of the case for
the reason that the expenditure stands explained insofar as the same was
incurred from the unaccounted commission earned by the assessee. Both the
Members who heard the matter have also concurred with the view of the CIT(A)
that S. 69C is not applicable. However, in the course of hearing before the
Tribunal, the learned Departmental Representative raised a fresh plea to the
effect that the AO should have invoked the provisions of S. 37(1) and requested
the Bench to remit the matter to the file of the AO to consider the allowability
or otherwise of the expenditure u/s. 37(1) of the Act. The learned Accountant
Member rejected the request of the learned Departmental Representative by
observing that the jurisdiction of the Tribunal is restricted to the
subject-matter of the appeal and the fresh plea taken by the learned
Departmental Representative being out of the subject-matter, it cannot be
accepted. In arriving at the conclusion that it is out of the subject-matter of
the appeal, the learned Accountant Member tried to draw distinction between the
words ‘aggrieved’ and ‘objects’ appearing in S. 253(1) and S. 253(2)
respectively. On the other hand, the learned Judicial Member held that the
Tribunal has the jurisdiction to entertain a fresh plea on the subject-matter

of the appeal and has the power to pass necessary direction for ascertainment of
relevant facts
and deciding the issue by applying correct
provisions of law.

The use of different words
in the two sub-sections i.e., ‘aggrieved’ and ‘objects’ appearing in S. 253(1)
and S. 253(2), respectively, has no bearing on the scope of the appeal to be
filed by the assessee and the Department. Relying upon the decision of
Hukumchand Mills Ltd. v. CIT, 63 ITR 232 (SC), it was held that there is no
reason as to why the plea of the learned Departmental Representative cannot be
accepted. In the present case, of course, the Department is the appellant unlike
in the case of Hukumchand Mills (supra). But, it makes no difference. The
Department is aggrieved by the deletion of disallowance of expenditure which
disallowance was made under one particular provision. The subject-matter of the
appeal was whether the expenditure claimed by the assessee was allowable or not.
If it was not disallowable under one particular provision, but is disallowable
under any other provision, the subject-matter, viz., the allowability of
expenditure remains the same. It is not precluded from considering a point which
arises out of the appeal merely because such point had not been raised or urged
by either party at the earlier stage of the proceedings. The matter was remanded
to the AO for considering the claim of the assessee for claiming deduction of
unaccounted expenditure u/s.37(1) of the Act.

For the relevant assessment
years, the assessee paid certain sums as tax in the USA. The same were claimed
as advance tax in India for availing credit under DTAA. The AO treated the same
as advance tax in the order passed u/s.143(3). Subsequently, as the AO was of
the opinion that the tax paid in the USA should be treated as self-assessment
tax, he issued notices u/s.154 and order u/s.154 was passed considering the
amounts as self-assessment tax. The demand payable and interest amounts were
thus modified. The AO was of the view that the DTAA nowhere mentions that the
tax so paid should be treated as advance tax.

Hence the said Explanation
is applicable to assessee and the tax paid in the USA has to be treated as
advance tax.