BCAJ | Bombay Chartered Accountant Journal

Collection of tax at source u/s.206C — Collection of octroi under Bombay Provincial Municipal Corporation Act, 1949 was neither for parking lot nor at toll plaza nor for mining or quarrying nor it was for purpose of business, and, therefore, collection of

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(2009) 120 ITD 7 (Nag.)

Akola Municipal Corporation v. ITO

A.Ys. : 2005-06 to 2007-08

Dated : 21-5-2008

Collection of tax at source u/s.206C — Collection of octroi
under Bombay Provincial Municipal Corporation Act, 1949 was neither for
parking lot nor at toll plaza nor for mining or quarrying nor it was for
purpose of business, and, therefore, collection of octroi by agent appointed
by assessee would not fall in S. 206C(1C).

The assessee-corporation had appointed an agent for
collection of octroi, as levied by the assessee under the Bombay Provincial
Municipal Corporation Act, 1949. The assessing authority held that the
assessee was to collect tax at source on the octroi which was in the nature of
‘Toll Plaza’ within meaning of S. 206C(1C). On appeal, the Commissioner
(Appeals) confirmed the order of the assessing authority.

On second appeal by the assessee :

(1) On a close reading of the legislation like the Bombay
Provincial Municipal Corporation Act, 1949, the Constitution, the Tolls Act,
1851 and the Supreme Court and the High Courts’ decisions and various
dictionary meanings, it could be said that ‘toll’ is a different thing than
‘octroi’. Octroi is normally a tax levied on entry of goods into local
areas, whereas ‘toll’ is a tax levied as compensation for the purpose of
temporary use of land or allowing passage of vehicles through the land.

(2) In the instant case, the contract of the
assessee-corporation with the agent for collecting octroi, was different
from clause (e) of the said section dealing with ‘toll’.

Accordingly, the orders of the Commissioner (Appeals) as
well as the Assessing Officer were to be vacated and the appeal of the
assessee was to be allowed.

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Nirav Shah

Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S. 80-IB are to be fulfilled only if eligible assessee is an industrial undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where assessee was engaged in business of carrying out scient

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(2009) 119 itd 427 (Mum.)

Enem Nostrum Remedies (P.) Ltd. v. ACIT

A.Ys. : 2003-04 and 2004-05

Dated : 28-8-2008

Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S.
80-IB are to be fulfilled only if eligible assessee is an industrial
undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where
assessee was engaged in business of carrying out scientific research and
development and was not an industrial undertaking and had been approved by
Government of India, for claiming benefit of deduction u/s.80-IB(8A),
conditions of Ss.(2) of S. 80-IB were not required to be fulfilled by it.

The assessee-company had been approved as an R&D company by
the department of scientific and industrial research. It claimed deduction
u/s.80-IB(8A). The Assessing Officer denied the deduction u/s.80-IB(8A) by
observing that :

(1) The assessee had not claimed deduction u/s.80-IB(8A)
in the initial year,

(2) Subsequent claim made by it in the relevant
assessment years could only lead to the surmise that its business was formed
by splitting up, or the reconstruction of a business already in existence;

(3) The certificate by the Chartered Accountant in Form
10CCB was not produced.

On appeal, the Commissioner (Appeals) held that the
assessee did not fulfill the conditions of S. 80-IB(2)(iii) as it was not
manufacturing or producing any article or thing, and, accordingly, upheld the
view of the Assessing Officer on a different count.

On second appeal by the assessee, the Tribunal held that :

(1) The four conditions stipulated U/ss.(2) of S. 80-IB
are to be fulfilled only if the eligible assessee is an industrial
undertaking within the meaning of S. (3) to S. (5) of said Section, as the
case may be.

(2) If the assessee is not an ‘industrial undertaking’
but is otherwise eligible for deduction under any of other sub-sections of
S. 80-IB, then there is no requirement for importing the conditions
stipulated in Ss.(2) of S. 80-IB which are applicable to industrial
undertakings.

(3) Since in the instant case, the assessee was engaged
in the business of carrying out scientific research and development and had
been approved by the Government of India, for claiming the benefit of
deduction u/s.80-IB(8A), the conditions of Ss.(2) of S. 80-IB were not
required to be fulfilled by it.

Based on the above observations, the Tribunal directed the
Assessing Officer to allow deduction as claimed by the assessee.

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Nirav Shah

S. 194J of the Act are applicable to payments made for availing bandwidth services and port charges — Held, No.

New Page 26
2009 TIOL 130 ITAT Mum.

Pacific Internet (India) Pvt. Ltd.
ITA Nos. 1607 to 1609 (Mum.) of 2006
A.Ys. : 2003-04 to 2005-06. Dated : 23-12-2008

Whether payments made to MTNL/VSNL for availing
bandwidth services and port charges are technical services — Held, No. Whether
provisions of

S. 194J of the Act are applicable to payments
made for availing bandwidth services and port charges
— Held, No.

Facts :

The assessee-company was engaged in the business
of providing internet access services to corporate clients and consumers. In
the course of survey action u/s.133A of the Act against the assessee, on
29-10-2004, it was found that the assessee had made huge payments to avail
services of MTNL and VSNL for using bandwidth and network operating. The
Assessing Officer was of the opinion that in respect of payments made to MTNL/VSNL
for availing bandwidth services and port charges, the assessee should have
deducted tax at source as required u/s.194J of the Act. The Assessing Officer,
therefore, treated the assessee as in default within the meaning of S. 201(1)
and passed the order, raising the demand against the assessee for failure to
deduct tax in respect of payments made to MTNL/VSNL and also levied interest
as per the provisions of S.

201(1A) of the Act. Aggrieved, the assessee
preferred an appeal to CIT(A), challenging the order passed by the Assessing
Officer treating the assessee in default within the meaning of S. 201(1), but
did not find favour.

On an appeal by the assessee to the Tribunal,

Held :

The bandwidth services and other infrastructure
availed by the assessee for providing Internet access to its customers are
standard facilities. The Tribunal was of the view that the case of the
assessee is covered by the decision of Delhi High Court in the case of Estel
Communications (P.) Ltd. and accordingly held that payment made by the
assessee company to MTNL/VSNL and other concerns for availing the service of
bandwidth network infrastructure cannot be said to be technical services
within the meaning of S. 194J of the Act read with Explanation 2 to clause
(vii) of S. 9(1) of the Act. The appeal filed by the assessee was allowed and
the orders passed by the Assessing Officer u/s.201(1) and u/s.201(1A) of the
Act were cancelled.

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Nirav Shah

S. 23 of the Income-tax Act, 1961 — Annual Value — In respect of a let-out property whether association maintenance charges are deductible while computing annual letting value of the property u/s.23 of the Act — Held, Yes.

New Page 25 2009 TIOL 126 ITAT Bang.

Sheriff Constructions v. ACIT
ITA No. 975/Bang./2008
A.Y. : 2005-2006. Dated : 23-12-2008

S. 23 of the Income-tax Act, 1961 — Annual
Value — In
respect of a let-out property whether association maintenance charges are
deductible while computing annual letting value of the property u/s.23 of
the Act — Held, Yes.

Facts :

The assessee-firm was owner of a property by
the name ‘The Summit’ from which rent of Rs.18,39,027 was declared and in
doing so, the assessee deducted association maintenance charges of
Rs.1,77,000. The AO disallowed the claim by holding that this is not an
allowable expenditure u/s.24 of the Act.

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

In an appeal before the Tribunal, the assessee
contended that since the association maintenance charges have to be paid by
the owner of the property, it depresses the annual letting value of the
property and thus the amount of rent which the property may be reasonably
expected to let from year to year would be an amount against which the
maintenance charges have to be reckoned with. Therefore, the association
maintenance charges were claimed u/s.23(1)(b) of the Act while computing the
annual letting value of the property.

Held :

The issue under consideration is squarely
covered in favour of the assessee in view of the decision of the Delhi Bench
of the Tribunal in the case of Neelam Cable Manufacturing Co. and the
decisions of Mumbai Bench of Tribunal in the case of Sharmila Tagore and
also in the case of Bombay Oil Industries Ltd. The Tribunal observed that no
order or judgment taking a contrary view was brought to its notice by the
Department. Accordingly, the AO was directed to deduct association
maintenance charges paid by the assessee to the Summit Apartment Owners’
Association while computing the annual letting value of the property u/s.23
of the Act.

Cases referred to :

Neelam Cable Manufacturing Co. v. ACIT, (1997) 63 ITD 1 (Del.)
Sharmila Tagore v.
JCIT, (2005) 93 TTJ 483 (Mum.)
Bombay Oil Industries,
ITA No. 550/Mum./ 2000 dated 15-11-2000.

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Nirav Shah

S. 10B of the Income-tax Act, 1961 — Second proviso to S. 10B(1) and Ss.(4) of S. 10B — When the assessee had domestic sales of more than 25% of total sales value during A.Y. 2001-02, is the asses-see still entitled to partial deduction proportionately on

New Page 24 2009 TIOL 124 ITAT Mad.-TM

Tube Investments of India Ltd. v. ACIT
ITA No. 12/Mds./2006
A.Y. : 2001-2002. Dated : 5-1-2009

S. 10B of the Income-tax Act, 1961 — Second
proviso to S. 10B(1) and Ss.(4) of S. 10B — When the assessee had domestic
sales of more than 25% of total sales value during A.Y. 2001-02, is the
asses-see still entitled to partial deduction proportionately on export
turnover in view of S. 10B(4) — Held, Yes. Whether excise duty needs to be
included in domestic turnover while computing the value of domestic sales to
find out the domestic sales as a percentage of total turnover — Held, Yes.

Facts :

The assessee had in its return of income claimed
a sum of Rs.2,88,84,327 as exempt u/s.10B of the Act in respect of income of
100% EOU. In the course of assessment proceedings, the AO noted that the
details of sales were as under :

Domestic Sales Rs. 901.40 lakhs

Export Sales Rs. 2,227.34 lakhs

Total Sales Rs. 3,128.74 lakhs

The AO held that since the domestic sales were
28.8%, the assessee was not entitled to deduction u/s.10B of the Act. The
domestic sales as mentioned above were taken to be inclusive of excise duty.

On an appeal by the assessee, the CIT(A)
confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to
the Tribunal where it contended that the amount of domestic sales to be
considered should be exclusive of excise duty. Also, since during the
assessment year under consideration, second proviso to as well as Ss.(4) were
both on the Statute Book, therefore, it is entitled to claim deduction
u/s.10B, if not at 100%, on proportionate basis in terms of Ss.(4) of S. 10B.

As regards inclusion of excise duty in computing
the value of domestic sales, the Tribunal held that in view of the ratio of
the decision of SC in the case of Chowranghee Sales Bureau P. Ltd., excise
duty and sales tax are part of trading turnover and therefore, excise duty
needs to be included in domestic sales to find out the value of domestic
sales.

The Accountant Member held that since during the
assessment year, both, the second proviso as well as Ss.(4) were on the
statute book, an assessee whose domestic sales were less than 25% would be
covered by the second proviso and would be entitled to 100% deduction and if
the domestic sales exceeded this limit of 25%, then Ss.(4) would apply and the
assessee would be entitled to deduction on a proportionate basis. In the
present case, since the domestic sales exceeded 25% of the total sales, the AO
was directed to allow deduction on a proportionate basis u/s.10B(4).

The Judicial Member disagreed with the Accountant
Member on the issue of grant of proportionate deduction and held that during
the period relevant to the A.Y. 2001-02, if an assessee had domestic sale of
more than 25%, then the assessee would not be entitled to exemption u/s.10B of
the Act.

Upon a difference of opinion amongst the Members,
the TM was asked to consider the question as to whether when the assessee had
domestic sales of more than 25% of the total sale value during the A.Y.
2001-02, he is still entitled to partial deduction on export turnover in view
of provisions of 10B(4) ?

On a reference the Third Member

Held :

The eligibility criteria are laid down in Ss.(1).
The second proviso is an additional incentive which has been granted to the
assessee to provide economic flexibility and to allow it to dispose of the
export-rejects and by-products, etc. The second proviso no way governs the
eligibility criteria. No interdict is laid down in the statute to withdraw the
total benefit of S. 10B in the eventuality of domestic sales being in excess
of 25% limit. There is no ambiguity in the language of the statute. The
interpretation that benefit of S. 10B is not available in the eventuality of
domestic sales exceeding the percentage mentioned in the second proviso would
render the provisions of Ss.(4) otiose. On the panoply of the second proviso
deduction cannot be denied. Accordingly, he held that the assessee was
entitled to claim deduction proportionately on export turnover in view of the
provisions of S.10B(4).

The view of the Accountant Member became the
majority view. The ground raised by the assessee stood allowed.

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Nirav Shah

S. 10(10D) read with S. 37(1) of the Income-tax Act, 1961 — Keyman Insurance Policy premium paid by firm in respect of policy on lives of partners is an allowable deduction.

New Page 23 (2009) 27 SOT 476 (Mum.)

ITO v. Modi Motors
ITA No. 6900 (Mum.) of 2006

A.Y. : 2003-04. Dated : 12-12-2008
S. 10(10D) read with S. 37(1) of the Income-tax Act, 1961 — Keyman Insurance Policy premium paid by firm in respect of policy on lives of partners is an allowable deduction.

For the relevant assessment year, the assessee’s
claim for deduction of premium paid by it on the Keyman Insurance Policy in
respect of the lives of two working partners u/s.37(1) was disallowed by the
Assessing Officer on the grounds that :

Keyman Insurance Policy
premium was allowable only in case an assessee who was an employer, paid the
amount in respect of the life of an employee.
the partnership firm could
not be termed as ‘Another person’ within the meaning of S. 10(10D), as a
firm is not independent and distinct from its partners.

The CIT(A) held that the Assessing Officer was
not justified in presuming that there was no distinction between the partners
and the firm, and the conditions of S. 37 were also satisfied because that
expenditure had been incurred for the purpose of business and, accordingly, he
deleted the disallowance made by the Assessing Officer.

The Tribunal allowed the claim of the assessee.
The Tribunal noted as under :

In view of
the various judicial opinions and also the legislative change in the Act, it
was to be held that under the Income-tax Act, a partnership firm is an
entity separate from its partners and if there exists any specific provision
in the Income Tax law modifying the partnership law, then such specific
provision shall be applied.

The
wordings of Explanation to S. 10(10D) are also relevant, wherein it has been
mentioned that “Keyman Insurance Policy life insurance taken by the person
on the life of another person who is or was the employee of a
first-mentioned person or is or was connected in any manner whatsoever with
the business of the first-mentioned person”. Hence, the Legislature has also
envisaged various kinds of relationships (in addition to employer-employee
relationship) which may exist between the person paying the premium and the
person on whose life such

Keyman Insurance Policy is taken.

The CBDT
vide its Circular No. 762, dated 182-1998 has explained the provisions of S.
10(10D) wherefrom it is abundantly clear that in order to allow the premium
paid on Keyman Insurance Policy as business expenditure, there can exist
relationships other than that of an employer and employee.

The amount
received on maturity or surrender of Keyman Insurance Policy is taxable
under the head ‘Income from salary’ u/s.17(3)(ii) or ‘Income from profits
and gains of business or profession’ u/s.28(1)(vii) or ‘Income from other
sources u/s.56(2)(iv)’. Hence, if the Legislature would have intended that
such premium was allowable as deduction only in cases where employer and
employee relationship existed, then the amount received on
maturity/surrender would have been made taxable only under the head `Income
from salary’.

In view of
the above, Keyman Insurance Premium paid by the firm on the life of its
partners is allowable as business expenditure.

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Nirav Shah

Tax avoidance — For application of Ss.(7) of S. 94, all the three conditions mentioned in clauses (a), (b) and (c) thereof must be cumulatively satisfied; conditions of three months before and after record date for purchase and sale respectively of units

New Page 22 (2008) 304 ITR (AT) 36 (Delhi)

ITO v. Shambhu Mercantile Ltd. ITA No. 2056/Del./2006
A.Y. : 2004-2005. Dated : 29-2-2008

S. 94(7) and CBDT Circular No. 14 of 2001

Tax avoidance — For application of Ss.(7) of
S. 94, all the three conditions mentioned in clauses (a), (b) and (c) thereof
must be cumulatively satisfied; conditions of three months before and after
record date for purchase and sale respectively of units not having been
satisfied cumulatively in all the transactions, loss incurred in those
transactions could not be disallowed by invoking Ss.(7) of S. 94.

The assessee had purchased units of three mutual
funds on the record date for declaration of dividend. These units were sold
after a period of three months from the said record date at a loss of
Rs.1,88,47,816.

The Assessing Officer held that S. 94(7) can be
invoked even if any one of the conditions is fulfilled. Since the units were
purchased on the record date, he held the case to be one of dividend stripping
and disallowed the loss invoking the provisions of S. 94(7), even though they
were sold after three months from the record date. The CIT(A) accepted the
claim of the assessee that all three conditions of S. 94(7) are to be
cumulatively satisfied. On Revenue’s appeal, the ITAT held that :

The question that arises for consideration is as to whether clauses (a), (b)
and (c) of S. 94(7) need to be satisfied cumulatively or not. One may take a
look at the language used in other portions of the IT Act, 1961, where such
requirement for satisfying one of the many conditions or all conditions
cumulatively is laid down.
The case where only one condition is needed to be satisfied as laid down in
the proviso to S. 139(1) relating to one by six scheme, may be taken for
instance. The language of such provision uses the expression ‘or’ at the end
of each condition.
The Legislature, when it desired that all conditions are to be satisfied
cumulatively, has used the word ‘and’ in the relevant provision. For
example, one may take the language used in provisions of S. 80-O, where the
conditions of receipt of income in convertible foreign exchange and such
income should be for services rendered outside India are cumulatively
required to be satisfied.
A
plain reading of the provision of S. 94(7) shows that it has neither used
the expression ‘or’ nor the expression ‘and’. The Revenue wants to say that
each of the conditions laid down in S. 94(7) is independent and if an
assessee satisfies any one of the conditions, then he should be held to be
covered within the mischief of the law. But the use of words, ‘such person’,
‘such unit’, ‘such date’, ‘such securities or units’ in clauses (b) and (c)
of S. 94(7) also indicates that the three clauses have to be read
together—Such an interpretation also finds support from CBDT Circular No. 14
of 2001.

On these reasonings, the ITAT upheld the claim of
the assessee that all the conditions laid down in clauses (a), (b) and (c) of
Ss.(7) of S. 94 have to be satisfied before the said provisions can be applied
in a given case.

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Nirav Shah

Assessee engaged in loading and unloading iron and steel at railway siding using a mobile crane cannot be said to be carrying on civil construction work within the meaning of S. 44AD and, therefore, she is not liable to penalty u/s.271B for failure to get

New Page 21 (2008) 304 ITR (AT) 246 (Patna)

Nirmal Jain (Smt.) v. ITO
ITA No. 273/Pat./2005
A.Y. : 2000-01. Dated : 8-2-2007

S. 44AB, S. 44AD, S. 271B, S. 273B

Assessee engaged in loading and unloading iron
and steel at railway siding using a mobile crane cannot be said to be carrying
on civil construction work within the meaning of S. 44AD and, therefore, she is
not liable to penalty u/s.271B for failure to get accounts audited u/s.44AB,
even though she has shown income below 8% of the gross receipts.

The assessee was engaged in loading and unloading
iron and steel at railway siding using a mobile crane. She declared net profit
at a rate lower than 8% of the gross receipts. The Assessing Officer held that
she should have got her accounts audited as required under clause (c) of S. 44AB
and accordingly imposed penalty u/s.271B. The said order of penalty was upheld
by the CIT(A). On second appeal, the ITAT held that :

1. Use of mobile crane for loading and unloading iron and steel cannot be said to be civil construction work. Once the provisions of S. 44AD are enacted for computing profits and gains of business of civil construction, then any other work which is not in the nature of civil construction cannot be brought within the mischief of this Section.

2. ‘Works contract’ cannot be construed to mean any contract relating to work. Therefore, the assessee was under a bona fide belief that her case does not fall u/s.44AD and that she was not required to get her accounts audited, even though she has shown income below 8% of the gross receipts.

3. Her gross receipts being less than Rs. 40 lacs, there was no compulsion to get the accounts audited u/s.44AB.

4. The principle of ejusdem generis has to be invoked when particular words pertaining to a class or category or genre are followed by general words, and the general words are construed as limited to words of the same kind as those specified. This principle would apply when : (i) the statute contains an enumeration of specified words; (ii) the subject of enumeration constitutes a class or category; (iii) that class or category is not entrusted by enumeration; (iv) each term follows enumeration; and (v) there is no indication of a different legislative intent.

5. There is no legislative intent to infer that works contract can mean any works contract other than civil construction. The heading of S. 44AD clearly says “Special provision for computing profits and gains of business of civil construction, etc.” Ss.(1) of S. 44AD provides that a sum equal to 8% of the gross receipts paid or payable to the assessee can be assessed as income from civil construction or supply of labour for civil construction. Therefore, intention of the Legislature is clear that S. 44AD has been enacted for the purpose of computing profits and gains of business of civil construction and nothing else.

Cases referred to :

CIT v. Shree Warna Sahakari Sakhar Karkhana, (2002) 253 ITR 226 (Bom.), and

CIT v. Mohd. Ishaque Gulam, (1998) 232 ITR 869 (MP)

Nirav Shah

Payment of tax by employer on behalf of employee is a non-monetary perquisite — Tax on such tax is exempt u/s.10(10CC)

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3) (2007) 109 ITD 141 (Delhi) (SB)

RBF Rig Corpn. LIC (RBFRC) v. ACIT

A.Y. 2004-05. Dated : 30-11-2007

Payment of tax by employer on behalf of employee is a
non-monetary perquisite and hence tax on such tax is not liable to be again
included in the total income of the employee by virtue of clause 10CC of S. 10.

For A.Y. 2004-05, the returns of income of non-resident
foreign national employees employed in India were filed by the employer as their
statutory agents. These employees were paid salary ‘net of taxes’ and the taxes
were borne by the employer company. Accordingly, the taxes borne by the employer
were added to the income of the employees and tax was calculated on the
grossed-up salary. However, the Assessing Officer held that the tax borne by the
employer was also a monetary perquisite and hence further tax on such tax should
also be added to the salary by multiple-stage grossing up process. The assessee
appealed to CIT(A), but without success.

In the following two cases, the Delhi Bench of the Tribunal
held that tax on tax borne by the employer was a monetary perquisite and hence
not exempt u/s.10(10CC) :

(1) B.J. Services Co. Middle East Ltd. v. ACIT, (IT
Appeal No. 4033 to 4053 of 2005)

(2) Western Geo International Ltd. v. ACIT, (2007)
16 SOT 459

In the circumstances, a Special Bench was constituted at the
request of the assessee and recommended by the Regular Bench to consider the
operation of S. 10(10CC) and to review the above decisions.

The Special Bench observed that :

(1) The Finance Act 2002 has inserted Clause 10CC in S. 10
to exempt tax on non-monetary perquisites paid by the employer on behalf of
the employees.

(2) The above clause overrides S. 200 of the Companies Act,
1956, which prohibits payment of tax-free salary by a Company.

(3) Combined reading of S. 10(10CC) along with other
consequential amendments by the Finance Act, 2002 like insertion of S.
192(1A), S. 40(a)(v), amendment of S. 195A, etc. suggests that the employer
has an option to pay the taxes on behalf of the employee. Once this option is
exercised by the employer, it is nothing but discharge of an obligation by the
employer, which but for such payment by the employer would have been payable
by the employee. Thus it is a perquisite fully covered by sub-clause (iv) of
clause (2) of S. 17.

(4) A payment by the employer to a third party on behalf of
the employee cannot be considered as a monetary payment to the employee. It
may be a monetary gain or monetary benefit or monetary allowance for the
employee, but it is definitely not a monetary payment to the employee.

(5) S. 10(10CC) excludes from its operation tax on direct
monetary payments to the employees. Tax paid to the Government is a payment to
a third party and hence cannot be excluded from the operation of S. 10(10CC).

Thus, taxes paid by employer on behalf of employees is a
non-monetary perquisite within the meaning of S. 17(2)(iv) and hence tax on such
tax is exempt u/s.10(10CC). Such taxes can be added in the salary of the
employees for the purpose of grossing up, but the tax on such tax can not be
again added for multiple-stage grossing up.

Case relied upon :

CIT v. Mafatlal Gangabhai & Co. (P) Ltd., (1966) 219 ITR 644 (SC)

levitra

Nirav Shah

S. 43B : (a) Advance payment of excise duty allowable without incurring of prior liability. (b) Modvat credit available does not amount to payment, hence not allowable.

New Page 2

2) (2007) 110 TTJ 183 (Chd.) (SB)

Dy. CIT v.
Glaxo Smithkline Consumer Healthcare Ltd.

ITA No. 343 (Chd.) 2005

A.Y.2001-02. Dated : 20-7-2007

S. 43B of the Income-tax Act, 1961 –

(a) Deduction for tax, duty, etc. is allowable u/s.
43B on payment basis before incurring the liability to pay such amounts;
excess amount of excise duty reflected in the account-current is, therefore,
nothing but actual payment of excise duty, even though mentioned as advance
payments. Hence, it is allowable deduction u/s.43B.

(b) Modvat credit available to assessee, as on the
last day of the previous year does not amount to payment of excise duty and,
hence, not allowable u/s.43B.

Allowability u/s.43B on payment :

The assessee’s claim before the Assessing Officer was that
the balance of Central Excise Duty lying in the PLA and RG-23 registers should
be allowed as a deduction u/s.43B. The CIT(A) allowed the claim, relying on the
decisions in the following cases :

(a) Raj & Sandeep Ltd. v. Asst. CIT, (ITA No.
1853/Chd./1992 dated 18-2-1993)

(b) Modipon Ltd. v. IAC, (1995) 52 TTJ (Del.) 477

The Regular Division Bench at Chandigarh found that divergent
views have been expressed by the co-ordinate Benches of the Tribunal on this
issue and there is no judgment of any superior Court so as to settle the
divergent views. The Special Bench was constituted to decide the following
issue :

“Whether deduction for tax, duty, etc. is allowed on
payment basis without incurring of prior liability to pay such amount u/s.43B
of the Act ?”

The Special Bench held that deduction for tax, duty, etc. is
allowable u/s.43B on payment basis before incurring the liability to pay such
amounts; excess amount of excise duty reflected in the account-current is,
therefore, nothing but actual payment of excise duty even though mentioned as
advance payments. Hence, it is allowable as deduction u/s.43B. The Special Bench
relied on the decisions in the following cases :

(a) Indian Communication Network (P) Ltd. v. IAC,
(1994) 48 TTJ (Del.) (SB) 604; (1994) 49 ITD 56 (Del.) (SB)

(b) Lakhanpal National Ltd. v. ITO, (1986) 54 CTR
(Guj.) 241; (1986) 162 ITR 240 (Guj.)

The Special Bench noted as under :

(a) S. 43B provides for the deduction of sums payable
mentioned in clauses (a) to (f), only if actually paid, but it shall be
allowed irrespective of the previous year in which the liability to pay such
sum was incurred by the assessee. The intention of the legislature is apparent
in the language used in S. 43B that the deduction in respect of tax or duty,
which was actually paid by the assessee has to be allowed as deduction without
looking into the year of incurring the liability. The expression ‘irrespective
of the previous year’ dispenses with the concept of previous year in the
matter of the sums covered by S. 43B.

(b) Any reference to the time of incurring or accruing of
the liability is dispensed with by the statute, while concentration is made on
the point of actual payment of the sum to the treasury of the Government.

(c) The payments made to the credit of the accounts-current
are nothing but substantial/actual payments of central excise duty. The
assessee has no option to pay or not to pay such deposits in that running
account to meet the liability of central excise duty arising from time to
time. The payments of advance deposits in the account-current are necessitated
by the mandate of law and not by the option of the assessee. The advance
payments of central excise duty, therefore, satisfy the character of exaction
made by the sovereign under authority of law.

(d) S. 43B has brought in a change in the normal rule of
deduction of expense based on the accounting method followed by an assessee.
The normal principles and practices are done away. Accordingly, there is no
force in the argument of the Revenue that the deduction can be granted only if
the liability is incurred during the previous year even when the payment was
made by the assessee.

(e) The nature of the account-current brings home the point
that the advance payments of excise duties are actual payments of duties.
Therefore, when the payments are understood as actual payments, those
payments, even if mentioned as advance payments, need to be allowed as
deduction u/s.43B.

Modvat credit not allowable u/s.43B :

The other issue considered by the Special Bench was whether
Modvat credit available to the assessee as on the last day of the previous year
amounts to payment of central excise duty u/s.43B.

The Special Bench held that Modvat credit available to the
assessee on the last day of the year does not amount to payment of excise duty
and, hence, it is not allowable u/s.43B.

The Special Bench noted as under :

(a) There is a distinction between unexpired Modvat credit
available in the hands of the assessee as well as the set-off of the credit
balance against actual liability. The time lag between the two points cannot
be ignored. On actual set-off of the unexpired Modvat credit against the
liability towards the payment of duty may be as good as tax paid, but the
unexpired Modvat credit before the point of such set-off cannot be treated as
tax paid.

b) In the case of unexpired Modvat credit, there is no question of set-off on the last day of the previous year and, therefore, there is no occasion to treat the unexpired credit as equivalent to tax paid. In fact, the unexpired Modvat credit available to an assessee is in the nature of a future entitlement which cannot be considered as equivalent to advance payment of duty.

c) In a case of advance payment of central excise duty, there is a defacto payment of duty by cash in the Government treasury. The payment is made towards the central excise account which has been already held as actual payment of excise duty itself. However, in the scheme of Modvat, there is no such payment of excise duty. The credit is available to an assessee under the scheme of Modvat in order to minimise the escalation effect of payment of excise duty by successive manufacturers. Therefore, the excise duty paid at the earlier point is set off against the central excise liability at the next point. Till the set-off is availed at the next point, the duty available for set-off by the assessee is nothing but part of the cost of the materials purchased by him. That is not a payment per se made towards excise duty, but it was in fact a payment made towards the purchase cost.

d) The balance of Modvat credit becomes equivalent to the payment only at the point of time the assessee exercises his option to set off the credit balance against the central excise liability and not before.

Nirav Shah

S. 147 : In proceedings /s.147, AO cannot probe if any other income had escaped assessment.

New Page 2

1 ) (2007) 110 TTJ 118 (Jp)

Silver Mines
v. ITO

ITA No. 426 (Jp) 2005

A.Y. 2000-01. Dated : 21-5-2007

S. 147 of the Income-tax Act, 1961 – When proceedings u/s.147
are initiated, Assessing Officer cannot probe if any other income had escaped
assessment.

In the course of reassessment proceedings, the Assessing
Officer made various additions to the assessee’s income. The CIT(A) held that
when proceedings u/s.147 of the Act are initiated, the proceedings are open only
qua items of underassessment. Further, finality of assessment proceedings on
other issues remains undisturbed. He noted that no assessment was framed
u/s.143(3), nor notice u/s. 143(2) was issued within the time allowed and,
therefore, other issues which are not covered by escaped income cannot be
disturbed. Accordingly, he deleted such additions. He relied on the decisions in
the cases of Vipin Khanna v. CIT, (2002) 175 CTR (P & H) 335 and CIT
v. Sun Engineering Works (P.) Ltd., (1992) 107 CTR (SC) 209.

The Tribunal, also relying on the decisions in the above
cases, upheld the CIT(A)’s order. The Tribunal noted as under :

(a) No notice u/s.143(2) had been served on the assessee
within the stipulated time, indicating that the Assessing Officer had not
found it necessary to require the assessee to produce any evidence in support
of the return. Therefore, the return filed by the assessee had become final.

(b) Therefore, when proceedings u/s.147 are initiated, the
proceedings are open only qua items of underassessment and the finality of
assessment proceedings on other issues remains undisturbed. The amendments
made in S. 143 and S. 147 w.e.f. 1st April 1989 do not in any manner negate
this proposition of law.

(c) The Assessing Officer is not permitted to make fishing
inquiries to probe if any other income had escaped assessment or not, and such
inquiries can only be permitted if, in the first instance, some material comes
to his notice to suggest that some other item of income may have escaped
assessment or had been underassessed.

levitra

Nirav Shah

I S. 2(47), 54EC- Transfer of shares is completed only on final delivery of shares and upon all covenants of the share purchase agreement becoming finally irrevocable and not on the date of execution of the share purchase agreement.

New Page 1

46 2009-TIOL- 789-ITAT- MUM

Mrs. Hami Aspi Balsara vs ACIT

ITA No. 6402/Mum/2008

Assessment Year: 2005-06.
Date of Order: 22.5.2009

I S. 2(47), 54EC- Transfer of
shares is completed only on final delivery of shares and upon all covenants of
the share purchase agreement becoming finally irrevocable and not on the date of
execution of the share purchase agreement.

II Ss. 28(va), 55(2)(a)- Section
28(va) would be attracted where the assessee was carrying on business and not
where the assessee only had right to carry on business in the form of capital
asset— Where capital asset is in the nature of right to carry on business, then
the consideration for non-compete will come within the ambit of capital gains
tax.

Fact I:

The assessee, on 27.1.2005, entered into an agreement for the
sale of shares held by the assessee and other persons in three companies viz.
Balsara Home Products Ltd., Balsara Hygiene Products Ltd. and Besta Cosmetics
Ltd. (i.e. target companies) to Dabur India Ltd. (the buyer). A sum of Rs
10,65,06,753 was received by the assessee on 28.1.2005. As per the terms of the
share purchase agreement, the transfer of shares was effective from 1.4.2005.
The assessee regarded 1.4.2005 to be the date of transfer, and investments
qualifying for exemption u/s 54EC were made within a period of six months from
1.4.2005.

The Assessing Officer (AO) held that since various covenants
in the share purchase agreement resulted in substantial extinguishment of the
rights of the assessee in the target company, and also since the sale
consideration was not refundable to the assessee, the transfer of shares had
taken place on 27.1.2005, it being the date of the share purchase agreement. He
taxed capital gains in the assessment year 2005-06. He also held that the
investment had not been made within six months from the date of transfer and,
therefore, denied exemption u/s 54EC.

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.

Fact II:

The sale consideration for shares of companies having
Intellectual Property Rights, was in excess of the book value of the shares.
Since the share purchase agreement had a non-compete covenant and no specific
consideration was assigned to it, the AO considered the difference between the
sale consideration for the transfer of shares and the book value of the shares —
which was approximately 80% of the sale consideration — to be the consideration
for non-compete, and charged it to tax u/s 28(va).

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held I:

(i) `Sale’, as contemplated u/s 2(47)(i), and
extinguishment of rights, as contemplated u/s 2(47)(ii), are not mutually
interchangeable. If a particular transaction is a transaction of sale, then,
unless the sale is complete, no transfer can be said to have taken place;
because there will always be extinguishment of rights in the case of a sale —
and if a single right out of the entire bundle of the property in a capital
asset is extinguished, then, the transfer would be complete. This will lead to
an absurd situation.

(ii) A case of sale and that of extinguishment of rights
are mutually exclusive. It could not be said that there was extinguishment of
rights on 27.1.2005 because extinguishment of rights implies that the right
cannot be revived. However, till the time the right is revocable, it could not
be said that there was extinguishment of rights. At best it can be said to be
a case of suspension of rights till all the requirements for completing the
sale were over. It was only on execution of the second amendment to the share
purchase agreement on 1.4.2005 that the Escrow Agreement and the power of
attorney became incapable of being revoked, modified or altered unilaterally
by the sellers. Therefore, prior to this date, the sellers had the right to
revoke the share purchase agreement.

(iii) Clause (c) of Section 372A of the Companies Act, 1956
mandates that a company cannot acquire by way of subscription, purchase or
otherwise the securities of any other corporate body, unless previously
authorized by a special resolution passed in a general meeting. This special
resolution was passed by Dabur India Ltd. on 28.3.2005. Therefore, in any
case, prior to this date, it cannot be said that the shares of the assessee
were acquired by Dabur India Ltd.

(iv) The definition of the term `sale’ as per the Sale of
Goods Act assumes importance since this term is not defined in the Income-tax
Act. On a reading of S. 4 of the Sale of Goods Act, it becomes evident that an
agreement to sell becomes complete when the conditions contemplated in the
agreement are fulfilled.

(v) S. 65 of the Indian Contract and Specific Relief Act
makes it very clear that if, for any reason, the terms of a contract cannot be
fulfilled, then the assessee is bound to restore the benefits she had
received, including the consideration to the purchaser.

(vi) The decision of the Amritsar Bench of ITAT, in the
case of Maxtelcon Ventures Ltd. (301 ITR (AT) 90), was rendered with reference
to K N Narayanan (145 ITR 373)(Ker) without considering the subsequent
decision of the same High Court in the case of 203 ITR 663.

Nirav Shah

In view of specific provision in Indo-Swiss treaty, income from shipping business does not qualify for benefit under DTAA and hence, such income would be taxable in terms of provisions of Income-tax Act.

New Page 1

Gearbulk AG (AAR)

(2009 TIOL 24 ARA IT)

AAR No. 803 of 2009

Article 7, 22, India-Switzerland Treaty

Dated : 30-9-2009

Issue :

In view of specific provision in Indo-Swiss treaty, income
from shipping business does not qualify for benefit under DTAA and hence, such
income would be taxable in terms of provisions of Income-tax Act.

Facts :

The applicant is a non-resident shipping Company
incorporated under the laws of Switzerland. The applicant enters into medium
and long term shipping contracts for the transportation of cargo worldwide.

During the financial years 2007-08 and 2008-09, the
applicant entered into a shipping contract with non resident charter for
transportation of cargo from Indian ports to overseas ports. The customers
were procured with the help of assistance of independent agents in UK. In
India, independent agent was appointed for shipping agency, clearing &
forwarding services and for acting as port agent. Admittedly, the applicant
had no physical presence or dependent agent anywhere including in India.

There was no dispute that the applicant trigged tax
liability in India in terms of provisions of S. 172 of the Act but, claimed
exemption by relying on treaty provisions.

Treaty between India and Switzerland as signed in the year
1994 is peculiarly worded. Article 7(1) of the treaty specifically excludes
profits from the operation of ships in international traffic. Article 8 of the
treaty is restricted in its application to the operation of aircraft in
international traffic. The treaty was amended in the year 2001 and ‘other
income’ article was added. In terms of ‘other income’ article, income not
dealt with in the foregoing articles was made taxable only in the Country of
Residence (COR) unless right or property in respect of which income paid is
effectively connected with PE in source country.

The applicant’s contention was that the profits from the
operation of ships in international traffic which stands excluded by Article 7
of the DTAA, is covered by ‘other income’ Article of the treaty; and in
absence of PE in India, the income cannot be taxed in India after amendment of
treaty in the year 2001.

Held :

The AAR held :

The Treaty provisions show that shipping business income
earned by a non-resident is not intended to be covered by Indo–Swiss treaty.
The language and scheme of the provisions of the treaty as also a comparative
study of Treaties of India & Switzerland with others lead to the inevitable
conclusion that shipping income derived from international operations is
sought to be kept outside the purview of the Treaty.

Article 7 of the treaty is explicit and specifically
excludes profits from shipping activity. While specific provision is made for
air transportation business, no such provision was made in the treaty for
shipping business.

The residuary Article 22, concerning ‘other incomes’ was
introduced in 2001. Till then, there was no dispute that the profits derived
from the operation of ships in international traffic was left untouched by the
Treaty because of the specific exclusion in Article 7. The obvious implication
of the exclusion is that such income is subjected to domestic tax law
provisions.

If such legal position was intended to be changed by the
amendments made to the treaty in 2001, specific reference to that effect was
required by amendment to Article 7 and/or in ‘other income’ Article. The AAR
observed :

‘Nor is there explicit language in Article 22 to bring it
within the coverage of the Article. When a particular species of income
excluded from the ambit of the Treaty is sought to be brought within the
scope of the Treaty for the first time, we would expect clear and specific
language to express the intendment rather than leaving it to be taken care
of by Article 22 by implication’.

Shipping profits is specie of business income. As a result
profits of shipping business can be considered to have been dealt with by
Article 7. In any case, when an article concerning business profits
specifically refers to profits from the operation of ships in international
traffic, it can be said that the shipping profits have been dealt with in a
manner as provided by Article 7 of DTAA and the exclusion clause clearly
depicts the intention of the authors of the treaty not to treat the shipping
profits at par with the business profits. As a result, for the purpose of
Article 22, Article 22 cannot apply as the profits arising from the operation
of ships cannot be treated as an item not dealt with in the preceding articles
of the treaty.

The AAR noted the commentary on UNMC and Prof. Klaus Vogel,
which was brought to the notice of the AAR by the applicant, on the rationale
of the provision of reserving the right of taxation to the country of
residence in respect of aircraft and shipping operations. The AAR however
contended that in the absence of clear words in the Indo Swiss Treaty, the
shipping profits could not be placed at par with international air transport.

levitra

Nirav Shah

S. 263 — Assessing Officer adopted one of the permissible view — Such order cannot be said to be erroneous.

New Page 2

Part A: Reported Decisions

(2010) 126 ITD 141 (Bang.)

Siemens Public Communication Networks Ltd. v. CIT

A.Y. : 2003-04. Dated : 16-1-2009

20. Provision of warranty created on accrual basis
is an allowable expenditure.

S. 263 — Assessing Officer adopted one of the
permissible view — Such order cannot be said to be erroneous.

Notional income cannot be considered for deduction
u/s.10B as the assessee is the same.

Facts:

The assessee created provision for warranty on
accrual basis on the last day of each quarter. The actual warranty-related
expenses were adjusted against the provision. The assessee claimed the provision
for warranty as expenditure in its computation of income. The Assessing Officer
allowed the assessee’s claim. The CIT invoked S. 263 and disallowed the
provision for warranty.

The main contention of the assessee was that
provision for warranty was made on the basis of past experience. It placed
reliance on the decision of Wipro-GE Medical Systems Ltd. v. DCIT, (81 TTJ 455)
(Bang.).

Held:

Following the decision of CIT v. Wipro GE Medical
Systems, (supra), the provision for warranty was held to be an allowable
expenditure.

The Tribunal further held that the Assessing
Officer had adopted one of the permissible views. An order is not erroneous or
prejudicial to the interest of Revenue, unless the view taken by the AO is
unsustainable in law.

Facts:

The assessee company had two units — SCS & TCM. SCS
unit’s income was exempt u/s.10B. The company maintains a common bank account
where the amounts received by both the units are deposited. As such no separate
balance sheets for both the units were prepared. The amounts received were
identified by the invoices in the name of respective units and necessary entries
passed in accounts maintained in SAP. Hence it was natural that the funds earned
by S. 10B unit were also utilised by non-10B unit. Based on the fund
utilisation, a monthly cross-charge interest at a suitable rate of interest was
made. Hence, the surplus funds which were available from the EOU have been used
by the other unit. The assessee booked a notional interest income in the account
of EOU unit and claimed expenditure u/s.10B for the said interest income.

Held:

The interest income booked by the assessee is only
a cross entry. As such the assessee has not earned any interest income. The
assessee is the same. There is no relationship of borrower or lender. Such
interest derived on notional basis cannot be considered for the purpose of
deduction u/s.10B.

Note : Though the judgment as regards second issue is
against the assessee, it discusses an important aspect of notional income which
cannot be taxed as the assessee remains the same.

levitra

Nirav Shah

Deeming fiction in S. 50C in respect of the words ‘full value of consideration’ applicable only to S. 48 — Meaning of full value of consideration in Explanation to S. 54F(1) not governed by S. 50C — For S. 54F, sale deed value is the full value of conside

New Page 2

Part A: Reported Decisions

(2010) 45 DTR (JP) (Trib) 41

Gyan Chand Batra v. ITO

A.Y. : 2006-07. Dated : 13-8-2010

19. Deeming fiction in S. 50C in respect of the
words ‘full value of consideration’ applicable only to S. 48 — Meaning of full
value of consideration in Explanation to S. 54F(1) not governed by S. 50C — For
S. 54F, sale deed value is the full value of consideration.

Facts :

The assessee had sold a plot of land for sale
consideration of Rs.10.81 lac and declared a long-term capital gain of Rs.5,558.
The AO invoked provisions of S. 50C and the full consideration was taken as
Rs.19,24,987 and reworked capital gain accordingly.

The assessee has purchased a flat within a period
of two years from the date of transfer of the plot. The assessee has made total
investment of Rs.21,14,986, out of which Rs.16.74 lac was paid before the date
of filing of return for concerned assessment year. Therefore, before the learned
CIT(A), the assessee contended that the assessee may be allowed relief u/s.54F
by considering the full value of the consideration as shown by the assessee in
the sale deed as compared to the full value of consideration adopted by the AO
in view of S. 50C of the Act. The learned CIT(A) rejected the claim of the
assessee by observing that the assessee had not claimed S. 54F deduction at the
time of filing of return of income or during the course of assessment
proceedings. Further, the learned CIT(A) held that the availability of deduction
u/s.54F is subject to fulfilment of various conditions and those conditions were
not fulfilled by the assessee.

Held :

The deeming fiction as provided in S. 50C in
respect of the words, ‘full value of consideration’ is to be applied only for S.
48 of the Income-tax Act. The words ‘full value of consideration’ as mentioned
in other provisions of the Act are not governed by the meaning as provided in S.
50C. For the meaning of full value of consideration as mentioned in different
provisions of the Act except in S. 48, one will have to consider the full value
of consideration as specified in the sale deed.

For claiming exemption u/s.54F, net consideration
received upon transfer of original asset is compared with the cost of the new
asset. In Explanation to S. 54F(1), it is mentioned that net consideration means
the full value of consideration received or accruing as a result of the transfer
of the capital asset as reduced by any expenditure incurred wholly and
exclusively in connection with such transfer. The meaning of full value of
consideration in Explanation to S. 54F(1) will not be governed by meaning of
words ‘full value of consideration’ as mentioned in S. 50C. In the instant case,
the cost of new asset is not less than the net consideration as per sale deed,
thus the whole of the capital gains will not be charged even if the capital
gains have been computed by adopting the value adopted by the stamp registration
authority.

The decision of Goetze (India) Ltd. v. CIT, (2006)
204 CTR (SC) 182 restricts the power of the AO to entertain the claim for
deduction otherwise than by revised return and did not impinge on the power of
the Tribunal u/s.254 of the Act. In the instant case, the assessee has claimed
the deduction u/s.54F before the learned CIT(A) and the learned CIT(A) has
entertained such claim. Therefore, the issue of claim can be considered.

levitra

Nirav Shah

Security deposit received from the licensee with a view to secure due performance of its obligations under the leave-and-licence agreement is in the nature of loan and is in the capital field — Forfeiture of such security deposit upon premature terminatio

New Page 2

Part A: Reported Decisions

(2010) 44 DTR (Mumbai) (Trib.) 124

ACIT v. Das & Co.

A.Y. : 2003-04. Dated : 27-8-2009

18. Security deposit received from the licensee
with a view to secure due performance of its obligations under the
leave-and-licence agreement is in the nature of loan and is in the capital field
— Forfeiture of such security deposit upon premature termination of lease does
not partake the character of income as a capital receipt cannot be said to have
converted itself into a trading receipt on signing of the termination agreement.

Facts :

The assessee was into the business of warehousing,
property leasing, trading in chemical and textile auxiliaries. The assessee
entered into a leave-and-licence agreement with Concord Motors Ltd., a
subsidiary of Tata Motors Ltd. for a period of two terms of three years each. A
lock-in period of five years and six months was provided in the agreement. The
lease rent was treated as business income. During the assessment year under
consideration, the agreement was terminated prematurely by the licensee when 16
months were still remaining out of the lock-in period. On termination of the
lease, the assessee forfeited the interest-free security deposit received by it
from the licensee which was for an amount of Rs.1.50 crore under a separate
security deposit agreement and Rs.5 lakh under a leave-and-licence agreement.
Further, the assessee had received an amount of Rs.24,37,500 as damages for
premature termination from the licensee. This amount was paid on account of
hardship and inconvenience suffered by the assessee as damages. The assessee
treated entire receipt as capital receipt. The AO treated it as revenue receipts
and as taxable income. Upon further appeal, the CIT(A) upheld the order of the
AO.

Held :

A perusal of the terms of agreements clearly shows
that the security deposit is a capital receipt. The deposit is not in the nature
of advance for goods or services, nor could it be qualified as in relation to
the rental component. It is in the nature of loan and is in the capital field.
On a perusal of the termination agreement, it is clear that the forfeiture of
security deposit in question is not in lieu of rental payments and the assessee
is not in default. The forfeiture of security deposit does not partake the
character of income, because a capital receipt cannot be said to have converted
itself into a trading receipt on signing the agreement.

In a decision of Morely (Inspector of Taxes) v.
Tattersall, (1939) 7 ITR 316 (CA), it is clearly laid down that the quality and
nature of receipt for income-tax purpose are fixed once and for all when it is
received and that it does not change its character subsequently. This decision
has been followed in the case of K.M.S. Lakshmanier & Sons v. CIT, (1953) 23 ITR
202 (SC) and it has been observed that one of the conditions is that it is to be
adjusted against a claim arising out of a possible default of a depositor,
cannot alter the character of the transaction or the fact that the purpose for
which the deposit is made is to provide a security for the due performance of a
collateral contract, cannot invest the deposit with a different character. It
remains a loan of which the repayment in full is conditioned by the due
fulfilment of obligations under the collateral contract.

In a subsequent decision of CIT v. T.V. Sundaram
Iyengar & Sons Ltd., (1996) 222 ITR 344 (SC), the above decision of Morely
(Inspector of Taxes) v. Tattersall was considered and held that if an amount is
received in the course of trading transaction, even though it is not taxable in
the year of receipt as being of revenue character, the amount changes its
character when the amount becomes the assessee’s own money because of limitation
or by any other statutory or contractual right. In the case on hand, the
original receipt was in the nature of a loan and never had a revenue character
as it was not at any time a trading receipt as in the case of T.V. Sundaram
Iyengar & Sons.

Further, in the case of Mahindra & Mahindra Ltd. v.
CIT, (2003) 261 ITR 501 (Bom.), it is held that subsequent waiver of principal
amount of loan was not assessable u/s.28(iv) of the Act.

Therefore, the forfeiture of security deposit
amounting to Rs.1.55 crore is not taxable. However, the payment of lump sum
consideration of Rs.24.37 lac is in lieu of the rents and is in the revenue
field unlike the remission of a loan liability. Therefore the same was rightly
taxed as such.

levitra

Nirav Shah

S. 80IB(10) — Merely because some flats are larger than 1500 sq. feet, the assessee will not lose the benefit in its entirety — Only with reference to the flats which have area more than the prescribed area the assessee will lose the benefit — While compu

New Page 2

Part A: Reported Decisions

(2010) TIOL 619 ITAT-Bang.

SJR Builders v. ACIT

ITA No. 1192/Bang./2008

A.Y. : 2005-06. Dated : 21-8-2009

17. S. 80IB(10) — Merely because some flats are
larger than 1500 sq. feet, the assessee will not lose the benefit in its
entirety — Only with reference to the flats which have area more than the
prescribed area the assessee will lose the benefit — While computing the
built-up area of 1500 sq. feet for the purpose of deduction u/s.80IB(10), the
mezzanine floor and common areas are to be excluded.

Facts :

The assessee firm was engaged in the construction
and real estate business. In the return of income filed, the assessee claimed
deduction u/s.80IB(10) in respect of the projects developed and built by it. The
Assessing Officer (AO) in a survey action found that some of the flats in the
project undertaken by the assessee, in respect of which deduction u/s.80IB(10)
was claimed were more than 1500 sq. feet. He held that the assessee was not
entitled to the benefit of S. 80IB(10).

Aggrieved, the assessee preferred an appeal to
CIT(A) who confirmed the disallowance made by the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal held that the assessee is entitled to
deduction u/s.80IB(10) to the extent of flats the built-up area of which is not
more than 1500 sq. feet. In respect of penthouses, the built-up area of which
was more than 1500 sq. feet, the Tribunal held that they may be excluded for
exemption. The Tribunal held that in the light of the decision of the Special
Bench in the case of Brahma Associates, merely because some flats are larger
than 1500 sq. feet the assessee will not lose the benefit in its entirety. It
held that the assessee will lose the benefit only with reference to the flats
which have area more than the prescribed area. It also held that while
considering the built-up area of 1500 sq. feet for the purpose of exemption
u/s.80IB(10), the mezzanine floor and common areas are to be excluded. It
directed the AO accordingly.

levitra

Nirav Shah

S. 194C and S. 194I — Payment made by an assessee for hiring vehicles for transportation of its employees qualifies for TDS u/s.194C.

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Part A: Reported Decisions

(2010) TIOL 618 ITAT-Mum.

ACIT v. Accenture Services P. Ltd.

ITA No. 5920, 5921 and 5922/Mum./2009

A.Ys. : 2007-08, 2008-09 and 2009-10

Dated : 20-10-2010

16. S. 194C and S. 194I — Payment made by an
assessee for hiring vehicles for transportation of its employees qualifies for
TDS u/s.194C.

Facts :

The assessee entered into agreements with various
transport service providers. Under the agreements entered into, the service
provider was to provide transport service at particular locations for
transportation of the assessee’s employees to different destinations and
locations mentioned in the agreement. The transport service provider had to
provide vehicles along with the requisite staff and relevant facilities, full
maintenance and repairs of vehicles, etc.

The assessee deducted income-tax u/s.194C on
payments made under the above-referred agreements. The Assessing Officer was of
the view that the payments under the above-referred agreements were covered by
provisions of S. 194I. The AO held the assessee to be in default as per
provisions of S. 201(1) and also charged interest u/s.201(1A) for all the
assessment years.

Aggrieved, the assessee preferred an appeal to
CIT(A) who held the contract entered by the assessee with the transport service
provider to be covered by Explanation 3 to S. 194C. He held the assessee should
not be treated as an assessee in default u/s.201(1) as well as also not liable
for levy of interest u/s.201(1A).

Aggrieved, the Revenue preferred an appeal to the
Tribunal.

Held :

The Tribunal upon going through the agreements
entered by the assessee noted that the assessee was not required to provide
anything, but was availing the services of the transport for picking up and
dropping of its employees from its offices at different locations to the places
of its clients. It observed that though as per the agreements, the vehicles
provided for the requirements of the assessee were dedicated but it is not a
case of hiring of vehicles only without other facilities. It observed that in
the case of the assessee, all the facilities along with the vehicles were to be
provided by the transport service provider and he was under the obligation to
replace the vehicles as well as the driver and other staff after running certain
hours. It also noted that each vehicle was provided appropriate number of
drivers and time directives to enable the vehicle to be operated 24 hours a day
and 7 days per week. The service provider was responsible for ensuring all legal
and operational obligations. Thus, it was a kind of wet lease, wherein the
assessee was utilising the transport services provided by the service provider
without making any arrangement of its own, but all the arrangements were the
responsibility and obligation of the service provider.

The Tribunal noted that the CBDT has in para 8(ii)
of Circular No. 681, dated 8-3-1994 clarified that transport contract would be
in addition to contract for transportation of loading and unloading of goods;
also covers contracts for plying buses, ferried, etc. along with the staff. It
noted that the Board has also considered this issue in Circular No. 558, dated
28-3-1990 in paragraph 3. It also noted that in Circular No. 715, dated 8-8-1992
the CBDT has in answer to question no. 6 clarified that the provisions of S.
194C shall apply when a plane or a bus or any other mode of transport is
chartered by one of the entities mentioned in S. 194C of the Act. It held that
the classification of vehicles as Plant for the purposes of claiming
depreciation cannot be stretched to determine the nature of services provided
which is otherwise clear from the agreement between the parties. It noted the
observations of the Bombay High Court in the case of Indian National Ship Owners
Association and Others v CIT, (TDS).

Upon going through paragraphs 56.2 and 56.3 of
Circular No. 3 of 2008, dated 12-3-2007 dealing with Explanatory notes on
provisions of the Finance Act, 2007, it held that the provisions of S. 194I are
confined to payment for rent on hiring of land or building including factory
building, furniture or fittings, but not for transport vehicle and other mode of
transportation, particularly when the same is in the nature of providing and
availing transport services. It also held that the expression plant and
machinery used in explanation to S. 194I refers to only plant and machinery used
by the assessee in the business of hiring them, but not the hiring of transport
service.

The appeal filed by the Revenue was dismissed.

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Nirav Shah

Reassessment u/s.147 — When the assessee has made full and true disclosure of all the facts to the AO, the assessment cannot be reopened on the same ground of failure to disclose all the material facts. Further, once the assessee has disclosed all the mat

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(2009) 120 ITD 374 (Delhi)

Moonbeam Finvest Lease Ltd. v. ITO, Ward-5(4), New
Delhi

A.Y. : 1998-99. Dated : 31-1-2008

Reassessment u/s.147 — When the assessee has made full and
true disclosure of all the facts to the AO, the assessment cannot be reopened
on the same ground of failure to disclose all the material facts. Further,
once the assessee has disclosed all the material facts, the proviso to S. 147
cannot be applied and hence reopening is invalid beyond 4 years from the
relevant assessment year.

Facts :

The assessee’s return for A.Y. 1998-99 was processed
u/s.143(1)(a). In the course of assessment proceedings, the details of ‘Lease
Equalisation Account’ charges were asked for by the AO The assessee submitted
his reply and assessment was completed u/s.143(3). On 7-3-2005 the AO reopened
the assessment by issuing notice u/s.148 on the ground of failure on the part
of the assessee to disclose fully and truly all the material facts. The
assessee challenged the reopening of the assessment on the ground of mere
change of opinion as well as on the ground that it was barred by limitation as
notice was issued after 4 years from the end of relevant A.Y. The CIT(A)
confirmed the action of AO. On appeal to Tribunal, it held that the duty of
the assessee was to make full and true disclosure of all material facts and
the AO had to decide what inference can be drawn therefrom. If assessee had
disclosed all the material facts, reopening could not be justified as it would
amount to mere change of opinion on the part of the AO. Since, in the instant
case the AO was satisfied with the explanation of the assessee at the time of
original assessment, it was not allowed to him to reopen the assessment on the
same ground. Further, as there was no failure on the part of the assessee to
disclose all the facts, proviso to S. 147 could not be applied and notice
u/s.148 could not be validly issued beyond 4 years from the end of relevant
assessment year.

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Nirav Shah

S. 50C — When the stamp valuation authority has accepted the consideration declared by the assessee in the sale deed, there is no question of once again referring the matter to Departmental Valuation Officer (DVO) u/s.50C.

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(2009) 120 ITD 233 (ASR)

Punjab Poly Jute Corpn. v. ACIT, Cir.-1,
Bhatinda

A.Y. : 2005-06. Dated : 11-4-2008

S. 50C — When the stamp valuation authority has accepted
the consideration declared by the assessee in the sale deed, there is no
question of once again referring the matter to Departmental Valuation Officer
(DVO) u/s.50C.

Facts :

The assessee had sold certain land at the rate of Rs.
220.81 per sq.yd. (total consideration Rs.16.34 lakhs) which rate was accepted
by stamp valuation authority. However, according to AO the value applicable to
the land as per Punjab State Rules, was at the rate of Rs.500 per sq.yd.
Hence, he referred the matter to DVO thus determining full value of
consideration at Rs.72 lakhs and capital gains at Rs.62.40 lakhs. On appeal to
CIT (A), it confirmed the order of the AO.

On appeal to Tribunal, it held that S. 50C comes into play
only when there is valuation at a higher value for stamp valuation purposes by
the State Authority than declared by assessee in sale deed. When there is such
difference noticed, valuation adopted by stamp valuation authority has to be
substituted with the sale consideration of such property mentioned in the sale
deed. In the instant case, the value of sale consideration was accepted by the
stamp valuation authority as the property was registered with the rate of
Rs.220.81 i.e. rate at which sale of land was made. When the stamp
valuation authority has accepted the consideration declared by the assessee in
the sale deed, there can not be any question of once again referring the
matter to Departmental Valuation Officer (DVO) u/s.50C.

levitra

Nirav Shah

Penalty u/s.271(1)(c) — When the explanation offered by the assessee was bona fide but assessee could not establish its case for deduction in quantum proceedings that would not automatically become a case for levy of penalty for concealment or furnishing

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(

(2009) 120 ITD 151 (Luck.)

Ashok Grih Udyog Kendra (P.) Ltd. v. ACIT-VI,
Kanpur

A.Y. : 2000-01. Dated : 11-4-2008

Penalty u/s.271(1)(c) — When the explanation offered by the
assessee was bona fide but assessee could not establish its case for deduction
in quantum proceedings that would not automatically become a case for levy of
penalty for concealment or furnishing of inaccurate particulars of income.

Facts :

The assessee company filed its return of income for A.Y.
2000-01 claiming an expenditure of Rs.2.37 lakhs as LTC paid to an employee
under the head travelling expenses. The AO disallowed the expenditure on the
ground that the expenditure had not been incurred for the purposes of
business. Further, it was also contended by the Department that if expenses
were incurred on account of travelling of the employee, no TDS had been
deducted and also that the employee was closely related to the director of the
company and hence the expenditure was disallowable u/s.40A(2)(b) as well. The
AO also imposed penalty u/s.271(1)(c) for claiming wrong deduction. The CIT(A)
confirmed the action of AO. On appeal to Tribunal regarding the allowability
of the expenditure, it confirmed the action of AO. Thereafter the assessee
preferred appeal for imposition of penalty u/s.271(1)(c). The Tribunal held
that there was only difference of opinion regarding the allowablility of
expenditure between assessee and department. Although, the disallowance of
expenditure has been upheld by the Tribunal, the department has never
challenged the genuineness of expenditure. It is well settled law that
findings in the assessment proceedings are relevant but not conclusive in
penalty proceedings because the considerations that arise in penalty
proceedings are different from those that arise in the assessment proceedings.
In the instant case, the assessee had disclosed all the material facts
necessary for assessment. Consequently, although the expenditure is
disallowed, the penalty u/s. 271(1)(c) for concealment or furnishing of
inaccurate particulars of income cannot be imposed.

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Nirav Shah

S. 80HHC r. w. S. 147 — Assessee filed original return but did not claim deduction u/s.80HHC since no positive business income — Case reopened and certain disallowances made — Consequently business income turned positive — Assessee claimed deduction u/s.8

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37 ITO v. Tamilnadu Minerals Ltd.
(2010) 124 ITD 156 (Chennai TM)
A.Ys. : 2001-02 & 2002-03. Dated : 13-10-2009

S. 80HHC r. w. S. 147 — Assessee filed original return but
did not claim deduction u/s.80HHC since no positive business income — Case
reopened and certain disallowances made — Consequently business income turned
positive — Assessee claimed deduction u/s.80HHC — AO did not allow the claim
since it was not claimed in the original return and no tax audit report was
filed. Held—Assessee rightfully claimed deduction.

Facts :

The assessee company is a Government of Tamil Nadu
undertaking engaged in the manufacture and export of granites. During the year
under consideration, the total income declared by the assessee was
Rs.2,97,86,549. This total income constituted entirely of income from other
sources. There was no positive income under the head ‘business income’.
Subsequently the assessment was reopened u/s.147 and the AO made certain
disallowance u/s.43B and u/s.14A. This resulted into positive business income.
The assessee thus contended that it should be allowed deduction u/s. 80HHC. The
Assessing Officer rejected the plea on the ground that the deduction was not
claimed in the original return despite there being a positive income, the
assessee had also not filed the audit report and the proceedings u/s.147 are for
the benefit of the revenue and so the assessee cannot claim a benefit which it
had not claimed in the original return.

Held :

(i) S. 147 being for the benefit of the revenue, the
assessee cannot be permitted to convert the reassessment proceedings into an
appeal or revision in disguise, and seek relief in respect of items not
claimed into the original assessment proceedings. However, in the given case,
the assessee could not have claimed the deduction in absence of any business
profits. Further, no sooner the disallowance u/s.43B was proposed by the AO,
the assessee immediately put forth its claim for deduction u/s.80HHC. This it
did because as a result of disallowance, the business income turned positive.
The assessee thus claimed a rightful deduction.

(ii) The argument of the Revenue that the assessee could
have filed a revised return has no force.

(iii) In original return since the deduction was not
claimed, there was no question of filing the audit report as well. But when
the business income became positive and when the assessee made a claim for the
deduction, it is well within its right to file the audit report at the time of
making the claim.

Nirav Shah

S. 194C(2) — Assessee hired lorries from other tank lorry owners to carry out the activity of transportation — Whether payments made to the tank lorry owners would amount to sub-contract within the meaning of S. 194C(2) — Held, No.

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36 Mythri Transport Corporation v. ACIT
(2010) 124 ITD 40 (Visakhapatnam)
A.Y. : 2005-06. Dated : 9-1-2009

S. 194C(2) — Assessee hired lorries from other tank lorry
owners to carry out the activity of transportation — Whether payments made to
the tank lorry owners would amount to sub-contract within the meaning of S.
194C(2) — Held, No.

Facts :

The assessee was a transport contractor engaged in
transporting bitumen to various points. Since the assessee did not have enough
number of lorries, it hired lorries from others. The tank lorry owners from whom
the lorries were hired were paid amounts after the receipt of bills from the
contractees by the assessee after retaining a certain amount termed as
commission.

The Assessing Officer and the CIT(A) held that the tank lorry
owners were sub-contractors and any payment made to tank lorry owners would come
within the purview of S. 194C.

Held :

As per the provisions of S. 194C(2), the sub-contractor
should carry out whole or any part of the work undertaken by the assessee. It
signifies positive involvement in the execution of the whole or any part of the
main work by spending his time, money and energy. In the instant case, there is
no material to suggest that the other lorry owners involved themselves by
spending their time, money and energy or by taking risk associated with the main
contract work. Hence, the payment made to the lorry owners would not fall within
the purview of S. 194C(2).

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Nirav Shah

S. 271(1)(c) — Mere change of head of income by AO cannot be construed as concealment of income — Valuation made by DVO cannot be construed as basis for levying penalty — Valuation done by DVO can be adopted by AO only when there is material on record tha

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35 DCIT v. JMD Advisors (P) Ltd.
(2010) 124 ITD 223 (Delhi)
A.Y. : 2003-04. Dated : 8-2-2008

S. 271(1)(c) — Mere change of head of income by AO cannot be
construed as concealment of income — Valuation made by DVO cannot be construed
as basis for levying penalty — Valuation done by DVO can be adopted by AO only
when there is material on record that sale consideration received by assessee is
more than that declared by him.

Facts :

The assessee-company was engaged in the business of real
estate. It purchased a property and carried on construction work on the same.
The constructed building alongwith the land was then sold at a loss. This loss
was claimed as business loss by the company. The Assessing Officer observed that
the said property was shown in the balance sheet as ‘fixed assets’ and not as
stock in trade. He thus held that the loss incurred was a long-term capital loss
and not business loss. He further referred the matter to the DVO to estimate the
sale consideration and the cost of construction of the property. Based on the
valuation figures given by the DVO, the AO worked out figure of long-term
capital loss.

He also initiated penalty proceedings u/s.271(1)(c) of the
Act.

Held :

(a) The Assessing Officer ignored the fact that the
assessee-company was incorporated with the main object of carrying on real
estate business. Further, the assessee had shown the property as ‘work in
progress’ in the balance sheets of prior years. Hence the action of the AO to
treat the property as capital asset was not well founded.

(b) Even though the action of the AO was not challenged in
the quantum proceedings as the income assessed was finally a loss, this cannot
draw any adverse inference in the penalty proceedings. Also, a mere change in
the head of income cannot be construed as concealment of income.

(c) Further, for reference to the DVO for valuation of the
fair market value, the AO first needs to bring the material on record to prove
that the assessee has received more consideration than that declared by him.
Since there was no material on record, the action of AO was not tenable in law
and addition made on this basis cannot be treated as concealed income of the
assessee to attract penalty.

(d) The AO had further substituted the cost of construction
recorded in the books of the assessee with the valuation of DVO. However, no
material was brought on record by the AO that the cost of construction was an
inflated one in the books of account of the assessee. Hence, the addition made
by the AO by substituting the cost of construction by the valuation of DVO was
not justified, much less the imposition of penalty.

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Nirav Shah

S. 55A—Bearing in mind that in the 1980s, it was common practice to pay a part of sale consideration by unaccounted cash, the rates given by independent media and press like Times of India/Accommodation Times is certainly more reliable indicator of the pr

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34 2010 TIOL 277 ITAT (Mum.)
Kumar K. Chhabria v.
ITO
A.Y. : 2005-06. Dated : 30-3-2010

S. 55A—Bearing in mind that in the 1980s, it was common
practice to pay a part of sale consideration by unaccounted cash, the rates
given by independent media and press like Times of India/Accommodation Times is
certainly more reliable indicator of the prevailing market value of properties
than comparable sale instances.

Facts :

The assessee, while computing long-term capital gain arising
on transfer of office premises purchased by him for Rs.69,000 on 1st October,
1978, considered the fair market value of this property as on 1st April, 1981 to
be its cost of acquisition. The fair market value claimed to be Rs.16,20,000 was
backed by a valuation report by an approved valuer which report relied upon
certain press reports about prevailing market prices and not on any comparable
sale instances.

The Assessing Officer (AO) found the value as per comparable
sale instances in the same society to be much lower. The assessee on being
confronted with these instances submitted that these transactions apparently had
cash element in the consideration and that the valuation of the assessee was
also in consonance with Indian Valuer Directory and Reference Book. The AO
referred the matter to the DVO who valued the premises at Rs.3,00,000 on the
basis of certain sale transactions at Cuffe Parade area. The AO adopted this
amount of Rs.3,00,000 as fair market value of the property on 1-4-1981 and
computed long-term capital gains on that basis. He rejected the assessee’s
objection to the DVO report by stating that this report is binding on the AO.

Aggrieved the assessee preferred an appeal to the CIT(A) who
rejected the appeal of the assessee.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

(i) A Third Member decision of the Tribunal in the case of
Rubab M. Kazerani v. JCIT, 91 ITD 429 (TM) has concluded that reference to DVO
u/s.55A can be made when value of the property as disclosed by the assessee is
less than the fair market value and not vice-versa. In the present case, on
the contrary, AO was of the prima facie view that the fair market value is
less than the value disclosed by the assessee. Thus, the learned CIT(A)’s
emphasis on binding nature of DVO valuation is wholly devoid of legally
sustainable basis.

(ii) It is not even in dispute that at least in eighties,
it was a common practice to pay a part of sale consideration by unaccounted
cash and it was because of this practice several legislative measures had to
be taken to combat tax evasion in property sale transactions. Bearing this in
mind, the rates given by independent media and press like Times of India/Accomodation
Times is certainly more reliable indicator of the prevailing market value of
properties. The market prices given in ‘Indian Valuer Directory & Reference
Book’, also partly supports the valuation by valuation report as filed by the
assessee.

(iii) The Tribunal noted that as against the assessee’s
valuation @ Rs.2,700 per sq.ft., the Directory & Reference Book states the
value of office premises in Nariman Point area @ Rs.2000 per sq.ft. The
valuation as per ‘Accommodation Times’, ranges from Rs.2,400 per sq.ft. to
Rs.3,200 per sq.ft. for commercial area.

(iv) The Tribunal adopted the rate of Rs.2,000 per sq.ft.
as given in the refrencer as against the valuation @ Rs.500 per sq.ft, adopted
by D.V.O. and valuation @ Rs.2,700 per sq.ft. as adopted by the assessee’s
valuer.

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Nirav Shah

S. 133(6)—Merely for want of Permanent Account Numbers, the AO is not justified in disbelieving the transactions by doubting the creditworthiness of the karigars and disallowing the payments made to karigars who have confirmed the receipt of amounts.

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33 2010 TIOL 272 ITAT (Mum.)
ACIT v. Lakhi Games Impex Pvt. Ltd.
A.Y. : 2003-04. Dated : 29-1-2010

S. 133(6)—Merely for want of Permanent Account Numbers, the
AO is not justified in disbelieving the transactions by doubting the
creditworthiness of the karigars and disallowing the payments made to karigars
who have confirmed the receipt of amounts.

Facts :

The assessee company was engaged in the business of import of
rough diamonds, cutting and polishing and thereafter export of the same. It had
claimed a sum of Rs.22,69,75,283 as labour charges paid to karigars. In the
course of assessment proceedings, particulars of individual recipients of labour
charges were furnished. The Assessing Officer (AO) issued notices u/s.133(6) to
five parties. Notice was served to one party and the other four notices were
returned unserved by the postal authorities. No reply was received from the
party to whom the notice was served. On being confronted, the assessee filed a
confirmation in respect of the said party. The assessee company also filed
confirmations of the other four parties to whom notices were issued but were
returned unserved. Since PAN in respect of all these five parties did not exist
in the confirmations, the AO doubted the creditworthiness of the parties and the
genuineness of the transactions. He disallowed the labour charges in respect of
these five parties.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
observed that this is not a case of cash credit where creditworthiness has to be
examined. He held that non-availability of PAN cannot make a transaction as
non-genuine. He allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal agreed with the finding of the CIT(A) that this
is not a case of cash credit and the issue relates to the allowability of
expenditure. Since the parties have confirmed to have received the payments,
merely for want of permanent account numbers the AO was not justified in
disbelieving the transactions by doubting the creditworthiness of the karigars.

The Tribunal upheld the order of the CIT(A) and the ground
raised by the Revenue was dismissed.

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Nirav Shah

Capital gains — Since sale consideration of the industrial unit has been arrived at by ‘capitalisation of profits’ and not challenged by any of the authorities below, it cannot be said that the sale of unit is an itemised sale of assets of the unit.

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42 (2010) 38 DTR (Pune) (TM) (Trib.) 393
J. B. Electronics v. JCIT
A.Y. : 1997-98. Dated : 31-12-2009

Capital gains — Since sale consideration of the industrial
unit has been arrived at by ‘capitalisation of profits’ and not challenged by
any of the authorities below, it cannot be said that the sale of unit is an
itemised sale of assets of the unit.

Facts :

The assessee-firm sold its industrial unit to the sister
concern and surplus of Rs.3,90,75,996 arising was claimed to be exempt on the
ground that it was a slump sale of its business. The price for transfer was
arrived at by capitalisation of profits method. The weighted average of net
profits for 3 preceding years has been capitalised and the consideration is
arrived at on the basis of 5 times of such weighted average. Accordingly the
sale consideration of Rs.5,64,79,500 was fixed. Individual value of assets and
liabilities was not considered in computation of price of sale of business.

The AO noted that the assessee had got its assets revalued at
Rs.1,71,85,000 as on 31st March, 1995 on the basis of valuation report of an
independent valuer. It was thus clear that the value of assets was not more than
Rs.1,71,85,000 shortly before the date of transfer of assets. The difference
between Rs.1,71,85,000 and WDV of assets was taxed as short-term capital gain
and difference between the consideration i.e., Rs.5,64,79,500 and Rs.1,71,85,000
was taxed as long-term capital gain as goodwill u/s.55(2)(ii).

Aggrieved, the assessee carried the matter in appeal before
the CIT(A) but without any success. Not satisfied with the order of the CIT(A),
the assessee carried the matter in appeal before the Tribunal. There was a
difference of opinion between the members, and the matter was referred to the
Third Member.

Held :

None of the authorities below had any issues with genuineness
or bona fides of the valuation method adopted for sale of the unit. It has never
been the case of any of the authorities below that the consideration arrived at
was part of the sham arrangement and that inter se relationship between the
buyer and the seller has vitiated the bona fides of the sale agreement.

There is no dispute that valuation as on 1st May 1996, which
was the date of transfer of the business, for individual assets is not
available, and the valuation report relied upon by the authorities below is
dated 12th April, 1995 estimating value of the assets as on 31st March, 1995.
The value of an asset as on 1st May 1996 cannot be the same as on 31st March,
1995. The decision of CIT v. Artex Manufacturing Co., 227 ITR 260 (SC), which
has been relied upon by the lower authorities will be relevant only in a case in
which sale consideration of the business is computed on the basis of values of
specific assets and liabilities.

The other aspect of the matter is that the unit has been
transferred as a going concern. Even the manpower, registrations, contracts,
permissions and sanctions were to be transferred to the buyer. The unit has been
transferred to the buyer in a fully functional state along with all the
employees and all the contracts.

Regarding the argument raised that the sale transaction is a
collusive transaction between the sister concerns and the whole theory of
valuation on the basis of capitalisation of profits is an afterthought, it has
not been the case of any of the authorities below that the sale agreement is a
sham agreement or that valuation method adopted by the assessee is not bona
fide. The payments have been made in accordance with this agreement on 1st May,
1996 itself, and therefore it cannot be said that the quantification of sales
consideration was an afterthought. As for the assessee and the buyer being
sister concerns, merely because an agreement is entered into by related parties
the effect of the agreement cannot be ignored. Therefore, the impugned
transaction is not a case of itemised sale and it is clearly a case of slump
sale of the business.

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Nirav Shah

S. 80HH and S. 80-I — New industrial undertaking vis-à-vis expansion of production capacity of existing unit.

New Page 1

41 (2010) 38 DTR (Delhi) (SB) (Trib.) 137
JCIT v. Thirani Chemicals Ltd.
A.Y. : 1992-93. Dated : 9-4-2010

S. 80HH and S. 80-I — New industrial undertaking vis-à-vis
expansion of production capacity of existing unit.

Facts :

The assessee is engaged in the business of manufacturing
calcium carbonate since 1978 with a starting production capacity of 5,000 MT
annually, which was enhanced in various stages — to 7,500 MT in 1986-97 — to
9,600 MT in the year 1988-89 — to 11,000 MT in 1990-91 and 70,000 MT in 1991-92,
which resulted in corresponding increase in the production. The assessee claimed
deductions u/s.80HH and u/s.80-I in these years on the basis that with each
expansion a new industrial undertaking came into existence in the year in which
the production capacity was increased and the period of allowability of
deductions will increase accordingly.

For A.Y. 1991-92 and 1992-93, the AO rejected such claims of
the assessee holding that it was a case of gradual expansion and reconstruction
of existing unit and the increase in the production capacity cannot be held as
establishment of new industrial undertaking. The CIT(A) confirmed the view of
the AO in A.Y. 1991-92. However for A.Y. 1992-93, the CIT(A) took a different
view than his predecessor and allowed the claim of the assessee.

The Tribunal decided the appeal for A.Y. 1991-92 in favour of
the assessee relying on the observations of the CIT(A) for A.Y. 1992-93. Whereas
for A.Y. 1992-93 the Tribunal considered the matter afresh without being
influenced by the earlier order on the ground that the fact that the appeal
against the order of the CIT(A) for A.Y. 1992-93 was pending before the Tribunal
was not brought to the notice of the Tribunal at the time when the appeal for
A.Y. 1991-92 was heard. Upon considering the matter afresh, the Tribunal decided
against the assessee.

Upon further appeal to the High Court, it was directed to
form a Special Bench to resolve the controversy.

Held :

The true test is, there must emerge a new and identifiable
undertaking, separate and distinct from the existing unit. In the present case,
there is no dispute that so-called expanded new plant and machinery were
installed in the existing building, on same process line-up and infrastructure
and new equipments were connected to the old machinery set-up. The rotary gas
producer was common for the old and the new plant. Similarly, all the raw
material processed passed through a common lime holding tank. The old and the
new plant were integrated in such a manner that it was difficult to identify the
input of raw material and final product whether it was produced through the
so-called expanded plant and machinery or through the old plant and machinery.
Raw material, finished products, employees, electric connection, maintenance of
books of accounts, etc. were all common and could not be identified as coming
from new or old plant. Further, the assessee was not able to ascertain the exact
profits independently from old and expanded plant, that is why the assessee
computed its profits on proportionate basis. Therefore no independent and
distinct unit came into existence for the purpose of claiming deduction either
u/s.80HH or u/s.80-I.

levitra

Nirav Shah

S. 80-I r/w S. 80-IA — Where old business is carried on and on growth of business, new units established, benefit of S. 80-I/80-IA available to new unit, if said unit is ‘undertaking’ — A unit qualifies as industrial undertaking when it produces articles

New Page 2

11 114 ITD 189 (Mum.)

Jt. Commissioner of Income-tax v.

Associated Capsules (P) Ltd.

A.Ys. : 1994-95 to 1997-98. Dated : 5-2-2008

S. 80-I r/w S. 80-IA — Whether where an old business is
carried on by the assessee and commensurate with the growth of the business, new
units are established, benefit of S. 80-I/80-IA will be available to a unit or
new unit, if said unit is in the nature of ‘undertaking’ — Held, Yes; Whether a
unit qualifies to be called an industrial undertaking when it undertakes
production or manufacture of articles or things in its own right and produces
such articles or things by itself as a separate and independent unit — Held,
Yes.

Facts :

The assessee had been engaged in the business of production
of empty hard gelatine capsules and their sale to pharmaceutical companies. The
manufacturing activities were carried out by the assessee with the help of
capsule manufacturing machines. In the relevant assessment year, the assessee
had seventeen capsule manufacturing machines installed in four separate
undertakings. It claimed deduction u/s.80-I and u/s.80-IA in respect of its
undertakings.

The AO noticed that the departmental authorities in a survey
u/s.133A at the factory premises of the assessee-company had found that all the
four undertakings were located in the same premises of the factory and all of
them were involved in the production of capsules; that the source of power for
all the units was one, inasmuch as there was one electricity bill for the
factory; that air-conditioning plant for all the units was common; and that
certain ancillary activities, pre and post-manufacturing were common. He held
that all the four undertakings, which were claimed by the assessee to be
separate and independent of each other were essentially one undertaking. He
therefore concluded that undertakings in question could not be regarded as
separate and independent for the purpose of deduction u/s.80-I and u/s.80-IA
and, accordingly, denied the deduction claimed by the assessee.

On appeal, the CIT(A) held that though all the machines and
undertakings involved in the manufacturing of the same article, i.e.,
capsules, were located in the same premises, yet the area of each of the four
undertakings was clearly demarcated and separated from each other; that though
the main source of power in the entire factory was common, yet the power
consumed by each machine was clearly and separately recorded; that though
centralised air-conditioning was provided to all the undertakings, it could be
shutoff for any undertaking without affecting the others; the supply of raw
materials was monitored machinewise and under-takingwise; in a nutshell, each of
the undertaking was working independently of the others. He, therefore, held
each of the undertaking to be separate and independent, and to be producing
capsules in its own right. He, therefore, allowed assessee’s claim for deduction
u/s.80-I and u/s.80-IA.

On Revenue’s appeal, the Tribunal made the following
observations :

1. A perusal of S. 80-I and S. 80-IA establishes that the
notion of ‘undertaking’ is a core jurisdictional element for the application
of S. 80-I and S. 80-IA. The other conditions stipulated can be satisfied only
when there is an ‘undertaking’. The undertaking should be new, in the sense
that it should have begun to manufacture or produce specified articles or
things after the prescribed time schedule.

2. Application of S. 80-I/S. 80-IA to new industrial
undertakings started for the first time by the assessee is usually devoid of
any difficulties. Controversies arise where the old business is being carried
out by the assessee and the new activity is launched by him establishing new
plants and machinery by investing substantial funds to produce the articles or
things which are the same as those from of the old business or to produce some
distinct marketable products
which may feed the old business. It is the general contention of the Revenue
in these cases that establishment of a new undertaking manufacturing the same
product is not a new undertaking eligible for tax incentives. Benefit under
the said Sections is available to a unit or a new unit only if it is in the
nature of an ‘undertaking’.

3. The term ‘undertaking’ has not been statutorily defined
in the Income-tax Act, and the crucial question of whether a unit is to be
considered as an undertaking is left to be decided by the Tribunals/Courts.
The Tribunal further observed that a unit qualifies to be an undertaking when
it undertakes production or manufacture of articles or things in its own right
and produces such articles or things by itself as a separate or independent
unit.

4. The CIT(A) on examination of the material on record had
held that the units in question were well-integrated units producing capsules
on their own, and had a separate and distinct identity of their own, which had
not been shown to be incorrect or based on no material. The Department had
also not rebutted the assessee’s claim that it had treated each undertaking as
separate and independent in its accounts. It was also not the case of the
Department that any of the negative tests laid down in S. 80I(2) was attracted
in this case. Therefore, the CIT(A) had decided the issue correctly.
Therefore, the appeal filed by the Revenue was liable to be dismissed.

Cases referred to :

(i) Textile Machinery Corpn. Ltd. v. CIT, (1997) 107
ITR 195 (SC) (para 7)

(ii) Periyar Chemicals Ltd. v. CIT, (1997) 226 ITR
467 (Ker.) (para 9)

Nirav Shah

S. 11(1)(a) — Application of income should result and should be for the purpose of charitable purposes in India and application need not be in India.

New Page 1

40 (2010) 38 DTR (Delhi) (Trib.) 105
National Association of Software & Services Companies (NASSCOM) v.

Dy. DIT (E)
A.Ys. : 1998-99, 2004-05 & 2005-06

Dated : 12-3-2010

S. 11(1)(a) — Application of income should result and should
be for the purpose of charitable purposes in India and application need not be
in India.

Facts :

The assessee incurred expenditure at an event at Hannover,
Germany, which was claimed as application of income within the meaning of S.
11(1)(a). The AO and CIT(A) were of the opinion that the expenditure should have
been incurred in India in order to be eligible for exemption.

Held :

A perusal of the provisions of S. 11(1)(a) of the Act clearly
shows that the words used are ‘is applied to such purpose in India’. The words
are not ‘is applied in India’. The fact that the Legislature has put the words
‘to such purpose’ between ‘is applied’ and ‘in India’ shows that the application
of income need not be in India, but the application should result and should be
for the purpose of charitable and religious purpose in India. It is not the case
of the Revenue that the expenditure incurred by the assessee in Hannover,
Germany has not resulted in the benefit being derived in India. In these
circumstances, it cannot be said that the expenditure incurred by the assessee
in Hannover, Germany, which resulted in and which was for the purpose of
attaining the charitable object in India, is not application of income. The
decision in the case of Gem & Jewellery Export Promotion Council v. ITO, 68 ITD
95 (Mum.) was followed.

levitra

Nirav Shah

S. 145 — Entire amount of time-share membership fee receivable by assessee upfront at time of enrolment of a member is not income chargeable to tax in initial year on account of contractual obligation fastened to the receipt to provide services in future

New Page 1

32 2010 TIOL 262 ITAT (Mad.) (SB)
ACIT v. Mahindra Holidays & Resorts (India) Ltd.
A.Ys. : 1998-99 to 2002-03. Dated : 26-5-2010

S. 145 — Entire amount of time-share membership fee
receivable by assessee upfront at time of enrolment of a member is not income
chargeable to tax in initial year on account of contractual obligation fastened
to the receipt to provide services in future over term of contract.

Facts :

The assessee was in the business of selling time share units
in its various resorts. It granted membership for a period of 25/33 years on
payment of a certain amount as membership fee. During the currency of the
membership, the member had a right to holiday for one week in a year at the
place of his choice from amongst the resorts of the assessee. He also had a
right to transfer, bequeath or gift his membership/time-share unit to any
person. The membership fee was received either in lump sum or in instalments. In
addition to the membership fee, the member was liable to pay annual maintenance
charges, irrespective of whether he made use of the resort or not. These charges
were for the maintenance and upkeep of the various resorts. Additional payment
towards utilities like electricity, water, etc. was payable if the resort was
utilised. The assessee was following the mercantile system of accounting. It
treated the membership fee as revenue receipt. However only 40% of the amount
received was offered for taxation in the year of receipt and the balance was
equally spread over the period of membership of 25 or 33 years on the ground
that it was relatable to the services to be offered to the members. The
Assessing Officer (AO) held that as per the accrual system of accounting, the
entire receipt had to be assessed as income in the year of receipt; the Act does
not recognise the concept of deferred income. He made an addition of 60% of the
receipts shown by the assessee as advance subscriptions.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
upheld the contentions of the assessee and deleted the addition in all the
years.

Aggrieved, the Department preferred an appeal to the
Tribunal. At the instance of the assessee a Special Bench was constituted to
consider the following question :

“Whether the entire amount of the time-share membership fee
receivable by the assessee upfront at the time of enrolment of a member is the
income chargeable to tax in the initial year when there is a contractual
obligation fastened to the receipt to provide the services in future over the
term of the contract ?”

Held :

(i) From the observations of the Supreme Court in E. D.
Sassoon & Co. Ltd v. CIT, (26 ITR 27) (SC), it is evident that two conditions
are necessary to say that income has accrued to or earned by the assessee.
They are, (i) it is necessary that the assessee must have contributed to its
accruing or arising by rendering services or otherwise, and (ii) a debt must
have come into existence and he must have acquired a right to receive the
payment. In the present case, a debt is created in favour of the assessee
immediately on execution of the agreement. However, it cannot be said that the
assessee has fully contributed to its accruing by rendering services. The
assessee is bound to provide accommodation to the members for one week every
year till the currency of the membership. Till the assessee fulfils its
promise, the parenthood cannot be traced to it.

(ii) The argument of the assessee that the main reason to
spread the balance amount of membership fee over the tenure of membership was
due to the fact that the assessee has to incur heavy expenditure for the
upkeep and maintenance of its resorts was not accepted since the assessee was
collecting separate charges for maintenance and use of utilities and therefore
it was held that matching concept cannot be pressed into service with regard
to the membership fee.

(iii) If the assessee is not able to provide accommodation
in any of its notified resorts, it will try to procure alternate
accommodation. This also will entail additional expenditure on the part of the
assessee over and above paying liquidated damages to the assessee. Unlike the
case in Calcuta Co. Ltd. (37 ITR 1) (SC), the liability in this case is
difficult not only to quantify but also to reasonably estimate it. The
liability is undoubtedly there. However, no scientific basis has been brought
to our notice to quantify the same even reasonably. Even if the assessee had
chosen to provide for the liability every year to comply with the matching
concept, it would have been wholly unscientific and arbitrary.

(iv) In the case of Rotork Controls India, 314 ITR 62 (SC),
the Supreme Court has observed that a provision is recognised when (a) an
enterprise has a present obligation as a result of a past event; (b) it is
probable that an outflow of resources will be required to settle the
obligation; and (c) a reliable estimate can be made of the amount of the
obligation. If these conditions are not met, no provision can be recognised.
In the present case, the assessee has a present obligation as a result of a
past event and outflow of resources is probable to settle the obligation.
Thus, first two conditions are satisfied. However, considering the nature of
activity, it is the third condition which is difficult to satisfy.

(v) Recognising the entire receipt as income can lead to
distortion. Somewhat similar, though not exactly identical, situation was face
by the Supreme Court in the case of Madras Industrial Investment Corporation
Ltd. v. CIT, 255 ITR 802 (SC). The only difference is that in the case of
Madras Industrial Investment Corporation the distortion was supposed to be on
account of expenditure, in the present case the distortion is on account of
the entire income being accounted in the year of receipt.

(vi) Since it is difficult to estimate the liability which
is likely to be incurred in future, more so in the absence of any scientific
basis or historical data, the only way to minimise the distortion is to spread
over a part of the income over the ensuing years.

(vii) The entire amount of time-share membership fee
receivable by the assessee upfront at the time of enrolment of a member is not
the income chargeable to tax in the initial year on account of contractual
obligation that is fastened to the receipt to provide services in future over
the term of contract.

levitra

Nirav Shah

S. 45, S. 48 and S. 55(2) — Assessee, CHS, owned land and building — Upon enactment of DCR, assessee became entitled to additional FSI which was transferred for consideration — Is right transferred covered by S. 55(2) — Held, No. Whether since right trans

New Page 1

Part B — Unreported Decisions

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

24 New Shailaja CHS Limited
v. ITO, 22(1)(4)

ITAT ‘B’ Bench, Mumbai

Before R. S. Syal (AM) and

V. Durga Rao (JM)

ITA No. 512/Mum./2007

A.Y. : 2003-04. Decided on : 2-12-2008

Counsel for assessee/revenue : Tarun Ghia/

Pitamber Das

S. 45, S. 48 and S. 55(2) of the Income-tax Act, 1961 (‘the
Act’) — A.Y. 2003-04 — Assessee, a co-operative housing society, owned land and
building — Upon enactment of Development Control Regulations, 1991 (DCR), the
assessee became entitled to additional FSI of around 11,000 sq.ft. which
additional FSI was transferred by the assessee for a consideration of
Rs.48,96,225 — Is the right transferred covered by any of the items mentioned in
S. 55(2) of the Act — Held, No. Whether since the right transferred emanated
from amendment to DCR and is not covered by any of the items of S. 55(2) and
does not have any cost of acquisition no capital gain can be charged on transfer
of additional FSI — Held, Yes.

Per R. S. Syal :

Facts :

The assessee, a co-operative housing society, had acquired
land in the year 1972 along with building thereon constructed by use of FSI of
approx. 11,000 sq.ft. Upon enactment of Development Control Regulations, 1991
(DCR) the assessee became entitled to an additional FSI of around 11,000 sq. ft.
The assessee sold such entitlement/right to M/s. D. K. Builders for a
consideration of Rs.48,96,225. The Assessing Officer (AO) computed capital gain
arising on sale of this entitlement to be Rs.1.22 crores, by considering the
value of residential flat as arrived at by stamp valuation authorities. The
assessee preferred an appeal to the CIT(A) who dismissed the same. Aggrieved,
the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the concept of transferable
development right has been introduced in Mumbai in the Development Control
Rules, 1991 of the Bombay Municipal Corporation. These rights are given in the
form of a Development Right Certificate (DRC) which is issued by the Municipal
Corporation. TDR means the development potential. The FSI of a plot of land is
separated from the plot and is allowed to be transferred. TDR can be used by the
person/ owner/lessee in whose favour it is granted on his land in the receiving
zone. He can use it fully or partly or sell it fully or partly at will. The
Tribunal stated that while it is true that such right is a capital asset as per
the provisions of S. 2(14) but in order to compute capital gain, apart from the
existence of capital asset there should be sale consideration accruing as a
result of the transfer of capital asset as well as the cost of acquisition of
the asset along with the cost of improvement, if any. The Tribunal observed that
the cost of land and the existing building structure could not be attributed in
the additional FSI received by means of 1991 rules since the assessee was the
owner of the land and building and continued to remain the same even after the
transfer of the said capital asset. The Tribunal noted that the Apex Court has
in B. C. Srinivasa Shetty’s case held that transfer of capital asset which does
not have any cost of acquisition does not result into capital gain chargeable
u/s.45. The Tribunal held that there is a difference in the situation when cost
of acquisition is Rs.Nil and where the cost of acquisition cannot be ascertained
or no cost of acquisition has been incurred. The Tribunal noted that the items
of capital assets specified in S. 55(2) are those for which the cost of
acquisition shall be taken to be Nil for computing capital gain. It held that if
the assessee had not incurred any cost of acquisition on a capital asset and
such capital asset does not fall in the category of the capital assets specified
in S. 55(2), then the judgment of the Apex Court in the case of B. C. Srinivasa
Shetty shall apply and no capital gains shall be charged. In the light of the
above, the Tribunal held that the right transferred emanated from the 1991 rules
making the assessee eligible to additional FSI. The right transferred is not
covered by any of the items mentioned in S. 55(2) and it does not have any cost
of acquisition and therefore no capital gain can be charged on transfer of
additional FSI for sale consideration of Rs.48.06 lakhs for the reason that it
has no cost of acquisition. It held that its view is fortified by the decision
of the Mumbai Bench in Jethalal D. Mehta, which decision has not been modified
or reversed by the Hon’ble High Court.

Cases referred to :

(1) Jethalal D. Mehta v. DCIT, (ITA No. 672/Mum./2000)
(Mum.)

(2) CIT v. B. C. Srinivasa Shetty, (1981) 128 ITR 294 (SC)

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Nirav Shah

S. 10B — Gain on account of foreign exchange rate fluctuation qua export proceeds credited/deposited in EEFC account of assessee in foreign exchange is export realisation which constitutes profits derived from export business eligible for exemption u/s.10

New Page 1

59. (2009) 121 TTJ 751 (Ahd.) (TM)

ITO v. Banyan Chemicals Ltd.

A.Y. 2001-02. Dated 29-12-2008

S. 10B — Gain on account of foreign exchange rate
fluctuation qua export proceeds credited/deposited in EEFC account of
assessee in foreign exchange is export realisation which constitutes profits
derived from export business eligible for exemption u/s.10B.

The assessee-company was a 100% EOU. For the relevant
assessment year, the Assessing Officer excluded the amount of net foreign
exchange gain which it received on account of gain on foreign exchange on
conversion of receipts from export sales. The learned CIT(A), by following the
decisions in the cases of K. Uttamlal Exports Ltd. v. Dy. CIT, (2003)
133 Taxman 196 (Mumbai) (Mag.) and Mohindra Impex v. Asstt. CIT, (2002)
121 Taxman 326 (Del.) (Mag.), allowed the claim of exemption u/s. 10B of the
Act. Since there was a difference of opinion between the Members, the matter
was referred to the Third Member u/s.255(4).

The Third Member held in favour of the assessee partly. The
Tribunal noted as under :

(1) The receipt of the sale consideration was in US
dollars. It was credited/deposited in the EEFC account of the assessee to be
retained in US dollars as per guidelines for operating this account. In this
account, the receipts may be kept in foreign currency instead of converting
it to Indian rupees.

(2) The gain on account of exchange fluctuation is part
of the receipt of foreign currency of export sales made by an assessee. It
is a part of the receipt of sale proceeds converted into Indian rupees.
There is no exception in S. 10B like that in Expln.(baa) to S. 80HHC.

(3) The gain accounted for by the assessee is the excess
rupee value of US dollars on the date of realisation of sale proceeds
credited. Therefore, the exchange gain on the date of deposit in the EEFC
account has to be treated as sales realised in US dollars on that date. The
exchange gain is thus sales realisation of the billed amount in US dollar
and would be an income derived from the export of goods and articles.

However, in respect of gains arising at the time of
withdrawal of amount from the EEFC account by way of difference in exchange
rates between the date of deposit into the account and the date of withdrawal
from the EEFC account, the Third Member noted adversely as under :

(1) Such gain would not be part of sales as once the sale
consideration is deposited in EEFC account, the exchange gain accrued
thereafter would not be a part of the turnover and, consequently, not a
profit arising from the export of goods.

The Third Member relied on the decisions in the following
cases :

(a) Smt. Sujata Grover v. Asst. CIT, (2002) 74
(Mumbai) TTJ (Del.) 347

(b) Renaissance Jewellery (P) Ltd. v. ITO, (2006)
104 TTJ (Mumbai) 382/(2006) 101 ITD 380 (Mumbai)

(c) Shah Originals v. Asst. CIT, (2007) 112 TTJ
(Mumbai) 754

(d) Priyanka Gems v. Asst. CIT, (2005) 94 TTJ (Ahd.)
557

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Nirav Shah

S. 140C, S. 244A(2) — Where power of attorney has not been attached to the return of income filed by a non-resident Company, which has been processed u/s.143(1)(a) and also assessment made u/s.143(3) without power of attorney, grant of interest u/s.244A(2

New Page 1

58. 2009 TIOL 483 ITAT (Del.)

China Trust Commercial Bank v. ADIT

(International Taxation)

A.Y. : 1998-99. Dated : 15-5-2009

S. 140C, S. 244A(2) — Where power of attorney has not been
attached to the return of income filed by a non-resident Company, which has
been processed u/s.143(1)(a) and also assessment made u/s.143(3) without power
of attorney, grant of interest u/s.244A(2) cannot be denied on the ground that
the delay is attributable to the assessee.

Facts :

The assessee, M/s. China Trust Commercial Bank incorporated
in Taiwan was engaged in the business of international banking services. The
assessee filed its return of income for A.Y. 1998-99 on 28-11-1998 declaring
taxable income of Rs.71,94,840. The return was processed u/s.143(1)(a) on
31-3-1999 and the assessment order u/s.143(3) was passed on 29-12-2000
accepting the income declared in the return of income. The Assessing Officer
issued a refund as claimed in the return of income, however, he did not grant
interest u/s.244A of the Act. The assessee filed an application u/s.154 of the
Act requesting the AO to rectify the mistake by granting interest u/s.244A.
The application u/s.154 of the Act was rejected on the ground that the
assessee had not filed valid power of attorney in due time, which was filed
only after the lapse of a long delay and, therefore, delay in issuing refund
was attributable to the assessee. He, therefore, denied granting interest
u/s.244A of the Act.

The CIT(A) held that the issue of declining interest
u/s.244A(2) to the assessee is well beyond the scope of proceedings u/s.154
being an issue on which two views are always possible. He upheld the order of
the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal noted that the power of attorney was filed on
30-9-2002. Non-grant of interest was because the power of attorney was not
filed alongwith the return. The refund became due on processing the return
u/s.143(1)(a) on 31-3-1999. The Tribunal noted the provisions of S. 140C of
the Act which mandate that in case of a non-resident company, the return of
income is to be signed and verified by a person who holds a valid power of
attorney and the power of attorney be attached to the return. The Tribunal
also noted that the return was processed without the power of attorney, the
assessment u/s. 143(3) was also made without the power of attorney. In the
circumstances, the Tribunal held that the refund due on such processing or on
making the assessment cannot be withheld because of the absence of such power
of attorney. The Tribunal held that if without the power of attorney the
return could be processed and assessment could be made, the refund could also
be prepared and made to the assessee. The Tribunal held that from a bare
reading of the Section it is evident that the delay is to be seen with
reference to the proceedings resulting in refund and the delay is attributable
in such proceedings, to the assessee. The proceedings which result in refund
are the processing of the return or making an assessment u/s.143(3) and since
these proceedings were completed long back even without the power of attorney,
the delay in filing the power of attorney was not the cause for delay in the
proceedings resulting in refund.

However, the Tribunal noted that the provisions of S.
244A(2) provide that where the question arises as to which period is to be
excluded, it shall be decided by the Chief Commissioner or the Commissioner
whose decision thereon shall be final. Since the AO had not referred the
matter for the decision of the Chief Commissioner or the Commissioner the
Tribunal set aside the order of the CIT(A) and the AO and remitted the matter
back to the file of the AO to decide the issue of excluding the period for
granting interest to be decided by the Chief Commissioner or the Commissioner,
as the case may be, and follow his decision on that.

levitra

Nirav Shah

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

New Page 1

57. 2009 TIOL 512 ITAT (Bang.)

Mrs. Shakuntala Devi v. DDIT (International
Taxation)

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

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

Facts :

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

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

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

Held :

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

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

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Nirav Shah

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

New Page 1

56. 2009 TIOL 477 ITAT (Mum.)

ACIT v. Shree Dhootapapeshwar Ltd.

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

Dated : 30-3-2009

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

Facts :

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

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

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

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

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

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

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

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

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

The appeal filed by the Revenue was dismissed.

levitra

Nirav Shah

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

New Page 1

55. 2009 TIOL 511 ITAT (Bang.)

Mrs. Yogesh Aurora v. ITO

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

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

Facts :

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

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

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

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

Held :

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

The appeal filed by the assessee was allowed.

levitra

Nirav Shah

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

New Page 1

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

ITO v. Vijeta Educational Society

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

Dated : 28-9-2007

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

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

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

On second appeal by the department, it was held :

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

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

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

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

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

levitra

Nirav Shah

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

New Page 1

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

Travel Agents Association of India v. ACIT

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

Dated : 10-2-2008

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

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

On appeal to the Tribunal it was held :

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

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

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

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

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

levitra

Nirav Shah

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

New Page 1

Part C — Tribunal & International Tax Decisions

Hyosung Corporation

Authority for Advance Ruling

224 CTR 329 (AAR)

Dated : 17-6-2009

Facts :

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

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

PGCIL entered into 3 separate contracts in the following
manner :

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

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

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

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

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

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

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

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

Ruling of AAR :

On the point of AOP emergence :

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

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

The AAR concluded that :

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

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

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

Nirav Shah

Royalty income, where payment is subject to fulfilment of certain conditions, accrues only on fulfilment of conditions specified

New Page 1

Part C —
International Tax Decisions

17 Guardian Industries Corporation v. ADIT
(2008) (Unreported)

S. 5, IT Act

A.Y. : 2002-2003. Dated : 31-3-2008

Issue :

Point of time for accrual of royalty income where payment is
subject to fulfilment of certain conditions.

Facts :

The assessee was an American company (‘USCo’). USCo had
entered into a technical licence agreement with an Indian company (‘IndCo’). In
terms of the agreement, IndCo was required to pay certain royalty to USCo for a
period of 8 years.

IndCo had obtained loans for its project from IDBI. Under the
loan agreement, IDBI had stipulated a condition that IndCo shall not pay royalty
to USCo till such time payments of instalments of principal, interest and any
other monies to IDBI were outstanding. USCo had also agreed to the said
condition.

IndCo defaulted in making payments to IDBI. Hence, it could
not pay any royalty to USCo between the periods 1st March 1993 to 31st March
1999. Thereafter, vide its letter dated 26th November 1999, IDBI allowed payment
of royalty for the period 1st April 1999 to 28th February 2001. Subsequently,
vide its letter dated 26th April 2001, IDBI gave its approval for payment of
past royalty (i.e., up to 31st March 1999). This was subject to two
conditions, namely, IndCo had adequate cash flows and it had no overdues to any
financial institutions or bank at the time of payment of each installment The
past royalty was permitted to be paid in 6 half-yearly installments during the
period 1st October 2001 to 1st April 2004.

On the basis that the royalty income had accrued at the time
when IDBI issued its letter of approval, the AO brought to tax the entire
royalty in the relevant previous year. In appeal, the CIT(A) confirmed the order
of the AO.

The Tribunal observed that notwithstanding that an assessee
was following mercantile or cash system of accounting, such income cannot be
brought to tax if the assessee does not have the right to receive such income
due to non-fulfilment of certain terms and conditions. The Tribunal referred to
AS-9 issued by the Institute of Chartered Accountants of India, which mentions
that revenue is to be recognised only at the time when it would be reasonable to
expect the ultimate collection; and, revenue recognition needs to be postponed
if there is uncertainty as to ultimate collection. The Tribunal observed that
the right to receive income from IndCo arose to USCo as per IDBI’s letter of
26th April 2001 and therefore, applying the ratio of E D Sassoon & Company
Ltd. v. CIT, (1954) 26 ITR 27 (SC), it held that only that portion of income
for which IndCo had complied with the terms and conditions of the said letter
can be said to have accrued.

Accordingly, only the instalments actually remitted during
the year upon fulfilment of attached conditions were held to be chargeable to
tax.

Held :

Notwithstanding the mercantile system of accounting followed
by USCo, the royalty income accrued in its favour only when both conditions
stipulated by IDBI were complied.

levitra

Nirav Shah

(i) Outright sale of documentation pertaining to plant supplied does not constitute royalty, either u/s.9(1)(vi) or under Article 12. 572 (ii) Mere shareholding by foreign supplier of plant in purchaser Indian company does not result in business connect

New Page 1

Part C —
International Tax Decisions

16 ADIT (IT) v. Zimmer AG

(2008) 22 SOT 297 (Kol.)

S. 9(1)(i), (vi), IT Act; Article 12,

India-Germany DTAA

A.Y. : 2001-2002. Dated : 19-12-2007

Issue :

(i) Outright sale of documentation pertaining to the
plant supplied does not constitute royalty, either u/s.9(1)(vi) or under
Article12.

(ii)
Mere shareholding by a foreign
supplier of plant in the purchaser Indian company does not result in business
connection.

Facts :

The assessee was a German company engaged in manufacture of
plant and machineries. It had entered into three separate agreements — Equipment
Supply Agreement, Engineering and Know-how Supply Agreement and Technical
Assistance Agreement — with an Indian company, which proposed to set up a plant
for manufacture of certain petrochemicals products. Under the Engineering and
Know-how Supply Agreement, the German company had undertaken to supply a fully
integrated plant. Under Engineering and Know-how Supply Agreement, the German
company agreed to sell engineering information, drawings and designs to Indian
company on outright basis. The transfer of ownership and title in the
documentation took place in Germany. The payment was also made by remittance to
Germany. Thereafter, the Indian company imported these in physical form into
India. These were required for installation and commissioning of the plant.

The Indian company’s contention was that: the import of the
documentation was similar to the import of plant; it was purchase on outright
basis of a capital asset on which depreciation was permissible and not a case of
mere right to use of engineering information and know-how; the technical
documentation formed integral part of the plant since in its absence, the Indian
company could not have set up, operated or maintained the plant; and as such the
consideration payable under the Engineering and Know-how Supply Agreement did
not constitute royalty and therefore it was not taxable either u/s. 9(1)(vi) of
the Income-tax Act or under Article 12 of the India-Germany DTAA.

The Department’s representative contended that under the
Engineering and Know-how Supply Agreement, the Indian company paid lump sum
consideration for transfer of technical know-how, design and secret process and
therefore, the payment was taxable in India (which was the country of source of
income) as royalty, not only u/s.9(1)(vi) of the Income-tax Act, but also under
Article 12(3) of the India-Germany DTAA. He also referred to the secrecy clause
in the said agreement which prohibited the Indian company from disclosing the
confidential information to any person and submitted that this made it apparent
that the German company had not sold these on outright basis, but allowed mere
use and hence, the payment was royalty u/s.9(1)(vi) of the Income-tax Act as
well as under Article 12(3) of the India-Germany DTAA. He, then, referred to the
order of the AO and argued that the German company was one of the promoters of
Indian company and therefore, there was a business connection between the German
company and the Indian company and hence, the income should be taxable
u/s.9(1)(i) itself. He also referred to the decisions in N. V. Philips’
Gloeilempenfabrieken v. CIT, (1988) 172 ITR 541(Cal.) and N. V. Philips
v. CIT, (1988) 172 ITR 521 (Cal.) to substantiate that even lump sum
payments were taxable in India as royalty.

The Tribunal referred to various relevant clauses of the
Engineering and Know-how Supply Agreement and found that : ownership, title and
risk in documentation was transferred in Germany; consideration was also paid
outside India; documentation was imported into India; the engineering supplied
by the German company was limited to designs of plant supplied by it; and supply
of engineering, drawings and designs was incidental to sale of plant which was
tailor-made to suit specific requirements of the Indian company. Considering
these factors, the Tribunal observed that supply of engineering, drawings and
designs was integral part of supply of plant and it could not be viewed in
isolation and therefore, the payment was not for acquiring mere right to use,
which would constitute royalty. The Tribunal found that even under Article 12(3)
of the India-Germany DTAA, it could not be considered as royalty. It then
referred to the decision in Scientific Engineering House P. Ltd. (1986) 157 ITR
86 (SC) wherein the Supreme Court had held that lump sum payment made to acquire
technical know-how to facilitate operations and process amounted to acquisition
of capital asset and technical drawings, designs, charts, processing data and
other literature fell within the definitions of ‘plant’. In light of that it
agreed with the German company’s contention that what was acquired was ‘plant’,
it was acquired outside India and therefore, the payment could not be taxed as
royalty in India. The Tribunal, thereafter, referred to and discussed the
following decisions and observed that these decisions squarely supported the
contention that the consideration received by the German company under the
Engineering and Know-how Supply Agreement was not in the nature of royalty,
either u/s.9(1)(vi) of Income-tax Act or under Article12 of India-Germany DTAA.

(a) DCIT v. Finolex Pipes Ltd., (2007) 106 TTJ 741 (Pune)

(b) Skoda Export Co. Ltd. v. DCIT, (2003) 81 TTJ 633
(Visakha.)

(d) CIT v. Klayman Porcelains Ltd., (1998) 229 ITR
735 (AP)

(e) CIT v. Neyveli Lignite Corporation Ltd., (2000)
243 ITR 459 (Mad.)

(f) CIT v. Davy Ashmore India Ltd., (1991) 190 ITR
626 (Cal.)

Held :

(i) Where both the plant as well as the engineering documentation were delivered outside India, payments for them were made outside India, supply of plant alongwith documentation represented a composite supply and hence, the payment for documentation cannot be considered separately as royalty, either u/s.9(1)(vi) of the Income-tax Act or under Article 12 of the India-Germany DTAA.

(ii) Merely because the German company is one of the shareholders of Indian company, payments made by the Indian company to the German company for supply of plant cannot be brought to tax as income in India on the ground of existence of business connection of German Company in India.

Nirav Shah

(i) S. 44BB : Actual reimbursements cannot be considered as income for the purpose of S. 44BB. 571 (ii) Article 12(2) of DTAA : Interest on Income-tax refund is subject to Article 12(2) of DTAA and not under Article 12(5).

New Page 1

Part C —
International Tax Decisions

15 ACIT v. Pride Foramer France Sas (2008) 116
TTJ 369 (Del.)

S. 44BB, IT Act; Article 12,

India-France DTAA

A.Y. : 2002-2003. Dated : 22-2-2008

Issue :

(i) Actual reimbursements cannot be considered as income
for the purpose of S. 44BB.

(ii)
Interest on income-tax refund is
subject to Article 12(2) of DTAA and not under Article 12(5).

Facts :

(i) The assessee was a French company operating in India in
oil drilling operations and related services under several contracts with ONGC.
Under one of the contracts, the assessee had charter-hired its drilling rig and
received gross fee for drilling operations and had offered the income for
taxation in accordance with S. 44BB of Income-tax Act. While working out the
receipts, the assessee had not taken into computation gross sum of Rs.34.73
lakhs, which was received by it from ONGC by way of reimbursements. Relying on
the Delhi Tribunal’s decision in Sedco Forex International Drilling Inc v.
Deputy CIT, (2000) 67 TTJ 670 (Del.), the assessee claimed that
reimbursements of actual cost of supply should not be included for the purpose
of computing receipts in terms of S. 44BB of Income-tax Act. The AO observed
that the reimbursements were part of contractual receipts and hence were
includible while computing profit u/s.44BB of Income-tax Act.

The assessee’s contention was that the reimbursements were
wholly unrelated to the project. For instance, these pertained to loss of
equipment, use of satellite communication and supply of dry fruits. After
considering that the AO had found that there was no element of profit in
reimbursements, CIT(A) found that supply of material was obligation of ONGC and
assessee had merely provided these services to ONGC. Relying on the Delhi
Tribunal’s decision in Sedco forex International Inc (supra),
CIT(A) held that the reimbursed expenses were not taxable u/s.44BB.

The Tribunal noted that S. 44BB is a code in itself, which
excludes application of normal business income computation provisions and to
assess any income u/s.44BB, the activity should be the one described in S.
44BB(2). The reimbursements made by ONGC had nothing to do with activity of
prospecting for, or extraction, or production of, mineral oils. Also, the
reimbursements were based on actual expenditure and there was no element of
profit. Hence, reimbursements were rightly held to be excludible by CIT(A).

(ii) The assessee had received interest on income-tax refund.
The assessee claimed that such interest should be taxed at the rate applicable
in terms of Article 12(2) of India-France DTAA (which restricts the tax rate to
15%). According to AO, the interest should be considered in terms of Article
12(5) (which applies in case the recipient of interest carries on business
through a PE) read with Article 7 of DTAA, since interest had accrued to the
assessee through its PE in India. The assessee’s contention was that the
interest received by it was not in respect of debt which was effectively
connected with PE, which is one of the conditions under Article 12(5) and
therefore, Article 12(5) could not be applied. The AO, however, considered
interest as chargeable to tax under Article 12(5) at the rate of tax applicable
to a foreign company. In appeal, the CIT(A) upheld the order of the AO.

The Tribunal noted that similar issue was considered in
Application No P 17 of 1998, In re (1999) 236 ITR 637 (AAR) wherein the
AAR had held that such case was covered under Article 12(2) of DTAA. The
Tribunal observed that although the order of AAR would not have a binding force,
it would have persuasive value. Further, the tax authorities did not bring any
contrary decision to the effect that the interest should be considered under
Article 12(5) of DTAA to the notice of the Tribunal. The Tribunal also noted
that in the assessee’s own case in earlier year, the Tribunal had observed that
the assessee was not in the business of obtaining income-tax refunds and earning
interest thereon and therefore, the interest was neither derived from, nor
attributable to the business activity of the assessee. Considering both the
abovementioned reasons, the Tribunal held that the interest cannot be taxed
under Article 12(5) of DTAA.

Held :

(i) If reimbursements were based on actual expenditure, had
no element of profit and had no relation to activity described in S. 44BB(2),
provisions of S. 44BB cannot be applied.

(ii) Interest received on delayed issue of income-tax
refunds would be chargeable to tax under Article 12(2) of DTAA and not under
Article 12(5) even though the assessee had PE in India, since the interest was
neither derived from, nor attributable to the business activity of the
assessee.

levitra

Nirav Shah

S. 9(1)(ii) : Salary relatable to visits outside India in respect of expatriate deputed to India held taxable.

New Page 1Part C —
International Tax Decisions

14 ACIT v.
Unger Booke David (2008)

(Unreported)

S. 9(1)(ii), IT Act

A.Y. : 2001-2002. Dated : 15-2-2008

Issue :

Taxability u/s.9(1)(ii) of salary relatable to visits outside
India in respect of expatriate deputed to India being R but NOR.

Facts :

The assessee was deputed to India as South East Asia Bureau
Chief of The Economist, UK for collection of news and views. He was having his
permanent base in India, controlling the operations from India and staying in
India with his family. During relevant year, the assessee visited Pakistan for 7
days, Sri Lanka for 14 days and the UK for 38 days, aggregating to a stay of 59
days outside India. Since his residential status during the relevant year was
resident but not ordinarily resident, he claimed that the remuneration received
for 59 days did not relate to services rendered to India and hence, it was not
taxable in India.

To examine the claim, the AO asked the assessee to furnish
copy of appointment/deputation letter, which the assessee did not furnish. Since
the assessee was responsible for South East Asian countries and the salary was
received because of his assignment in India, the AO held that the visits outside
India were incidental to the assignment in India and hence the salary for 59
days outside India was also taxable in India.

In appeal before CIT(A), the assessee furnished several
documents including the deputation letter and news stories/articles collected
from Pakistan, Sri Lanka, discussion with London editors on SEA Region
activities. After reviewing the documents, the CIT(A) held that the assessee’s
visits to Pakistan and Sri Lanka were for work done in those countries and hence
the remuneration relatable to stay in those countries was not taxable in India.
In respect of the assessee’s stay of 38 days in the UK at a stretch, the CIT(A)
held that entire period of 38 days cannot be considered as towards briefing
London editors about developments in SEA Region. The CIT(A) concluded that
period of 18 days could be considered for briefing and hence, remuneration
relatable to that period was not taxable in India but remuneration of balance
days was held taxable in India.

The Tribunal found that: the assessee was appointed as South
East Asia Bureau Chief for collection of news, views and information on various
aspects pertaining to that region; he was staying in India with his family; he
had no establishment in Pakistan and Sri Lanka; there was no material on record
to indicate that the terms of his appointment varied when he visited those
countries; and during visits to countries outside India he had not shifted his
family to those countries. The Tribunal observed that the assignment terms
contained provision for gathering news from neighbouring countries and
therefore, short visits to Pakistan and Sri Lanka for collection of news and to
London Head Quarters to brief the editors were also in connection with the
employment in India. The Tribunal, then, observed that the issue in question was
squarely covered by the decision in CIT v. Halliburton Offshore Services Inc,
(2004) 271 ITR 395 (Uttaranchal), wherein the Court had observed that S.
9(1)(ii) read with the Explanation provides for an artificial place of accrual
for income taxable under the head ‘Salaries’ and in such case, the place of
receipt or accrual of salary is immaterial. The Tribunal also referred to the
decision in the case of Hiromi Hirose in ITA No. 4506/Del./2003 for A.Y. 2003-04
and observed that the facts in that case were identical to those of the
assessee’s case.

Held :

Following the precedent in case of Hiromi Hirose, the
Tribunal held that the CIT(A) was not justified in treating that the salary
relatable to Pakistan, Sri Lanka and UK was for performance of duties outside
India and held that such salary was taxable in India.

Editorial Note : The abovementioned decision of the Delhi
Tribunal appears to be taking a position different than that taken by the Delhi
Tribunal in its two decisions in DCIT v. Mr. Erick Moroux C/o. Air France and
Others, (BCAJ July 2008 Page 455) and DCIT v. Vivek Paul, [82 TTJ
(Del.) 699], wherein it had held that Salary income of an expatriate who partly
rendered services in India and partly outside India would not be chargeable to
tax in India in respect of proportionate period for which services are performed
outside India.

levitra

Nirav Shah

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

New Page 2

Tribunal News

Geeta Jani, Dhishat B. Mehta

Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions

3. Rakesh Chauhan v. DDIT

(2010) 128 TTJ (Chd.) 116

S. 195, Income-tax Act

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

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

Facts :

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

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

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

Held :

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

levitra

Nirav Shah

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

New Page 2

Tribunal News

Part C : Tribunal & AAR International Tax Decisions

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

(2010) TIOL 59 ITAT (Del.)

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

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

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

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

Facts :

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

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

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

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

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

Before the ITAT, the assessee contended
that :

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

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

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

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

ITAT held :

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

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

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

Circular No. 23 of 1969

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

levitra

Nirav Shah

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

New Page 1

Tribunal News

Geeta Jani, Dhishat B. Mehta

Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions

1. TVS Motor Co. Ltd. v. ITO

(2010) 35 SOT 230 (Chennai)

Articles 7, 13, India-UK DTAA

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

Dated : 18-9-2009

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

Facts :

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

Under first project, UK Co was to :

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

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

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

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

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

Before the Tribunal, the appellant contended that :

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

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

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

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

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

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

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

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

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

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

Held :

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

levitra

Nirav Shah

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

New Page 1

Tribunal News

Geeta Jani, Dhishat B. Mehta

Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions

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

(2010) 127 TTJ 435 (Hyderabad)

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

Income-tax Act; Article 12(4),

India-USA DTAA

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

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

Facts :

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

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

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

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

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

Held :

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

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

levitra

Nirav Shah

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

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

(2009 TIOL 30 ITAT Mum.)

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

Issues :

India-Malaysia Treaty

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

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

India-UK Treaty

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

Issue 1 :

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

Facts :

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

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

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

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

(a) Malaysian company deputed its own technical personnel;

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

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

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

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

Held :

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

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

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

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

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

Nirav Shah

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

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

(2009 TIOL 30 ITAT Mum.)

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

Issues :

India-Malaysia Treaty

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

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

India-UK Treaty

Issue 1 :

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

Facts :

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

(a) Malaysian company deputed its own technical personnel;

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

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

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

Held :

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

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

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

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

Nirav Shah

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

New Page 1

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

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

Issue :

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

Facts :

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

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

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

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

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

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

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

Held :

The Tribunal observed :

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

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

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

Nirav Shah

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

New Page 1Part B : UNREPORTED DECISIONS

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

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

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

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

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

Per R. S. Padvekar :

Facts :

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

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

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

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

Held :

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

This appeal of the assessee was allowed.

levitra

Nirav Shah

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

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

22 The Timken Company &

Praxair Pacific Limited

2010 TII 25 & 26 ARA-Intl.

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

Article 13 of India-Mauritius Treaty

Dated : 23-7-2010

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

Facts :

As part of its global
restructuring exercise, Timken, a US company (USCO) proposed to transfer
shares of in an Indian listed company. The proposed transfer was to be through
stock exchange, and hence, was expected to qualify for exemption from capital
gains tax in terms of S. 10(38) of the Act.
The issue raised
before AAR was whether in absence of any presence in India, USCO was liable to
pay tax under MAT provisions on capital gains arising from transfer of shares.

Ruling of AAR :

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

A foreign company
that has not established a place of business in India is not required to
prepare its financial statements in accordance with S. 591 r.w. S. 594 of the
Companies Act.
The context of the
MAT regime, the Finance Minister’s speech and the administrative circulars
indicate that the MAT is not designed to be applicable to a foreign company
which does not have presence in India.
The earlier AAR
ruling holding that MAT is applicable to foreign companies was in the context
of an entity that was doing business in India and had a PE in India. Such
foreign company had obligation to comply with the provisions of the Companies
Act and maintain books of accounts in India and therefore, was liable to MAT.

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

levitra

Nirav Shah

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

New Page 1

Part C : Tribunal & AAR International Tax Decisions

21 Linklaters LLP v. ITO

2010 TII 80 ITAT Mum.-Intl.

Article 5 & 7, India-UK DTAA

Partnership firms,
though assessed as fiscally transparent entities1 in the country of residence,
are eligible to claim treaty benefits under the India-UK DTAA.
A Service PE is a
deemed PE and, therefore, does not need to satisfy requirement of Basic PE
rule. The presence of personnel in excess of the specified time-threshold,
triggers service PE in India.
By providing for
coverage ‘profits indirectly attributable to permanent establishment’ Article
7 of India-UK DTAA incorporates Force of Attraction (FOA) rule. Profits
relating to services rendered outside India in respect of Indian projects are
also taxable in India.

Facts :

The taxpayer, was a
UK-based limited liability partnership, engaged in law practice. It did not
have a branch or any other similar form of presence in India, but rendered
legal services to certain clients whose operations extended to India. These
services were rendered partly from the UK and at times, by partners and staff
visiting India. During the financial year under consideration, the taxpayer’s
partners/staff were present in India for more than 90 days.
The taxpayer
disclosed ‘nil’ taxable income in Indian tax return by claiming treaty benefit
and by contending that it has no PE presence (including service PE) in India.
Without prejudice,
the taxpayer also claimed that as per DTAA, profits of PE were to be computed
having regard to the market conditions in India. Arm’s-length income of PE is
based on fiction of independence and is required to be calculated having
regard to the rates that would have been charged by Indian
lawyers/professionals for similar services.
The Tax Department
rejected the taxpayer’s arguments and concluded that the taxpayer had a
service PE in India. Entire income in relation to Indian projects (including
services rendered from the UK office) was taxed on the ground that no details
about overseas work was furnished.
On appeal, the CIT(A)
agreed with the AO on the applicability of service PE Rule, but restricted
taxation only to the extent of services rendered in India.

Held :

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

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

Having proceeded to answer the issue, the ITAT held :

The UK legal firm is
a person under the treaty definition of the term.
The difference in
taxation system applicable to the partnership firm in the source jurisdiction
[(India) and residence country (UK)] results in economic double taxation
though not juridical double taxation. The philosophy of DTAA which supports
merits of avoiding juridical double taxation should equally be applicable to a
situation of economic double taxation.
The decision of
Canadian Court in the case of TD securities (USA) LLC v. Her Majesty the
Queen, (2010 TCC 186) supports that the treaty benefit can be given even in a
situation involving asymmetrical taxation. In this case, single-member LLC of
the USA was given the benefit of USA-Canada treaty despite the fact that in
Canada, assessment was in the names of LLC whereas in the USA, due to the
option exercised, the assessment was in the name of the member of the LLC. The
decision also supports that the treaties need to be interpreted on a
contextual basis rather than based on strict principles of interpretation as
applicable to tax laws. The treaty interpretation is not subjected to literal
interpretation in isolation with the objects and the purpose for which the
treaty provisions are made.
The treaty benefit is
available to a person who is a treaty resident of the other country. In terms
of the treaty, an entity is resident of the UK if it attracts tax liability in
the UK on account of criteria such as domicile, residence, place of
management. Though the modalities or mechanism of taxation may vary, facts of
taxation need to be decided in an objective and uniform manner.

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

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

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

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

Other issues :

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

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

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

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

Nirav Shah

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

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

20 Seabird Exploration FZ LLC

AAR No. 829 of 2009

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

Dated : 25-6-2010

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

Facts :

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

Agreements for hiring
of vessels were entered into outside India;
In terms of the
agreement, hire charges were payable outside India;
Delivery and
redelivery of vessels was to take place outside India;
The taxpayer was
obliged to pay period-linked hire charges irrespective of usage of vessel
i.e., even during idle period fixed hire charges were payable;
Vessels were under
complete control and dominion of the hirer;
It was the discretion
of the hirers to use equipment in or outside India;
The owner had limited
responsibility of maintenance of equipments and consequential right of
inspecting the vessels during the term of the agreement.

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

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

Held :

The AAR accepted contentions of the taxpayer and held :

The income can be
taxed in the hands of the non-resident owner only if income accrues or arises
in India or is deemed to be accruing or arising in India, given the fact that
the hire charges were payable outside India.
The income can be
deemed to accrue or arise in India if it was income earned through or from any
asset or source of income in India. The source of income for owner of the
equipment lies in delivering and transferring control of the vessel to the
hirer outside India and not its subsequent utilisation which may or may not be
in India.
The expression
‘source of income’ is not a legal concept, but needs to be understood the way
a practical man would regard it to be a real source of income. It is required
to be understood in a broad and practical sense and not in a technical manner.
Reliance was placed
on the following extract of Privy Council decision in the case of Commissioner
of Inland Revenue v. Hang Seng Bank Ltd. [1991 (1) AC 306]

“. . . . . , if the profit was earned by the exploitation of property assets
as by letting property, lending money or dealing in commodities or securities
by buying and reselling at a profit, the profit will have arisen in or derived
from the place where the property was let, the money was lent or the contracts
of purchase and sale were effected.”
Having regard to the
above, it was concluded that in case of hire of moveable property, the source
of income is the place where property is let out and delivered and subsequent
utilisation of such equipment as per the discretion of the hirer does not
impact the determination of source.
Consequentially,
income from hire charges does not accrue or arise in India if the asset is
delivered outside India. It can be charged to tax only if the delivery of the
asset is in India either at the time of entering into original agreement or at
the time of renewal of the agreement.

levitra

Nirav Shah

S. 92CA — Difference on tangible bearing on costs, price or profit to be given due weightage while comparing controlled & uncontrolled transactions

New Page 1

22 Egain Communications Pvt. Ltd. v.
ITO Pune

(2008) TIOL 282 Pune

Transfer Pricing Provision — S. 92CA

A.Y. : 2004-05. Dated : 10-6-2008

Issue :

While comparing the controlled and uncontrolled transactions
under the Transactional Net Margin Method (TNMM), the differences having
tangible bearing on costs, price or profit are to be given due weightage to make
suitable adjustments.

Facts :

The assessee, an Indian company (ICO) was engaged in the
business of software development and was a registered STPI eligible for 100% tax
break u/s.10A of the Act. The entirety of turnover of ICO was in favour of its
parent in the USA (USCO). The USCO had assured complete buyback from ICO. USCO
had privity with the ultimate customers and was responsible for all risks
including the risk of credit, marketing risk, recovery risk, inventory risk,
warranty risk, foreign exchange risk and post-sales risk, etc.

The revenue model of ICO was based on cost plus basis. ICO
recovered mark-up of 5% of all the costs including depreciation which was
provided in the books of ICO based on the US system.

The TPO made addition on the ground that comparable PBIT was
about 16%. For the purpose of determining comparable mark-up, TPO took into
account 20 comparable cases which included two high margin cases where the
profit was 67% and 54%, respectively, as against average of 16%.

There was no dispute on application of TNMM being the most
appropriate method with reference to profit level indicator of PBIT.

Before the ITAT, the assessee claimed adjustment to the
comparable margin determined by the TPO on account of the following factors :

(1) Adjustment was made to rework PBIT of ICO by adopting
depreciation as per Schedule XIV rates. This was as against accelerated rates
at which depreciation was provided by ICO based on US system. The adjustment
lowered depreciation charge and improved profitability of ICO.

(2) Adjustment was made to exclude non operating income
like interest income in respect of the comparables adopted by TPO. This was
suggested as ICO did not have any other income.

(3) Adjustment was made to exclude margin of an entity
which was engaged in trading activity — the same being activity unrelated to
the activity of the assessee.

(4) Downturn economic adjustment on account of low risk
profile of ICO as it was a captive unit of USCO which was responsible for all
business risks.

It was also indicated that the parent suffered losses and the
fact that ICO was otherwise eligible for 100% deduction also supported that
there was no motive for transfer pricing evasion. It was also argued by the
assessee that no adjustment was warranted so long as the price charged by the
assessee was within the range of margin of the comparables.

Held :

The ITAT accepted the assessee’s claims for adjustments on
account of the factors narrated above.

The ITAT accepted that in application of TNMM, (i) the
differences likely to affect the price, cost charged or paid or the profit in
the open market are to be taken into consideration to make reasonable and
accurate adjustments to eliminate the differences having material impact; (ii)
if the differences are not capable of being evaluated, the comparables may need
to be ignored.

The ITAT confirmed that Rule 10B as also OECD Guidelines
specifically required suitable adjustments for differences on account of FAR and
other relevant factors. The ITAT also relied on decision of Delhi Tribunal in
the case of Mentor Graphics (Noida) Pvt. Ltd. v. DCIT, (109 ITD 101) to
support that determination of arm’s-length price, functional profile, assets and
assumed risk of controlled and uncontrolled transactions (FAR analysis) need to
be appropriately screened and adjusted for the purpose of making them
comparable.

The ITAT relied on US IRS manual on transfer pricing
provisions which supported adjustments to be made to uncontrolled transactions
to make them comparable.

The ITAT also noted that from out of 20 comparables
considered by the TPO, there were two comparables with high profitability of 54%
and 68% as against the average of 16% and that such extreme cases needed special
consideration. For this ITAT relied on OECD Guidelines :

Para 1.47 of OECD guidelines is to the following effect :

“1.47 Where application of one or more methods produces a
range of figures, a substantial deviation among points in that range may
indicate that the data used in establishing some of the points may not be as
reliable as the data used to establish the other points in the range or that
the deviation may result from features of the comparable data that require
adjustments. In such cases, further analysis of those points may be necessary
to evaluate their suitability for inclusion in any arm’s-length range.”

Having observed the above, the ITAT permitted adjustments as
requested for, since the adjusted profit margin of the assessee was comparable
with uncontrolled margin with tolerance of 5%.

levitra

Nirav Shah

S. 9(1)(vi) —Payment of USCO towards bandwidth for availing standard services not chargeable as equipment royalty.

New Page 1

21 Dell International Services India Pvt.
Ltd. Bangalore

(2008) TIOL 09 ARA IT

S. 9(1)(vi) of the Act

Article 12 of India-US DTAA

Dated : 18-7-2008

Issue :

Payment to USCO towards telecom bandwidth in the form of
private leased line telecom circuits is for availing standard services which is
not chargeable as equipment royalty. Such services are not fees for included
services.

In terms of S. 9(1)(vi)(b), source of income is not outside
India only because customers are located outside India.

Facts :

The applicant, Dell India, an Indian Company (ICO) was
engaged in the business of providing call centre, data processing and
information technology support services to its group companies. For providing
the services, ICO entered into agreement with US Company by name BT America (BTA)
for two-way transmission of voice and data through telecom bandwidth. For this
purpose, ICO was provided private leased line circuit for full country coverage
in the USA and in India. ICO established privity with BTA though the rates of
services were fixed pursuant to Master Services Agreement signed by ICO’s parent
with BTA for all the group concerns. BTA raised invoices for monthly recurring
charges on ICO. The invoice also described the amount as rent for dedicated
private telecom leased circuits.

BTA had its own network up to certain point while it tied up
with other service providers such as VSNL and Bharati for the balance part of
the connectivity. It was however a common ground that ICO had privity only with
BTA, while BTA was responsible for arrangements with VSNL/Bharati, etc. The
following chart depicts the flow of the arrangement.

The applicant sought ruling on TDS implications in respect of
remittance made on account of recurring charges to BTA.

The AAR noted the following to be the features of arrangement
entered into between ICO and BTA :

Agreement described that BTA provided dedicated, point-to-point, international
links directly connecting two customers sites via digital circuits for
transmission of voice & data.

The services provided by BTA was an end-to-end offering between the specific
site in country A and the specific site in country B.

BTA has huge network of optical fibres cables laid under sea, other equipments
and infrastructure which were controlled and operated by BTA for the purpose
of rendering such services. Additionally, BTA had tied up with other service
providers for taking care of the segment in which BTA did not have its own
network.

BT provided similar services to others also. Incidentally, similar services
were provided by other service providers also. The services were standard
services akin to telephone connection.

The agreement made it clear that the arrangement was for provisioning of
services. BTA was responsible for maintenance of service levels. The agreement
was clear that the ownership, right and responsibility of operating and
maintaining assets and infrastructure was that of BTA. The agreement made it
clear that ICO had no control, possession or right of operating the
infrastructure, while BTA had control, possession, dominion over the assets of
its network.

For establishing connectivity, certain instruments were placed at the location
of ICO. While the agreement contemplated recovery of one-time installation
charges, actually the same were waived.

The applicant contended that the remittance did not attract
tax implications either in terms of domestic Act provisions or in terms of
India-USA treaty.

As against that, the Department’s contention was
that the remittance was towards rental of equipment, hence subject to
withholding taxes in India as royalty income both in terms of provisions of S.
9(1)(vi) and in terms of provisions of India-USA treaty.

Held :

AAR held that the contract was for rendition of services
which was admittedly not in the nature of fees for included services and was
therefore not liable to tax in India in terms of India-USA treaty. The AAR held
that the amount was not in the nature of royalty for use or right to use the
equipment. For this purpose, the AAR concluded :

The use or the right to use equipment covers only those arrangements where
there is some positive act of utilisation, application or employment of
equipment for the desired purpose by the payer. Merely because
facility/service is provided to the customer from sophisticated equipment
installed and operated by the service provider does not result in grant of
right of use of equipment to the service recipient.

To determine whether the arrangement involves right of user, the question to be asked is whether the payer is required to do positive act in relation to the equipment such that he operates and controls the equipment in order to enjoy the facility. The right of adapting the equipment for the use by the payer is essential to characterise the transaction as that of equipment rental. The fact that the service availer exercises no possessory rights in relation to the network and merely enjoys facilities/services rendered from the infrastructure, supports that the transaction is that of service and not that of rent.

The fact that BTAmaintains the entire infrastructure for offering services to various other cus-tomers also indicates that use of equipment is by BTA. The AAR likened and compared the arrangement with the use of bridge, road or telephone connection.

The AAR referred to following extract from Professor Klaus Vogel’s commentary to make distinction between service and rent of equipment.

“……the use of a satellite is a service, not rental; this would not be the case only in the event that the entire direction and control over the satellite such as piloting, steering were transferred to the user” (at page 802)”.

The use of expression rentals or the fact that certain part of the instruments were installed at the premises of the assessee were held to be of no relevance.

The AAR also held that the amount was not royalty as consideration for use of secret process. In view of AAR, the treaty triggered royalty taxation only in the event when consideration was for use of secret process and the fact that services were of standard nature and provided by multiple other service providers supported that the arrangement was not for use of secret process.

The AAR did not accept the applicant’s contention that the amount remitted was protected from taxation in India on account of exception of S. 9(1)(vi)(b). In view of AAR, the assessee had its business principally carried out in India and the fact that the export was made to the US counterpart did not lead to conclusion that the source of income was situated outside India. In view of AAR, source is the starting point or the origin from where something springs or comes into existence and the fact that the customers were located outside India did not make the source of income to be outside India.

Nirav Shah

S. 2(31) — AOP is assesable person even when formed without object of deriving income

New Page 1

20 Geoconsult Zt GmbH (2008)

TIOL 11 AAR IT

Explanation to S. 2(31) of the Act

Article 5 and 12 of India-Austria DTAA

Dated : 31-7-2008

Issue :

Joining together with common purpose gives rise to emergence
of AOP, which is assessable as such, even when the members share gross
consideration.

Explanation to S. 2(31)(v) makes AOP an assessable person
even when formed without the object of deriving income.

Facts :

The applicant GZT, a company incorporated in Austria (Ausco),
was specialised in providing consultancy services.

Ausco entered into joint venture with other two Indian
companies by name Rites and Secon.

Under MOU signed in April, 06, Ausco, Rites and Secon agreed
to collaborate together in a joint venture for providing consultancy services to
Himachal Pradesh Road and Infrastructure Development Corporation Ltd. (HPRIDC).
The joint venture executed service agreement with HPRIDC in August 2006, wherein
the JV was service provider / consultant to HPRIDC being the client. The
services were to be rendered by the JV to HPRIDC for HPRIDC’s project of
development of seven tunnels in Shimla. JV was responsible only for consultancy
services and to carry out implementation of said services. The service contract
was a fixed price contract. Ausco was the lead member. In terms of the
agreement, each of the joint venture members was jointly and severally liable to
HPRIDC for performance of the contract.

As a sequel to the service contract signed with HPRIDC,
formal joint venture agreement was executed between three parties viz.
Ausco, Rites & and Secon in September 2006. The AAR took note of the following
features of the joint venture agreement :

(1) The preamble read that the three parties had agreed to
‘collaborate’ for performing all works associated with the consultancy
services to be rendered to HPRIDC.

(2) Each of the members had joint and several liability to
the client, though Ausco was a leading member and one of the employees of
Ausco present in India was designated to be the team leader.

(3) Certain of the tasks were entrusted to each of the
members. The agreement however clarified that while each member had primary
responsibility in respect of task allotted to it, the other parties were bound
to render assistance to the other members.

(4) Each of the members had unrestricted access to the work
carried out by the other members in connection with the project.

(5) In the event of default/insolvency of one of the
members, other members were irrevocably appointed to step in and perform the
work of the defaulting member in view of joint and several liability of the
parties. Also, in the event of default by one, the work was assigned to the
others.

(6) The total consideration received from the client was
distributed at gross level with Ausco receiving approximately 50% of the
amount, while the other parties received 20% and 30% of the amount. The amount
was directly paid to the respective party pursuant to common bill on the
client being raised by HPRIDC. The agreement also clarified that each party
was responsible for meeting its own cost and expenses and was responsible for
maintenance of accounts concerning its own affairs.

The applicant Ausco primarily sought ruling of the AAR on tax
implications of the amount which fell to Ausco’s share. It was the claim of
Ausco that consultancy services which Auso was liable to render viz. the
services of carrying out geological and technical investigation, undertaking
field survey, collecting seismological data, surveying topographical conditions,
etc. were primarily rendered from outside India. And, in absence of PE or long
duration presence in India in connection with the project, the amount was not
chargeable as business income. The applicant however conceded that the amount
was fees for technical services chargeable as such at 10% on gross basis
u/s.9(1)(vii) of the Act read with Article 12 of India-Austria treaty.

During the course of hearing, the department representative
contended that the joint venture of Ausco with Rites and Secon constituted an
AOP, particularly in terms of Explanation to S. 2(31) of the Act.

It was agreed by the parties that the issue of presence or
absence of emergence of AOP was crucial to determine the tax implications of
Ausco and the questions raised before the AAR would be influenced by conclusion
on this basic issue.

Before the AAR, the applicant relied on the AAR’s ruling in
the case of Van Oord ACZBV, 248 ITR 399 (AAR). It was claimed by the applicant
that there was no emergence of AOP as :

Each of the members was responsible for identified task allocated and that
consortium or joint venture was only for convenience of execution.

The agreement was clear that the task of each individual member was identified
and the cooperation amongst them was only for co-ordination and satisfactory
completion of the project.

The joint venture was clear that each of the parties to the contract merely
shared gross revenue and there was no sharing of profit/loss.

All in all, each individual member was executing a standalone and independent
portion of the overall contract and was receiving revenue for the work done by
the member and each member alone was responsible for meeting its part of the
cost.

Nirav Shah

S. 195 — Commission paid to foreign selling agents does not trigger tax with-holdings obligation on payer

New Page 1

19 DCIT, Hyderabad v.
Hyderabad Industries Ltd.

(2008) TIOL 309 Hyd.

S. 195 of the Act.

A.Ys. : 1996-97 to 2000-01. Dated : 30-5-2008

Issue :

Commission paid to foreign selling agents does not trigger
tax withholding obligation on the payer.

Facts :

The assessee, Indian manufacturer of engineering goods,
exported goods to various foreign countries through its sales agents based in
the foreign countries. The assessee remitted commission to foreign agents
without deducting tax at source.

As a sequel to survey operations, the Department held that
the assessee was liable to deduct tax at source in respect of commission
payment. The Department raised huge demand u/s.201(1) and u/s.201(1A) on the
ground that :

The assessee ought to have made application u/s.195(2) before taking the view
on non-applicability of TDS;

The amount was taxable in the hands of the recipient as payment was received
by the agents in India.

Incidentally, the decision has considered only domestic law
provision. It is not clear whether any of the recipients had benefit of a
treaty.

Before the Tribunal, the DR also sought to justify taxation,
on the ground that remittance was in the nature of royalty for commercial
information given by the agent or was in the nature of technical services
rendered by the agent who provided assistance in obtaining LC established or
getting advance payment from customers, etc.

Held :

The Tribunal held that :

Since the contract between the assessee and the overseas agent did not specify
any mode of payment, the remittance made by the assessee by way of cheque or
draft cannot be regarded as payment made in India to the agent of non-resident
in India.

The services rendered by the commission agent were commercial services in
respect of sales effected. The commercial information provided or after-sales
services provided to the customers of the assessee were part of the composite
arrangement which the assessee had with the agent.

The information provided by the commission agent was simple market information
and over which the agent had no exclusive domain. Payment for information can
be termed as royalty only when it is consideration for information concerning
industrial, commercial or scientific experience over which the granter has an
exclusive right. The Tribunal observed :

“The commercial information which the agent in our case is
expected to provide to the assessee is not such over which the agent has an
exclusive domain. It is merely a market information which any Tom, Dick and
Harry can go into the market and obtain it. The definition given in the DTAA
is also in consonance with the definition discussed above. It states that
royalty means payment of any kind received as a consideration for information
concerning industrial, commercial or scientific experience. It simply means
that a person who has an exclusive right over a particular information and
over which no one else in the world is a privy to it, can assign a right to
use such information to the other.”

The Tribunal also held that the services of commission agent were not
technical in nature.

In absence of tax liability of the recipient, the remittance made without
deduction of tax at source was held to be justified.

“. . . ., the Circulars of the Board apply with full force
to the facts of the present case and since the payments made to the
non-residents are not income chargeable to tax in India, the assessee was not
liable to deduct at source u/s.195 of the Act”.

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Nirav Shah

S. 9(1)(i) — Liaison office of USCO acting as buyer’s agent for exports by independent manufacturers to associates of USCO, covered by exclusion

New Page 118 Nike Inc. India Liaison Office
v. ACIT

(2008) TIOL 255 Bang.

S. 9(1)(i) of the Act

India-USA Treaty

A.Ys. : 1999-2000 to 2002-03. Dated : 28-5-2008

Issue :

Liaison office of a US Company, which is acting as
buyer’s agent in respect of exports made by independent manufacturers to the
associates of USCO is covered by exclusion provided in terms of Explanation to
S. 9(1)(b) of the Act.

Facts :

Nike Inc., (USCO) is a company incorporated in USA.
It is a world-known name and brand in sports apparels. It has its main office in
the USA with AEs, subsidiaries (associates) in various parts of the world. The
associates distribute goods in various countries.

From its office in the USA, the USCO arranges
sourcing of goods for all its subsidiaries and associates (being sports
apparels, accessories) from independent manufacturers spread across the globe.
The associates establish direct privity with independent manufacturers. The USCO
acts as procurement and liaisoning agent and provides diverse services to the
associates enabling them to procure the goods. The associates pay
commission/fees to the assessee company for providing assistance in procurement
and purchase of goods from the independent manufactures.

In respect of procurements from India, USCO set up
a liaison office in India with approval of RBI. The approval was obtained for
acting as a communication channel between the manufacturers in India, the H.O.
and the associates. The activities of the Indian liaison office involved the
following functions :

1. Liaisoning with manufacturers. For this
purpose, the liaison office employed merchandisers, product analysts, quality
engineers, fabric controllers, etc.

2. Giving opinion on reasonableness of rates to
be negotiated with independent manufacturers.

3. Getting the samples of products approved by
the H.O. or the associate and ensuring that the final product matched with the
approved sample.

4. Providing training to personnel of the
manufacturers, undertake evaluation of the factory, etc.

5. Supervising the production schedule and
activities of the manufacturer.

6. Undertaking fabric testing, garment testing
and generally to do quality assurance activities.

7. Keeping tab on delivery schedule and shipments
for ensuring timely delivery to the concerned purchaser.

In a nutshell, as a buying agent of its associates,
the USCO assisted by liasoning with the manufacturers, assisting in selection of
goods, supervising production, scheduling, quality control and managing
transportation and logistics of shipment, etc.

The USCO, as a buying agent for the associates, had
entered into agreement with the manufacturers on behalf of the associates. The
agreement with the manufacturers defined their obligations, including the
obligation to purchase equipments required specifically for production of
apparels on which the brand ‘Nike’ was put.

It was a common ground that there was direct
privity between the manufacturers and the associates. USCO earned commission
from associates for performing buying agency services.

The goods which were procured from India
constituted less than a fraction of one percent i.e., about 0.22% of the
overall goods procured the world over, in respect of which USCO earned
commission income from the associates.

The Tax Department held that the liaison office in
India had transgressed the scope of RBI-permitted functions and had indulged in
income earning activity. The Department assessed 5% of the global income as
attributable to the operations of liaison office in India. The Tax Department
rejected contention of USCO that the operations carried out by the liaison
office in India were preparatory and auxiliary and were confined to export of
goods from India and hence no part of income was taxable having regard to
provisions of Explanation to S. 9(1)(b).

To support its contention that the operations of
the assessee were not limited to that of facilitating export and were involved
functions, the Tax Department relied on statements of the employees and the job
profile of the employees employed by the liaison office. The Department
contended that as per the statements of the employees, the employees indulged in
the activities of designing, providing suggestions on manufacturing, verifying
the receipt of raw materials, commercial negotiations of pricing with the
manufacturers, etc. These activities, according to the Department, were part of
core income-earning activity. The Department also contended that exclusion from
taxation in respect of purchase of goods by a non-resident for the purpose of
export would not apply to the buying agent and was limited only to the person
who actually purchased the goods.

Held :

The Tribunal noted that the role of USCO and its
liaison office in India was restricted to provide assistance to the associates
in the matter of procuring goods from India and that USCO/Liaison office had not
acted as an agent of manufacturers and had not received any remuneration or
commission from the manufacturers. The only source of income for the USCO was
buying agent’s commission that it received from its associates.

Nirav Shah

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

New Page 1

Part C — Tribunal & International Tax Decisions

M/s. Xelo Pty Limited v. DDIT

ITAT Mumbai

Before Shri R. S. Syal (AM) and

Shri D. K. Agarwal (JM)

ITA Nos. 4107 & 4108/Mum./2002

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

Counsel for assessee/revenue : Percy Pardiwala/ Abhijit
Patankar

Facts :

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

Imported
supplies on FOB basis (offshore supply)

Imported
services (offshore services)

Indigenous services (onshore services)

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

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

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

(b) the assessee had PE in India.

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

Before ITAT, the Tax Department raised the following
contentions :

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

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

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

Held :

The ITAT held :

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

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

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

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

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

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Nirav Shah

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

New Page 1Part B : UNREPORTED DECISIONS

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

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

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

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

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

The genuineness of the
appellant was not proved; and

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

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

Held :

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

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Nirav Shah

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

New Page 1Part B : UNREPORTED DECISIONS

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

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

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

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

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

Per D. R. Singh :

Facts :

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

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

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

The assessee preferred an appeal to the Tribunal.

Held :

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

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Nirav Shah

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

New Page 5

Part C : Tribunal & AAR International Tax Decisions

2 GeoQuest Systems B.V., In re

AAR No. 774 of 2008 (AAR)

Article 7, 12 of India-Netherlands DTAA;

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

Dated : 6-8-2010

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

Facts :

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

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

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

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

Held :

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

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

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

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Nirav Shah

Sections 14A read with section 2(22A) of the Income Tax Act, 1961 – Interest in relation to investment in shares of foreign companies not to be disallowed u/s. 14A.

6. (2013) 153 TTJ 181 (Mumbai)
ITO vs. Strides Arcolab Ltd.
ITA No.6487 (Mum.) of 2004
A.Y.2001-02. Dated 03-08-2012

Sections 14A read with section 2(22A) of the Income Tax Act, 1961 – Interest in relation to investment in shares of foreign companies not to be disallowed u/s. 14A.

Facts
For the relevant assessment year, the Assessing Officer made disallowance u/s. 14A in respect of interest on investment in shares on which assessee had earned dividend income which was claimed as exempt/s.10(33). The CIT(A), inter alia, held that only the dividend income received from a domestic company is exempt u/s. 10(33) [this was the section during A.Y.2001-02 – now it is section 10(34)]. Therefore, interest in respect of assessee’s investment in shares of foreign companies was not liable to be considered u/s. 14A.

Held

The Tribunal upheld the CIT(A)’s order in respect of the above matter. The Tribunal noted as under :

1. Section 10(33), at the material time, exempted, inter alia, dividend referred to in section 115-O from the purview of taxation. Section 115-O talks of a `domestic company’.

2. On perusal of the definition of `domestic company’ u/s. 2(22A), it transpires that it is only Indian company or any other company, which has, in respect of its income is liable to tax under this Act, made prescribed arrangement for the declaration and payment of dividend. Obviously, this definition does not extend to foreign companies.

3. Therefore, the disallowance u/s. 14A is conceivable only in respect of investment made in the shares of domestic companies and not foreign companies.

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Nirav Shah

2012-TIOL-703-ITAT-KOL Sri Raajkumar Jain v ACIT A. Y.: 2004-05. Dated: 07-09-2012

20. 2012-TIOL-703-ITAT-KoL
Sri Raajkumar Jain v ACIT
A. Y.: 2004-05. Dated: 07-09-2012

S/s 263, 271(1)(c) – An order sheet entry dropping the penalty which was never communicated to the assessee can be construed as an order to take up action u/s. 263. What the CIT himself cannot do, he cannot get it done through the assessing authority by exercising revisional powers.

Facts:

There was a search and seizure operation in the case of Sri Gopal Lal Badruka and M/s Ahura Holdings on 26.7.2006, a copy of an agreement for sale deed dated 26.8.2003 was found, according to which the assessee had entered into an agreement for purchase of plot admeasuring 1529 sq. yards @ 11570 per sq. yard from M/s Ahura Holdings. The total sale consideration worked out to Rs. 1,79,65,750. In the registered sale deed the sale consideration was mentioned as Rs. 56,20,000 which worked out @ Rs 4000 per sq. yard. During the assessment proceedings in the case of M/s Ahura Holdings, Sri Gopal Lal Badruka had confirmed that he had received entire consideration of Rs. 1,65,08,750 from the assessee for 1405 sq. yards @ 11750 per sq. yard. As the difference of Rs. 1,08,88,750 between amount admitted to have been received by Sri Gopal Lal Badruka and the amount mentioned in the registered sale deed, represents the assessee’s unaccounted purchase consideration of plot from M/s Ahura Holdings for the AY 2004-05, the AO issued notice u/s. 148. In response thereto, the assessee filed revised return admitting additional income of Rs. 1,08,88,750. The assessment was completed u/s. 143(3) r.w.s. 147 on 28.4.2010. The AO initiated penalty proceedings for concealment of income u/s. 271(1)(c) of the Act.

The AO after considering the submissions made by the assessee dropped the penalty proceedings u/s 271(1)(c) by order sheet noting as follows:

“The assessee filed a detailed explanation in response to the notice u/s. 271(1)(c) of the Act read with section 274. Considering the facts and circumstances of the case and in the light of the explanation filed, the penalty proceedings initiated u/s. 271(1)(c) of the Act are dropped.”

The CIT invoking his jurisdiction u/s. 263 of the Act held that the dropping of penalty proceedings u/s. 271(1)(c) is erroneous and prejudicial to the interest of the revenue. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

Even an order sheet entry as to be considered as an order in view of the judgment in the case of H H Rajdadi Smt. Badan Kanwar Medical Trust v CIT (214 ITR 130)(Raj). On merits, the Tribunal noted that the additional income was offered in revised return only on evidence found in search and on the basis of the statement of acceptance of the transaction by Sri Gopal Lal Badruka of M/s Ahura Holdings. The Tribunal noted that the reply given by the assessee was considered by the AO and his conclusion is based on the explanation offered by the assessee and he has taken one possible view. If the CIT is not agreeable with that proposal he cannot say that the order of the AO is erroneous and prejudicial to the interest of the revenue. Levy of penalty is a quasi criminal proceeding. The AO must have enough material to prove that there is concealment of income or furnishing of inaccurate particulars of income. He cannot presume that there is concealment or furnishing of inaccurate particulars. The Gujarat High Court has in the case of CIT v Parmanand M. Patel (278 ITR 3) held that the CIT is not empowered to record satisfaction by invoking section 271(1)(c) of the Act and if he is not entitled to do so, on his own, he cannot do it by directing the assessing authority. The Court observed that in other words, what the CIT himself cannot do, he cannot get it done through the assessing authority by exercising revisional powers. Considering these observations, the Tribunal vacated the direction of the CIT to AO to levy penalty u/s 271(1)(c) of the Act.

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Nirav Shah

2012-TIOL-771-ITAT-KOL DCIT v Rajeev Goyal A.Y.: 2007-08. Dated: 01-06-2012

19. 2012-TIOL-771-ITAT-KoL
DCIT v Rajeev Goyal
A.Y.: 2007-08. Dated: 01-06-2012

S/s 2(31), 54EC, 64(1A) – In a case where the income of minor child is clubbed with the income of the assessee u/s. 64(1A), the assessee is eligible for separate deduction u/s 54EC of the Act on investment in specified bonds on account of minor’s income being long term capital gains. Prior to insertion of proviso to section 54EC, for the purpose of section 54EC, the investment is limited to Rs 50 lakh in respect of a person and not in respect of an assessee. Minor child being a separate person, investment in the name of minor child, whose income is to be clubbed in the hands of the assessee, is eligible for separate limit of investment prior to insertion of proviso to section 54EC.

Facts:

During the previous year, the assessee and his two minor children sold shares which resulted in long term capital gains. The assessee invested Rs 50 lakh in bonds qualifying for deduction u/s 54EC of the Act. He also invested Rs. 49.50 lakh and Rs. 39.50 lakh in the names of two minor children. In the return of income filed, the assessee included total income of two minor children after claiming separate deduction for investment made in bonds, qualifying for deduction u/s. 54EC, in the names of the respective minor children. Thus, total deduction claimed u/s. 54EC was Rs. 139 lakh.

The Assessing Officer, relying upon Notification No. 380/2006 dated 22.12.2006, restricted the deduction u/s. 54EC to Rs 50 lakh.

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the appeal of the assessee. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

Section 54EC provides that capital gain is not to be charged to tax if net consideration is invested in certain bonds. Therefore, investments made in certain bonds shall be outside the scope of capital gain for the purpose of computation of total income itself. It is not a deduction under Chapter VI-A which comes into picture only after computing the total income and the deductions are being allowed from gross total income as per section 80A(1).

There is a difference between the word `assessee’ and the word `person’. The notification on which the AO relied upon has not put any embargo on investments by an assessee but the embargo is on allotment of the bonds to a `person’ and such embargo is on the allotting authority. The bonds have been allotted to the three persons as per the notification itself and the assessee is entitled to the benefits as per provisions of section 54EC under which restriction has been put only for investments from 1.4.2007.

The Tribunal noted that the ratio of the decision of Mumbai Tribunal in the case of JCIT v Govind Rohira alias Srichand Rohra 95 ITD 77 (Mum) and also other decisions of the High Courts is that even if the income of the minor is clubbed with the income of the other individual, all the deductions are to be allowed while computation of income of the minor /spouse and only the net taxable income is to be clubbed u/s. 64.

The Tribunal allowed the claim of the assessee and directed the AO to re-compute the long term capital gains accordingly.

The appeal filed by the revenue was dismissed.

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Nirav Shah

(2011) 132 ITD 296 (Del) Mrs. Maninder Sidhu vs. ACIT A.Y.: 2004-05. Dated: 09-04-2010

18. (2011) 132 ITD 296 (Del)
Mrs. Maninder Sidhu vs. ACIT
A.Y.: 2004-05. Dated: 09-04-2010

Section 271(1)(c) – Set off long term capital loss against short term capital gain wrongly claimed by assessee – Withdrew the claim during course of assessment- Revenue did not prove or show falsity of facts as disclosed by assessee in computation of income – In fact revenue accepted computation of capital loss and gain – Assessee under bonafide belief that set off is allowed – in absence of any proof of falsity of facts in computation of income as submitted by assessee, penalty not to be leviedwrong claim is to be distinguished from false claim.

Facts:

The assessee had incurred long-term capital loss and short term capital gain. The loss was adjusted against the gain. However, after issue of notice u/s. 143(2), the claim of the adjustment was withdrawn in the course of hearing. Assessee explained that the adjustment was a mistake made while preparing the return. However, the AO initiated penalty proceedings u/s. 271(1)(c) of the Act as according to the him if there was no mala fide intention in making the claim, the assessee could have withdrawn the claim before the receipt of the notice. However, the claim was withdrawn only when notice was issued to the assessee.

Held:

The claim of assessee was a bona fide mistake. All facts regarding computation of the loss and the gain were furnished along with the return of income. Thus, it is neither a case of concealment of income nor furnishing inaccurate particulars of income.

Falsity of facts made by the assessee in computation of long-term capital loss or short-term capital gain was not proved by the revenue. On the contrary, computation of the loss and the profit had been accepted by the revenue.

Setting off of the loss against the gain was an inadvertent mistake by the assessee which should be taken as bona fide mistake. In absence of proof of falsity in the details regarding computation of income, it was held that the assessee cannot be charged with the penalty. In such matters, one has to distinguish between a wrong claim and a false claim. There was no falsity in the assessee’s case. Penalty ought not to have been levied on assessee in respect of inadvertent but wrong claim.

levitra

Nirav Shah

(2012) 77 DTR 235 (Jodhpur) Amit Jain vs. DCIT A.Y.: 2007-08. Dated: 17-09-2012

17. (2012) 77 DTR 235 (Jodhpur)
Amit Jain vs. DCIT
A.Y.: 2007-08. Dated: 17-09-2012

Section 56(2)(vi) – Gift by father to son directly out of borrowings from HUF does not necessarily mean gift by HUF to the son and hence no tax leviable on such gift.

Facts:

The assessee received a gift of Rs. 5 lakh from his father to enable the assessee to purchase a new flat. The father had received a loan of Rs. 5 lakh in bank account of his proprietary concern from his HUF and on the same day he made gift of Rs. 5 lakh from that bank account. According to the Assessing Officer, the HUF had made payment to the assessee rotating the money through the father. Hence, the Assessing Officer treated the gift of Rs. 5 lakh as gift from HUF of father to the assessee. Since HUF is not covered under the definition of “relative” as given in the Explanation to section 56(2)(vi), the Assessing Officer treated the amount of Rs. 5 lakh received as gift as income from other sources. The learned CIT(A) upheld the stand of the Assessing Officer stating that the so-called loan transaction between HUF to individual has to be ignored and real transaction was in the nature of gift from HUF to the assessee.

Held:

In the given case, the assessee received a gift of Rs. 5 lakh from his father who was assessed to income-tax. The father of the assessee being a donor asserted in the declaration of the gift that he had given an absolute and irrevocable gift out of natural love and affection of Rs. 5 Iakh to his son i.e., the assessee. Also the father was having opening balance in his capital account at Rs. 20.24 lakhs and closing balance of Rs. 20.53 lakhs. Therefore, it is clear that the donor was having the capacity to give the gift which was given to his son under love and affection, there was also an occasion for which gift was received and this contention of the assessee that the gift was received for purchase of a flat at Mumbai, has not been rebutted at any stage. The amount which was paid by way of an account payee cheque by HUF to father had been shown under head “loan and advance” by HUF. Also the gift made by father to son was by way of an account payee cheque.

Therefore, the transaction was a genuine transaction. In the instant case, nothing was brought on record to substantiate that the loan received by the father of the assessee from his HUF was bogus or non-genuine or it was taken with an intention of non-payment. In the present case, the donor was identifiable, his creditworthiness was not doubted and occasion for giving the gift was also there. The donor being the father of the assessee, was a close relative and therefore it was a genuine gift received by the assessee from his father and the same is not chargeable to tax as ‘income from other sources’ u/s. 56(2)(vi).

levitra

Nirav Shah

(2012) 77 DTR 89 (Mum) Chemosyn Ltd. vs. Asst. CIT A.Y.: 2007-08. Dated: 07-09-2012

16. (2012) 77 DTR 89 (Mum) Chemosyn Ltd. vs. Asst. CIT A.Y.: 2007-08. Dated: 07-09-2012

Section 37 (1) Business Expenditure Allowability – Premium paid by company on purchase of own shares from warring group of shareholders as per order of Company Law Board is revenue expenditure and allowable as business expenditure.

Facts:

The assessee, a pharmaceutical company had two groups holding shares of a company i.e. one owning 66% and other 34%. Owing to differences between two groups which were headed by two brothers. The disputes between them reached the Company Law Board which directed assessee to buy 34% shareholding. The assessee purchased 34% shareholding and paid Rs. 6.81 crores as premium on purchase and cancellation of own shares. As per Assessing Officer, the said expenditure was incurred as a part of family dispute settlement and the same could not be attributed to the business of the company. The Assessing Officer disallowed the expenditure stating that even otherwise, the same was a capital expenditure since incurred for acquisition of a capital asset. The action of the Assessing Officer in disallowance was upheld by the learned CIT(A) stating that the purchase of shares was a result of mutual settlement amongst family members and hence was of personal nature.

Held:

In the given case, the warring group of shareholders were creating problems in the smooth functioning of the business. The total sales of the assessee which were in the range of Rs. 20 to 25 crore p.a. during the pre-dispute period had come down in the range of Rs. 10 to 14 crore during litigation period. After the settlement period there was substantial increase in sales. Similarly, negative profits during the period of disputes became positive after the settlement. Very few new products were launched by the assessee company during the period of disputes, while many new products were launched during the post-settlement period giving boost to assessee’s business.

Documentary evidence showed that demand notices were issued by the Debt Recovery Tribunal to the assessee for recovery of debts during the period of disputes, whereas a fresh loan was sanctioned by bank to the assessee for the purpose of working capital as well as for the purpose of acquiring new assets after the settlement. All these facts are sufficient to show that the dispute among the shareholders had affected the day-to-day business of the assessee and that the settlement of the said dispute certainly helped the assessee to run its business smoothly and effectively. Therefore, expenditure incurred by the assessee company on payment of premium for purchase of its own shares from warring group of shareholders and cancellation thereof is revenue expenditure and is allowable as business expenditure.

levitra

Nirav Shah

Sections 194H read with section 40(a)(ia) of the Income Tax Act, 1961 – Mere distribution of the collected amount of commission does not require tax deduction if it is not shown as an expense.

5. (2013) 55 SOT 356 (Delhi)
ITO vs. Interserve Travels (P.) Ltd.
ITA No.3526 (Delhi) of 2010
A.Y.2006-07. Dated 18-05-2012

Sections 194H read with section 40(a)(ia) of the Income Tax Act, 1961 – Mere distribution of the collected amount of commission does not require tax deduction if it is not shown as an expense.

Facts

The assessee was engaged in business of travel agents. It had entered into a consortium agreement with 12 other members who were travel agents for booking air tickets through platform provided by `A’. The consortium members agreed that assessee would act as a lead member and authorised it to enter into contracts with `A’ to make collections and distribute monies to each of the consortium travel agents in proportion to segment bookings effected by each travel agent. The assessee collected commission for services rendered by other members and distributed said commission amongst members on priority basis. Though the TDS certificate issued by `A’ reflected commission of Rs. 65.72 lakh, the assessee distributed an amount of Rs. 52.22 lakh amongst members for services rendered by them in booking tickets, etc. Since assessee did not deduct tax at source while making payment of commission to travel agents, the Assessing Officer disallowed the amount of Rs. 52.22 lakh u/s. 40(a)(ia).

The CIT(A) held that since the amount of Rs. 52.22 lakh was not received for any services rendered by the assessee to `A’, the amount could not be treated as income of the assessee. Further, since the assessee did not claim the said amount as expenditure in its accounts, no tax was deducted at source by the assessee. Therefore, no disallowance could be made in terms of provisions of section 40(a)(ia).

Held
On further appeal by the Revenue, the Tribunal upheld the CIT(A)’s order. The Tribunal noted as under :

1. As is evident from the terms and conditions of the consortium agreement, the payment by the assessee to other consortium members is not voluntary. The assessee is under a legal obligation in terms of the agreement to pay the amount to other consortium members in accordance with settled terms.
2. There is nothing to suggest that the assessee rendered any service to `A’. It is the settled legal position that income accrues when an enforceable debt is created in favour of an assessee. In other words, income accrues when the assessee acquires the right to receive the same. The terms of the consortium agreement do not reveal any such right in favour of assessee. Income of Rs. 52.22 lakh rightfully belonged to the other consortium members to whom the amount was distributed by the assessee.
3. Since the assessee only distributed the income in terms of the agreement and this did not amount to incurring of an expenditure nor did the assessee claim any expenditure, there was no infirmity in the findings of the CIT(A) in deleting the disallowance u/s. 40(a)(ia).

levitra

Nirav Shah

Sections 2(24) read with sections 4 and 28(i) of the Income Tax Act, 1961 – Amount realised on sale of carbon credits is a Capital Receipt and it cannot be taxed as a Revenue Receipt.

2. (2013) 151 TTJ 616 (Hyd.)
My Home Power Ltd. vs. Dy.CIT
ITA No.1114 (Hyd.) of 2009
A.Y.:2007-08. Dated: 02.11.2012

Sections 2(24) read with sections 4 and 28(i) of the Income Tax Act, 1961 – Amount realised on sale of carbon credits is a Capital Receipt and it cannot be taxed as a Revenue Receipt.

For the relevant assessment year, the amount realised by the assessee from sale of carbon credits was treated by the Assessing Officer and the CIT(A) as a revenue receipt and not a capital receipt.

The Tribunal, relying on the decision of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. (1965) 57 ITR 36 (SC), held that sale of carbon credits is to be considered as a capital receipt.

The Tribunal held as under :

Carbon credit is in the nature of “an entitlement” received to improve world atmosphere and environment by reducing carbon, heat and gas emissions. It is not generated or created due to carrying on business but it is accrued due to “world concern”. It has been made available assuming character of transferable right or entitlement only due to world concern.

Further, carbon credits cannot be considered as a by-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one’s negative point carbon credit. Carbon credit is entitlement or accretion of capital and, hence, income earned on sale of these credits is capital receipt.

Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head on income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56.

levitra

Nirav Shah

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

New Page 1

Part C : Tribunal & AAR International Tax Decisions

1 2010 TII 72 ITAT-Mum.-Intl.

JCIT v. Telerate

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

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

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

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

Facts :

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

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

Held :

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

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

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

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

levitra

Nirav Shah

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

New Page 3

Part C : Tribunal & AAR International Tax Decisions

JDIT v. M/s. Commonwealth Development Corporation

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

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

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

Dated : 25-2-2010

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

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

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

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

Facts :

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

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

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

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

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

Held :

The ITAT held that :

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

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

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

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

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

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

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

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

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

levitra

Nirav Shah

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

New Page 4

Part C : Tribunal & AAR International Tax Decisions

Goldcrest Exports v. ITO

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

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

S. 9(1) of Income-tax Act

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

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

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

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

Facts :

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

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

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

Held :

The ITAT held that :

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

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

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

levitra

Nirav Shah

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

New Page 3

Part C : Tribunal & AAR International Tax Decisions

Besix Kier Dabhol, SA v. DDIT

ITA No. 4249/Mum./07

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

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

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

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

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

Facts :

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

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

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

Held :

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

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

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

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

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

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

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

levitra

Nirav Shah

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

New Page 3

Part C : Tribunal & AAR International Tax Decisions

8. Microsoft Corporation v. ADIT

ITA No 1331 to 1336 of 2008

Article 12(3) of India-US DTAA

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

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

Reliance Industries Ltd.

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

Article 12(3) of India-US DTAA

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

Dated : 29-10-2010

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

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

levitra

Nirav Shah

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

New Page 3

Part C : Tribunal & AAR International Tax Decisions

ACIT v. Dufon Laboratories

(2010) TII 26 ITAT-Mum.-TP

S. 92C of Income-tax Act

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

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

Facts :

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

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

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

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

Held :

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

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

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

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

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

levitra

Nirav Shah

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

New Page 2

DIT v. Scientific Atlanta Inc.,

(2009) 33 SOT 220 (Mum.)

Articles 7, 12, India-USA DTAA

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

Issue :

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

Facts :

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

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

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

Held :

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

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

levitra

Nirav Shah

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

New Page 2

Umicore Finance, In re

(2009) 318 ITR 78 (AAR)

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

Dated : 7-7-2009

Issue :

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

Facts :

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

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

Held :

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

levitra

Nirav Shah

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

New Page 2

JCIT v.
State Bank of Mauritius Ltd.

(2009 TIOL ITAT Mum.)

S. 37, Income-tax Act;

Articles 7, 24, India-Mauritius DTAA

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

Issues :

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

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

Facts :

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

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

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

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

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

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

Held :

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

(i) Applicable rate of tax :

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

(ii) As regards limitation on allowance of
expenditures :

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

levitra

Nirav Shah

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

New Page 2

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

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

Articles 7, 12, India-Germany DTAA

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

Issues :

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

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

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

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

Facts :

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

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

Before the Tribunal, the appellant contended that :

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

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

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

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

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

Held :

(i) Allowance of expenses and deductions :

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

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

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

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

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

(iv) Non-discrimination article and its impact :

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

(v) Applicable rate of tax :

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

Nirav Shah

Interest on fully convertible bonds till date of conversion, taxable in India as interest.

New Page 1

Part C — International Tax Decisions

7 LMN India Limited

In re
[No. 769 of 2007] (AAR)

S. 2(28A), S. 90 of IT Act; Article 11 of India-USA DTAA

Dated : 10-10-2008

Issue :

Interest paid to a non-resident investor on fully and
compulsorily convertible bonds till the date of conversion is taxable in India
as interest.

Facts :

The applicant, a non-banking financial company of India, had
issued fully convertible bonds to LMCC of USA.

As per the Bond Subscription Agreement :

(a) The bonds were convertible into equity shares at the
end of five years from the date of issue.

(b) Interest was payable on the bonds on half-yearly basis,
irrespective of whether the applicant made profits or not.

(d) The bonds ranked in priority to equity shares in the
event of winding-up/liquidation of the applicant-company.

(e) Upon conversion, the equity shares issued were to rank
pari passu with the existing equity shares.

The basic issue before the AAR was about tax implications and
consequential withholding tax obligation in respect of interest paid/payable to
the investor up to the date of conversion of bonds into equity shares.

Held :

Payment made to LMCC of USA up to the date of conversion of
bonds into equity shares was held to be interest in terms of definition of
‘interest’ u/s. 2(28A) of the IT Act as well as under the India-USA DTAA.

The AAR noted that under the IT Act, the term ‘interest’ is
defined in a broad manner to include interest payable in any manner in respect
of any moneys borrowed or debt incurred. Under the India-USA DTAA, it is defined
to mean income from debt claims of every kind, including income from bonds or
debentures.

Payment of interest pre-supposes borrowal of money or the
incurring of a debt. Raising of funds by means of fully convertible debenture is
a well-known commercial and business practice. Debenture creates or recognises
existence of a debt which remains to be so till it is repaid or discharged.

The convertibility of debentures does not affect its
characteristic feature of being a debt. The AAR held that conversion was the
mode of discharging the debentures and the debt would be extinguished on handing
over the fully-paid equity shares at the agreed price and at the agreed time to
the bondholder. The Supreme Court’s decisions in the case of CWT v. Spencer &
Co., (1973) 88 ITR 429 (SC) and Eastern Investments Ltd. v. CIT,
(1951) 20 ITR 1 (SC) were relied upon to support the proposition.

levitra

Nirav Shah

(2013) 84 DTR 383 (Pune) Ramsukh Properties vs. DCIT A.Y.: 2007-08 Dated: 25.7.2012

Section 80-IB(10) – Assessee is entitled to deduction in respect of completed flats if the entire project could not be completed due to reasons beyond his control

Facts:
The assessee claimed a deduction u/s. 80-IB(10) in respect of a project consisting of six buildings and 205 flats although the completion certificate was obtained only for 173 flats within the statutory time period. The assessee contended that 85% of the project was completed within statutory time period and revenue was fully booked in accordance with the project completion method of accounting. The latecompletion was due to the fact that the assessee submitted certain modifications/rectifications for the top floors of the buildings. The said revision could not be completed as the Pune Municipal Corporation could not approve the modification as their files had been taken over by the CID for investigation under ULC Act by the Government of Maharashtra. The Assessing Officer rejected the claim of deduction on account of violation of basic condition of completing the construction within the given time period and even an alternative plea of the assessee to allow the proportionate deduction.

Held:
In case such a contingency emerges which makes the compliance with provision impossible, then the benefit bestowed on an assessee cannot be completely denied. Such liberal interpretation should be used in favour of assessee when he is incapacitated in completing project in time for the reasons beyond his control. The assessee was prevented by sufficient reasonable cause which compelled the impossibility on part of the assessee to have completion certificate in time. It is settled legal position that the law always give remedy and the law does wrong to no one. Plain reading of section 80-IB(10) suggests about only completion of construction and no adjective should be used along with the word ‘completion’. This strict interpretation should be given in normal circumstances. However, in this case, assessee was prevented by reasonable cause to complete construction in time due to intervention of CID action on account of violation of provisions of Urban Land Ceiling Act applicable to land in question. Assessee should not suffer for same. The revision of plan is vested right of assessee which cannot be taken away by strict provisions of statute. The taxing statute granting incentives for promotion of growth and development should be construed liberally and that provision for promoting economic growth has to be interpreted liberally. At the same time, restriction thereon too has to be construed strictly so as to advance the object of provision and not to frustrate the same. The provisions of taxing statute should be construed harmoniously with the object of statue to effectuate the legislative intention. In view of above facts and circumstances, it was held that assessee is entitled for benefit u/s. 80-IB(10) in respect of 173 flats completed before prescribed limit.

levitra

Nirav Shah

(2013) 84 DTR 271 (Mum) SKOL Breweries Ltd vs. ACIT A.Y.: 2007-08 Dated: 18.1.2013

Section 40(a)(i) – Provisions of section 40(a)(i) are not attracted to the claim of depreciation and licence fee for using computer software which falls under Explanation 4 to section 9(1)(vi)

Facts:
During the relevant assessment year, the assessee made payments to a foreign company for acquiring its trade name. The amount so paid was capitalised and depreciation was claimed in respect of it. The Assessing Officer held that the payment made by the assessee for acquisition of trademarks though capitalised by the assessee company in the books of account, the said payment attracted provisions of section 195. Since, assessee failed to deduct tax at source while making said payment, it was disallowed u/s. 40(a)(i).

Held:
There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated u/s. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to section 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure. The deduction u/s. 32 is not in respect of the amount paid or payable which is subjected to TDS; and therefore, the provisions of section 40(a)(i) are not attracted on such deduction.

Facts:
The assessee made payment to a group company towards software license fees. The Assessing Officer opined that the payment made by the assessee to the group company was royalty and thereby attracting the provisions of section 195 failure of which attracted the provisions of section 40(a)(i). Accordingly, the Assessing Officer disallowed the said amount.

Held:
It is clear from the Clause A of Explanation to section 40(a)(i), the meaning of the royalty for the purpose of section 40 has to be taken as given in the Explanation 2 to section 9(1)(vi). It is also clear from the Explanation 2 to section 9(1)(vi) that the payment for transfer of any right to use computer software does not fall within the meaning of royalty. Rather, the payment for transfer of right for use or right to use of computer software has been defined as royalty under Explanation 4. When the royalty for transfer of right to use of computer software does not fall under Explanation 2 to section 9(1)(vi); but the same falls under Explanation 4 to section 9(1) (vi), then in view of the Explanation to section 40(a) (i), the said amount cannot be disallowed under the provisions of section 40(a)(i).

levitra

Nirav Shah

(133 ITD 363)(Mum.) Vidyavihar Containers Ltd. vs. Deputy Commissioner of Income Tax AYs. : 2002-03 & 2006-07 Date of Order: 21st October 2011

Section 45(2) – Conversion of Capital Asset (Land) into Stock in Trade – conduct of the assessee showed that land was converted to stock in trade for the purpose of conducting business – hence the assessee should be rightly entitled to the benefits of section 45(2).

Section 48 – fee paid for change in the user name from industrial to commercial would constitute the cost of improvement of the asset.

Notional income – assessee cannot be charged to taxed on notional income.

Facts:
The assessee was earlier engaged in manufacturing activity. It discontinued the business and passed a special resolution at the extra ordinary general meeting of shareholders held on 12th September, 1994 authorising commencement of business of real estate and converting its land into stock in trade. It further took steps to make the property fit for development and contracted with a third party for further development in consideration of allotment of constructed area. The assessee also applied for change in the user of land from industrial to commercial user and permission for the same was granted on 4th March, 1997. The AO held that the factory land could not have been converted into stock in trade prior to the permission of the government in respect of change of user of the said land. He further held that the land thus remained to be a capital asset irrespective of the fact that special resolution was passed. Hence the assessee was denied the benefits of section 45(2) and was charged to tax u/s. 45(1).

Held:
The intention of the assessee to pass a special resolution in the meeting of shareholders to authorise the commencement of business of real estate, convert the land into stock in trade, and the further steps taken to make the property fit for further development in consideration of allotment of constructed area makes it clear that the assesseecarried on the business of real estate development. Further, the provisions of section 45(2) only pertain to computation of capital gains and business income arising on sale of asset which is converted into stock in trade prior to sale. It does not prescribe any conditions to be fulfilled. Hence, the question for permission to be sought from government for change in user of land prior to conversion does not arise. Thus the assessee was liable to be charged in terms of section 45 (2) and not section 45(1).

Facts:
The assessee has paid fees amounting to Rs. 23 crore to the collector for change of user of land from industrial to commercial. The assessee claimed the same as business expense. Alternatively, the assessee submitted that the same be treated as cost of improvement while computing capital gains u/s 45(2). The AO however held that there was no real estate development business carried on and thus declined to allow the claim of the assessee. He also disallowed the alternative claim of the assessee for deduction of the said amount in computation of capital gains u/s 48 holding that the said amount was not in the nature of cost of improvement.

Held:
The assessee had paid to the collector the amount for change in user of land before conversion of land into stock in trade. This amount paid was vital in determining fair market value of the asset. If the said amount was paid prior to conversion, the same would constitute cost of improvement. And if the said amount is paid after conversion, the same would constitute business expense. The matter was remanded back to the AO with the direction to consider and allow the claim of the assessee depending upon the fair market value of the property as on the date of conversion.

Facts:
The property of the assessee was offered as collateral security for the bank guarantee limits availed by its holding company in the AY 2002-03. Assessee did not receive any commission for the same. However, the AO noted that the assessee company had foregone commission of 2 percent for offering its property as collateral security and made addition of such notional income.

Held:
There was nothing bought on record to show that any such commission was agreed to be paid to the assessee by its holding company. Thus the addition made by the AO in the form of notional income which had never actually accrued or arisen to the assessee was not sustainable.

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Nirav Shah

(2011) 133 ITD 306 (Mum.) NRB Bearings vs. DCIT A.Y.: 2005-06. Dated : 20th September, 2011

Section 32(1)(iia) – Allowability of Additional Depreciation Claim – enhanced capacity has to be considered unit wise and not in relation to entire business

Facts:
The assessee acquired plant & machinery in a manufacturing unit at Waluj, Ahmedabad on which additional depreciation was claimed. The claim mentioned was rejected by the AO on grounds that the enhanced capacity can only be considered with reference to the overall capacity of the company and not a single unit.

Held:
The increase in capacity is to be compared with reference to the concerned undertaking where the machinery was installed and not the whole business. This was because the additional depreciation was claimed on only one unit where the machinery was installed. This made the manufacturing unit a separate industrial undertaking for the purpose of allowability of depreciation. Also the allowability of additional depreciation nowhere requires that the capacity increase is to be compared with reference to the operational activities of all the units which have already been set up earlier by the assessee. The intention of the legislature is only to examine the increase in capacity of the undertaking where the machinery was installed and not of the entire business. The claim of the assessee was thus justified.

levitra

Nirav Shah

Income from offshore supply of equipment not taxable in India if property in equipment passes outside India.

New Page 33 LG Cable Ltd. v.
DDIT

(2008) 113 ITD 113 (Del.)

S. 5, S. 9, S. 90, Income-tax Act, Articles 5, 7, India-Korea
DTAA

A.Y. : 2002-2003. Dated : 8-8-2008

Issue :

Income from offshore supply of equipment not taxable in India
if property in equipment passes outside India.

Facts :

The assessee was a Korean Company (‘KorCo’). KorCo had set up
a project office in India after obtaining approval of RBI. In 2001, it was
awarded two contracts by PGCIL. One contract was for onshore execution of fibre
optic cabling system package project (‘onshore contract’). The other contract
was for offshore supply and offshore services (‘offshore contract’). KorCo
rendered the services under the onshore contract through its project office, for
which it maintained separate books of account since the project office
constituted a PE in India under Article 5 of DTAA. Income attributable to
onshore contract was offered for tax. However, income attributable to offshore
contract was not offered for tax on the ground that as property in equipment was
transferred outside India, sale transaction of offshore supply of equipment had
also taken place outside India. KorCo supported its contention with the
following facts :

(i) The bill of lading in respect of equipment sold was
issued in Korea in favour of the PGCIL (buyer) and the notified party was also
PGCIL;

(ii) The bill of entry clearly showed that the importer was
PGCIL and the goods were directly transported to the site of PGCIL and not to
that of KorCo;

(iii) As per terms of the contract, PGCIL was co-insured
under the insurance policies;

(iv) In terms of the contract, the ownership of equipment
and materials supplied from outside India was transferred to PGCIL in the
country of origin, i.e., in Korea.

The AO did not accept KorCo’s contention and held that income
from offshore contract was taxable in India. He determined 10% of the contract
value as the income chargeable to tax in India.

In appeal, CIT(A) after considering particular article of
both the contracts, held that: the two contracts were dependent on each other
and one cannot be completed without completing the other; KorCo’s responsibility
does not end merely upon delivery of equipment, but it continues till the
successful completion of the project as otherwise both contracts could be
cancelled; thus, there is interrelation and interdependence of both contracts
and it was a composite contract; it was a colourable device adopted by KorCo;
and hence, the income was taxable in India in terms of S. 9(1)(i) as well as
under Article 7 of DTAA.

Held :

The Tribunal observed and held on the various aspects as
follows :

(i) U/s.90(2) of Income-tax Act, KorCo is entitled to more
beneficial of the treatments under DTAA or under Income-tax Act. However, this
question would arise only if provisions of Income-tax Act are applicable. If
they are not, question of applicability of DTAA would not arise. As held by
the Supreme Court in Union of India v. Azadi Bachao Andolan, (2003) 263
ITR 706 (SC), no provision of DTAA can possibly fasten a tax liability where
the tax liability is not imposed by the Income-tax Act.

(ii) While considering almost identical facts and
circumstances and even where there was a single agreement for both supply and
erection of equipment, the Supreme Court [in Ishikawajima-Harima Heavy
Industries Ltd. v. DIT, (2007) 288 ITR 408 (SC)] had held that income from
offshore supply of material/equipment did not arise in India and was not
taxable in India. It was not open to the Revenue to contend that this decision
was not applicable to the facts of the case.

(iii) Under the Sale of Goods Act, 1930, the property in
goods passes to the buyer as per the intention of the parties, which is
gathered from the facts and circumstances. The offshore contract specifically
provided that property would pass to PGCIL when KorCo loaded the goods and
handed over the documents (including bill of lading) to the nominated bank.
The payment was also received outside India. Thus, the property in goods was
transferred outside India. Merely because certain terms intended to protect a
buyer’s interest are included, it cannot be construed that the property in
goods had not passed or that it had passed conditionally.

(iv) Since delivery of goods, documents and receipts of
substantial part of sale consideration had taken place outside India, the sale
took place outside India and such income would not be taxed under Indian law.
The income from offshore contract was not taxable in India.

levitra

Nirav Shah

Payment for outright sale of drawings and designs is not royalty either u/s.9(1)(vi) or under Article 12(3) of DTAA

New Page 3

2 Parsons Brinckerhoff India (P) Ltd. v. ADIT

(2008) 118 TTJ 214 (Del.)

S. 9(1)(vi), S. 195, Income-tax Act; Article 12,
India-Thailand DTAA

Dated : 4-7-2008

Issue :

Payment for outright sale of drawings and designs is not
royalty either u/s.9(1)(vi) or under Article 12(3) of DTAA.

Facts :

The assessee was an Indian company. It was engaged in the
business of rendering engineering, consultancy services and was awarded a
contract by a consortium for rendering such services for a tollway project.
Inter alia, the scope of work required preparation of design and drawings by
the assessee. The assessee entered into a contract, titled as service agreement,
with a Thailand company (‘ThaiCo’) for : supply of detailed design services,
including preparation and submission of fully dimensional general arrangement
drawings, segment casting data, etc.; calculations, drawings and reports,
rectification to design errors, etc.; site visits by ThaiCo as may be necessary;
design review for about 13 items; supply of detailed design; and production of
final design drawings. As per the contract, ThaiCo was to carry out the work
from its office in Thailand and for actual execution, its personnel may be
required to make short visits to the site. In particular, the contract
stipulated observance of confidentiality and non-disclosure of the assessee’s
trade secrets/confidential information as well as not using these either for its
own purpose or for benefit of any third person. It was further stipulated that
upon termination of the contract, ThaiCo shall surrender all the documents and
information relating to the assessee which may be in its possession. The
assessee was required to remit the contract consideration to ThaiCo in Thailand.

The assessee applied to the AO u/s.195(2) of Income-tax Act
requesting the AO to pass an order authorising remittance of the consideration
without deduction of tax. The assessee submitted that : the payment was in the
nature of business income and as ThaiCo did not have PE in India, it was not
taxable in India; the payment did not represent Fees for Technical Services (‘FTS’)
as there was no specific article dealing with FTS; and the payment could not be
construed as ‘other income’ under Article 22 of DTAA. The AO held that the
payment was for use of design/model/plan developed by ThaiCo and also that it
represented consideration for information concerning industrial, commercial or
scientific experience, and concluded that it was ‘royalty’ under Article 12 of
DTAA. In appeal, CIT(A) agreed with the conclusion of the AO.

Held :

The Tribunal observed that :

Though the contract was titled as service agreement, actually it was agreement
for supply of the package of designs and drawings that would enable the
assessee to effectively render engineering consultancy services under its
contract with the consortium.

The site visits of ThaiCo’s personnel seemed to be only to explain the
drawings and designs to the assessee and they were similar to the visit of a
machine supplier’s personnel to supervise the installation of machinery.

Decisions in Pro-Quip Corporation v. CIT, (2002) 255 ITR 354 (AAR),
CIT v. Davy Ashmore India Ltd., (1991) 190 ITR 626 (Cal.), CIT v.
Klayman Porcelains Ltd., (1998) 229 ITR 735 (AP) and CIT v. Neyveli
Lignite Corporation Ltd., (2000) 243 ITR 459 (Mad.) have brought out the
distinction between outright sale of the property and transfer of
right to use the property while retaining the ownership right. In case of
outright sale, the consideration would be business profits and in case of
transfer of right to use, it would be royalty.

There are a number of words used in Explanation 2(i) to S. 9(1)(vi)(b) and
Article 12(3) of DTAA and all these words signify a form or a kind of
intellectual property. The words ‘model’ or ‘design’ should be understood in
this context. Having regard to the rules of interpretation, it would not be
proper to hold that these two words should be understood in a different sense.
Therefore, these two words cannot refer to drawings and designs which are sold
outright without the seller retaining any proprietary right.

The Tribunal, accordingly, held that :

an outright sale of drawings and designs cannot fall under the definition of
‘royalty’ in Explanation 2 to S. 9(1)(vi).

As outright sale of drawings and designs is not ‘royalty’, ThaiCo is not
chargeable to tax in India u/s.9(1)(vi).

Since no liability had arisen on the non-resident under the domestic law, it
is not legally necessary or permissible to examine DTAA.

The payment would not be covered under Article 22 of DTAA, since the income is
business profits which are expressly dealt with in Article 7.

The payment is not chargeable to tax in India.

levitra

Nirav Shah

(i) Remuneration for processing of seismic data outside India is not taxable in India since not royalty and no PE. (ii) Fees for training for use of software pertaining to exploration/extraction of mineral oil is taxable u/s.44BB.

New Page 3

ACIT v.
Paradigm Geophysical Pty Ltd. (2008) 117 TTJ 812 (Del.)

S. 9(1)(vii), S. 44BB, S. 90, Income-tax Act; Articles 7, 12,
13, India-Australia DTAA

A.Y. : 2003-2004. Dated : 27-6-2008

Issues :

(i) Remuneration for processing of seismic data outside
India is not taxable in India since not royalty and no PE.

(ii) Fees for training for use of software pertaining to
exploration/extraction of mineral oil is taxable u/s.44BB.

Facts :

(i) The assessee was an Australian company (‘AusCo’). AusCo
entered into contract with RIL for processing of certain seismic data. The
seismic data was to be collected by RIL. Under the contract, AusCo was to :
collect the original data tapes from RIL at Mumbai; process these tapes at only
one processing centre in Australia; return the original data tapes together with
the processed data tapes to RIL at Mumbai; provide all committed equipments and
personnel for the processing at the processing centre; ensure not to divert the
committed resources to any other jobs without prior written approval of RIL;
provide licence for the use of certain software for limited period; and complete
timely execution and delivery of data.

While furnishing its return, AusCo offered the receipts for
assessment u/s.44BB, in terms of which 10% of the receipts would be deemed to be
profits and gains of business of rendering services in connection with the
prospecting for or the extraction of mineral oil. However, during the course of
assessment proceeding, it took the position that it had no PE in India under
Article V and hence, in terms of Article VII, the receipts were not taxable in
India. While not disputing that processing was carried out in Australia, the AO
held that the basic ingredient was the situs at which the processed data was to
be utilised (which was India) and accordingly, assessed the receipts u/s.44BB.

In appeal before CIT(A), CIT(A) accepted AusCo’s contention
that AusCo did not have PE in India and hence, receipts were not to be taxed in
India.

Before the Tribunal, the Revenue contended that the software
was a copyright and hence, consideration for the use of the software was a
royalty in terms of Clause (a) of Article XII(3) (Royalties) of DTAA. Further,
in terms of Clause (d) of Article XII(3), rendering of any technical service
which is ancillary or subsidiary to the application of software was also royalty
and thus both these clauses were applicable. Therefore, the receipts cannot be
assessed as business profits under Article VII(1) of DTAA. Consequently, the
Revenue also contended that presumptive taxation u/s.44BB was not applicable if
the receipt being royalty was covered by provisions of S. 115A.

AusCo contended that it did not ‘make available’ [as
clarified in Raymond Ltd. v. DCIT, (2003) 86 ITD 791 (Mum.)] any
technical knowledge, experience, etc. to RIL. Factually, processed seismic data
provided by AusCo cannot be used by RIL in future for any project undertaken in
another area, such processed data cannot be construed to be ‘development and
transfer of a technical plan or design’ and hence, it was not ‘made available’
by AusCo to RIL. Consequently, receipt cannot be treated as royalty under
Article XII(3) and one would need to look at Article VII and not domestic law.
Once in Article VII, since there is no PE, receipt cannot be taxed in India
[relying on DCIT v. Boston Consulting Group Pte. Ltd., 93 TTJ (Mumbai)
293].

(ii) AusCo had also entered in to a separate contract for
training employees of RIL to use software which was used exclusively by oil and
gas industry worldwide for exploration/extraction of mineral oil. The training
was to be provided at RIL’s office in India as may be decided by RIL.

While furnishing its return, AusCo declared that receipts
from RIL under training contract were subject to taxation under Article XIII
(Alienation of property) of DTAA. However, during the course of assessment
proceeding, it resiled from its stand and offered the receipts for assessment
u/s.44BB, in terms of which 10% of the receipts would be deemed to be profits
and gains of business of rendering services in connection with the prospecting
for or the extraction of mineral oil. AusCo contended that its case was covered
by CBDT’s Instruction No. 1862, dated 22nd October 1990, which explains the
expressions ‘mining project’ and ‘like project’ in connection with Explanation 2
to S. 9(1)(vii).

The AO rejected AusCo’s contention and assessed the receipts
under Article XIII (Alienation of property) of DTAA.

In appeal before CIT(A), CIT(A) accepted AusCo’s contention
and directed the AO to assess the income u/s.44BB.

Held :

(i) The Tribunal observed and held that :

S. 44BB applies to provision of services and facilities in connection with the prospecting for or extraction of mineral oils in India and unlike Explanation 2 to S. 9(1)(vii)(b), of Income-tax Act, in S. 44BB the word ‘services’ is not qualified. It cannot be disputed that the services rendered by AusCo to RIL were consultancy or technical services in terms of Explanation 2 to S. 9(1)(vii)(b). However, since S. 44BB did not qualify the word ‘services’, consideration for any services rendered by a non-resident company in connection with prospecting or extraction of mineral oil will fall within S. 44BB.

The question to be examined was whether AusCo ‘made available’ any technical knowledge, experience, etc. to RIL. Factually, processed seismic data provided by AusCo cannot be used by RIL in future for any project undertaken in another area, such processed data cannot be construed to be ‘development and transfer of a technical plan or design’ and hence, it was not ‘made available’ by AusCo to RIL. Consequently, Article XII(3)(g) of DTAA would not ‘apply.

As per Article VII(7), if business profits include items of income for which specific provisions are made in any other Article of DTAA, then those provisions should apply to those items. However, if any of such specific provisions are not applicable to a particular item of income, such item would be subject to Article VII. AusCo’s receipts from RIL did not represent consideration for any technical services which could bring it within Article XII(3)(g). Hence, it would be business profits subject to Article VII and since AusCo did not have a PE in India, such business profits cannot be taxed in India.

(ii) The Tribunal observed that AusCo was required to impart training to employees of RIL in various aspects pertaining to exploration/ extraction of mineral oil and that the controversy is whether S. 9(1)(vii)(b) or S. 44BB should be applied. Noting the difference between the two provisions, as brought out by Delhi Tribunal in Hotel Scopevista Ltd. v. ACIT, (ITA No. 124 to 126/Del./2006), the Tribunal held that S. 44BB would be more appropriate since AusCo was rendering services to RIL in connection with prospecting for or extraction or production of mineral oil. The Tribunal also derived support for its view from CBDT’s instruction No. 1862 dated 22nd October 1990.

Nirav Shah

Amount paid towards domain name registration, server charges for web hosting are not payment towards technical services

New Page 2

12 M/s. Millenium Infocom Technologies Ltd.
v. ACIT

21 SOT 152 (Del.)

S. 40(a)(i), S. 9(1)(vi)/S. 9(1)(vii), 195;

India-USA Treaty Article 26(3)

A.Y. : 2001-02. Dated : 31-1-2008

Issues :

l
Amount paid towards domain name registration, server charges for web hosting
are not payments towards technical services. There is no withholding
obligation u/s.9(1)(vii) or u/s.9(1)(vi) as it subsisted for A.Y. 01-02.

l
Even if there is default of TDS, there can be no disallowance u/s.40(a)(i) for
non-deduction of tax at source in view of provisions of non-discrimination
Article of the Treaty.

l
The assessee who has remitted funds without tax deduction by obtaining
requisite certificate of a CA and by following CBDT-laid down procedure cannot
be faulted with for not obtaining prior NOC of the AO u/s.195(2).

Facts :

The issue in appeal was disallowance u/s.40(a)(i) for alleged
failure of the assessee of not deducting tax at source in respect of amounts
remitted for registration of domain name and for server charges. The assessee
had remitted the amounts after obtaining requisite certificate of a Chartered
Accountant.

The AO was of the view that the services obtained by the
assessee in the form of domain registration and in the nature of access to
server space were technical services chargeable to tax in India u/s. 9(1)(vii)
of the Act.

Before the Tribunal, the assessee contended that the amount
paid towards server space was in the nature of lease rental and was not for
obtaining any services. The assessee himself had contended that the amount would
be equipment royalty if regard be had to amendment made to the definition of
royalty effective from A.Y. 2002-03.

The assessee also relied on provisions of non-discrimination
Article of the Treaty to contest disallowance u/s.40(a)(i). In the view of the
assessee, Article 26(3) of India-USA Treaty did not permit disallowance of
expenses in respect of payment made to US resident merely because of failure of
the payer (assessee) to deduct tax at source, since parallel payment made to
resident without deduction of tax at source would not have triggered
disallowance for the payer.

The assessee also claimed that since remittance was supported
by suitable NIL TDS certificate of CA obtained in terms of procedure laid down
in CBDT Circulars, it was not imperative for it to have obtained prior NOC
u/s.195(2).

Held :

The Tribunal accepted the contentions of the assessee and
held as under :

Relying on the decision of the Madras High Court in
Skycell Communications Ltd. v. DCIT, (2001) (251 ITR 53) (Mad.), it was held
that payment made for hosting of website and access of server was not fees for
technical services.

Referring to Model commentaries, it was concluded that the
server on which the website is stored and through which it is accessible is a
piece of industrial equipment. Having noted that, the Tribunal referred to
amended definition of royalty u/s.9(1)(vi) (as applicable from A.Y. 2002-03) and
concluded that rent paid for hosting of website on servers was for use of
commercial and scientific equipment and was therefore royalty. The Tribunal
noted that the amended definition was applicable from the subsequent year and
hence the amount was not chargeable as royalty income for the year under
reference.

The Tribunal noted in detail self-certification procedure
laid down by various CBDT Circulars which replaced the need of obtaining
authorisation of the AO for making remittance to a non-resident. Having noted
the contents of various CBDT Circulars and after referring to the decision of
Supreme Court in the case of Transmission Corporation of AP Ltd. v CIT,
(1999) (239 ITR 587) (SC), the Tribunal concluded as under :

“Even in the cases where lower tax has been deducted or no
tax deducted, the assessee by filing an undertaking before the RBI (addressed
to the assessing officer) has made himself liable not only for payment of tax
on such remittances, but also for penalty and prosecution for the defaults
committed by him for non-deduction or lower deduction of tax at source. The
contention of the Ld DR by placing reliance on the decision of the Hon’ble
Supreme Court in the case of Transmission Corporation of Andhra Pradesh
Limited (supra) that the assessee was under an obligation to make
application to the Assessing Officer u/s.195(2) of the Act for the
determination of income and tax to be deducted, in our view, holds no water,
as it runs contrary to the Circulars issued by the CBDT.”

Relying on the decision of Herbalife International India
(P) Ltd. v. ACIT, (2006) (101 ITD 450), the Tribunal also accepted the
assessee’s contention that no disallowance can be made having regard to
non-discrimination provisions of Article 26(3) of the treaty, irrespective of
whether or not the assessee theoretically had obligation of deducting tax at
source.

levitra

Nirav Shah

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

New Page 2

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

S. 195, Income-tax Act

A.Y. : 2003-04. Dated : 15-10-2009

Issue :

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

Facts :

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

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

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

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

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

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

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

Held :

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

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

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

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

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

levitra

Nirav Shah

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

New Page 2

M/s. International Tire Engineering

Resources LLC

(2009 TIOL 25 AAR IT)

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

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

Part II, First Schedule, Finance Act, 2009

Dated : 28-10-2009

Issues :

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

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

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

Facts :

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

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

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

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

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

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

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

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

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

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

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

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

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

Held :

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

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

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

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

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

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

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

In relation to outright transfer of designs, AAR held :

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

In relation to rate of TDS, AAR held :

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

Nirav Shah

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

New Page 2

Federation of Indian Chambers of Commerce and Industry

(2009 TIOL 30 AAR)

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

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

Dated : 30-11-2009

Issues :

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

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

Facts :

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

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

Training;

Technology
Assessment;

Business
Development; and

Program
Management

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

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

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

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

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

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

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

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

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

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

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

Ruling :

The AAR held :

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

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

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

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

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

Nirav Shah

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

New Page 2

Part C — International Tax Decisions

13 Manpreet Singh Gambhir v.
DCIT

(2008) 119 TTJ (Del.) 615

Articles 2, 25, India-USA DTAA

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

Issues :

Under India-USA DTAA :

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

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

Facts :

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

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

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

Held :

The Tribunal held that :

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

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

levitra

Nirav Shah

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

New Page 2

Part C — International Tax Decisions

12 Mustaq Ahmed, in re

(2008) (AAR) (Unreported)

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

Dated : 19-11-2008

Issue :

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

Facts :

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

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

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

Held :

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

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

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

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

levitra

Nirav Shah

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

New Page 2

Part C — International Tax Decisions

11 BJ Services Company Middle East Ltd.
v. ACIT

(2008) 119 TTJ (Del.) 553

Articles 7, 12, India-UK DTAA

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

Issue :

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

Facts :

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

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

Editorial note :

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

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

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

Held :

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

levitra

Nirav Shah

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

New Page 2

Part C — International Tax Decisions

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

ITA No. 2160/Del./2006

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

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

Issues :

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

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

Facts :

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

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

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

Held :

The Tribunal held that :

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

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

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

Editorial note :

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

levitra

Nirav Shah

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

New Page 1

part B: unreported decisions

2 KJS India Pvt. Ltd. v.
DCIT

ITAT ‘D’ Bench, Delhi

Before G. E. Veerabhadrappa
(VP) and

Rajpal Yadav (JM)

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

Decided on : 30-7-2010

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

Kavita Bhatnagar & H. K. Lal

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

Per Rajpal Yadav :

Facts :

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

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

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

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

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

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

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

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

Held :

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

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

Cases referred to :

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

Ravindranathan Nair
v. CIT, 247 ITR 178

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

(SC);

CIT v. Ananda Bazar
Patrika, 184 ITR 542

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

(Cal.);

261;

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

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

(Bom.)

Nirav Shah

Sections 45(4) read with section 2(47) of the Income Tax Act, 1961 – Capital gain tax cannot be levied on firm on mere admission of partner if there was no distribution of any capital asset.

4. (2013) 55 SOT 122 (Mumbai)
ITO vs. Fine Developers
ITA No.4630 (Mum.) of 2011
A.Y.2008-09. Dated 12-10-2012

Sections 45(4) read with section 2(47) of the Income Tax Act, 1961 – Capital gain tax cannot be levied on firm on mere admission of partner if there was no distribution of any capital asset.

Facts

During the relevant assessment year, the assesseefirm of builders and developers admitted HDIL as a new partner with 50% share. The Assessing Officer held that on the date of admission, there was a plot of land costing Rs. 28 crore held by the firm and 50% of such amount was transferred in favour of the new partner HDIL on its admission in the firm. Accordingly to the Assessing Officer the assesseefirm was, therefore, liable to capital gain tax u/s. 45(4).

The CIT(A) held that :
a. During the relevant assessment year there was only admission of HDIL as new partner in the firm.
b. There was neither retirement nor distribution of assets nor revaluation of plot of land during the assessment year under consideration.
c. Mere admission of partners did not attract provisions of section 45(4).
d. During the continuance of the partnership-firm, rights of the partners were confined to obtaining the share of the profit and no partner could have exclusive claim to any assets.

Accordingly, the addition made by the Assessing Officer was set aside.

Held
On appeal by the Revenue, the Tribunal dismissed the appeal. The Tribunal noted as under :

1. It is not a case where firm was taken over by the new partner so that provisions of section 45(4) can be invoked. As per the settled principles of law of partnership, during the continuation of the partnership, partners do not have separate right over the assets of the firm in addition to interest in share of profits. The basis of the said proposition is that value of the interest of each partner with reference to the assets of the firm cannot be isolated and carved out from the value of the partners’ interest in the totality of the partnership assets.

2. In the case under consideration, asset of the firm, i.e., plot of land, was never transferred to anybody – it always remained with the assesseefirm only. From the date of purchase of the plot till 27-05-2008, when three partners retired, it was the asset of the firm and there was no change in the ownership of the said plot. Thus, there was no extinguishment of rights, as envisaged by section 2(47), in the case of assessee-firm.

3. From the very beginning of the partnership, the plot of land in question was treated as stockin- trade by the assessee-firm. Even on 31-03- 2008 it was shown as current asset (i.e. W-I-P) in the balance sheet. The Assessing Officer has nowhere rebutted/doubted this factual position.

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Nirav Shah

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S. 23 of the Income-tax Act, 1961 — Annual Value — In respect of a let-out property whether association maintenance charges are deductible while computing annual letting value of the property u/s.23 of the Act — Held, Yes.

Whether payments made to MTNL/VSNL for availing
bandwidth services and port charges are technical services — Held, No. Whether
provisions of

S. 23 of the Income-tax Act, 1961 — Annual
Value — In
respect of a let-out property whether association maintenance charges are
deductible while computing annual letting value of the property u/s.23 of
the Act — Held, Yes.