Tribunal News: Part A-Domestic Taxation Archives

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

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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.

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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

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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).

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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.

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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.

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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.

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Nirav Shah

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

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Tribunal News

Part C : Tribunal & AAR International Tax Decisions

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

(2010) TIOL 59 ITAT (Del.)

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

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

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

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

Facts :

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

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

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

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

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

Before the ITAT, the assessee contended
that :

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

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

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

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

ITAT held :

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

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

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

Circular No. 23 of 1969

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

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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.

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Tribunal News

Geeta Jani, Dhishat B. Mehta

Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions

1. TVS Motor Co. Ltd. v. ITO

(2010) 35 SOT 230 (Chennai)

Articles 7, 13, India-UK DTAA

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

Dated : 18-9-2009

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

Facts :

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

Under first project, UK Co was to :

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

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

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

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

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

Before the Tribunal, the appellant contended that :

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

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

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

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

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

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

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

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

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

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

Held :

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

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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.

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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)

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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”.

levitra

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.

levitra

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

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

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.

levitra

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.

levitra

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.

levitra

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.

levitra

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.

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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.

levitra

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.

levitra

Nirav Shah

Liaison office of non-resident is chargeable to FBT even if no income is earned in India

New Page 2

9 Singapore Tourism Board, in re

(2008) 307 ITR 34 (AAR)

S. 115WA, S. 115WB, Income-tax Act

Dated : 17-10-2008

Issue :

Liaison office of non-resident is chargeable to FBT even if
no income is earned in India.

Facts :

The applicant was a company incorporated in Singapore with
the objective of promoting Singapore tourism (‘SingCo’). SingCo had set up
several liaison offices in India and had employees based in India, working in
these liaison offices. SingCo did not carry on any business activities through
these liaison offices; no income accrued or arose to SingCo in India; and the
expenses relating to the liaison offices were reimbursed by the Singapore office
of SingCo.

SingCo sought advance ruling on the question whether FBT
would be applicable in respect of its employees in its liaison offices in India.

Before the AAR, the tax authorities referred to AAR’s ruling
in Population Council Inc., In re (2006) 286 ITR 243 (AAR) and submitted
that while in that ruling, the applicant was a non-profit-making organisation,
in the present case, the applicant is a profit earning company though it is not
earning any income in India because RBI does not permit liaison offices of
foreign companies to do so. It further submitted that the applicant has incurred
expenses which would be subject to FBT and the earlier ruling should apply to
the applicant’s case.

Held :

The AAR referred to the observations in the earlier ruling
and ruled that :

(i) as per the scheme of Chapter XII-H and S. 115WA, FBT
liability is in addition to income-tax and is subject to separate provisions
with regard to return, assessment, payment of tax, etc.

(ii) FBT is a levy on certain types of expenditure rather
than tax on income. Taxability of income is not a prerequisite for liability
to FBT. S. 115WA(2) makes it clear that even when there is no liability to pay
income-tax, FBT liability may still be attracted.

(iii) a foreign entity not earning any income in India, but
having employees based in India, is liable to FBT if it pays fringe benefits
to those employees.

levitra

Nirav Shah

(I) AO/TPO should establish that the taxpayer had manipulated prices to shift profits. (ii) After taxpayer discharges onus by conducting proper analysis, before determining ALP, AO/TPO should prove that one of four conditions in S. 92C(3) is satisfied. (

New Page 2

Part C — International Tax Decisions

8 Philips Software Centre (P) Ltd. v.
ACIT (2008) 26 SOT 226 (Bang.)

A.Y. : 2003-2004

S. 92C, S. 92CA, Income-tax Act

Dated : 26-9-2008

Issues :

(i) AO/TPO should establish that the taxpayer had
manipulated prices to shift profits.

(ii) After the taxpayer discharges onus by conducting
proper analysis, before determining ALP, AO/TPO should prove that one of the
four conditions in S. 92C(3) is satisfied.

(iii) Data used for comparability and analysis should
relate to the relevant financial year and should also be available as on the
specified date (i.e., the due date of filing tax return).

(iv)
Margin of comparable companies
cannot be taken as a benchmark without a proper FAR analysis to eliminate
differences.

Facts :

IndCo was engaged in providing software development services
to its associated enterprises. The Company claimed tax holiday under the
Income-tax Act, 1961 relating to the A.Y. 2003-04. While preparing its transfer
pricing documentation under Indian transfer pricing Rules for the relevant tax
year (2002-03), the Taxpayer selected the Cost Plus Method (‘CPM’) as the most
appropriate method for determining the arm’s-length price and also undertook a
benchmarking analysis using Transaction Net Margin Method (‘TNMM’). Based on the
analysis, the Taxpayer conducted a search on the electronic database available
in public domain and used various qualitative and quantitative filters. Data
till October 2003 (i.e., available up to the date of filing return of
income) was used for comparable analysis. The Taxpayer had made adjustment on
account of depreciation for difference in the depreciation policy adopted by the
him vis-à-vis comparable companies.

The TPO rejected the transfer pricing analysis undertaken by
IndCo on several grounds and determined the arm’s-length margin at higher
amount. On the basis of the TPO’s order, the Assessing Officer (‘AO’) made
adjustment to the total income of the Taxpayer.

Before ITAT, the assessee claimed that the adjustment was not
warranted as :

(a) The AO/TPO did not establish that the Taxpayer had
manipulated prices to shift profits outside India.

(b) The AO/TPO did not satisfy and communicate to the
Taxpayer the relevant clause u/s.92C(3) of the Act which alone empowers the AO
to disregard the analysis conducted by the Taxpayer.

(c) The AO/TPO conducted the analysis using the data that
did not exist by the specified date of filing the return of income and thus
contravened statutory requirement of using contemporaneous method.

(d) The AO/TPO did not grant suitable adjustments to
account for differences in functions performed, assets employed and risks
assumed between the Taxpayer and the comparable companies to arrive at the
ALP.

(e) The TPO had not granted the benefit of ±5% of tolerance
adjustment as provided under the Act.

Held :

The ITAT accepted most of the contentions of the appellant
and held that :

(i) The intention of the transfer pricing provisions is to
curtail avoidance of taxes by shifting profits outside India. The AO/TPO is
duty bound to demonstrate that the Taxpayer has manipulated its prices to
shift profits outside India, before a transfer pricing adjustment can be made.
The Taxpayer had also highlighted that the average rate of tax was much lower
in India than the tax rate applicable to the associated enterprise (‘AE’) in
the Netherlands. Accordingly, there was no motive on the part of the taxpayer
to shift profits out of India.

(ii) The AO/TPO did not establish, either before initiating
the transfer pricing proceedings or even at the time of concluding the
proceedings that the taxpayer had manipulated prices to shift profits. Since
the Taxpayer was availing tax holiday benefit, it would be devoid of logic to
argue that the Taxpayer had manipulated prices and shifted profits to an
overseas jurisdiction for the purpose of avoiding tax in India.

(iii) At no stage of the assessment proceedings the AO/TPO
established that the transfer pricing analysis of the Taxpayer could have been
rejected in terms of provisions of S. 92C(3) of the Act. The Taxpayer had
discharged its onus by conducting proper analysis. The AO/TPO cannot reject
such analysis unless they find deficiency or insufficiency in the
documentation of the Taxpayer.

(iv) As per the transfer pricing rules, for the purpose of
conducting the comparability analysis, subject to certain exceptions, the data
to be used for the comparability analysis need to relate to the relevant
financial year in which the international transaction has been entered into
and should exist latest by the specified date (i.e., the due date of
filing tax return). The ITAT held that both the conditions are cumulative in
nature. If any one of the conditions is not satisfied, the relevant comparable
cannot to be included in the analysis.

(v) The ITAT held that for the purpose of the analysis, the
comparables should not have transactions with its associated enterprises. Any
company having even a single rupee of related-party transaction cannot be
considered for benchmarking purpose.

(vi) The ITAT held that the margin of the comparable
companies cannot be directly taken as a benchmark without doing a proper FAR
analysis to eliminate differences on account of functions performed, risk
assumed and assets employed. By relying on the earlier Tribunal decisions in
case of Mentor Graphics (Noida) Pvt. Ltd. v. CIT, [(2007) 109 ITD 101]
and E-gain Communication (P) Ltd. v ITO, [(2008) 23 SOT 385], the ITAT
emphasised that adjustment needs to be made to the margins of the comparables
to eliminate differences on account of functions, assets and risks.

levitra

Nirav Shah

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

New Page 1

part B: unreported decisions

1 ITO v. Surendra V. Shah

ITAT ‘E’ Bench, Mumbai

Before D. Manmohan (VP) and

Pramod Kumar (AM)

ITA No. 5667/Mum./2008

Decided on : 23-7-2010

Counsel for revenue/assessee
:

Naveen Gupta/Dr. Rashmi J.
Zaveri

Per Pramod Kumar :

Facts :

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

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

Held :

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

levitra

Nirav Shah

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

New Page 2

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

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

7th December, 2009

Issue

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

Facts

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

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

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

Held

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

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

End notes:

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

levitra

Nirav Shah

S. 45 read with S. 10(38) — Profit from delivery-based transactions in shares treated as capital gains and not as business income.

New Page 1

60. (2009) 29 SOT 117 (Mum.)

Gopal Purohit v. Jt. CIT

A.Y. : 2005-06. Dated : 10-2-2009

S. 45 read with S. 10(38) — Profit from delivery-based
transactions in shares treated as capital gains and not as business income.

During the relevant assessment year, the assessee entered
into transactions of sale and purchase of shares in two forms i.e.,
delivery-based transactions and non-delivery-based transactions. Non-delivery
based transactions had been treated by the assessee as business activity and
income earned by assessee from delivery-based transactions was treated as
capital gain. The assessee’s claim for exemption of long-term capital gain
u/s.10(38) was rejected by the Assessing Officer on the following grounds :

the frequency of the transactions carried on by the assessee was very high
with large volumes of shares.

the assessee had borrowed funds which were utilised for carrying out share
transactions.

transactions where no delivery was taken had been squared up on the same day
the profit/ loss resulting therefrom was shown as business income.

in respect of delivery-based transactions, as per the statement of capital
gains filed by the assessee, the period of holding was few days only.

The Assessing Officer, therefore, held that the entire
profit was to be assessed as income from business and profession.

Before the CIT(A) the assessee contended that in earlier
five assessment years on identical facts, the assessment had been completed
u/s.143(3) by accepting the assessee’s claim. Hence, on the basis of the
principle of consistency and in absence of any fresh material, the same
treatment should be given by the Revenue for this year also. The CIT(A) upheld
the Assessing Officer’s order.

The Tribunal, relying on the decision in the case of
Sarnath Infrastructure Pvt. Ltd. v. Asst. CIT, (2009) 120 TTJ 216 (Luck.),
held in favour of the assessee. The Tribunal noted as under :

1. The assessee had claimed himself both as a dealer as
well as an investor and offered income for taxation accordingly and he claimed
that such income had been accepted by the Revenue authorities in earlier
years. Hence, it becomes important to analyse the facts of earlier years. On
considering the facts of the earlier years, the following conclusions
emerged :

(i) The facts of the year under consideration with regard
to nature of income(s) earned by the assessee and the transactions were same
in all those years, except transactions in F & O segment in some of the
years, wherein this kind of activity was started by the stock exchange.

(ii) Interest on borrowed capital had been allowed as
business expenditure against the profit on jobbing activities shown by the
assessee as business profit.

(iii) The assessee had shown shares purchased on delivery
basis as investments at the end of the year and no stock-in-trade existed on
that date and the assessee had earned both long-term and short-term capital
gains which meant that the assessee had also held shares for the period of
more than 12 months.

Thus, the nature of activities, modus operandi of
the assessee, manner of keeping records and presentation of shares as
investments at the year end were the same in all the years and hence,
apparently, there appeared no reason as to why the claim made by the assessee
should not be accepted.

2. The Revenue authorities had taken a different view in
the year under consideration by holding that the principle of res judicata
was not applicable to the assessment proceedings. There could not be any
dispute on this aspect, but there is also another judicial thought that there
should be uniformity in treatment and consistency under the same facts and
circumstances and it was already found that facts and circumstances were
identical, even though a different stand had been taken by the Revenue
authorities.

3. On the facts and circumstances of the instant case, on
the basis of principle of consistency alone, the action of the Revenue
authorities was liable to be quashed.

4. On the basis of merits also, in view of the ratio of the
decision of Sarnath Infrastructure (P.) Ltd.’s case (supra), it was
held that the delivery-based transaction should be treated as of the nature of
investment transactions and profit therefrom should be treated as capital
gains.

5. The Revenue authorities had also held that borrowed
funds were utilised for making such investment. In earlier years, interest on
such loans had been allowed as business expenditure against profit on share
trading transaction shown as business income. In the year under consideration
also no nexus between the interest-bearing funds and investments had been
established and, hence, for this reason also, there was no merit in treating
the capital gains as business profit.

levitra

Nirav Shah

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

New Page 1

29 G. K. Ramamurthy vs JCIT

ITAT Mumbai `G’ Bench

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

ITA No. 1367/Mum/2009

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

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

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

Per A. L. Gehlot:

Facts:

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

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

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

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

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

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

The Tribunal allowed the appeal filed by the assessee.

levitra

Nirav Shah

(2011) 132 ITD 604(Mum.) Momaya Investments (P) Ltd. vs. ITO AY : 1996-97 Date of order : 22-06-2011

Section 73 – Not applicable if the principal business of the company is banking or granting of Loans and Advances – The business of Banking need not be necessarily mentioned in the Memorandum of Association of the company – But the actual nature of the business is to be looked at.

Facts:

The assessee company was mainly engaged in the business of providing loans and advances that formed about 68% of the income. The original assessment dated 30th September, 1998 was passed assessing the total income at Rs. 8,58,522/- This was eventually followed by a revision order passed which stated that the assessee dealt in shares and hence Explanation to section 73 was attracted since the main income did not consist of “Interest on securities, income from House Property, Capital Gains or Income from Other sources.” The assessee had appealed to the tribunal which remanded the matter back to CIT to re-examine certain aspects. The matter was then remanded back to the AO. In the fresh assessment, the assessee submitted that it was mainly engaged in the business of providing loans and advances and rediscounting bill. And therefore, Explanation to section 73 was not applicable. The AO however, objected to assessee’s contention that it was in business of granting loans and advances on the basis that main object of the memorandum of association was only to acquire, hold or deal in stocks and shares. Further, he also held that the activity of bill rediscounting cannot be called as granting of loans and advances.

Held:

What is important is not the object stated in the memorandum of association, but it is also important to look at the actual activity of the assessee. Therefore, merely because the business of granting loans was not mentioned in the memorandum, would not mean that actual nature of business cannot be looked at. It was even concluded that the activity of bill rediscounting has to be treated as only granting of loans. This was because the word “discount”, in regard to financial transactions, represents interest.

levitra

Nirav Shah

(2012) 80 DTR 23 (Mum) Genesys International Corporation Ltd. vs. ACIT A.Ys.: 2008-09 & 2009-10 Dated: 31-10-2012

Facts:

While computing tax liability u/s. 115JB, the assessee deducted income of its Mumbai unit which was a SEZ unit and eligible for tax benefit u/s. 10A. The Assessing Officer disputed the claim of the assessee on the ground that the Finance Act, 2007 amended section 115JB w.e.f. A.Y. 2008-09 for bringing the amount of income to which provisions of section 10A or 10B apply within the purview of MAT.

Held:

By SEZ Act, 2005 w.e.f. 10th February 2006, a new section 10AA has been inserted which provides exemption to the units located in SEZ. Section 2 of SEZ Act, defines SEZ as under:

“(za) Special Economic Zone means each Special Economic Zone notified under the proviso to s/s. (4) of section 3 and s/s. (1) of section 4 (including free trade and warehousing zone) and includes an existing Special Economic Zone.”

It is evident from the relevant provisions that an existing SEZ unit will also be governed by SEZ Act, 2005. Therefore, the benefits which are to be provided to the newly established unit in SEZ as per section 10AA will also be available to the existing units in SEZ. Moreover, section 4(1) of SEZ Act provides that an existing SEZ unit shall be deemed to have been notified and established in accordance with provisions of SEZ Act and the provisions of SEZ Act shall apply to such existing SEZ units. It is also observed that by the SEZ Act, s/s. (6) to section 115JB was also inserted providing that provisions of section 115JB shall not apply to the income accrued C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants Tribunal news or arisen on or after 1st April, 2005 from any business carried on, or services rendered, by an entrepreneur or a developer, in a unit or SEZ, as the case may be. Hence, income of units located in SEZ will not be included while computing book profit for the purpose of MAT as per section 115JB(6). In view of above, irrespective of the fact that amendment has been made in clause (f) of Explanation 1 to section 115JB(2) to apply the provisions of MAT in respect of units which are entitled to deduction u/s. 10A or section 10B, the units which are in SEZ will continue to get benefits from the applicability of provisions of MAT in view of s/s. (6). Section 115JB(6) does not refer section 10A or section 10AA but it only refers that provisions of section 115JB will not apply to the income accrued or arisen on or after 1st April, 2005 from any business carried on in a unit located in SEZ. Hence, the unit in SEZ will be covered by s/s. (6) to section 115JB irrespective of the fact that those units were claiming deduction u/s. 10A.

levitra

Nirav Shah

Section 253 of the Income-tax Act, 1961 — Direct stay application filed before Tribunal is maintainable and it is not a requirement of law that assessee should necessarily approach Commissioner before approaching Tribunal for grant of stay.

(2012) 49 SOT 333 (Pune)
Honeywell Automation India Ltd. v. Dy. CIT
A.Y.: 2006-07. Dated: 24-2-2011

Section 253 of the Income-tax Act, 1961 — Direct stay application filed before Tribunal is maintainable and it is not a requirement of law that assessee should necessarily approach Commissioner before approaching Tribunal for grant of stay.

The assessee filed separate application for stay of demand before the Deputy Commissioner, before Additional Commissioner and finally before the Commissioner. None of these officials disposed of the assessee’s applications for stay of demand. The assessee-company thereupon filed application before the Tribunal for stay against the demand of arrears by the Revenue. The Revenue raised an objection that Tribunal had no jurisdiction to entertain directly stay application (DSA) without waiting for decision of the lower authorities.

The Tribunal dismissed the objections raised by the Revenue. The Tribunal noted as under:

(1) The Act has conferred certain powers on the Income Tax authorities for discharging and 158 (2012) 44-A BCAJ 9 10 one such power relates to matters of stay of the demand. The assessee filed the stay application before the Assessing Officer, but the Assessing Officer did not take any action, be it a case of rejection or otherwise. The same is the fate of application lying with the Additional Commissioner. The Commissioner merely passed on the responsibility to his deputies instead of either staying the demand or rejecting the request for stay of the same or otherwise.

(2) While there is inaction on part of the Revenue on the applications for stay, the assessee is busy in making application for stay of demand from time to time fearing ultimate coercive action by the AO and its likely adverse effects on the business operations of the assessee.

(3) Regarding the DSA by the assessee before the Tribunal, the decisions of the Tribunal are in favour of the assessee for the proposition that it is not necessary that the assessee should necessarily approach the Commissioner of Income-tax before approaching the Tribunal for grant of stay.

(4) Therefore, DSA filed before the Tribunal is maintainable and it is not the requirement of law that the assessee should necessarily approach the Commissioner before approaching the Tribunal for grant of stay.

(5) It does not make any difference whether the assessee filed any application before the Revenue and not awaited their decisions before filing application before the Tribunal or directly approached the Tribunal without even filing the applications before the Revenue authorities when there exists threat of coercive action by the Assessing Officer.

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Nirav Shah

Section 54F of the Income-tax Act, 1961 — Deduction allowable even if the building in which investment was made was under construction and assessee had paid entire amount as advance.

(2012) 49 SOT 90 (Mumbai)
ACIT v. Sudhakar ram
A.Y.: 2005-06. Dated: 31-10-2011

Section 54F of the Income-tax Act, 1961 — Deduction allowable even if the building in which investment was made was under construction and assessee had paid entire amount as advance.

The assessee earned long-term capital gain on sale of shares and claimed deduction u/s.54F in respect of investment in a new house. The Assessing Officer noted that the assessee had made investment in two new flats and the building was under construction stage and the assessee had chosen to pay the entire advance and, therefore, deduction u/s.54F could not be given.

The CIT(A) allowed the assessee’s claim. The Tribunal also held in favour of the assessee. The Tribunal noted that since the assessee has paid the full consideration before the statutory period of 2 years from the date of sale of shares and has acquired the right in the two flats which is being constructed by the builder, the benefit of deduction u/s.54F cannot be denied to the assessee.

levitra

Nirav Shah

Sections 147, 154 — Once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act — In the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

(2012) TIOL 193 ITAT-Mum.
Binani Cement Ltd. v. DCIT
A.Y.: 2007-08. Dated: 27-1-2012

Sections 147, 154 — Once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act — In the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

Facts:

For A.Y. 2007-08, the assessment of total income of the assessee was completed vide order dated 23-3- 2007, passed u/s.143(3) of the Act. While assessing the total income, the Assessing Officer (AO) allowed a deduction of Rs.74,42,770 being the amount of interest on term loan from IDBI which was not paid as due, but was deferred by IDBI and such deferral was regarded as deemed payment.

Subsequently the Assessing Officer (AO) recorded the reasons which were supplied to the assessee vide letter dated 26-8-2009, and issued notice u/s.148. One of the reasons recorded was that on perusal of the assessment records it is noticed that in respect of the loan obtained by the assessee from IDBI, the assessee had not paid interest instalment amounting to Rs.74,42,770 which was deferred by IDBI. This had been treated as deemed payment of interest and was allowed as deduction. Upon receiving the copy of reasons recorded, the assessee objected to the issuance of notice u/s.148 on the ground that the time section 43B was amended after the assessee has filed its return of income, by Finance Act, 2006 with retrospective effect from 1-4-1989 to provide for disallowance of interest which has been converted into loan and also that since the amount under consideration has been paid in subsequent years it will not have any impact on the income-tax liability ultimately. The assessee consented that this can be rectified u/s.154 of the Act. The AO without disposing of the assessee’s objections proceeded to complete the reassessment and added the sum of Rs.74,42,770 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO in reopening the assessment u/s.147 r.w.s. 148 of the Act on the ground that the assessee has admitted one of the reasons recorded for reopening the assessment. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that in view of the retrospective amendment of section 43B of the Act by the Finance Act, 2006, subsequent to the filling of the return, certain disallowance under this provision was called for, which was consented by the assessee by filing rectification petition vide letter dated 30-9-2009. The amendment was on the statute even at the time when the AO completed assessment u/s.143(3) of the Act. On behalf of the assessee, relying on the decision of the Bombay High Court in the case of Hindustan Unilever Ltd. v. DCIT, (325 ITR 102) (Bom.) it was contended that proceedings u/s.147 were being objected to as there was no escapement of income.
The Tribunal held that:

(1) Mere fresh application of mind to the same set of facts or mere change of opinion does not confer jurisdiction even after amendment in section 147 w.e.f. 1-4-1989.

(2) When a regular order of assessment is passed in terms of section 143(3), a presumption can be raised that such an order has been passed on application of mind. A presumption can also be raised to the effect that in terms of section 114(e) of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take, benefit of its own wrong.

(3) Considering the ratio of the decisions of the Delhi High Court in the case of Jindal Photo Films Ltd. v. DCIT, 234 ITR 170 (Del.) and also the decision of the Full Bench of the Delhi High Court in the case of CIT v. Kelvinator India Ltd., (256 ITR 1) which has been affirmed by the Supreme Court in 320 ITR 561 (SC), in order to invoke the provisions of section 147, the AO is required to have some tangible material pinpointing escapement of income from assessment and in the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

(4) The amendment to section 43B was available to the AO while framing assessment, even otherwise, based on the ratio of the decision of the Bombay High Court in the case of Hindustan Unilever Ltd. (supra) it can be safely concluded that once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act.

The Tribunal held that the jurisdiction is to be assumed by the AO u/s.154 of the Act and not 148 of the Act. The Tribunal allowed this issue of the assessee’s cross-objections.

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Nirav Shah

Section 255(4) — The opinion expressed by the Third Member (TM) is binding on the member in minority — Questions framed by the member in minority while giving effect to the opinion of majority are outside the purview of section 255(4) of the Act and have no relevance.

(2012) TIOL 188 ITAT-Mum.-SB
Tulip Hotels Pvt. Ltd. v. DCIT
A.Ys.: 2004-05 & 2005-06. Dated: 30-3-2012

Section 255(4) — The opinion expressed by the Third Member (TM) is binding on the member in minority — Questions framed by the member in minority while giving effect to the opinion of majority are outside the purview of section 255(4) of the Act and have no relevance.

Facts:

In an appeal filed by the assessee, the Tribunal was considering taxability of certain amounts as cash credits u/s.68 of the Act and also allowability of certain expenditure as a deduction. In the course of hearing before the Tribunal, the assessee filed certain additional evidence. After considering the evidence filed by the assessee before the lower authorities and also the additional evidence filed before the Tribunal, the Judicial Member (JM) decided both the issues in favour of the assessee, while the Accountant Member (AM) decided both the issues in favour of the Department. The members formulated questions to be referred by the President to the Third Member. The TM agreed with the JM and decided both the issues in favour of the assessee. At the stage of giving effect to the opinion of the TM, the JM passed an order in conformity with the order of the TM, whereas the AM observed that it is not possible to give effect to the order of the TM on the ground that the order of TM was contrary to the opinion expressed by the TM himself in his own order and that the TM had not considered various points of differences arising from the dissenting orders. He raised certain new questions on merits of the dispute and directed that the matter be referred back to the President. The JM did not agree and raised an issue whether the Members of the Bench could comment on the order of the TM instead of merely passing a confirmatory order in terms of section 255(4). The President on a reference made by the Division Bench referred the following question to the SB for its consideration:

“Whether on a proper interpretation of s.s (4) of section 255 of the Income-tax Act, the order proposed by the learned AM while giving effect to the opinion of the majority consequent to the opinion expressed by the learned Third Member, can be said to be a valid or lawful order passed in accordance with the said provision.”

Held:

(1) There is no doubt that the Accountant Member while agreeing with the questions formulated at the time of the original reference to the President of the ITAT has again framed three new questions at the time of giving effect to the opinion of the majority de hors the provisions of section 255(4) of the Act as he had become functus officio after he passed his initial draft order;

(2) The opinion expressed by the Third Member was very much binding on the Accountant Member. The Accountant Member who is in minority was bound to follow the opinion of the Third Member in its true letter and spirit. It was necessary for judicial propriety and discipline that the member who is in minority must accept as binding the opinion of the Third Member;

(3) On a difference of opinion among the two Members of the Tribunal, the third Member was called upon to answer two questions on which there was difference of opinion among the two members who framed the questions and the third Member in a wellconsidered order, answered the reference by giving sound and valid reasons agreeing with the views of the Judicial Member. Thus, the majority view was in favour of the assessee;

(4) The proposed order dated 18-2-2010 of the Accountant Member who is in the minority and had become functus officio wherein he has expressed his inability to give effect to the opinion of the majority and proceeded to frame three new questions to be referred to the President, ITAT again for resolving the controversy cannot be said to be a valid or lawful order passed in accordance with the provisions of section 255(4) of the Act. The SB held that the said order dated 18-2-2010 proposed by the Accountant Member to be not sustainable in law. It answered the question referred to it in favour of the assessee.

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Nirav Shah

S. 37(1) — Amount spent on the prizes given under the lottery system allowed as business expenditure

New Page 1

11 Eyetech Industries v.
ACIT

ITAT ‘G’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 1799/Mum./2005

A.Y. : 2001-02. Decided on : 31-7-2008

Counsel for assessee/revenue : N. R. Agarwal/

B. K. Singh

S. 37(1) of the Income-tax Act, 1961 — Business expenditure
— Amount spent on the prizes given under the lottery system allowed as
business expenditure.

Per P. Madhavi Devi :

Facts :

The assessee was trading in eye-testing equipments. During
the year under appeal it had claimed Rs.7.68 lacs as expenditure incurred
towards sales promotion campaign. The same was explained thus: The assessee
conducted lottery at the exhibition centre from 11-3-2000 to 15-1-2001. As per
the scheme, the purchaser of the assessee’s products during the defined period
was entitled to a lottery ticket. At the annual optical fair, a lucky draw was
announced in which three lucky winners were given the prizes. According to the
AO, this was a lottery business not related to the business of the assessee.
Hence, he disallowed the expenditure claimed. On appeal, the CIT(A) confirmed
the addition.

Held :

The Tribunal agreed with the assessee that the expenditure
was to attract customers and to encourage them to purchase the assessee’s
products. It disagreed with the AO who held such activity of the assessee as
in the nature of gambling. Accordingly, the expense claimed was allowed by the
Tribunal.

à
The flat in question was exclusively used for the purpose of the business of
the assessee. It was used for accommodating the business executives of various
suppliers, who visited the assessee’s shop for business purpose. Apart from
that, some senior staff of the assess was also residing in the flat;

à
No rent was paid by the assessee for the use of the flat;

à
The assessee had substantial amount of interest-free funds during both the
years under appeal;

à
The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.

In view of the above, the Tribunal upheld the order of the
CIT(A).

(iii) In the case of SCM Creation, which was the intervener
in the case of Rogini Garments before the Special Bench of Chennai Tribunal,
the Madras High Court relying on its own decision in the case of V.
Chinnapandi, had allowed the appeal filed by the assessee;

(iv) The Bombay High Court in the case of Nima Specific
Family Trust, which decision was again based on the decision of the M. P. High
Court in the case of J. P. Tobacco Products Pvt. Ltd., had held that both the
Sections were independent and hence, deduction could be claimed on the gross
total income, subject to ceiling of 100%.

Cases referred to :

1. Ifunik Pharma Ltd. (ITA No. 4389/M/02);

2. CIT v. V. Chinnapandi, (2006) 282 ITR 389 (Mad.);

3. J. P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR
123 (M.P.);

4. SCM Creation (Tax case Appeal No. 310 & 311 of 2008 —
Madras High Court);

5. Nima Specific Family Trust, 248 ITR 291 (Bom.)

6. ACIT v. Rogini Garments, (2007) 108 ITD 49 (SB)
(Chennai)

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Nirav Shah

Whether stock exchange membership card acquired after 1-4-1998 represents a commercial right/intangible asset and qualifies for depreciation u/s.32 — Held, Yes.

New Page 1

10 K. Damani Securities Pvt. Ltd.
v. ITO

ITAT ‘C’ Bench, Mumbai

Before G. E. Veerabhadrappa (VP) and

G. C. Gupta (JM)

ITA No. 2568/M/04

A.Y. : 2001-02. Decided on : 22-10-2007

Counsel for assessee/revenue : Hiro Rai/

B. K. Singh

Whether stock exchange membership card acquired after
1-4-1998 represents a commercial right/intangible asset and therefore
qualifies for depreciation u/s.32 of the Income-tax Act, 1961 — Held, Yes.

The assessee claimed depreciation on membership card of
Bombay Stock Exchange, acquired after 1-4-1998. The Assessing Officer did not
allow the claim of the assessee. The CIT(A) upheld the action of the Assessing
Officer. The assessee preferred an appeal to the Tribunal. In the appeal to
the Tribunal the contention of the assessee was that membership card of Bombay
Stock Exchange represents a commercial right/intangible asset and therefore
qualifies for depreciation u/s.32 of the Act. Reliance in this connection was
placed on the decision of the Division Bench in the case of Techno Shares &
Stocks Ltd. (ITA Nos. 778, 779 and 1951/Mum./2004 decided on 4-1-2006). On the
other hand the Departmental Representative pointed out that subsequent to the
decision in the case of Techno Shares & Stocks Ltd., the Tribunal, in another
case, has set aside the issue to the file of the Assessing Officer with a
direction to allow depreciation only after he finds that there is a diminution
in the value of the asset as a result of use.

Held :

The principle that the acquisition of Bombay Stock Exchange
Card after 1-4-1998 results in acquisition of a commercial asset in the form
of an intangible asset and therefore is entitled for depreciation in the light
of the amended provisions has been accepted by both the decisions. The
Tribunal in the light of the contention of the AR that S. 32 which grants
depreciation on various conditions itself does not spell out such diminution
to be the condition for allowance of depreciation and also having regard to
the ratio of Techno Shares & Stocks Ltd. decided the issue in favour of the
assessee. The Tribunal also stated that the decision rendered in the other
case where the matter has been restored to the Assessing Officer must be taken
to have been decided on the facts that existed in that case.

The flat in question was exclusively used for the purpose of the business of
the assessee. It was used for accommodating the business executives of various
suppliers, who visited the assessee’s shop for business purpose. Apart from
that, some senior staff of the assess was also residing in the flat;

No rent was paid by the assessee for the use of the flat;

The assessee had substantial amount of interest-free funds during both the
years under appeal;

The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.

In view of the above, the Tribunal upheld the order of the
CIT(A).

Nirav Shah

S. 37(1) — No interest held to be allowable where firm had advanced Interest free loan to a relative of a partner for purchase of a flat.

New Page 1

9 DCIT v. Parthas Power House

ITAT Cochin Bench

Before N. Barathwaja Sankar (AM) and N. Vijayakumaran (JM)

ITA No. 50 & 51/Coch./2007

A.Ys. : 2003-04 & 2004-05. Decided on : 12-6-2008

Counsel for revenue/assessee : T. R. Indira/

R. Srinivasan

S. 37(1) of the Income-tax Act, 1961 — Business expenditure —
Interest-free loan to a relative of a partner for purchase of a flat — The flat
used for the purpose of the business of the assessee — Whether AO justified in
disallowing interest paid by the assessee — Held, No.

Per N. Barathwaja Sankar :

Facts :

One of the issues before the Tribunal was regarding the
allowability of interest paid by the assessee. During the years under appeal,
the assessee had paid the sum of Rs.25.23 lacs to a builder towards the cost of
a flat purchased by the wife of the partner. In addition the assessee had also
paid interest of Rs.15.53 lacs on behalf of the said person to HDFC for the loan
received by her for the said flat. According to the AO, the assessee to the
extent of the said advances had diverted its fund for non-business purpose.
Therefore, he disallowed interest amount equal to the sum computed @ 14% of the
said advance. On appeal, the CIT(A) deleted the additions made by the AO.

Held :

The Tribunal noted the following facts considered by the
CIT(A) :

à
No rent was paid by the assessee for the use of the flat;

à
The assessee had substantial amount of interest-free funds during both the
years under appeal;

à
The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.

In view of the above, the Tribunal upheld the order of the
CIT(A).

Cases referred to :

1. Ifunik Pharma Ltd. (ITA No. 4389/M/02);

2. CIT v. V. Chinnapandi, (2006) 282 ITR 389 (Mad.);

3. J. P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR
123 (M.P.);

4. SCM Creation (Tax case Appeal No. 310 & 311 of 2008 —
Madras High Court);

5. Nima Specific Family Trust, 248 ITR 291 (Bom.)

6. ACIT v. Rogini Garments, (2007) 108 ITD 49 (SB)
(Chennai)

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Nirav Shah

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

New Page 1

26 ITO v Smt. Kusum Gilani

ITAT Delhi `D’ Bench

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

ITA No. 1576/Del/2008

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

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

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

Per K. G. Bansal:

Facts:

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

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

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

Held:

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

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

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

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

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

The
Tribunal dismissed the appeal filed by the Revenue.

Cases referred to:

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

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

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

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Nirav Shah

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

New Page 1

25 Geetanjali Trading Ltd. vs ITO

ITAT Mumbai `G’ Bench

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

ITA No. 5428/Mum/2007

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

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

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

Per J. Sudhakar Reddy:

Facts :

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

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

Cases referred to:

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

2 CIT vs Farida Shoes Ltd. 235 ITR 560

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

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

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

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Nirav Shah

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

New Page 1

24 Pancard Clubs Ltd. vs DCIT

ITAT Mumbai `C’ Bench

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

SA No. 235/Mum/2009

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

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

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

Per S. V. Mehrotra:

Facts :

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

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

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

Held:

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

Cases referred to:

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

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

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

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

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Nirav Shah

S. 37(1) — Expenditure on new technology to replace existing one is revenue expenditure

New Page 2

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.)

33 Unidyne Energy Env System Pvt. Ltd.

v. ITO

ITAT ‘G’ Bench, Mumbai

Before P. Madhavi Devi (JM) and

D. Karunakara Rao (AM)

ITA No. 4007/Mum./2005

A.Y. : 2001-02. Decided on : 10-9-2008

Counsel for assessee/revenue :

Prakash Jhunjhunwala/T. Diwakar Prasad

S. 37(1) of the Income-tax Act, 1961 — Capital or Revenue
expenditure — Expenditure incurred in acquiring new technology to replace the
existing technology — Whether allowable as expenditure — Held, Yes.

Per D. Karunakara Rao :

Facts :

The assessee was engaged in the business of manufacturing and
trading of boilers and installation of thermal engineering systems. During the
year the assessee had claimed expenditure of Rs.41.4 lacs incurred in improving
its existing technology. The expenditure incurred included payments made to IIT
for technology acquired. In its accounts, the as-sessee
had shown the expenditure so incurred as capital work in progress. According to
the assessee, it was done so in order to disclose to IDBI about its fund
involved for seeking grant/reimbursement from USAID. According to the AO as well
as the CIT(A), the expenditure incurred was to develop technology for new
product, which has an enduring benefit hence, they disallowed the assessee’s
claim.

Held :

The Tribunal found that the assessee had incurred expenditure
on development and design of the technology for substituting the existing
technology. According to it, the expenditure was undisputedly spent wholly and
exclusively for business purpose and the same was aimed at the development of
new variant product with enduring benefit. However, relying on the Mumbai High
Court decision in the case of Kirloskar Tractors Ltd., it noted that the
enduring advantage of the expenditure was not the final test and it has
exceptions. Further it also noted that the assessee did not acquire any
exclusive ‘right to use’ the said technology, nor did it acquire the ‘right to
transfer’. In the opinion of the Tribunal, in the absence of such rights, the
said expenditure was in the nature of revenue. Further, it noted that the object
of the expenditure was aimed at meeting the ever changing needs on the
technological frontiers. Therefore, relying on the Supreme Court decision in the
case of Alembic Chemical Works Co. Ltd., it held that the expenditure incurred
was revenue in nature.

Cases referred to :

(1) Kirloskar Tractors Ltd., 98 Taxman 112 (Mum);

(2) Alembic Chemical Works Co. Ltd., 177 ITR 377 (SC)

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Nirav Shah

S. 2(24) – Notional value of advance licences/DEPB credited to P&L account not income

New Page 2

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.)

32 National Leather Mfg. Co. v. JCIT

ITAT ‘E’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

R. S. Padvekar (JM)

ITA No. 8294/Mum./2003

A.Y. : 2000-01. Decided on : 13-6-2008

Counsel for assessee/revenue : Mayur Shah/

Somogyan Pal

S. 2(24) of the Income-tax Act, 1961 — Income — Assessee
notionally computing the value of advance licences/DEPB and crediting the same
to Profit and Loss account — In its return of income filed, the said amount
excluded from its income — Whether the assessee justified in doing so — Held,
Yes.

Per R. S. Padvekar :

Facts :

The assessee, an exporter, was holding licences/ DEPB, which
were transferable. Hitherto, it was providing for the benefit under the said
licences/ DEPB only on the basis of its actual utilisation. However, during the
year under consideration, it changed its method of accounting, and made the
valuation of the benefit receivable in respect of the unutilised licences/DEPB,
and a sum of Rs.167.67 lacs was credited to Profit and Loss account. But while
filing return of income, the said amount was not considered as income of the
previous year and its loss was enhanced to that extent. However, the AO as well
as the CIT(A) did not agree with the said treatment, and the same was considered
as the income of the current year.

Held :

The Tribunal noted that the assessee had not transferred the
said licences, nor were the same utilised in paying import duty. The assessee
had merely calculated the notional value for the purpose of suppressing the huge
losses reflected in the books of account. According to it, merely because book
entries were passed and when there was no real income accrued to the assessee,
there was no justification to support the addition. Further, relying on the
Bombay Tribunal decision in the cases of Jamshi Ranjitsing Spg. & Wvg. Mills
Ltd. and of the Amritsar Tribunal in the case of Dera Singh Sham Singh, it
allowed the appeal of the assessee.

Cases referred to :

(1) Jamshi Ranjitsing Spg. & Wvg. Mills Ltd. v. IAC,
41 ITD 142 (Bom.);

(2) JCIT v. Dera Singh Sham Singh, 96 ITD 235 (Asr)

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Nirav Shah

S. 194J — Payments for network services cannot be Technical services’ liable to TDS

New Page 2

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.)

31 Pacific Internet (India) Pvt. Ltd. v.

ITO — TDS

ITAT ‘D’ Bench, Mumbai

Before R. S. Padvekar (JM) and

Rajendra Singh (AM)

ITA Nos. 1607 to 1609/Mum./2006

A.Y. : 2003-04 to 2005-06

Counsel for assessee/revenue : Anil Sathe/

Sanjay Agrawal

S. 194J Income-tax Act, 1961 — TDS on Fees for Professional
or Technical services — Whether payments for bandwidth and network services
could be said to be ‘Technical services’ liable to TDS — Held, No.

Per R. S. Padvekar :

Facts :

The assessee was engaged in the business of providing
internet services to its clients. For the same it acquired bandwidth and network
operating infrastructure services from MTNL/VSNL. According to the AO, such
services availed were in the nature of technical services covered u/s.194J and
treated the assessee in default u/s.201(1). The CIT(A) on appeal, confirmed the
AO’s order. Before the Tribunal the Revenue submitted that the decision of the
Madras High Court in the case of Skycell Communications Ltd. was not applicable
to the facts of the assessee’s case, as bandwidth and network operating
infrastructure services were nothing but technical services and accordingly,
relied on the orders of the lower authorities.

Held :

The Tribunal did not agree with the contention of the Revenue
and held that since the services availed were standard facility, the case of the
assessee was not only covered by the decision in the case of Skycell
Communications Ltd., but also by the Delhi High Court decision in the case of
Estel Communication Pvt. Ltd. Accordingly, it was held that the payments made to
MTNL/VSNL for availing the services of bandwidth and network operating
infrastructure cannot be said to be technical services within the meaning of S.
195J read with Explanation 2 to S. 9(1)(vii) of the Act.

Cases referred to :

(1) Skycell Communications Ltd., 251 ITR 59 (Mad.)

(2) CIT v. Estel Communication Pvt. Ltd., 217 CTR
(Del.) 102

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Nirav Shah

Whether violations of Rules & Regulations of NSE by members could be offence or act prohibited by law — Held, No. Whether fine paid by member to NSE can be disallowed under Explanation to S. 37(1) — Held, No.

New Page 2

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.)

30 Goldcrest Capital Markets Ltd. v. ITO

ITAT ‘B’ Bench, Mumbai

Before K. C. Singhal (VP) and

Abraham P. George (AM)

ITA Nos. 1240 & 1241/Mum./2006

A.Y. : 2003-04. Decided on : 21-1-2009

Counsel for assessee/revenue : Ajay Gosalia/

Pitamber Das

Explanation to S. 37(1) of the Income-tax Act, 1961 — A.Y.
2003-04 — Whether violations of the Rules & Regulations of National Stock
Exchange by its members could be termed as an offence or as an act prohibited by
law — Held, No. Whether amount paid as fine by a member of National Stock
Exchange to NSE can be disallowed under Explanation to S. 37(1) of the Act —
Held, No.

Per Abraham P. George :

Facts :

The assessee, a member of the National Stock Exchange (NSE),
debited its profit & loss account with a sum of Rs.3,85,511 on account of bad
delivery and other charges. In the course of assessment proceedings the assessee
explained that this amount represents payments to NSE (a) Rs.2,50,000 for
violation of Capital Market Segment Trading, (b) Rs.1,00,000 for change in
shareholding pattern, and (c) Rs.35,511 — for miscellaneous. According to the
AO, Stock Exchanges were regulated by SEBI which was a statutory body
constituted by an Act of the Parliament and such Rules & Regulations of SEBI
having been framed in public interest, fine for violation could be considered as
penalty. He disallowed Rs.3,85,511 on the ground that these fines were penal in
nature and could not be allowed as deduction in view of the Explanation to S.
37(1).

The CIT(A) upheld the disallowance of Rs.3,50,000 on the
ground that the fine of Rs.2,50,000 imposed for violation of Rules fell under
the heading ‘unfair trade practice’ and such violations being for breach of
public policy, fine imposed was in the nature of penalty and as regards the fine
of Rs.1,00,000 he was of the view that violation of clause 30 of Membership
undertaking for capital market segment of the Exchange was also a violation of
Rule 4(c) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that NSE is not a statutory body on par
with SEBI. Fines & penalties levied for violation on account of ‘unfair trading
practice’ as specified in 4.6 of NSE regulations and ‘un-business like conduct’
as specified in IV(4)(e) of the NSE Rules cannot be equated with violation of
statutory rule or law. Since there was no violation of law, the fine paid for
non-observance of internal regulations of Stock Exchange was held to be
allowable. The Tribunal stated that its reasoning gets support from the decision
of the co-ordinate Bench in the case of CFL Ltd.

Case referred to :

1. ACIT v. CFL Ltd., (ITA No. 2656/M/2006) order
dated 5th December 2008.

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Nirav Shah

Whether delay of more than 19 months in issuance of notice after completion of assessment order in case of person searched and satisfaction required u/s.158BD not recorded by AO of person searched, proceedings are vitiated and null and void — Held, Yes.

New Page 2

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.)

29 Bharat Bhushan Jain v. ACIT

ITAT ‘A’ Bench, New Delhi

Before Rajpal Yadav (JM) and

K. G. Bansal (AM)

ITA No. IT(SS) A. No. 13/Del./2007

A.Ys. : 1991-92 to 2001-02. Decided on : 7-11-2008

Counsel for assessee/revenue : Rano Jain/

B. Koteshwara Rao

S. 158BD of the Income-tax Act, 1961 — Whether in view of the
fact that there was a delay of more than 19 months in issuance of notice
u/s.158BD of the Act after the completion of the assessment order in the case of
the person searched and also because the satisfaction required u/s.158BD of the
Act was not recorded by the Assessing Officer (‘AO’) of the person searched, the
proceedings are vitiated and need to be declared as null and void — Held, Yes.

Per Rajpal Yadav :

Facts :

On 30th August 2002 a search u/s.132 of the Act was conducted
at the business premises of M/s. Friends Portfolios (P) Ltd. and the residential
premises of its director Shri Manoj Aggarwal. Assessment u/s. 158BC of the Act,
in the case of Manoj Aggarwal was completed on 29th August 2002. On 15th July
2003, the DCIT, Central Circle 3, New Delhi, who assessed Shri Manoj Aggarwal
informed the AO of the assessee that during the course of search on Shri Manoj
Aggarwal, documentary evidence was found indicating the fact that Shri Manoj
Aggarwal was giving bogus accommodation entries to various persons. He also
informed that the present assessee is one of the mediators who has played a
crucial role in providing accommodation entries to various entities and
individuals from Shri Manoj Aggarwal and therefore he needs to be assessed
u/s.158BD of the Act. Accordingly, the AO of the present assessee issued a
notice u/s.158BD of the Act on 31-3-2004. In response to this notice, the
assessee filed return of income for the block period on 27-5-2004 declaring nil
income. The AO assessed undisclosed income of the assessee at Rs.3,52,25,105.
The CIT(A) observed that only commission income earned by the assessee in
helping Shri Manoj Aggarwal needs to be assessed in the hands of the assessee
and accordingly the commission income on the total transaction was computed at
Rs.5,20,568 which was confirmed by the CIT(A). Aggrieved, the assessee preferred
an appeal to the Tribunal challenging the proceedings on the ground that there
was a huge delay of 19 months in issue of notice from the time of
completion of block assessment u/s.158BC in the case of Shri Manoj Aggarwal and
also on the ground that no satisfaction was recorded by the AO who passed
assessment order u/s.158BC of the Act in the case of the person searched. The
satisfaction note was supplied to the assessee by the DCIT, Central Circle 37
under the signature of Shri Jatender Kumar, the AO of the present assessee.
Relying on the decision of the Supreme Court in the case of Mahinsh Maheshwar
(289 ITR 341) it was contended that in the absence of satisfaction recording
that incriminating material was found indicating the fact that the assessee has
undisclosed income, no proceedings u/s.158BD of the Act could be initiated.

Held :

The Tribunal found that the issue of delay in issuance of
notice u/s.158BD has been considered by the co-ordinate Bench of ITAT in the
case of Shri Radhey Shyam Bansal to which Accountant Member was a party. The
Tribunal after extracting lucid enunciation of the law from the decision in the
case of Radhey Shyam Bansal came to the conclusion that the Tribunal has in the
case of Radhey Shyam Bansal considered the fact that the provisions of S. 158BD
of the Act do not provide for a time limit for issue of a notice. The Tribunal
in that case came to the conclusion that the notice needs to be issued within a
reasonable time. The Tribunal noted that the principle of consistency demanded
it to follow the decision of the co-ordinate Bench in the case of Radhey Shyam
Bansal. As regards the second contention, the Tribunal went through the alleged
satisfaction and found it to be an office note, which very office note was
considered by the Tribunal in the case of Radhey Shyam Bansal, which did not
even have reference of any seized material relatable to the assessee. This
alleged satisfaction note spoke of the general modus operandi of various
persons in carrying out giving bogus accommodation entries. The Tribunal after
considering the facts and circumstances of the case, allowed the appeal of the
assessee and quashed the assessment order.

Cases referred to :

1. Shri Radhey Shyam Bansal v. ACIT, IT (SS) A No.
12/Del./07

2. Kandhubhai Vasanji Desai v. DCIT, 236 ITR 73 (Guj.)

3. Vikrant Tyres v. 1st ITO, 247 ITR 821 (SC)

4. Ambika Prasad Mishra v. State of UP, AIR 1980
(SC) 1762

5. Manoj Aggarwal and Ors., 113 ITD 377 (Del.) (SB)

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Nirav Shah

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

New Page 1

28 Puja Agencies Pvt. Ltd. vs ACIT

ITAT Mumbai `C’ Bench

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

MA No. 452/Mum/2009

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

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

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

Per Rajendra Singh:

Facts :

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

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

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

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

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

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

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

Held:

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

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

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

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

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

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Nirav Shah

Whether order of reassessment u/s.147 r.w. S. 143(3) without valid notice u/s.143(2) is null & void — Held, Yes. Whether amendment to S. 148 saves reassessment done without notice u/s.143(2) — Held, No. Whether provisions of S. 292BB are retrospective — H

New Page 2

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.)

28 Chandra R. Gandhi v. ITO

ITAT ‘K’ Bench, Mumbai

Before M. A. Bakshi (VP) and

Rajendra Singh (AM)

ITA No. 6006/Mum./2007

A.Y. : 2000-01. Decided on : 23-12-2008

Counsel for assessee/revenue : G. P. Mehta/

Ankur Garg

Income-tax Act, 1961 — S. 143(2), S. 147, S. 148 and S. 292BB
— A.Y. 2000-01 — Whether an order of reassessment passed u/s.147 r.w. S. 143(3)
of the Income-tax Act, 1961 without issue of a valid notice u/s.143(2) of the
Act is null and void — Held, Yes. Whether the amendment to S. 148 by the Finance
Act, 2006 saves the reassessment done without issue of notice u/s.143(2) — Held,
No. Whether provisions of S. 292BB of the Act are retrospective — Held, No.

Per M. A. Bakshi :

Facts :

The assessee filed his return of income on 18-12-2001.
Assessment u/s.143(3) r.w. S. 147 was made vide order dated 19-3-2004 at an
income of Rs.1,54,070 as against the returned income of Rs.43,970. The addition
made was on account of disallowance of interest of Rs.1,10,100.

The assessee challenged the validity of proceedings on the
ground that (a) no notice u/s.143(2) had been issued; and (b) that the assessee
having filed the return of income in respect of which no assessment was made,
notice u/s.148 could not be issued as the assessee’s return was to be considered
as pending on the date of issue of notice u/s.148.

The CIT(A) dismissed the appeal of the assessee. Aggrieved,
the assessee preferred an appeal to the Tribunal.

Held :

(a) In view of the ratio laid down by the Apex Court in the
case of Rajesh Jhaveri Stock Brokers Pvt. Ltd., the contention of the assessee
that since no regular assessment was made in this case, the AO was precluded
from issuing notice u/s.148 is not based on correct appreciation of law, as
amended w.e.f. 1-4-1998.

(b) In the case of Raj Kumar Chawla, the Special Bench of
the Tribunal has held that issue of notice u/s.143(2) within the prescribed
time is also mandatory in the proceedings initiated u/s.147 and in the absence
of the same, the reassessment made shall be null and void.

(c) The Tribunal followed the decision of the Special Bench
of the Tribunal in the case of Raj Kumar Chawla and held that reassessment
made in the absence of service of notice u/s. 143(2) is invalid. It was of the
view that the Division Bench of the Tribunal is bound by the decision of the
Special Bench of the Tribunal until it is superseded by any superior
authority. Since the decision of the Madras High Court in the case of Areva T
& D India Ltd. was not a decision of jurisdictional High Court, either of
Bombay (being jurisdictional High Court in the present case) or of Delhi
(Special Bench decision being of Delhi jurisdiction), the Tribunal followed
the decision of the Special Bench of Delhi Tribunal though this decision of
the Special Bench was contrary to the decision of Madras High Court in the
case of Areva T & D India Ltd.

(d) The Tribunal held that the amendment to S. 148 by
Finance Act, 2006 w.e.f. 1-10-1991 does not save the reassessment u/s.147 in
this case, since the amendment precludes the assessee from raising the issue
of validity on the ground of late service of notice u/s.143(2). It noted that
in the present case no notice has been issued.

(e) The Tribunal noted that S. 292BB has been incorporated
by the Finance Act, 2008 w.e.f. 1-4-2008. This provision is applicable w.e.f.
1-4-2008 and is not retrospective and hence the same has got to be ignored.

The Tribunal quashed the reassessment and allowed the appeal
of the assessee.

Cases referred to :

1. Raj Kumar Chawla v. ITO, 94 ITD 1 (Del.) (SB)

2. Areva T&D India Ltd. v. ACIT, 294 ITR 233 (Mad.)

3. ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd., 291
ITR 500 (SC)

4. CIT v. K. M. Pachayappan, 304 ITR 264 (Mad.)

5. CIT v. Jai Prakash Singh, 219 ITR 737 (SC)

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Nirav Shah

(2013) 88 DTR 150 (Mum) Windermere Properties (P) Ltd. vs. DCIT A.Y.: 2006-07 Dated: 22.03.2013

Section 24(b) – Prepayment charges paid for closure of loan are covered under the definition of interest and hence deductible u/s. 24(b).

Facts:
The assessee had claimed deduction of Rs. 11.05 crores u/s. 24(b) of the Act. Out of the same, the AO did not allow deduction of Rs. 1.56 crore paid as prepayment charges for the closure of the loan which was taken for acquisition of the property. The CIT(A) upheld the claim of the AO. The assessee went into further appeal.

Held:
The Honourable Tribunal held that the prepayment charges paid on account of closure of loan account are deductible u/s. 24(b). Section 24(b) provides deduction of interest payable on borrowed capital in computation of income under the head “Income from House Property”. The term “interest” has been defined in section 2(28A) to mean interest payable in any manner in respect of any moneys borrowed or debt incurred and includes service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. The definition of interest has basically two components viz. first the amount paid by whatever name called in respect of the money borrowed or debt incurred and secondly, any charge paid by whatever name called in relation to such debt incurred both qualify for deduction.

The assessee had made early repayment against its bank loan. By such repayment, the assessee managed to wipe out its interest liability in respect of the loan, which would have otherwise qualified for deduction u/s. 24(b) during the continuation of loan. It is obvious that these prepayment charges have live and direct link with the obtaining of loan which was availed for acquisition of property. The payment of such prepayment charges cannot be considered as de hors the loan obtained for acquisition or construction or repair etc of the property on which interest is deductible u/s. 24(b). Both the direct interest and prepayment charges are species of the term ‘interest’. Hence the prepayment charges paid by the assessee for closure of loan qualify for deduction us/s. 24(b).

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Nirav Shah

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

New Page 1

27 Mehul H. Mehta vs ITO

ITAT ‘B’ Bench, Mumbai

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

ITA No. 8531 / M / 2004

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

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

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

Per Rajendra Singh:

Facts:

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

The AO disallowed the claim for the following reasons:

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

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

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

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

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

Held:

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

Cases referred to:

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

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

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Nirav Shah

S. 40A(2)(b) — Discount on sales given to sister concern not covered.

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.)

20 DCIT v. Orgo Chem Guj. Pvt.
Ltd.

ITAT ‘H’ Bench, Mumbai

Before K. C. Singhal (JM) and

A. K. Garodia (AM)

ITA No. 7872 /Mum./2004

A.Y. : 2001-02. Decided on : 17-8-2007

Counsel for revenue/assessee : D. K. Rao/

Mayur A. Shah

S. 40A(2)(b) of the Income-tax Act, 1961 — Payments to
relatives — Discount on sales given to sister concern — Whether covered under
the provisions — Held, No.

Per K. C. Singhal :

Facts :

The assessee had given sales discount of Rs. 19.3 lacs to its
sister concern. Since no such discount was given to other parties, the AO
treated the same as unreasonable and disallowed it u/s.40A(2)(b). On appeal, the
CIT(A) noted that the sales to other parties were only of meager amount, while
the sale to sister concern was in bulk. Accordingly, the assessee’s appeal was
alllowed.

Held :

According to the Tribunal, a bare reading of the provisions
reveals that such provision could be invoked only where an expenditure was
incurred in respect of which, payment was to be made to the sister concern. In
case of discount on sales, no payment was made by the assessee as it only
reduced the sale price. Therefore, relying on the Madhya Pradesh High Court
decision in the case of Udhaji Shrikrishanadas, it held that the assessee’s case
was not covered u/s.40A(2)(b).

Case referred to :

Udhaji Shrikrishanadas, 139 ITR 827 (M.P.)

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Nirav Shah

S. 14A — Whether any part of expenses claimed against remuneration from a partnership firm can be disallowed on account of exempt share of profit — Held, No.

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.)

19 Hitesh D. Gajaria v. ACIT,
11(2)

ITAT ‘H’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavidevi (JM)

ITA No. 993/Mum./2007

A.Y. : 2003-04. Decided on : 14-11-2008

Counsel for assessee/revenue : Arvind Sonde/Mayank
Priyadarshi

S. 14A of the Income-tax Act, 1961 (‘the Act’) — Whether
expenditure can be disallowed out of expenses claimed against business income
being remuneration from a partnership firm in which assessee is a partner on the
ground that share of profit received from the firm is claimed as exempt u/s.
10(2A) of the Act — Held, No.

Per Sudhakar Reddy :

Facts :

The assessee while filing his return of income claimed a
deduction of Rs.3,90,268 against his business income being remuneration from a
partnership firm in which he was a partner. The assessee had claimed share of
income from partnership firm as being exempt u/s.10(2A). The Assessing Officer
(AO) apportioned the expenditure claimed and disallowed a sum of Rs.1,16,752 by
invoking provisions of S. 14A of the Act. The CIT(A) upheld the action of the
AO. On an appeal by the assessee to the Tribunal.

Held :

The Tribunal found that similar issue was considered and
decided in favor of the assessee by Mumbai Bench of the Tribunal in the case of
Sudhir Kapadia (ITA No. 7888/Mum./2003 and Bharat S. Raut (ITA No.
9212/Mum./2004). Following these two precedents the tribunal deleted the
disallowance.

Cases referred to :

1. Sudhir Kapadia v. ITO — Mum. ‘C’ Bench, ITA No.
7888/M/03 dated 26-2-2003

2. Bharat S. Raut — Mum ‘E’ Bench, ITA No.
9212/Mum./2004 and CO No. 212/Mum./2005

Note :

In the case of Sudhir Kapadia (ITA No. 7888/Mum./2003) the
Tribunal after considering various decisions concluded that it is not possible
to hold the view that share income in the hands of a partner of a partnership
firm is altogether tax free. It held that share of profit in the hands of a
partner is income which has suffered tax in the hands of the firm and found that
the share of profit from the firm is exempt from tax u/s.10(2A) not in absolute
sense but with a view to avoid double taxation. Accordingly, it concluded that
S. 14A is not applicable to the facts of the case.

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Nirav Shah

S. 139(5) read with S. 132(9) — Defects in Return filed cured during extended period requested for by assessee — AO not justified in treating Return as defective

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.)

18 ITO v. PIC (Gujarat) Ltd.

ITAT Ahmedabad Bench ‘B’

Before I. S. Verma (JM) and

N. S. Saini (AM)

ITA No. 3058/Ahd./2002

A.Y. : 1990-91. Decided on : 4-1-2008

Counsel for revenue/assessee : R. I. Patel/

Jitendra Jain and Sachin Romani

S. 139(5) read with S. 132(9) of the Income-tax Act, 1961 —
Return of loss filed based on un-audited accounts considered as defective —
Assessee asked to file audited accounts within 15 days and rectify the defect —
Assessee requested for two months time and filed the accounts within the time
requested for — Without rejecting the assessee’s request, AO treated the
original return filed as defective and the revised return filed as belated
return — Whether AO justified — Held, No.

Per I. S. Verma :

Facts :

For the year under appeal the return of income, declaring
loss of Rs.12 lacs, was filed based on the basis of the un-audited accounts,
which according to the AO, was defective return. Hence, by notice u/s.139(a),
dated 22-1-1991 (served on 1-2-1991), the assessee was asked to file the audited
accounts within 15 days and rectify the defect. By its letter dated 15-2-1991,
the assessee requested the AO to extend the time for rectifying the defect by
two months. Thereafter, the audited accounts were filed on 15-3-1991 and the
revised (loss) return was also filed on 25-3-1991. The revised return was
processed u/s.143(1) and the refund due to the assessee was granted.

Later on, the return was processed u/s.143(3) and the loss
claimed by the assessee was rejected, on the ground that the original return
filed was defective, hence invalid. And the revised return filed was treated as
original and since it was filed late, the carry forward of loss was disallowed.
On appeal, the CIT(A) directed the AO to consider the assessee’s revised return
as valid.

Held :

The Tribunal noted that the assessee’s request for extension
of time was if rejected by the AO, the order of rejection was never intimated to
the assessee. Therefore, it held that the CIT(A) was quite justified in
accepting the assessee’s plea that the original return was a valid return and,
and therefore, revised return was also valid.

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Nirav Shah

S. 28(iv) & 145 —(i) Dividend on shares held in assessee’s name pending settlement of dispute cannot be taxed in the assessee’s hand u/s.28(iv). (ii) In the absence of trading during the year shares held as stock-in-trade can still be valued at lower of

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.)

17 ACIT v. Pal Enterprises
Pvt. Ltd.

ITAT ‘H’ Bench, Mumbai

Before M. A. Bakshi (VP) and

V. K. Gupta (JM)

ITA No. 1994/Mum./2005

A.Y. : 2001-02. Decided on : 20-10-2008

Counsel for revenue/assessee : Anadi Nath Mishra/ Jayesh
Dadiya

(i) S. 28(iv) of the Income-tax Act, 1961 — Dividend
on shares held in assessee’s name pending settlement of dispute — Whether such
receipt could be taxed in the assessee’s hand u/s.28(iv) — Held, No.

(ii) S. 145 of the Income-tax Act, 1961 — Shares held
as stock-in-trade valued at lower of cost or market price — In the absence of
trading during the year whether loss on account of lower market price could be
disallowed — Held, No.

Per V. K. Gupta :

Facts :

(A) Re : Dividend received on shares :

In terms of the family settlement certain shares held by the
assessee were to be transferred to Walchand & Co. Pvt. Ltd. However, on account
of certain reasons, the same could not be transferred. However, the physical
possession of the share certificates was handed over to the solicitors. The
dividend received by the assessee during the intervening period was shown as
liability in its accounts. According to the AO, had there been a dispute, the
same would have been so disclosed in the accounts of the assessee. Therefore, in
the absence thereof, the AO treated the same as benefit or perquisite chargeable
to tax u/s.28(iv) of the Act.

On appeal the CIT(A) held that the provisions of S. 28(iv)
could be applied only in a case where benefit or perquisite was received in kind
or when the assessee had credited such amount in the profit and loss account.
Accordingly, the addition made was deleted.

(B) Re : Loss arising on account of valuation of shares held as
stock-in-trade at market value :

The assessee was holding shares of Premier Automobile Ltd. —
both as investment and as stock-in-trade. As per its method of valuation, the
stock was valued at lower of cost or market price. On account of fall in the
market price of the shares, the shares held as stock were valued at the lower
figure which was claimed as loss. According to the AO, the assessee who belonged
to the promoter group of Premier Automobiles, would be holding the shares with
the sole motive of retaining the control. Therefore, it cannot be recognised as
stock-in-trade.

On appeal the CIT(A) noted that the assessee was an
investment company and these shares were held as stock-in-trade which were
valued at lower of cost or market price in accordance with the method
consistently followed, hence there was no justification in making addition on
account of the same.

Before the Tribunal, the Revenue justified the order of the
AO, on the ground that the shares held as stock-in-trade, without any
transaction of sale and purchase, could not be a proper source of loss, hence
the same was not allowable.

Held :

(A) The Tribunal noted that the impugned sum represented
dividend which was received from the year starting from F.Y. 1995-96 and
secondly, in some of those years, dividend income was exempt. Further,
according to the Tribunal, the provisions of S. 28(iv) could be applied only
in a case where an actual income was received by the assessee in the garb of
some benefits or perquisites and which were not shown as chargeable to tax.
According to the Tribunal, that was not so in the case of the assessee.
Accordingly, the order of the CIT(A) was upheld and the addition made on this
account was deleted.

(B) The Tribunal noted the facts that the assessee was
having shares — both as investment as well as stock-in-trade. The method of
valuation of stock was one consistently followed and accepted. Further, it
noted that the assessee was having substantial brought forward loss. Hence,
the practice followed cannot be termed as tax saving device. In view thereof,
the order of the CIT(A) was upheld.

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Nirav Shah

(2013) 90 DTR 197 (Chennai) Madras Motor Sports Club vs. DIT (Exemptions) A.Y.: 2009-10 Dated: 21-12-2012

S/s. 2(15) & 12AA – Registration of a charitable trust cannot be cancelled only on the ground that its aggregate receipts of the nature mentioned in the first proviso to section 2(15) exceeded threshold limits provided in second proviso to section 2(15).

Facts:

The assessee, a motor sports club, registered as a society, was also having registration under erstwhile section 12A(a). The objectives of the assessee, inter alia, were to promote sports of motor car and motorcycle and conduct motor races competitions, etc. As per DIT (Exemptions), though the objects and activities were covered under the category of “advancement of general public utility” coming within the ambit of section 2(15), assessee’s receipts were in the nature of business receipts and were more than Rs. 10 lakh (this limit is now raised to Rs. 25 lakh w.e.f. 01-04-2012). Therefore, the objects and activities of the assessee could no more be considered as charitable in nature as per the first and second provisos to section 2(15). In this view of the matter, he cancelled registration granted to the assessee u/s. 12A(a).

Held:

A harmonious reading of both the provisos to section 2(15) will only mean that in the years in which the receipts of nature mentioned in first proviso exceeded Rs. 10 lakh, the assessee will not be eligible for exemption u/ss 11 and 12. It will not mean that an otherwise charitable object of general public utility will become a non-charitable one merely because its aggregate receipts of the nature mentioned in the first proviso to section 2(15) exceeded Rs. 10 lakh. Therefore, registration granted to the assessee u/s. 12A(a) cannot be cancelled only on that ground. If in the very next year, assessee’s receipts are less than Rs. 10 lakhs, then it will have to be granted the exemption available u/ss. 11 and 12, if other conditions are satisfied. In other words, nature of objects of the assessee cannot fluctuate in tandem with the quantum of receipts mentioned in the first proviso.

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Nirav Shah

(2013) 90 DTR 350 (Mum) ACIT vs. Jaimal K. Shah A.Y.: 2007-08 Dated: 30-05-2012

Section 2(29A) – Capital gains on subsequent sale of flats received by the land owner from the developer under a development agreement needs to be computed separately for transfer of land and suprestructure.

Facts:

The assessee, owner of land since 1962, entered into an agreement with a developer in 2001. Under the agreement, while transferring interest in the land to the extent of 45 % for a consideration of Rs. 61 lakh, assessee retained the balance 55 % of land together with right to corresponding built up area thereon. As regards transfer of 45 % of land, assessee paid capital gains tax in A.Y.: 2002-03. Assessee was handed over possession of the built up area vide occupation certificate dated 24-2-2005. During A.Y.: 2007-08, assessee sold two flats and returned capital gains on sale of flats as long-term capital gains on the plea that it was under the right created under agreement of 2001 that assessee acquired and sold the flats. The Assessing Officer did not accept the computation of capital gain made by the assessee taking gain as long term capital gain. The Assessing Officer observed that the assessee had taken possession of the flats as per full occupation certificate dated 24-02-2005 and therefore, assessee was holding the said flats from the said date and since flats were sold in A.Y.: 2007- 08, the period of holding was less than three years and therefore capital gain had to be treated as short term capital gain.

Held:

Right to claim the flat as per agreement in the year 2001 was an asset but the assessee had not sold the right to acquire the flats. The assessee had sold the flats of which he was owner. The right to acquire the flats, no longer subsisted once the assessee acquired the flats and took possession of the same on 24-02- 2005. The right to acquire the flats and ownership of the flats are two different assets. The capital gain had therefore to be computed in respect of sale of flats and not in respect of right to acquire the flats.

However the assessee alongwith flats had also sold his right in the land which was an independent asset and which was being held by him since 1962 as an owner. Therefore sale consideration also included price paid in respect of right in the land in addition to price for superstructure. It would be reasonable to adopt a profit margin of 25% on the cost of construction of the flats to arrive at the sale consideration pertaining to the superstructure. The balance sale consideration of the flats will be appropriated towards the sale price for the transfer of right in the land.

Thus, the capital gain in respect of transfer of right of assessee in the land has to be computed separately as long term capital gains and gain in respect of sale of superstructure has to be treated as short term capital gain.

levitra

Nirav Shah

(2013) 90 DTR 289 (Bang)(SB) Biocon Ltd. vs. DCIT A.Ys.: 2003-04 to 2007-08. Dated: 16-07-2013

Facts:

The assessee-company floated an ESOP scheme, under which it granted option of shares with face value of Rs. 10 at the same rate by claiming that the market price of such shares was Rs. 919, thereby claiming the total discount per option at Rs. 909. The difference between the alleged market price and the exercise price, at Rs. 909 per option was claimed as compensation to the employees to be spread over the vesting period of four years on the strength of the SEBI Guidelines and accounting principles. The assessee claimed that the employee stock option compensation expense was deductible u/s. 37(1).

The revenue did not accept the assessee’s contention of the supremacy of the accounting principles and SEBI Guidelines for the purposes of computation of total income on ground that it was a short capital receipt and a contingent liability. The revenue also canvassed a view that expenditure denotes “paying out or away” and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction u/s. 37.

A Special Bench was constituted by the Division bench to decide whether discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head profits and gains of business.

Held:

The Special Bench analysed this issue by sub-dividing it into three questions , viz.,

I. Whether any deduction of such discount is allowable?

When a company undertakes to issue shares to its employees at a discount on a future date, the primary object of this exercise is not to raise share capital, but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the revenue that by issuing shares to employees at a discount, the company got a lower capital receipt, is bereft of any force.

From the stand point of the company, the options under ESOP vest with the employees at the rate of 25 % only on putting in service for one year by the employees. Once the service is rendered for one year, it becomes obligatory on the part of the company to honour its commitment of allowing the vesting of 25 % of the option. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. It is, therefore, held that the discount in relation to options vesting during the year cannot be regarded as a contingent liability.

When the definition of the word “paid” u/s. 43(2) is read in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure, but also incurring of the expenditure which entails deduction u/s. 37(1) subject to the fulfillment of other conditions. Thus discount on shares under the ESOP is an allowable deduction.

II. If deductible, then when and how much?

Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the liability which it incurred over the vesting period by obtaining their services. Thus, the liability is neither incurred at the stage of the grant of options nor when such options are exercised.

The company incurs liability to issue shares at the discount only during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period.

III. Subsequent adjustment to discount

The company incurs a definite liability during the vesting period, but its proper quantification is not possible at that stage as the actual amount of employees cost to the company, can be finally determined at the time of the exercise of option or when the options remain unvested or lapse at the end of the exercise period. It is at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the time of grant of options, needs to be suitably adjusted with the actual amount of discount.

As regards the adjustment of discount when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and hence there can be no deduction of discount qua such part of unvested or lapsing options. But, as the amount was claimed as deduction by the company, such discount needs to be reversed and taken as income.

In the second situation in which the options are exercised by the employees after putting in service during the vesting period, the actual amount of remuneration to the employees would be only the amount of actual discount at the time of exercise of option. After certain changes to the relevant provisions in this regard , the position which now stands is that the discount on ESOP is taxable as perquisite u/s. 17(2)(vi). The position has been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount with respect to the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be with respect to the same base.

The amount of discount at the stage of granting of options with respect to the market price of shares at the time of grant of options is always a tentative employee cost because of the impossibility in correctly visualising the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employee cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options.

levitra

Nirav Shah

2013-TIOL-831-ITAT-MUM Administrator of Estate of late Mr. E F Dinsha vs. ITO ITA No. 3019/Mum/2008 Assessment Year: 2005-06. Date of Order: 14-08-2013

Section 50C – Section 50C cannot be applied to sale agreements entered into before the introduction of the said provisions i.e. before 01-04-2003 specially when delay in execution and registration of conveyance is sufficiently explained and there is no allegation of suppression of actual consideration.

Facts:

The assessee, an administrator to the Estate of Late Mr. E. F. Dinshaw held landed properties and other tenanted properties with EF Dinshaw Trust & EF Dinshaw Charities jointly. During the previous year relevant to the assessment year 2005-06, two properties of the estate whose stamp duty value was Rs. 5,95,78,500 were sold for Rs. 42,55,045 and profit arising from the sale was computed by considering the consideration as per sale deed to be full value of consideration. The profit so computed was declared under the head `long term capital gain’. The assessee had not disputed the stamp duty value adopted by the stamp valuation authorities.

In the course of assessment proceedings, the assessee was asked to explain the vast difference between the sale consideration and the stamp duty value of the properties sold. The assessee explained that the properties were agreed to be sold in the year 1997 and 1999 and the completion of sale was delayed due to delay in obtaining the requisite permissions from the Charity Commissioner and RBI and under UL(C&R) Act. The difference in value had arisen because of a long time gap between the date when the properties were agreed to be sold and the date of actual sale. The explanation offered by the assessee was substantiated with requisite evidence in the form of correspondence, permissions, etc. The AO worked out the profit by considering the stamp duty value to be consideration and following the past practice assessed the income under the head `profits and gains of business or profession’.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that profit on sale was to be charged to tax under the head `Capital Gains’ and section 50C applied to the transaction under consideration. He rejected the contention that the agreement was entered into before the date of section 50C becoming effective. He held that section 50C applied to transactions after 01-04-2003.

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that in the facts and circumstances involved in the case of the assessee, provisions of section 50C have to be read with reference to the date of agreement instead of date of transfer and accordingly the value of the properties made for the purpose of stamp duty as on date of agreement should be taken and not as on the date of execution of conveyance deed.

Held:

The Tribunal noted that (i) for a property agreed to be sold to Avadh Narayan Singh & Ors on 12-03-1999 for Rs. 25 lakh the entire consideration was received upto 03-05-1999 and assessee had moved an application to the Charity Commissioner for sale on 05-04-1999; and (ii) the delay in executing the final conveyance of the property was because of delay in getting the required clearances from the concerned authorities, which was beyond the control of the assessee. It also noted that in respect of the other property the agreement was executed on 07-02- 1997 and the consideration of Rs 10 lakhs was partly received by the assessee on the date of agreement itself. The Tribunal mentioned that the delay in execution of conveyance was satisfactorily explained with reference to sequence of events that occurred with the supporting evidence which was beyond the control of the assessee.

The Tribunal noted that in the case of M. Siva Parvathi & Ors vs. ITO (37 DTR 124)(Vishakapatnam)(ITAT) similar issue arose. In the said case both the parties confirmed having entered into a sale agreement in August 2001 and the vendors had received part payment of total consideration in August 2001 itself. The delay in registering the sale deed was on account of the fact that vendors were under an obligation to obtain urban land clearance permission and were also under an obligation to settle certain disputes and the explanation offered by the assessee was supported by documentary evidence. There was no material brought on record by revenue to show that there was any suppression of actual sale consideration. In these facts, the Tribunal held that the provisions of section 50C could not be applied to the sale agreement as the section was not available in the statute at the time when the transaction was initially entered into. The Tribunal held that the final registration of the sale agreement was only in fulfillment of the contractual obligation and the provisions, which did not apply at the time of entering into the transaction initially could not be applied at the time the transaction was completed. It held that section 50C cannot be applied to sales agreement entered into before the introduction of the said section especially when delay in registration of sale deed was sufficiently explained and there was no suppression of actual consideration.

Following the above mentioned decision, the Tribunal held that section 50C cannot be applied to the sale agreement entered into before the introduction of the said section especially when delay in registration of sale deed was sufficiently explained and there was no suppression of actual consideration. The addition made by the AO and confirmed by CIT(A) was deleted. The appeal filed by the assessee was allowed.

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Nirav Shah

2013-TIOL-827-ITAT-PUNE GKN Sinter Metal Pvt. Ltd. vs. ACIT ITA No. 3465/M/2010 Assessment Years: 2003-04. Date of Order: 06-05-2013

Section 37 – Payment of pre-closure charges, though not a contractual obligation, to the Bank, in respect of debentures issued are expenses incurred by the assessee for the purpose of business and are allowable. By incurring pre-closure charges the assessee is relieved of further financial obligation.

Facts :

The assessee with an objective to raise funds for general corporate purposes issued unsecured, redeemable, non-convertible debentures to Mahindra & Mahindra Ltd on private placement basis. The principal terms and conditions of the placement specified only the Tenor/Maturity & Coupon Rate. There was no mention for payment of any pre-closure charges. Mahindra & Mahindra Ltd. sold these debentures to Deutsche Bank. Pending utilisation of funds, the proceeds of debenture issue were deposited in short term deposit with Standard Chartered Bank. Upon realising that the company is paying heavy interest on debentures for a period of 3 years, the debentures were cancelled and money paid back to Deutsche Bank. However, in the process, the Company had to pay pre-payment charges of Rs. 43,34,000.

The Assessing Officer (AO) held that the expenditure was not contractual but voluntary since there was no provision in the terms of issue of debentures for payment of pre-closure charges. He held the payment to be discretionary decision by the assessee who was not under any legal compulsion to make the payment. He disallowed the pre-payment charges.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO by relying on the decision of the Punjab & Haryana High Court in the case of Associated Hotels of India Ltd. vs. CIT (231 ITR 134)(P & H). Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that there was no dispute about genuineness of the expenditure. The only dispute was as regards its allowability. The Tribunal did not find any merit in the contentions on behalf of the revenue that there was no contractual obligation to pay the amount under consideration. Also, that the assessee had not incurred the expenditure for raising the money but had incurred it to return the money already raised and that issue of debentures is not the business of the assessee. The Tribunal found merit in the contention of the assessee that the assessee had to incur the expenditure to relieve it from further financial burden and this was a commercial decision.

The Tribunal held that the decision relied upon by the CIT(A) was not applicable to the facts of the present case. In that case the debentures were redeemed before maturity by paying bonus and fresh debentures were issued before maturity. In the instant case, the assessee has not issued fresh debentures after prepayment of the debentures.

The Tribunal held that the sum of Rs. 43,34,000 incurred by the assessee towards prepayment charges in respect of debentures issued to be an expenditure incurred for the purpose of business and therefore allowable.
This ground was decided in favour of the assessee.

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Nirav Shah

Sections 4, 28(i), 36(1) (iii) and 37(1) — Gross interest received from the Income-tax Department and not the net interest remaining after the set-off of the interest paid to the Income-tax Department is to be included in assessable income.

(2012) 143 TTJ 528 (Pune) (TM)
Sandvik asia Ltd. v. Dy. CiT
A.Y.: 1992-93. Dated: 13-9-2011

Sections 4, 28(i), 36(1) (iii) and 37(1) — Gross interest received from the income-tax Department and not the net interest remaining after the set-off of the interest paid to the income-tax Department is to be included in assessable income.

The assessee had credited only the net interest received from the Income-tax Department i.e., the interest paid to the Income-tax Department was deducted from the interest received on income-tax refund. This claim was made by the assessee on the basis of the following two Tribunal decisions:

(1) R. N. Aggarwal v. ITO, [ITA Nos. 3913 & 3914 (Delhi) of 1980 and 620 (Delhi) of 1981, dated 21-8-1981].

(2) Cyanamide India Ltd. v. ITO, [ITA No. 4561 (Bom.) of 1982, dated 23-5-1984].

The Assessing Officer rejected the assessee’s claim. He was of the view that interest charged on late payment of tax by the Department is not a business expense deductible for the purpose of computing income under the Income-tax Act and, therefore, interest charged by the Department was added to the income of the assessee. The CIT(A) directed the Assessing Officer to tax only the net interest in view of the above Tribunal decisions. Before the Tribunal, there was a difference of opinion between the two Members and the matter was referred to the third Member u/s.255(4). The third Member, did not concur with the decisions of the Tribunal (stated above) and relying on the decisions in the following cases, held that the assessee is assessable to tax on the gross interest received from the Department:

(1) Bharat Commerce and Industries Ltd. v. CIT, (1998) 145 CTR (SC) 340/(1998) 230 ITR 733 (SC).

(2) CIT v. Dr. V. P. Gopinathan, (2001) 166 CTR (SC) 504/(2001) 248 ITR 449 (SC).

(3) Aruna Mills Ltd. v. CIT, (1957) 31 ITR 153 (Bom.).

The third Member noted as under:

(1) Interest paid cannot be allowed u/s.36(1) (iii) because there is no borrowing by the assessee. There can be no two opinions on the same.

(2) The interest cannot also be claimed as a deduction u/s.37(1). Thus, the interest paid to the Income-tax Department under the provisions of the Act cannot be deducted while computing the business income of the assessee.

(3) The assessee’s argument based on the theory of real income has to be rejected. The rule of netting does not apply to the instant case and the assessee is assessable on the gross interest.

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Nirav Shah

Sections 80, 139(1), 139(3) and 139(5) — Where the assessee had filed original return u/s.139(1) declaring positive income and claim for carry forward of long-term capital loss was made only in the revised return filed u/s.139(5), carry forward of loss cannot be denied.

(2012) 143 TTJ 166 (Mumbai)
Ramesh R. Shah v. ACIT
A.Y.: 2005-06. Dated: 29-7-2011

Sections 80, 139(1), 139(3) and 139(5) — Where the assessee had filed original return u/s.139(1) declaring positive income and claim for carry forward of long-term capital loss was made only in the revised return filed u/s.139(5), carry forward of loss cannot be denied.

The assessee filed original return of income showing positive income on 28-10-2005.
This return was processed u/s.143(1) on 15-12-2005. Thereafter, on 28-3-2006, he filed a revised return claiming longterm capital loss Rs.182.27 lakh which he claimed was to be carried forward u/s.74. The Assessing Officer, relying on the decision in the case M. Narendranath (Indl.) v. ACIT, (2005) 94 TTJ 284 (Visakha) and as per the provisions of section 80, declined to allow carry forward of the long-term capital loss.

The CIT(A) upheld the order passed by the Assessing Officer. The Tribunal allowed the carry forward of the long term capital loss claimed by the assessee in the revised return of income. The Tribunal noted as under:

(1) Correct interpretation of section 80, as per the language used by the Legislature, is that condition for filing revised return of loss u/s.139(3) is confined to cases where there is only a loss in the original return filed by the assessee and no positive income and assessee desires to take benefit of carry forward of the said loss.

(2) Section 80 is a restriction on the right of the assessee when the assessee claims that he has no taxable income but only a loss, but does not file the return of income declaring the said loss as provided in s.s (3) of section 139.

(3) The Legislature has dealt with two specific situations (i) u/s.139(1), if the assessee has a taxable income chargeable to tax, then he has a statutory obligation to file the return of income within the time allowed u/s.139(1) and (ii) so far as section 139(3) is concerned, it only provides for filing the return of loss if the assessee desires that the same should be carried forward and set off in future. As per the language used in s.s (3) of section 139, it is contemplated that when the assessee files the original return, at that time, there should be loss and the assessee desires to claim the said loss to be carried forward and set off in future assessment years.

(4) Ss. (1) and (3) of section 139 provide for the different situations and there is no conflict in applicability of both the provisions as both the provisions are applicable in different situations.

(5) Once the assessee declares positive income in the original return filed u/s.139(1), but he subsequently finds some mistake or wrong statement and files a revised return declaring loss, then he cannot be deprived of the benefit of carry forward of such loss.

(6) In the present case, the assessee filed the return of income declaring the positive income and even in the revised return the assessee has declared positive income since the loss in respect of the sale of shares could not be set off inter-source or inter-head u/s.70 or 71.

(7) As per the provisions of s.s (5) of section 139, in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time-limit prescribed and, subsequently, files the revised return, then the revised return is treated as valid return.

(8) In the present case, as the assessee filed its original return declaring positive income and hence, subsequent revised return is also valid return and the assessee is entitled to carry forward of long-term capital loss. Therefore, there is no justification to deny the assessee the carry forward the loss.

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Nirav Shah

2013-TIOL-800-ITAT-MUM ITO (TDS) vs. Jet Airways (india) Ltd. ITA No. 7439, 7440 and 7441/Mum/2010 Assessment Years: 2009-10, 2007-08 and 2008-09. Date of Order: 17-07-2013

S/s. 194H, 195(3) and Rule 29B(5) – Section 194H does not apply to amounts retained by bank while making payments to assessee for tickets booked through credit card. Amounts retained by the bank are fees and not commission. Certificates issued u/s. 195(3) are effective for the concerned financial year i.e. from the first day of the financial year and not with effect from the date of issuance thereof.

Facts I:

On 05-01-2009, there was a survey action u/s. 133A of the Act on the assessee. The assessee engaged in the business of aviation i.e. transportation of passengers and goods by air, received payments from banks for tickets booked through credit cards. The assessee received from the banks only the net amounts after retention of service charges. The Assessing Officer (AO) noted that the amounts retained by the banks for the assessment years 2007-08, 2008-09 and 2009-10 was Rs. 1,21,61,091; Rs. 4,23,31,210; and Rs. 18,24,57,871 respectively. The AO rejected the contention of the assessee that the amounts retained by the banks are in the nature of discounting charges in consideration of the immediate payment made by the banks to the assessee. He held that these amounts constituted commission u/s. 194H and since the assessee had not deducted tax on these amounts he held the assessee to be an assessee-in-default and directed the assessee to pay the amount of TDS along with interest u/s. 201(1A) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who decided the issue in favor of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Facts II:

Two banks viz. American Express Bank Ltd. and Citibank NA had obtained from the AO a certificate u/s. 195(3) for receiving payments without deduction of tax at source. The certificate mentioned that it was applicable for the financial year. However, the AO held that the certificate would apply only from the date of its issuance though the specified period mentioned in the certificate is the financial year.

The CIT(A) held that the AO is not justified in applying the certificate from the date of its issuance and bringing to tax the amount retained by the bank to tax for the concerned month by applying the provisions of section 194H of the Act. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held I:

The Tribunal agreed with the contention on behalf of the assessee that the issue is square covered in favor of the assessee by the decision of the Jaipur Bench of the Tribunal in the case of M/s. Gems Paradise vs. ACIT (ITA No. 746/Jp/2011)(AY 2008-09)(order dated 02-12-2012) which was followed by the same bench of the Jaipur Tribunal in Shri Bhandari Jewellers vs. ACIT (ITA No. 746/Jp/2011)(AY 2008-09)(order dated 02- 12-2012). It also observed that similar issue was also considered by the Bangalore Bench of the Tribunal in the case of Tata Teleservices Ltd. vs. DCIT (140 ITD 451)(Bang) which has been decided by following the decision of the Hyderabad Bench of the Tribunal in the case of DCIT vs. Vah Magna Retail (P) Ltd. (ITA No. 905/Hyd/2011)(AY 2007-08)(order dated 10-04-2012) where it has been held that payments made to the banks on account of utilisation of credit card facilities would amount to bank charges and not commission within the meaning of section 194H of the Act.

Following the ratio laid down by these decisions, the Tribunal held that section 194H is not applicable to amounts retained by the bank out of payments made by it to the assessee for tickets booked by credit card.

Held II:

The Tribunal observed that the assessee had filed copies of certificates issued by AO u/s. 195(3)( dated 27-04-2006, 30-03-2007, 31-03-2008 and 31-03-2008 which were addressed to Citibank NA for financial year 2006-07 to 2008-09 respectively. It noted that the said certificates specifically mention that the said bank is authorised to receive the payments, interest without deduction of income-tax u/s. 195(1) in the respective financial years. The Tribunal considered Rule 29B(5) of the Rules and held that the certificates issued u/s. 195(3) of the Act are applicable for the concerned financial years and will not be effective only from the date of issuance thereof. The Tribunal upheld the order of CIT(A) for all the three assessment years.

The appeals filed by the department were dismissed.

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Nirav Shah

[2012] 137 ITD 163 (Panaji) DCIT vs. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. AY 2007-08 to 2009-10 Dated: 30th March, 2012

Section 80P and section 5(b), 5(cci) and 5(ccv) of Banking Regulation Act,1959–assessee society engaged in business of providing credit facilities to its members and collecting deposits–section 80P was amended w.e.f. 01-04-2007 and hence AO denied deduction as assessee was a co-operative bank– Held that principal business of assessee was not to accept deposits from the public for the purpose of lending or investment—hence, principal business was not banking business–assessee society entitled to deduction u/s. 80P(2)(a)(i).

Facts:
The assessee-society was engaged in business of providing credit facilities to its members by granting loans for various purposes. It also collected deposits. It availed deduction u/s. 80P. However, section 80P was amended w.e.f. 01-04-2007 whereby s/s. (4) was introduced which denied the deduction u/s. 80P to co-operative banks (other than primary agricultural credit society or a primary rural development bank). The AO denied deduction to assessee holding assessee as being a co-operative bank. The CIT(A) allowed deduction to assessee.

Held:
As per explanation to s/s. (4) of 80P, co-operative bank as defined in section 5(cci) of the Banking Regulation Act, 1959 means a state co-operative bank, a central co-operative bank and a primary cooperative bank. Assessee is not a state or central co-operative bank. The primary co-operative bank as defined in section 5(ccv) means a co-operative society (other than agricultural credit society) (1) the primary object or principal business of which is transaction of banking business, (2) the paid-up share capital and reserves of which are not less than one lakh of rupees and (3) the bye-laws of which do not permit admission of any other co-operative society as a member. The conditions No. (2) and (3) are applicable to assessee.

Banking business as defined u/s. 5(b) means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

Going through the aims and objects of the assessee society, it is observed that none of the aims and objects allows the assessee to accept deposits of money from the public for the purpose of lending or investment. The assessee is therefore held as not to be a primary co-operative bank and in consequence thereof, it cannot be a co-operative bank as defined in the Banking Regulation Act, 1949. Thus the assessee is entitled to deduction u/s. 80P.

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