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Canora Resources Ltd. In re 313 ITR 2 (AAR) Section 45(3), 10(2A), 92, 184, 245R of the Income-tax Act and Article 24 of India-Canada DTAA.

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Part C — International Tax Decisions

Canora Resources Ltd. In re 313 ITR 2 (AAR)
Section 45(3), 10(2A), 92, 184, 245R of the Income-tax Act and Article 24 of
India-Canada DTAA.

Dtd. : 23rd
April, 2009

Issue

^ A foreign
partnership can be assessed as a partnership firm under the Indian Income-tax
Law.

^ Provisions
of Transfer Pricing Regulations override provisions of Section 45(3) of the
Act. Capital gains in respect of contribution of asset to a partnership firm,
if in the nature of international transaction, attracts tax liability w.r.t.
fair market value.

^
Nationality non-discrimination provision cannot be invoked for claiming non
applicability of transfer pricing provisions which are based on residential
status of the parties.

Facts

Applicant, a
company registered in Canada, is engaged in the business of exploration and
production of petroleum and natural gas. In India, applicant held
participating interest (PI) in three oil blocks. Amongst others, it held 60%
PI in Amguri development block (Amguri block). The Amguri block had good
commercial prospects and had known commercial discovery while the other two
blocks were at nascent stage.

The
applicant proposed to restructure its business in India with a view to
attracting investments in Amguri block and with a view to holding Amguri block
in a separate entity. It proposed to transfer its PI in Amguri block to a
partnership firm (Firm) to be formed in Canada. The Firm was proposed between
the Applicant and its wholly-owned Canadian subsidiary as partners.

Before the
AAR, the applicant raised the following contention.

a) The
Canadian firm should be assessed to tax as a ‘firm’. The applicant furnished
copy of the partnership Act of Alberta, Canada to show that the provisions
of that Partnership Act were almost at par with the provisions of the Indian
Partnership Act. It was explained that the Act of Alberta recognised the
principle of agency between partners; the liability of partners was joint
and several; properties of the firm belonged to the partners collectively;
the firm had no separate legal personality of its own, etc.

b) It is
enough that the mechanism of sharing is described or defined on a certain
basis; it is not necessary to express or set out the fractional or other
shares, so as to enable the entity to be assessed as firm in compliance with
Section 184 of the Act.

c) The
capital gains income, if any, arising from transfer of PI to the proposed
firm should be computed as per provisions of Section 45(3) of the Act by
adopting contribution value. In view of the special provisions of charging
Section of Section 45(3), the transfer pricing provisions cannot be applied.

As against
that, the Tax Department contended :

a) The
application deserved to be rejected having regard to the provisions of
Section 245R(2) of the Act as the transaction was for avoidance of
Income-tax. The proposed restructuring was merely a ruse for avoidance of
tax and the applicant had failed to substantiate how its object of
attracting investments was sub-served. The proposal was prone to tax
avoidance since the proposed restructuring would facilitate the applicant to
exit from Amguri block by transferring its stake in the firm without payment
of tax in India.

b) A
partnership firm can be assessed as a firm under the Act only if it is a
partnership firm as understood under the Indian Law. The proposed
partnership firm would have characteristic of a company or a corporation and
should be taxed in India as a foreign company. For this purpose, the Tax
Department sought to place reliance on features like managing partner of the
firm having power akin to that of a managing director, likely feature of
payment of dividend, etc.

c) The
proposed partnership deed was so worded that it failed to specify the
individual shares of the partners in the instrument of partnership and hence
also the firm cannot be assessed as a partnership firm under the Act in view
of provisions of Section 184 of the Act.

d) The
transaction between the applicant and the firm is in the nature of
international transaction between two associated persons. Therefore, the
transfer pricing regulations would require that the capital gains income is
computed with reference to the arm’s-length price.

The AAR Held

(1) In the case of Azadi Bachao Andolan (263 ITR 706),
the Supreme Court has approved the principle that a taxpayer is entitled to
resort to a legal method available to him to plan his tax liability. The AAR
noted that it may reject the application, provided it relates to a
transaction which is designed prima facie for avoidance of tax. The
expression ‘prima facie’ can be understood as ‘at first sight’; ‘on
first appearance’; ‘on the face of it’; etc. The future possibility of the
applicant’s exit from Amguri block by transferring PI to someone cannot by
itself be a ground to conclude that the arrangement was, on the face of it
to avoid tax.

Nirav Shah

S. 37(1) — Capital or revenue expenditure — Whether the amount paid for handsets and for talk-time charges were capital in nature — Held, No.

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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.)

8 Radial Marketing Pvt. Ltd. v. ITO
ITAT ‘SMC’ Bench, Mumbai
Before R. K. Gupta (JM)
ITA No. 3868/Mum./2008
A.Y. : 2003-04. Decided on : 19-5-2009
Counsel for assessee/revenue : G. P. Mehta/K. K. Mahajan

S. 37(1) — Capital or revenue expenditure — Whether the
amount paid for handsets and for talk-time charges were capital in nature —
Held, No.

Facts :

During the year under appeal the assessee had claimed a sum
of Rs.24,500 paid for handsets and Rs.14,000 paid for talk-time charges as
revenue expenditure. However, the AO treated the same as capital expenditure and
allowed the depreciation.

Held :

The Tribunal referred to the CBDT Circular issued with
reference to the payments made under ‘Own Your Telephone’ scheme of MTNL. It
noted that as per the Circular the amount paid for the purchase of handsets was
allowable as revenue expenditure. In view thereof, it allowed the claim of the
assessee. As regards the amount paid for talk-time — it agreed with the assessee
that it cannot be treated as capital in nature as the same was not for any
capital assets.

Reference :

CBDT Circular No. 204/70/75-IT (All), dated 10-5-1976.

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Nirav Shah

S. 80-IA — Deduction in respect of profit of the power-generating undertaking — Power generated by the eligible unit captively consumed — Valuation at market price — Rates charged by the State Electricity Board, including the electricity tax levied thereo

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Part B :
Unreported
Decisions

7 DCW Ltd. v. ACIT
ITAT ‘D’ Bench, Mumbai
Before A. L. Gehlot (AM) and P. Madhavi Devi (JM)
ITA No. 126/Mum./2008
A.Y. : 2003-04. Decided on : 29-1-2010

Counsel for assessee/revenue : Salil Kapoor/R. N. Jha

S. 80-IA — Deduction in respect of profit of the
power-generating undertaking — Power generated by the eligible unit captively
consumed — Valuation at market price — Rates charged by the State Electricity
Board, including the electricity tax levied thereon, adopted as a benchmark to
arrive at the market value — Whether the CIT(A) was right in excluding the
electricity tax to arrive at the market value — Held, No.

Per A. L. Gehlot :

Facts :

One of the issues before the Tribunal was with reference to
the claim for deduction u/s.80-IA in respect of income from power plant. The
assessee was using power generated by its power plant for its own consumption.
In terms of the Explanation to S. 80-IA(8) — the assessee applied the rate
charged by the State Electricity Board and arrive at the market price of the
power used for captive consumption. The rate charged by the State Electricity
Board also included electricity tax levied by the State Government. According to
the CIT(A), since the electricity tax was a statutory payment, the same cannot
form part of the market price. For the purpose he relied on the decision of the
Mumbai Tribunal in the case of West Coast Paper Mills Ltd.

Held :

According to the Tribunal the issue before the Mumbai
Tribunal in the case of West Coast Paper Mills Ltd. was different than the case
of the assessee. In the case of the former, the issue was which rate was to be
adopted out of the two rates available on record. Referring to the Explanation
to S. 80-IA(8) defining the term ‘market value’, it observed that, the market
value could be understood by the simple fact viz., if the assessee was not
producing the electricity by itself and if it was purchased from the State
Electricity Board, the amount paid would be the market price which includes the
taxes levied by the authority. Therefore, it held that there was no reason for
exclusion of tax for the purpose of calculation of market price.

Case referred to :

West Coast Paper Mills Ltd. v. ACIT, 103 ITD 19 (Bom.).

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Nirav Shah

Explanation to S. 73 — For the purpose of deciding whether the case of the assessee is covered by exceptions provided in Explanation to S. 73, speculation loss is to be excluded while computing business income and arriving at the gross total income.

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Part B :
Unreported
Decisions

6 Paramount Information Systems Pvt. Ltd. v. ITO
ITAT ‘K’ Bench, Mumbai
Before P. Madhavi Devi (JM) and B. Ramakotaiah (AM)
ITA No. 921/Mum./2008
A.Y. : 1993-94. Decided on : 24-2-2010

Counsel for assessee/revenue : Jayesh Dadia/Anil K. Mishra

Explanation to S. 73 — For the purpose of deciding whether
the case of the assessee is covered by exceptions provided in Explanation to S.
73, speculation loss is to be excluded while computing business income and
arriving at the gross total income.

Per P. Madhavi Devi :

Facts :

The assessee incurred speculation loss of Rs.22,728. This
speculation loss was in addition to the loss on trading in shares amounting to
Rs.6,66,971 separately shown in P & L Account. While assessing the total income
u/s.143(3) of the Act, in order to ascertain whether the Explanation to S. 73
applies, and therefore the loss of Rs.6,66,971 on trading in shares is to be
regarded as speculation loss, the Assessing Officer (AO) treated speculation
loss of Rs.22,728 as such and excluded it from computation under the head
‘Profits and Gains of Business’. In the computation filed by the assessee, there
was a carried forward speculation business loss of Rs.22,728 and unabsorbed
depreciation of Rs.36,992 which was to be carried forward. The assessee
contended that depreciation on business premises of Rs.38,881 on new office
which was not put to use needs to be excluded since the same was claimed wrongly
and is not allowable since the new office has not been put to use. The ITAT
remanded this matter (of depreciation being not allowable) along with the issue
of application of S. 73 to the AO.

In reassessment proceedings, AO reiterated the contentions in
original assessment but the CIT(A) after admitting additional evidences and
remanding the matter back to the AO gave a finding that the assessee had not put
to use the office premises and the AO was directed to withdraw the depreciation
on the new building and recompute business loss. However, the CIT(A) worked out
gross total income by treating speculation loss of Rs.22,728 as part of business
income. He rejected the assessee’s contention that for computing gross total
income, speculation loss of Rs.22,728 should not form part of business income
and therefore also for arriving at gross total income.

Aggrieved, the assessee preferred an appeal to the Tribunal.
The question for consideration being whether the speculation loss of Rs.22,728
is to be included as part of gross total income or to be excluded while
computing business income and arriving at the gross total income.

Held :

The Tribunal after referring to the judgment in the case of
IIT Invest Trust Ltd. 107 ITD 257, held that under the scheme of the Act
whenever there is a separate loss which cannot be set off in the computation
under each head, the same cannot be included in the gross total income and it
does not enter in the computation of gross total income being a loss, unless set
off against income under any other head. The Tribunal held that the speculation
loss was to be treated separately under the provisions of the Act. Explanation 2
to S. 28 makes it mandatory that where speculative transactions carried on by
the assessee are of such a nature as to constitute the business, the business
shall be deemed to be distinct and separate from any other business. The
Tribunal held that the speculation loss of Rs.22,728 constituted a separate
business and it cannot be set off from other business loss or profit including
income from other sources. Accordingly, it was held that the same be excluded
while working out gross total income. Upon excluding the speculation loss of
Rs.22,728 the gross total income became a positive figure of Rs.2,957 and
accordingly income from other sources was more than business profits and
assessee’s loss on trading in shares was not attracted by provisions of S. 73.
The assessee’s case was held to be covered by first exception in Explanation to
S. 73. The Tribunal observed that this principle is also laid down in IIT Invest
Trust Ltd. 107 ITD 257 and also in Concord Commercial Pvt. Ltd. 95 ITD 117 (SB).

The Tribunal allowed the appeal filed by the assessee.

It observed that the judgment of the Madras High Court is a
case of liability arising on account of a retrospective amendment, as in the
present case. It held that levy of interest in respect of the amount of deferred
tax deducted while arriving at the book profit in the return is invalid.

As regards the argument raised at the time of hearing that since powers of reduction/waiver are vested in the CBDT whether the Tribunal can examine the validity of the levy of interest, the Tribunal having noted that the Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961) held that if the assessee denies his liability to pay interest the appeal on that point was maintainable. Based on the ratio of the decision of the Apex Court and also having noted that there is no express or implied restriction on the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is maintainable. It further held that the fact that the administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with a valid appeal before it.

The appeal filed by the assessee was partly allowed.

Nirav Shah

S. 234B — Assessee is not liable to pay interest u/s.234B when by retrospective amendment made later the amount becomes taxable. The fact that administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with

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Part B :
Unreported
Decisions

5 Sun Petrochemicals Pvt. Ltd. v. ITO
ITAT ‘D’ Bench, Ahmedabad
Before R. V. Easwar (VP) and D. C. Agarwal (AM)
ITA No. 1010/Ahd./2009

A.Y. : 2006-07. Decided on : 5-6-2009 Counsel for assessee/revenue
: S. C. Jalan/ Abani Kanta Nayak

S. 234B — Assessee is not liable to pay interest u/s.234B
when by retrospective amendment made later the amount becomes taxable. The fact
that administrative relief can be obtained by the assessee cannot erode the
powers of the Tribunal while dealing with a valid appeal laid before it.

Per R. V. Easwar :

Facts :

The assessee company while computing book profit u/s.115JB of
the Act deducted the deferred tax amounting to Rs.4,94,21,478 and fringe benefit
tax of Rs.62,279. At the time when the assessee filed the return of income,
there was no specific provision in the Section to the effect that deferred tax
was not deductible while arriving at the book profit. However, by the Finance
Act, 2008 an amendment was made to the Section with retrospective effect from
1-4-2001, that is, w.e.f. A.Y. 2001-02, that the deferred tax cannot be deducted
in arriving at the book profit.

The Assessing Officer (AO) in the order passed u/s.143(3) of
the Act computed the book profits by adding back the amount of deferred tax and
fringe benefit tax to book profits computed by the assessee and gave a direction
to charge interest accordingly. Aggrieved the assessee filed an appeal to the
CIT(A) on the ground that levy of interest was illegal since the amount of
deferred tax became liable to be added to the book profit only because of the
retrospective amendment made to the Section which could not be anticipated by
the assessee.

The CIT(A) was of the view that levy of interest was
mandatory and power was vested with the CBDT to waive or reduce the same,
subject to certain conditions, one of which is that no interest can be charged
if addition or disallowance is due to a retrospective amendment in law. He
upheld the levy but held that it was open to the assessee to seek
waiver/reduction from the CCIT/DGIT.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that the following judgments support the
case of the assessee :

(1) CIT v. Revathi Equipment Limited, (298 ITR 67) (Mad.)

(2) Haryana Warehousing Corporation v. DCIT, (75 ITD 155)
(TM)

(3) Priyanka Overseas Ltd. v. DCIT, (79 ITD 353) (Del.)

(4) ACIT v. Jindal Irrigation Systems Ltd., (56 ITD 164) (Hyd.)

As regards the argument raised at the time of hearing that
since powers of reduction/waiver are vested in the CBDT whether the Tribunal can
examine the validity of the levy of interest, the Tribunal having noted that the
Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961)
held that if the assessee denies his liability to pay interest the appeal on
that point was maintainable. Based on the ratio of the decision of the Apex
Court and also having noted that there is no express or implied restriction on
the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is
maintainable. It further held that the fact that the administrative relief can
be obtained by the assessee cannot erode the powers of the Tribunal while
dealing with a valid appeal before it.

The appeal filed by the assessee was partly allowed.

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Nirav Shah

Section 254 — Ex-parte order passed for non-appearance as the assessee’s representative went to attend phone call when the matter came up for hearing – Whether reasonable and sufficient ground for non-appearance — Held : Yes.

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Ajanta Offset & Packaging Ltd. vs. DCIT

ITAT
Delhi Bench ‘Friday’ New Delhi

Before I. P. Bansal (J.M.) and R. C. Sharma (A.M.)

MA No.459/D/08 in ITA No.1510/Del./2007

A. Y.
2001-02. Decided on 27.03.2009

Counsel for Revenue/Assessee : V. P. Gupta and Basant Kumar/B. K. Gupta

Section 254 — Ex-parte order passed for non-appearance as
the assessee’s representative went to attend phone call when the matter came
up for hearing – Whether reasonable and sufficient ground for non-appearance —
Held : Yes.

Per I. P. Bansal

Facts :

Vide
miscellaneous application the assessee has sought recall of the ex-parte
order passed by the Tribunal. According to the assessee, its director was
present in the Court for taking adjournment, as the counsel of the assessee
was busy in the High Court waiting for his turn. When the case of the assessee
was to come for hearing, the director had gone out of the Courtroom to attend
to the phone call and when he came back, the case was already decided as
ex-parte.

Held :

The
Tribunal was satisfied with the explanation and held that the assessee was
prevented by reasonable and sufficient cause for non-appearance before the
Tribunal. Accordingly, as per Rule 24 of the Appellate Tribunal Rules, 1983,
the ex-parte order passed was set aside.

Note :

All the decisions
reported above are selected from the website www.itatindia.com.

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Nirav Shah

Section 36 (i)(iii) — Allowance of interest paid — Where interest-free fund was more than the alleged investment in non-business assets, whether the interest paid could be disallowed —Held : No.

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Almona Investment & Marketing Pvt. Ltd. vs.
ITO

ITAT Mumbai
Bench ‘A’ Mumbai.

Before R. S. Syal (A.M.) and Asha Vijayaraghavan (J.M.)

ITA No. 4908/Mum/2006

A. Y.
2003-2004. Decided on : 30.03.2009

Counsel for
Assessee/Revenue : Hiro Rai/Sanjeev Jain.

Section 36 (i)(iii)
— Allowance of interest paid — Where interest-free fund was more than the
alleged investment in non-business assets, whether the interest paid could be
disallowed —Held : No.

Per R. S. Syal

Facts :

The assessee was a non-banking finance company.
As per its accounts, the accumulated loss was of Rs.52.2 lacs. It had claimed
deduction of Rs.4.37 lacs towards interest. The AO noted that the assessee had
invested Rs.40 lacs in shares, which according to it, was not for the purpose
of the business activity of the assessee company. Therefore, the entire amount
of interest of Rs.4.37 lacs was disallowed. On appeal the CIT(A) upheld the
order of the AO.

Held :

From the accounts of the assessee the Tribunal
noted that the assessee had interest-free loan and share capital aggregating
to Rs.1.26 lacs and after adjusting the debit balance in the Profit and Loss
account, the net interest free funds available at the disposal of the assessee
was of around Rs.53 lacs. As against this, the investment in the shares was
only to the tune of Rs.40 lacs. The Tribunal referred to the decision of the
Mumbai High Court in the case of Reliance Utilities & Power Ltd. where it was
held that if there were funds, both interest-free and interest bearing, then a
presumption would be that the investment would be out of the interest-free
fund generated or available with the company, if the interest-free funds were
sufficient to meet the investments. Relying on the same, it held that since in
the case of the assessee, the interest-free funds were more than the
investment made in shares, the sustenance of disallowance of interest by the
CIT(A) was not justified.

Case referred to :

CIT vs. Reliance Utilities & Power Ltd.,
(2009) 18 DTR (Bom) 1.

Editor’s Note :

During the relevant
assessment year, dividend income was taxable.

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Nirav Shah

Section 32 — Depreciation — Income assessed applying the net profit rate of 8% to the turnover — Whether the assessee’s claim for allowance of depreciation from the income so determined tenable — Held : Yes.

New Page 1ACIT vs. Keshav Kumar Tiwari

ITAT Delhi
Bench ‘H’ New Delhi

Before G. C. Gupta (J.M.) and K. G. Bansal (A.M.)

ITA No.1386/Del/2005

A. Y.
1999-2000. Decided on : 13.03.2009

Counsel for
Revenue/Assessee : Jagdeep Goel/O. P. Sapra

Section 32 —
Depreciation — Income assessed applying the net profit rate of 8% to the
turnover — Whether the assessee’s claim for allowance of depreciation from the
income so determined tenable — Held : Yes.

Per G. C. Gupta

Facts :

The assessee
failed to produce books of account and supporting vouchers before the AO. He
applied the provisions of Section 44AD and assessed the income. He rejected
the assessee’s claim to allow depreciation out of the income estimated. Before
the CIT(A) the assessee contended that since his turnover was more than Rs.40
lacs, the provisions of Section 44AD were not applicable, hence its claim for
depreciation was justifiable. The CIT(A) accepted the assessee’s contention
and allowed the appeal of the assessee.

Before the
Tribunal the Revenue accepted the fact that the turnover was above Rs.40 lacs.
However, it justified the action of the AO in applying the provisions of
Section 44AD, as according to it, the correctness of the accounts statement
filed by the assessee was not verifiable and all the conditions for
application of the said provisions were present and satisfied. For the same,
it relied on the Board Circular no. 684, dt. 10.06.1994.

Held :

The Tribunal
accepted the contention of the assessee and held that since the turnover of
the assessee was more than Rs. 40 lacs, the provisions of Section 44AD were
not applicable. It also held that the Revenue was justified in rejecting the
book result and in applying a flat rate of 8%, though the issue admittedly was
not before it. However, as regards the allowance of depreciation, it held in
favour of the assessee by relying on the decision of the Allahabad high court
in the case of Bishambhar Dayal & Co. and upheld the order of the CIT(A).

Cases referred to :

CIT vs.
Bishambhar Dayal & Co., 210 ITR 118 (All.)

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Nirav Shah

Section 41(1) — Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the assessee as on 31.3.1996 and thereafter carried forward in all subsequent balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys. 1995-96 and 1996

New Page 1ACIT vs. Amit Anil Biswas

ITAT ‘F’ Bench, Mumbai.

Before Sunil Kumar Yadav (JM) and D. Karunakara
Rao (AM)

ITA No. 1019/Mum/2006 and ITA No. 5762/Mum/2006

A.Ys. : 1997-98 and
2003-04. Decided on : 30.3.2009.

Counsel for Revenue/Assessee : None/Arvind
Sonde

Section 41(1) —
Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the
assessee as on 31.3.1996 and thereafter carried forward in all subsequent
balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys.
1995-96 and 1996-97, could be taxed in AY 2003-04 on the ground that upon
transfer to capital account during the financial year 2002-03 it has assumed
the character of income, as it was no more payable and did not represent
liability as falsely disclosed in the accounts by the assessee — Held : No.

Per Sunil Kumar Yadav :

Facts :

The assessee had received professional fees for
executing off-shore project during the financial years 1994-95 and 1995-96.
The gross bills raised in relation to the work were to the tune of
Rs.2,46,95,375 and after setting off various expenses and amounts written off,
the net professional fees were to the tune of Rs.1,77,27,681. This sum was
grouped under ‘current liabilities’ as off-shore project advances in the
balance sheet as on 31.3.1996 and then carried forward to subsequent years
till 31.3.2002. During the financial year 2002-03, this amount of
Rs.1,77,27,681 was transferred by the assessee to his capital account.

The Assessing Officer (AO) added this sum on a
protective basis to the income of the assessee for the AY 1997-98, after
reopening the assessment on the ground that the assessee had earned this
income in that assessment year and also made an addition on substantive basis
in AY 2003-04 on the ground that this amount had assumed the character of
taxable income, as it was no more payable and did not represent any liability
as falsely disclosed in the accounts by the assessee. The AO invoked the
provisions of S. 41(1) of the Act. He also held that the opening balance was a
Revenue receipt which was transferred to capital account in financial year
2002-03 and therefore this amount was taxed by him on a substantive basis as
income of AY 2003-04.

The CIT(A) decided the issue in favour of the
assessee and held that the income had accrued during the financial year
relevant to A.Y.s 1995-96 and 1996-97 and only because of transfer of receipt
to the capital account in the year relevant to AY 2003-04, it cannot be held
to be taxable in AY 2003-04.

Aggrieved, the Revenue preferred an appeal to the
Tribunal.

Held :

On perusal of the documents filed, the Tribunal
noted the following facts :

The agreement for rendering particular services
was executed on 23rd Feb., 1995 between the assessee and Mazgaon Docks Ltd.
and according to the work schedule, the required work was to be completed
pre-monsoon 1995. The invoices were raised between 23rd March, 1995 to 26th
April, 1995. The work was completed before start of the monsoon. The payments
were received by the assessee between 6.4.1995 to 1.6.1995. While making
payments, the payer had deducted TDS. Accounts were finally settled within
financial year 1996-97.

Based on the above facts, the Tribunal held that
as per mercantile system of accounting the income was earned by the assessee
in AY 1996-97, though the assessee had grouped this receipt as current
liability. The Tribunal observed that any nomenclature given to a Revenue
receipt would not change its character. It observed that it is unfortunate
that this income generated by the assessee was not noticed by the Revenue and
the treatment given by the assessee to this receipt was accepted by them. In
AY 2003-04 when the assessee transferred the amount to capital account, the
Revenue realised its mistake and tried to tax this as income in AY 2003-04 or
in AY 1997-98 by reopening the assessment. The Tribunal held that since the
income was not generated in those assessment years it cannot be taxed by
applying any method of accounting. The Tribunal observed that the Revenue
should be more vigilant to keep a check and make necessary verification if
they have any doubt, but they have no power to tax the income of a different
assessment year in a year in which they notice the mischief committed by the
assessee. The Tribunal held that the law in this regard is very clear that the
Revenue can make the assessment of any undisclosed income within the
permissible limit, but they cannot tax the income of different assessment
years in a year in which they notice it.

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

Case referred :

1 CIT vs.
T. V. Sundaram Iyengar & Sons Ltd., 222 ITR 344 (SC).

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Nirav Shah

India-Australia DTAA; S. 9(1)(vii) — Receipts for monitoring and supervision of project work — Not royalties — Business income, chargeable to the extent attributable to PE

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10 WorleyParsons Services Pty Ltd. (AAR)
(Unreported)

Articles 5, 7, 12 of India-Australia DTAA; S. 9(1)(vii)(b) of
the Act

A.Y. : 2004-05. Dated : 30-4-2008

Issue :

Characterisation of receipts for monitoring and supervision
of project work.

Facts :

The applicant was an Australian company, which was tax
resident of Australia. It was in the business of providing professional services
such as engineering, procurement and object management. It executed a contract
with an Indian company for monitoring a gas pipeline project as project
monitoring consultant. The applicant had to carry out various responsibilities
that were set out in the tender document under the section titled as
“consultant’s scope of work”.

The AAR considered the following issues :

(a) Whether the receipts under the contract were
‘royalties’ in terms of Article 12 of India-Australia DTAA ?

(b) If answer to (a) is in negative, whether such receipts
were to be taxed as business profits taxable in India in terms of Article VII
of India-Australia DTAA and if so, to what extent ?

The applicant had submitted that most of the services
relating to the work assigned to it were performed in India; its employees were
present in India for 165 days during the relevant year; nearly 90 to 95% of the
work related to the contract was performed in India; and hence, it should be
deemed to have have construction supervisory PE in India within the meaning of
Article 5(2)(k) of India-Australia DTAA. The applicant also contended that the
payments received by it under the contract were not in the nature of royalty
under Article 12 of India-Australia DTAA, but were attributable to its PE and
taxable as business profits in terms of Article 7 of India-Australia DTAA — a
contention not disputed by the Department.

The AAR then referred to the definition of ‘royalties’ in
Article 12(3) of India-Australia DTAA. In particular, AAR referred to clause (g)
of Article 12(3), in terms of which payment made as consideration for “the
rendering of any services (including those of technical or other personnel),
which make available technical knowledge, experience, skill, know-how or
processes or consist of the development and transfer of a technical plan or
design” ‘royalties’. The AAR observed that monitoring and supervision of project
work with a view to ensure its timely completion within the approved cost does
not amount to ‘making available’ technical knowledge, experience, etc. which can
be subsequently used by the Indian company on its own. Hence, by rendering the
services the applicant had not ‘made available’ any technical knowledge,
experience, skill or know-how to the Indian company.

The Department had contended that the contractual receipts
were in the nature of fees for technical services in terms of S. 9(1)(vii)(b) of
the Act. The AAR rejected this contention on the ground that the receipts cannot
be taxed under the Act in derogation of DTAA provisions and since the income
could be brought within the purview of Article VII, which deals with business
profits, only that provision was relevant. The AAR noted that in its reply, the
Department had admitted the applicability of Article 7(1) of India-Australia
DTAA. Further, no Article other than Article 12 dealt with ‘fees for technical
services’. Hence, the receipts of the applicant were business profits and since,
admittedly, the applicant carried on its business through a PE, profits
attributable to that PE were taxable in India in terms of Article 7.

The AAR then referred to Article 5(2)(k) and agreed with the
applicant’s contention that it constituted a PE in India in terms of Article
5(2)(k), since the activities were carried on in India for more than six months
during financial year 2003-04.

Held :

(i) The applicant’s receipts under the contract were not
‘royalties’ in terms of Article 12(3)(g) of India-Australia DTAA, since
monitoring and supervision project work does not amount to making available
technical knowledge, experience, etc.

(ii) The applicant had construction supervisory PE in India
in terms of Article 5(2)(k) of India-Australia DTAA.

(iii) Since the payment is not covered by specific Article 12
dealing with royalties, it is business income to be taxed in terms of Article 7
of India-Australia DTAA, but only to the extent of the profits attributable to
the applicant’s PE in India and in accordance with the provisions of the Act.

levitra

Nirav Shah

Section 36(1)(vii) r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit given for taking godown on rent is allowable as a business loss — Held : Yes.

New Page 1

ACIT vs. Foseco India Ltd.

ITAT ‘F’ Bench, Mumbai

Before R. S. Syal (AM) and V. Durga Rao (JM)

ITA No. 7307/Mum/2007 and CO No. 63/Mum/2008

A.Y. : 2003-04. Decided
on : 25.3.2009.

Counsel for Revenue/Assessee : J.
V. D. Langstich/H. P. Mahajani.

Section 36(1)(vii)
r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit
given for taking godown on rent is allowable as a business loss — Held : Yes.

Per R. S. Syal :

Facts :

The assessee had given a security deposit of
Rs.5,00,000 to one Mr. Agrawal for taking his godown on rent. The assessee
stated that the owner had not returned the money and accordingly claimed the
same as ‘bad debt’. This amount was written off by the assessee. The Assessing
Officer (AO) held that since the provisions of S. 36(2) were not fulfilled the
claim for bad debt could not be allowed. No relief was allowed in the first
appeal. On an appeal to the Tribunal,

Held :

Sub-Section (2) of Section 36 provides that no
deduction for bad debt shall be allowed unless such debt or part thereof has
been taken into account in computing the income of the assessee of the
previous year in which the amount of such debt or part thereof is written off
or of an earlier previous year, or represents money lent in the ordinary
course of business of banking or money lending which is carried on by the
assessee.

The Tribunal noted that this amount was not taken
into account in computing the income of the assessee of an earlier or current
year.

Satisfaction of the provisions of S. 36(2) is a
pre-condition for claiming deduction u/s. 36(1)(vii). Since the assessee had
not satisfied the provisions of S. 36(2), it was not entitled to claim
deduction u/s 36(1)(vii).

However, the Tribunal noted that the amount was
given as security for acquiring godown for carrying on the business. The
Tribunal noted that the Apex Court has in the case of Mysore Sugar Co. held
that loss due to irrecoverable advance/security given for the purpose of trade
is allowable. The Tribunal also noted that the Bombay High Court had in the
case of IBM World Trade Corporation held that the money advanced by the
assessee to the landlord for the purposes of and in connection with the
acquisition of the premises on lease was not recoverable, such loss of advance
was a business loss.

The Tribunal found the facts of the present case
to be on all fours with the facts of the case before the Bombay High Court. It
accordingly allowed this ground of the cross-objection.

Cases referred :

1 CIT vs. Mysore Sugar Co. Ltd., 46 ITR
649 (SC)

2 IBM World Trade Corporation Ltd. vs. CIT,
186 ITR 412 (Bom).

levitra

Nirav Shah

S/s. 43B & 145A – Service tax on unrealised service charges cannot be added back to the income

3. (2013) 82 DTR 303 (Mum)
Pharma Search vs. ACIT
A.Y.: 2007-08 Dated: 2.5.2012

S/s. 43B & 145A – Service tax on unrealised service charges cannot be added back to the income

Facts:

The assessee was engaged in the business of rendering consultation in pharmaceuticals, chemicals and drugs. In the P & L A/c, the assessee has shown fees for rendering consultancy services net of service tax. The service charges of Rs. 32 lakh was not realised and outstanding at the year end. The Assessing Officer was of the view that the service tax should have been shown as receipts in the P & L A/c on the principle laid down by the Honourable Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. vs. CIT [87 ITR 542] and also as per the provisions of section 145A. The Assessing Officer made an addition of Rs. 3,91,680/- on account of service tax on the ground that the assessee ought to have made payment of the service-tax in order to claim deduction as per provisions of section 43B.

Held:

As per the service tax law, service tax is payable as and when the payments/fees for underlying service provided are realised. As the assessee has not received the sum till the end of the financial year, question of paying the same did not arise at all. If for any reason the payment for services rendered is not realised, there was no liability as to payment of service tax. Thus, the service tax law stands on a different footing as compared to other laws like Central excise or VAT.

The application of section 145A is restricted to purchase and sale of goods only, and does not extend to service contracts. Therefore, the action of the Assessing Officer in invoking provisions of section 145A and adding service-tax to gross receipts is incorrect in as much as against the very basic principles of section 145A.

The rigours of section 43B might be applicable to the case of sales-tax or excise duty, but the same could not be said to be the position in case of service tax because of two reasons. Firstly, the assessee is never allowed deduction on account of service tax which is collected on behalf of the Government and is paid to the Government account. Therefore, a service provider is merely acting as an agent of the Government. Secondly, section 43B(a) uses the expression “any sum payable”. If there is no liability to make the payment to the credit of the Central Government because of nonreceipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of section 43B(a).

levitra

Nirav Shah

Clinical trial test reports did not ‘make available’ technical knowledge, experience, know-how, etc. — Consideration is not fee for included services under India-Canada DTAA

New Page 1

Part C — International Tax Decisions

6 Anapharm Inc, In re

(2008) 305 ITR 394 (AAR)

S. 9(1)(vii) of IT Act; Articles 5, 7, 12 of India-Canada
DTAA

Dated : 11-9-2008

Issue :

Issuance of clinical trial test reports to clients did not
‘make available’ technical knowledge, experience, know-how, etc. and
consideration thereof is not fee for included services under India-Canada DTAA.

Facts :

The applicant, a Canadian company, was a contract research
organisation which assisted pharmaceutical companies globally by providing
clinical and bio-analytical services for development of new drugs or generic
equipments of drugs already being marketed.

The applicant had entered into agreement with two Indian
pharma companies for undertaking clinical and bio-analytical studies. The issue
before the AAR was whether the fee received by the applicant from the Indian
pharma companies is subject to tax in India in accordance with the provisions of
the Income-tax Act, 1961 (‘IT Act’) and DTAA between India and Canada.

For the purpose of undertaking clinical trials, the applicant
had devised product-specific methods/protocols which were in conformity with
international regulations and requirements of the drug authorities of the
various countries. Such methods/protocols belonged to the applicant and were not
shared with the clients. The applicant merely gave final reports/conclusions of
the trials to its clients. The applicant contended that the services rendered to
the Indian pharma companies did not result in transfer of any technical
experience, know-how or technical plan or technical design to the payers and
hence, did not satisfy the test of ‘make available’ under ‘Article 12 – Fees for
included services’ (‘FIS’) of the DTAA.

Held :

The AAR accepted the contention and held :

(i) There was some difference between S. 9 of the IT Act
and Article 12 of DTAA. Mere provision of technical services, in absence of
their being ‘made available’, was not enough to attract Article 12(4)(b).

(ii) To ascertain the meaning of the expression ‘makes
available’ as embodied in the treaty, the AAR referred to the similar
provision of India-USA DTAA and the annexed protocol. The AAR observed that
consideration paid can be regarded as ‘FIS’ only if the twin test of rendering
services and making technical knowledge available were satisfied. Reliance for
this was placed on the Bombay High Court decision in the case of Diamond
Services International Ltd. v. UOI, (2008) 169 Taxman 201.

(iii) Though the services rendered were sophisticated in
nature, the applicant did not reveal to Indian pharma companies the process of
how it conducted clinical trials and related tests. A broad description or
indication of the type of test carried out before issuance of reports did not
enable Indian pharma companies to derive requisite knowledge to conduct the
tests or to develop the technique on their own.

(iv) Clinical procedure, analytical methods, etc., which
were proprietary items of the applicant, were not transferred, assigned or
handed over to Indian pharma companies. Mere handing over of reports of tested
samples and test compounds cannot be equated with making technology, know-how,
etc., available to the pharma companies.

levitra

Nirav Shah

Basic design services provided by US entity which includes preparation of plan, concept design, schematic design, design development and other related consultancy services during construction phase are part of architectural services provided by the US ent

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

8 HMS Real Estate
(2010) TIOL 17 ARA-IT
Article 12 of the India-US DTAA,
S. 115A & S. 195 of the Income-tax Act
Dated : 18-3-2010

Basic design services provided by US entity which includes
preparation of plan, concept design, schematic design, design development and
other related consultancy services during construction phase are part of
architectural services provided by the US entity. Payment received for such
services are fees for included services as it involved development and transfer
of technical plan and design. The agreement needs to be read having regard to
the predominant features of the contract and by taking into account crux and
substance of the contract.

Remittance made to the US entity for making payment to
consultants for the services rendered by such consultants directly to the
taxpayer represents reimbursement of actual expenses and does not represent
income chargeable to tax.

Facts :

The US entity entered into agreement with the Indian company
for providing architectural design services in connection with development and
management of commercial real estate project of ICO. In terms of the agreement,
the US entity was obliged to develop master plan, prepare concept design,
schematic designs, etc. Additionally, it was also obliged to :

(i) understand the specifications from ICO and get the
designs approved by ICO;

(ii) assist ICO in bidding and contractor selection
process;

(iii) observe construction progress;

(iv) provide alternative proposals for cost reduction; and

(v) co-operate with the local director in getting the
requisite approvals or modify the designs to conform with the regulations,
etc.

The agreement was for a fixed fee. The fee was payable on the
basis of the milestones achieved. The US entity was also entitled to
reimbursement of fees paid by it to the consultants who assisted the US entity
in rendering services if such consultants were appointed with the consent of ICO.

For rendering services, personnel of the US entity were
present in India for a period of 50 days. There was no dispute that the presence
of the US entity did not result in emergence of service PE in India.

ICO as a payer contended that substantial portion of the
consideration was for transfer and sale of designs on an outright basis. By
relying on the specific provision of the agreement, it was contended by ICO that
all the rights in designs, including right to use the designs for the other
projects vested in ICO. Hence, the contract was for sale of design which was
concluded outside India and hence not taxable, either under the IT Act or in
terms of DTAA.

AAR held :

The AAR rejected contention of the ICO that the agreement
merely involved transfer of right, title and interest in the drawings, models
and work product and that the transaction can be regarded as one of sale of
designs. The AAR concluded that the contract was for rendering of services
having regard to the following :

The agreement needs to
be read as a whole. The true scope and dominant object of the contract needs
to be ascertained having regard to the predominant features of the contract
and by taking holistic view of the matter.

The US entity developed
the designs after in depth interview with ICO and participated as an expert
service provider at every stage from the conceptualisation till the stage of
completion. This supported that the contract was a service contract.

The role of the
applicant did not end upon transfer of plans, drawings and designs.

The substance
and crux of the contract was rendering of services and the sale of designs
was incidental. To contend that the essence of the contract was the sale of
designs, models and that the services were to distort and stultify true
nature and dominant purpose of the contract.

The consideration
was for development and transfer of a technical plan and designs, which is
specifically covered as fees for included services. Article 12(4)(b) covers
transfer of technical plan or design which arises as a sequel to and as an
integral part of the service contract.

The decision of
the Calcutta High Court in CIT v. Davy Ashmore, (190 ITR 626) is
distinguishable as that case involved transfer of designs which were already
available on an outright basis and did not appear to be a case of tailor-made
designs and drawings.

The remittance
made to the US entity for reimbursements towards the fees of the consultants
who assisted the US entity in rendering architectural services and who were
appointed with the consent of ICO represented remittance towards reimbursement
of actual expenses. Accordingly, it was not income chargeable to tax.

levitra

Nirav Shah

Mutual concern — Income of the association of flat owners is not taxable on the principle of mutuality, despite the fact that most of the flats are let out and tenants are paying the contribution — Interest earned from bank on surplus funds deposited in t

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.)

9 Wellington Estate Condominium v. ITO
ITAT ‘I’ Bench, Delhi
Before R. P. Tolani (JM) and A. K. Garodia (AM)
ITA No. 2846/Del./2007

A.Y. : 2003-04. Decided on : 16-10-2009

Counsel for assessee/revenue : Ved Jain & V. Mohan/Anusha
Khurana

Mutual concern — Income of the association of flat owners is
not taxable on the principle of mutuality, despite the fact that most of the
flats are let out and tenants are paying the contribution — Interest earned from
bank on surplus funds deposited in the bank is also not taxable on the principle
of mutuality.

Per A. K. Garodia :

Facts :

The assessee was an AOP formed by Residents’ Welfare
Association of the residents of Wellington Estate, DLF City, Phase V, Gurgaon
which consisted of 555 flats, out of which 505 flats were sold out by DLF
Universal Ltd. (Developer) and 51 unsold flats remained in possession of the
developer. The association was registered with The Registrar of Societies,
Haryana on 1-10-2002 and hence this was the first year of operation of the
assessee.

The association claimed itself to be a mutual concern and
claimed that its income is not taxable. The AO rejected the claim of the
assessee and assessed the total income at Rs.25,95,060 as against returned
income of Rs.14,180.

The CIT(A) rejected the claim of the assessee on the ground
that (i) most of the flats were rented out to tenants who were paying various
charges to the association and tenants are not the members of the association;
(ii) the assessee is receiving money on account of various charges from
non-members as per rules; (iii) profits on account of excess charges were
refundable to the members which indicates the profit making purpose of the AOP
and distribution of profits amongst members; and (iv) there is no identity
between the contributors and participators which is essential element of mutual
concern.

The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that clause 18(b) of the bye-laws of the
assessee regarding winding up or dissolution of the society provide that any
surplus remaining after satisfaction of its debts and liabilities shall not be
paid to or distributed among the members of the society at the time of
dissolution, but shall be given or transferred to some other institution having
objects similar to the objects of the society to be determined by the members of
the society at the time of dissolution. It also noted that clause 2 and 4 of the
bye-laws provided that the assessee could invest or deposit money and could let
out suitable portion of the common areas to outsiders for commercial purposes
and to accumulate the common profit for building up reserve fund.

The Tribunal observed that the Delhi Bench of Tribunal has in
the case of Standing Conference of Public Enterprise (SCOPE) v. ITO in ITA No.
5051/Del./2007, dated 31-3-2008 dealt with the situation where as per bye-laws
the surplus was not required to be distributed amongst the members on
dissolution of the society and the Revenue had denied mutuality on this ground.
Clause (xvi) of the bye-laws of SCOPE was identical to clause 18(b) of the
bye-laws of the assessee. The Tribunal after considering the decision of Apex
Court in the case of Bankipur Club (226 ITR 97) (SC) rejected the argument of
the Revenue. Further, in the case of SCOPE, interest income was earned from
surplus funds and rental income was received from non-members also. Therefore,
letting out of suitable portion of common area to outsiders for commercial
purposes and accumulation of common profit for building up reserve fund could
not be a reason for denying mutuality. As regards interest income the Tribunal
has in the case of SCOPE held that this issue is covered in favour of the
assessee by the judgment of the Delhi High Court in the case of All India
Oriental Banking Commerce of Welfare Society (184 CTR 274) (Del.).

As regards the allegation of the CIT(A) that when flats are
rented out, maintenance charges are received by the assessee from non-members,
the Tribunal held that liability of payment of maintenance and other charges is
of the member i.e., the owner and even if the same is paid to the society by the
tenant of the members, it cannot be said that the society is receiving it from
non-members because in case of default the assessee can collect the same from
members only and not from tenants. The Tribunal observed that as per clause 4(b)
of the bye-laws all the owners are obliged to pay monthly assessment imposed by
the association to meet all expenses relating to Wellington Estate Condominium,
which may include an insurance premium for a policy to recover repair and
reconstruction work in certain cases. The Tribunal held that payments made by
tenants of the members are to be considered as received from members since the
liability to pay the amount is of the member and the tenant is making the
payment to the assessee for and on behalf of the member. The Tribunal held the
assessee to be a mutual concern and allowed the appeal filed by the assessee.

levitra

Nirav Shah

2013-TIOL-641-ITAT-MUM Cinetek Telefilms P. Ltd. v ACIT ITA No. 7834 and 7645/Mum/2010 Assessment Year: 2007-08. Date of Order: 07.06.2013

Section 40(a)(ia) – Provisions of section 40(a)(ia) do not apply to a case where there is shortfall in deduction of tax at source.

Facts:
The assessee engaged in the business of making T.V. serials and ad films had incurred certain expenses on which tax was deductible at source but the assessee had either not deducted tax at source at all or had deducted it at a lower rate. The Assessing Officer disallowed a sum of Rs. 71,30,633 u/s. 40(a)(ia) – Rs. 62,33,890 for short deduction of tax at source and Rs. 8,96,743 for non-deduction of tax at source.

Aggrieved, the assessee preferred an appeal to CIT(A) who on the basis of some additional evidence deleted certain disallowances and confirmed the remaining.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that in some cases the assessee treated the payment to be covered u/s. 194C of the Act whereas the authorities below treated the same payment as being covered u/s. 194I of the Act thereby resulting in short deduction of tax at source. It held that the issue whether disallowance u/s. 40(a)(ia) can be made where assessee short deducted tax at source instead of non-deduction of tax at source is no mere res integra in view of several orders passed by various benches of the Tribunal across the country holding that no disallowance u/s. 40(a)(ia) can be made in such cases. The Tribunal made a mention of U.E. Trade Corporation (India) Ltd. vs. DCIT (2012) 54 SOT 596 (Del) and DCIT v. Tekriwwal (2011) 48 SOT 515 (Kol). It also noted that the Calcutta High Court has vide its judgment dated 03-12-2012 in the case of CIT vs. S. K. Tekriwal (2012 – TIOL- 1057-HC-KOL) upheld the view of the Kolkata Bench of the Tribunal. Following these, it held that CIT(A) was not justified in sustaining disallowance u/s. 40(a)(ia) in respect of expenses on which short deduction of tax at source was made.

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Nirav Shah

2013-TIOL-632-ITAT-AHM Shrinivas R Desai v ACIT ITA No. 1245 and 2432/Ahd/2010 Assessment Year: 2007-08. Date of Order: 28.06.2013

S/s. 45, 54(1) & 54 (2), 55(1)(b) – Cost of purchase includes any capital expenditure incurred by the assessee on the property purchased to make it livable though the expenditure may be incurred after having purchased the property. The use of words `purchased or constructed’ does not mean that the property can either be purchased or constructed and not a combination of both the actions.

Facts:
During the relevant previous year the assessee earned long term capital gain of Rs. 98,76,855 on sale of his residential house in August 2006. In May 2006, he purchased a house property for Rs. 71,94,570 and claimed to have spent Rs. 15,48,773 on its improvement. The expenditure on improvement was claimed to have been incurred till 31st March, 2007. The assessee claimed exemption u/s. 54 with reference to both the cost of purchase as well as expenditure incurred on improvement. It was submitted that “cost of improvement, as per section 55(1)(b), in any other case, means all the expenditure of capital nature incurred in making any addition or alteration to the capital asset by the assessee, after it becomes his property.”

The Assessing Officer (AO) was of the view that cost of improvement can be allowed as a deduction only to the transferor and not to the transferee. He denied claim of exemption u/s. 54 with reference to cost of improvement incurred by the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal took note of the fact that the authorities below had laid a lot of emphasis on the fact that as the original house property was sold by the assessee in August 2006, it cannot be believed that the new house property was not habitable till September 2007. These observations were on the assumption that on sale of the old house, the assessee had to shift to new house. However, this overlooked the uncontroverted fact that the assessee had, during the period from August 2006 to June 2007 lived in a residential unit taken on lease. Lease rent was paid by cheque, copies of lease agreement and broker’s note were also filed and no errors were found in these evidences. Thus, the contention of the Department that the new house was habitable at the time of purchase was held to be unsustainable.

The Tribunal held that the cost of purchases does include any capital expenditure incurred by the assessee on such property to make it livable. As long as the costs are of such a nature as would be included in the cost of construction in the normal course, even if the assessee has bought a readymade unit and incurred those costs after so purchasing the readymade unit – as per his taste and requirements, the costs so incurred will form an integral part of the qualifying amount of investment in the house property. The use of words `purchased or constructed’ does not mean that the property can either be purchased or constructed and not a combination of both the actions. A property may have been purchased as a readymade unit but that does not restrict the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work.

The Tribunal held that as long as the assessee has incurred bonafide construction expenditure, even after purchasing the unit, the additional expenses so incurred would be eligible for qualifying investment u/s. 54. The Tribunal restored the matter to the file of the AO for carrying out factual verifications, which was not done, in the light of its observations and to pass a speaking order after giving an opportunity of hearing to the assessee.

The appeal filed by the assessee was allowed for statistical purposes.

levitra

Nirav Shah

Asst. CIT vs. B.V.Raju, Hyderabad(SB) (2012) 135 ITD 1 Date of the order : 13.02.2011 A.Y.2000-01

Section 28(va)(a) – When compensation is paid for not carrying out any activity in relation to any business which transferor is not carrying on same would be chargeable u/s. 28(va)(a) and not as capital gain.

Facts:
Assessee was a chairman of two companies namely, Rassi Cements Ltd. (RCL) and Sri Vishnu Cements Ltd. (SVCL) without any controlling interest. Both these companies were subjected to a hostile takeover by India Cements Ltd. (ICL).

ICL Paid Rs. 11 crore to assessee under Non-compete agreement (NCA). After takeover assessee lost his business and died. Mean while, Search was conducted in the premises of one of the close relatives of the assessee where copy of NCA disclosing Rs. 11 crore paid to assessee were found. Based on the same, AO issued notice u/s. 148 and added the above sum to income of the assessee under the head Capital gain.

Aggrieved by the order of Ld. A.O. legal heirs of the assessee preferred appeal before CIT(A). CIT(A) held that sum was in the nature of capital receipt and not chargeable to tax before insertion of provisions of section 28(va)(a) w.e.f. 01-04-2003. Revenue preferred appeal against order of CIT(A).

Held:
Taxability of amount paid at the time of takeover of business depends upon:

1- Purpose of payment.

2- What was the right transferred by assessee.

When Right to manufacture, produce or process any article or thing is transferred, there is an extinguishment/relinquishment of rights, the same being capital asset chargeable to capital gain tax.

In the instant the case assessee had no controlling interest in the transferred companies. He was associated with business in his managerial capacities and was not carrying on any business directly. Hence, the amount received by assessee under NCA is for “not carrying out any activity in relation to business” which is taxable u/s. 28(va)(a).

levitra

Nirav Shah

S. 140A(3) : Assessee offers explanation for failure to pay S.A. tax — Full tax and interest paid — Penalty not justified

New Page 1

10 Dy. CIT v. Kamala Mills
Ltd.

ITAT ‘K’ Bench, Mumbai

Before G. E Veerabhadrappa (VP) &

Ms. Sushma Chowla (JM)

ITA No. 7775-77/Mum./2004

A.Ys. : 2000-01, 2001-02 and 2002-03.

Decided on : 31-10-2007

Counsel for revenue/assessee : Mohit Jain/

Jitendra Jain

S. 140A(3) of the Income-tax Act, 1961 — Failure to pay
self-assessment tax — Assessee deemed to be in default — assessee offers full
explanation for non-payment — Taxes fully paid together with interest — Whether
imposition of penalty justified — Held, No.

Per G. E Veerabhadrappa :

Facts :

The assessee had filed its return of income for A.Y. 2000-01
to 2002-03 in time, but did not make the payment of S.A. Tax. The AO asked the
assessee to explain as to why penalty should not be imposed u/s.221, read with
S. 140A(3) of the Income-tax Act. The assessee explained that it could not make
payment due to financial crunch on account of paucity of funds. The AO was not
satisfied with the explanation and imposed penalty of Rs.20 lacs for A.Y.
2000-01, Rs.50 lacs for A.Y. 2001-02 and Rs.20 lacs for A.Y. 2002-03.

Being
aggrieved, the assessee appealed before the CIT(A) who considered the
explanation offered by the assessee and deleted the penalty mainly on the
following grounds :

(1) Paucity
of funds at the material time when S.A. Tax was to be paid does constitute a
reasonable cause for the default of non-payment of S.A. Tax.

(2) The
assessee has paid the entire tax, together with applicable interest u/s.234B,
u/s.234C and u/s.220(2), before show-cause notice u/s.221 was served on the
assessee. This shows that the assessee had no mala fide intention to
withhold the payment of S.A. Tax.

(3)
Initiation of penalty proceedings after a long period is contrary to the
spirit of the provisions relating to bar of limitation for imposing penalties
and hence imposition of penalty was illegal.

The Department appealed to the ITAT.

Held :

The Tribunal examined the provisions of S. 220(4) and S. 221,
together with provisions of S. 140A(3) and came to a conclusion that in the
present case, the assessee has paid all the taxes, together with interest and it
cannot be held that the assessee is in default or deemed to be in default, and
as such, there is no merit in the levy of penalty u/s.221 of the Act, specially
when there is no clear provisions for imposition of penalty u/s.140A(3), after
the amendment in S. 140A(3) in the year 1987. The Tribunal therefore confirmed
the order of CIT(A) and dismissed the Revenue’s appeal.

Errata :

Attention of the readers is drawn to the Tribunal decision
reported at Sr. No. 26 in March 2008 issue of the Journal. The last line of the
said decision on page no. 638 should be read as “Accordingly, the assessee could
not be treated as an assessee in default.” The error is regretted.

levitra

Nirav Shah

S. 263 : Assessed income higher than income determined by CIT — CIT’s order bad

New Page 1

9 Bhuppindera Flour Mills Pvt.
Ltd. v. ITO

ITAT Amritsar Bench, Amritsar

Before Joginder Pall (AM) and

A. D. Jain (JM)

ITA Nos. 457 and 540/Asr./2005

A.Y. : 2000-01. Decided on : 15-2-2008

Counsel for assessee/revenue : P. N. Arora/

Tarsem Lal

S. 263 of the Income-tax Act, 1961 — Revision of
orders — Power of the Commissioner of Income-tax — Income assessed u/s.143(3)
higher than the income determined u/s.263 — Held, that the order passed u/s.263
by the CIT bad in law.

Per Joginder Pall :

Facts :

The assessee had filed its return of income
declaring loss of Rs.1.47 lacs. However, the assessee had not filed the accounts
hence, in the order dated 1-8-2001 passed u/s.143(1)(a), the loss returned was
disallowed by the Assessing Officer. Subsequently, the Assessing Officer
assessed the income u/s.143(3) vide his order dated 12-3-2003, determining a
long-term capital gain of Rs.46.07 lacs. On appeal the CIT(A) vide his order
dated 14-5-2003 deleted the addition made by the Assessing Officer. According to
the CIT, the order passed by the Assessing Officer u/s.143(3) was erroneous and
prejudicial to the interest of the Revenue inasmuch as the book profit u/s.115JA
of Rs.1.13 crore liable to tax was not considered by the AO. Being aggrieved,
the assessee appealed before the Tribunal.

Held :

According to the Tribunal in order to confer
jurisdiction on the CIT u/s.263, both the conditions viz., the order
passed by the Assessing Officer must be (i) erroneous; and (ii) prejudicial to
the interest of the Revenue, must be fulfilled. The Tribunal found that at the
time of making assessment u/s. 143(3), the income computed as per regular
provisions of the Act was higher at Rs.46.07 lacs as against income u/s.115JA of
Rs.33.93 lacs (30% of Rs.1.13 crore). Therefore, according to the Tribunal, the
provisions of S. 115JA were not attracted. Therefore, it held that the order
passed by the Assessing Officer cannot be said to be erroneous, because the same
was as per the provisions of the Act. It further held that the order passed was
also not prejudicial to the interest of the Revenue, because there was no loss
of revenue. Therefore, the assumption of jurisdiction by the CIT u/s.263 was bad
in law.

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Nirav Shah

Carry forward and set-off in case of Nil Return v. Reassessment at Loss — Unabsorbed depreciation entitled to be carried forward and set off even if return showing nil income was filed — Also, loss determined in Appellate proceedings and not claimed by assessee eligible to be carried forward.

(2012) 67 DTr (Ahd.) (Trib.) 470
ACIT v. Mehsana District Co-operative Milk
Producers Union Ltd.
A.Y.: 1999-2000. Dated: 30-6-2011

Carry forward and set-off in case of Nil Return v. Reassessment at Loss — Unabsorbed depreciation entitled to be carried forward and set off even if return showing nil income was filed — Also, loss determined in Appellate proceedings and not claimed by assessee eligible to be carried forward.

Facts:

The assessee, a co-operative society had filed nil return of income u/s.139(1). The assessment was completed u/s.143(3) r.w.s. 147 at total income of Rs.48.19 crore. The assessee went into appeal and after Appellate proceedings, the income of the assessee was determined at loss of Rs.5.41 crore. The assessee vide application u/s.154 requested the AO to permit carry forward of such loss to subsequent year. The AO vide his order u/s.154 held that loss can be carry forward only if the same is determined in pursuance to return filed u/s.139(3). In this case as per return of income, the income declared was nil and the loss was determined only on giving appeal effect which was could not be carry forward as per the AO.

On further appeal, the CIT(A) upheld the stand of the AO. He further stated that in this case, the assessment was reopened by issue of notice u/s.148. Placing reliance on the decision of the Apex Court in the case of CIT v. Sun Engineering Works (P) Ltd., (198 ITR 297), the CIT(A) held that section 147 was for the benefit of the Revenue and the assessee cannot be allowed relief not claimed by him in the original assessment. However, out of the total loss of Rs.5.41 crore, sum of Rs.5.10 crore pertained to unabsorbed depreciation. The CIT(A) permitted carry forward of such unabsorbed depreciation referring to Explanation 5 to section 32 wherein benefit is allowed even if deduction not claimed by the assessee. Both the Revenue as well as the assessee went into appeal.

Held:

As per section 32(2), for carry forward of unabsorbed depreciation, the only condition is that full effect cannot be given to depreciation allowable u/s.32(1) on account of there being insufficient profit. Carry forward of unabsorbed depreciation as per section 32(2) is automatic. No other condition is required to be fulfilled by the assessee for carry forward of unabsorbed depreciation. Hence, assessee is eligible to carry forward unabsorbed depreciation even if not claimed in return of income. Regarding balance business loss, as per section 72, the assessee is not required to fulfil any conditions so as to be eligible for carry forward of loss. The only requirement is that the result of computation under the head ‘Income from Business or Profession’ should be loss. However, for denying the benefit of carry forward of loss, the Revenue has relied upon section 139(3). The Tribunal held that section 139(3) would have application only where the assessee files the return disclosing the loss. If the assessee files the return disclosing the loss, then he is required to file return as per section 139(1). In the given case, firstly, the assessee has not disclosed any loss in the return of income, so 139(3) should not be applicable. Even if applied, only condition u/s.139(3) is for filing return before due date as stated u/s.139(1) which has been filed by the assessee. So, benefit of carry forward of loss is to be allowed.

The judgment of the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd., (supra) was distinguished since that case could have relevance during the assessment/Appellate proceedings. In the given case the assessment as well as Appellate proceedings are already completed. The AO has himself given effect to Appellate orders and determined the loss. Hence, once the orders of Appellate authorities have become final and the effect has been given and loss is determined thereby, the same has to be carried forward as per provisions of the Income-tax Act.

Hence, even though nil return of income was filed by the assessee u/s.139(1), he is entitled to carry forward entire loss as determined under Appellate proceedings.

levitra

Nirav Shah

Section 80G — Approval for the purpose of section 80G cannot be denied simply because the trust is not registered as charitable trust.

(2011) 131 ITD 117 (Hyd.)
Kamalakar Memorial Trust v. DIT (Exemptions)
Dated: 5-3-2010

Section 80G — Approval for the purpose of section 80G cannot be denied simply because the trust is not registered as charitable trust.

Facts:

The assessee was engaged in running of old-age home as a charitable trust and was claiming a deduction u/s.80G. On filing of application for renewal of exemption certificate, the Director of Income-tax (DIT) rejected the application stating that running an old-age home constitutes as business activity. Further the DIT observed that the assessee is not registered as a charitable trust under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowment Act, 1987. He thus held that the trust is not eligible for renewal of exemption certificate.

Held:

Running an organisation purely with the intentions of no profit cannot be termed as trade activity. The nature of activity depends not only on the economies of scale of organisation but also on the motives of organisation. In the given case, the assessee had applied for renewal of exemption certificate required for the purposes of section 80G which as per the Director of Income-tax is against the laws. The assessee contended that the fees charged by them for inmates are nominal fees for the services rendered for the inmates and further stated that these fees only fulfilled a partial amount of expenses which the organisation actually incurred for the inmates. Five members out of seventeen were admitted for free. Thus, there is no profit motive of the assessee, as there was no benefit from the fees charged from the inmates. Also it mentioned that for the year ended 31-3-2007 there was excess of expenditure over income of Rs.60,923 which shows that there is no intention of making profits. The assessee further relied on the decision given by the Nagpur Bench, in the case of Agricultural Produce & Market Committee v. CIT, (2006) 100 ITD 1.

Thus, in the light of the justifications presented by the assessee, it is clear that though it is not registered as a charitable trust, one cannot ignore its intentions and objectives of the organisation. Thus the DIT was directed to accept the application for renewal of approval u/s.80G within three months from the date of receipt of this order.

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Nirav Shah

Section 153A read with section 143 — Non-service of notice u/s.143(2) when a return is filed u/s.153(A), AO cannot make addition and is bound to accept income returned.

(2011) 130 ITD 509 (Agra) Narendra Singh v. ITO-2(3), Gwalior A.Y.: 2001-02. Dated: 30-11-2010

Section 153A read with section 143 — Non-service of notice u/s.143(2) when a return is filed u/s.153(A), AO cannot make addition and is bound to accept income returned.

Facts:

The assessee filed return of income u/s.153A. The Assessing Officer completed the assessment wherein he made certain addition to the assessee’s income. On appeal, the assessee raised an objection that the assessment framed without issuing notice u/s.143(2) was void ab initio. The CIT(A) rejected the assessee’s objection. Aggrieved the assessee made an appeal to the ITAT.

Held:

Section 153(A) states that all other provisions of the act shall apply to the return filed in response to notice issued under this section as if such return is a return required to be furnished u/s.139. It does not provide for any methodology for making assessment. It only states that the AO shall assess or reassess the total income in respect of each assessment year falling within such six assessments. The section creates a legal fiction that all the provisions of the Act so far as they are applicable to return filed u/s.139 shall apply to the return filed u/s.153A. The provisions of both the sections 139 and 153A are under Chapter XIV. The word ‘shall’ makes it mandatory that all the provisions of this Act as are applicable to section 139 will apply to the return filed in response to notice issued u/s.153A.

According to section 143, the AO is permitted to process the return based on the return filed by the assessee. AO shall have no power to make an assessment unless he has issued the notice within the prescribed time.

Thus it was held that in the absence of service of such notice the AO cannot make addition in the income of the assessee and AO is bound to accept the income as returned by the assessee.

levitra

Nirav Shah

Section 271(1)(c), read with section 10(13A) of the Income-tax Act, 1961 — Mere making of a claim, which is not mala fide but which is not sustainable in law by itself does not amount to furnishing of inaccurate particulars regarding income of assessee so as to attract levy of penalty u/s. 271(1)(c).

(2011) 130 ITD 378/9 taxmann.com (Delhi) N. G. Roa v. Dy. CIT, Circle 47(1), New Delhi A.Y.: 2004-05. Dated: 7-4-2010

Section 271(1)(c), read with section 10(13A) of the Income-tax Act, 1961 — Mere making of a claim, which is not mala fide but which is not sustainable in law by itself does not amount to furnishing of inaccurate particulars regarding income of assessee so as to attract levy of penalty u/s. 271(1)(c).

Facts:

The assessee had claimed exemption u/s.10(13A) for two residential accommodations taken on rent. The assessee, in view of CIT v. Justice S. C. Mittal T.C. 32R 593 (Punj. & Har.), was under a belief that he was entitled to exemption with regard to both the residential accommodations held by him. Whereas, the Assessing Officer disallowed the exemption claimed with respect to one property, holding that exemption u/s.10(13A) could be allowed only qua one residential accommodation. Further, the Assessing Officer levied penalty u/s.271(1)(c). On appeal, the Commissioner (Appeals) also confirmed the levy of penalty. Aggrieved, the assessee went for second appeal.

Held:

(1) The factum of the assessee taking two residential accommodations on rent was not disputed. The only issue was whether by claiming exemption with regard thereto, the assessee had rendered himself liable to levy of penalty for furnishing inaccurate particulars of income.

(2) The meaning of word ‘particulars of income’ has been clearly laid down by the Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. As held in this case, there has to be a concealment of the particulars of the income of the assessee; the assessee must have furnished inaccurate particulars of his income; the meaning of the word ‘particulars’ used in the section would embrace the details of the claim made and to attract penalty, the details supplied by the assessee should in his return must not be accurate, not exact or correct, not according to the truth or erroneous. Also it was held that mere making of a claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars regarding the income of the assessee and there is no question of inviting penalty u/s.271(1)(c) for the same.

(3) The instant case of the assessee is squarely covered under the above decision. In the instant case, the assessee had accurately and truthfully disclosed all particulars of the residential accommodations rented and payments made. It was only, as such, a case of difference of opinion where the claim made by the assessee [exemption u/s.10(13A)] relying on earlier relevant decision was viewed differently by the Department. Thus, no concealment penalty was, in such situation, attracted. Thus the appeal of the assessee was to be allowed and penalty levied was to be cancelled.

levitra

Nirav Shah

Section 140A r.w.s. 244A — Whether an assessee is entitled to interest on excess payment of selfassessment tax from date of payment upto the date the refund is actually granted — Held, Yes.

2011) 130 ITD 305
11 ADIT v. Royal Bank of Scotland N.V.
A.Y.: 2007-08. Dated: 3-11-2010

Section 140A r.w.s. 244A — Whether an assessee is entitled to interest on excess payment of self-assessment tax from date of payment upto the date the refund is actually granted — Held, Yes.

Facts:

The assessee was into the business of banking. The return of income filed by the assessee, in the relevant assessment year was processed u/s.143(1) to determine the final income tax liability of Rs.272.93 crore. Against this, the credit of Rs.346.36 crore was allowed which was aggregate of T.D.S, advance tax and self-assessment tax. Accordingly the refund was issued, but as it didn’t include any interest element u/s.140A, the assessee filed an application u/s.154. On appeal the CIT(A) allowed the assessee’s claim.

Held:

The CIT(A) relying on the decision of the Madras High Court in the case of Ashok Leyland Ltd. (2002) (254 ITR 641/125) and Cholamandalam Investment & Finance Co. Ltd. (2008) 166 Taxmann 132, held that computation of interest on excess payment of selfassessment tax has to be paid in terms of section 244A(1)(b) i.e., from the date of payment of such amount up to the date on which refund is actually granted.

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Nirav Shah

Section 40(a)(ia) of the Income-tax Act, 1961 — Provisions of section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax at source.

(2012) 49 SOT 448 (Mumbai)
Dy. CIT v. Chandabhoy & Jassobhoy
A.Y.: 2006-07. Dated: 8-7-2011

Section 40(a)(ia) of the Income-tax Act, 1961 — Provisions of section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax at source.

Accountants, had employed 18 consultants with whom it entered into agreements for a period of two years renewable further at the option of either parties. These consultants were prohibited from taking any private assignments and worked full time with the assessee. During the year, the assessee had paid an amount of Rs.26.75 lac to the said consultants by way of salary after deduction of tax at source u/s.192 and claimed deduction of the same. The Assessing Officer after analysing the agreements entered by the assessee-firm with the said consultants came to a conclusion that there was no employer-employee relationship and that the payment made to the consultants was in the nature of fees for professional services. He, therefore, held that the assessee should have deducted tax at source u/s.194J and, invoking the provisions of section 40(a)(ia), he disallowed the entire payment made to the consultants. The CIT(A) deleted the disallowance made by the Assessing Officer.

The Tribunal confirmed the CIT(A)’s order. The Tribunal noted as under:

(1) There is no dispute with reference to the deduction of tax u/s.192 and also the fact that in the individual assessments of the consultants these payments were accepted as salary payments.

(2) It is also not the case that the assessee has not deducted any tax.

(3) The assessee had indeed deducted tax u/s.192 and so the provisions of section 40(a)(ia) also do not apply since the said provisions can be invoked only in the event of non-deduction of tax at source, but not for lesser deduction of tax.

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Nirav Shah

Section 12AA of the Income-tax Act, 1961 — When assessee had not carried out any activity other than running school or hostel and all properties owned by it were held in trust for purpose of carrying on charitable activities, there was nothing unlawful in assessee acquiring assets and buildings and registration u/s.12AA could not be denied to it.

(2012) 49 SOT 242 (Chennai)
Anjuman-e-Khyrkhah-e-Aam v. DIT (e)
Dated: 18-7-2011

The assessee-trust was running a school with hostel facilities. Its application for grant of registration u/s.12AA was rejected on the ground that the activities carried on by it were not charitable in nature. The Tribunal allowed the appeal of the assessee and directed the authority to grant registration u/s.12AA. This order was challenged before the High Court which remitted the matter back to the DIT(E) for fresh disposal. The DIT(E) considered the issue again and finally reached at a conclusion that the assessee was not eligible for getting registration u/s.12AA on the ground that the main activity of the assessee was to accumulate huge investments in purchase of assets and earn rental income from those assets without engaging itself in any charitable activities.

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

(1) It was true that the assessee-trust had been established since more than 100 years and it was running the school with hostel facilities attached to it.

(2) Amounts collected by the assessee-trust had been used for the purpose of running the school and hostel and also in constructing buildings. A major portion of the outgoings of the assessee-trust had been towards construction of buildings.

(3) If the object of the assessee-trust was to run educational institution and the assessee had been carrying on that activity alone, the construction of buildings and purchase of property could not be treated as a point against the assessee. The assessee might be purchasing properties and constructing buildings for the purpose of letting out to earn income necessary for carrying on the charitable activity in the nature of running the school and hostel.

(4) All the properties owned by the assessee-trust were held in trust for the purpose of carrying on charitable activities. There was nothing unlawful in the assessee acquiring assets and buildings.

(5) If the entire activities carried on by the assessee were charitable in nature, the expenses incurred for construction of buildings and purchase of assets also qualified to be considered as application of funds for charitable purposes.

levitra

Nirav Shah

Income of foreign company from satellite navigation and transponder capacity lease not royalty for equipment hire

New Page 1

Part C — International Tax Decisions

5 ISRO Satellite Centre, In re

(2008) 220 CTR 13 (AAR)

S. 9(1)(vi), S. 90 of IT Act;

Article 13 of India-UK DTAA

Dated : 22-10-2008

Issue :

Income of a foreign company towards satellite navigation and
transponder capacity lease is not royalty for equipment hire.

Facts :

ISRO, the applicant, a part of the Department of Space,
Government of India, jointly with Airport Authority of India, was implementing
GAGAN Project (a satellite-based augmentation system) to provide seamless
navigation and tracking facility for civil aviation in India. For this purpose,
it entered into a contract with M/s. Inmarsat Global Ltd., UK (‘IGL’) for
availing of ‘Navigation Transponder Capacity’ for its GAGAN project.

As per the contract, the applicant had taken on lease the
space segment capacity which was utilised through data commands sent from the
ground station set-up by the applicant in India. The transponders for navigation
purposes were meant to dispatch satellite-based augmentation system signals in
space on specified frequencies which were accessed for GAGAN project. The
corrected or augmented data sent from the land station, and transmitted by the
said transponder over the footprint area of the satellite was to be used for
better tracking of planes. The applicant paid a fixed annual charge to IGL,
regardless of the actual use of the transponder capacity.

The issue before the AAR was whether the payment by ISRO to
IGL was royalty having regard to the provisions of the IT Act and the India-UK
DTAA, so as to be subject to tax withholding obligation u/s.195 of the IT Act.

The applicant submitted that the access to navigation
transponder did not amount to use of equipment as the applicant was not able to
operate or control the satellite or transponder. The applicant contended that
even if it was assumed that there was use of equipment, such use was not within
the Indian territory, but it was in space. The amount represented business
income and as there was no permanent establishment of IGL in India, the payment
was not exigible to tax in India.

The Revenue authorities contended that the exclusive capacity
of specific transponder was kept entirely at the applicant’s disposal. The
Revenue also contended that the transponder was under control of the applicant
and can be regarded as operated by applicant, as the transponder was responding
to the directions sent through the ground station of the applicant. Such
directions were held to be akin to operation of TV by remote control. The amount
was therefore claimed to be chargeable as royalty income.

Held :

The AAR accepted the applicant’s claim that the payment was
not royalty for equipment user. It held :

(i) Mere earmarking a space segment capacity of the
transponder for use by the applicant did not enable the applicant to get
possession (actual or constructive) or control of the equipment of IGL.

(ii) The applicant did not use or operate any equipment of
IGL.

(iii) The expression ‘use of space segment’ of transponder
had no reference to any operations performed by the applicant by means of the
transponder capacity.

(iv) The substance of the contract was the ‘facility’
provided to the applicant for the utilisation of space segment capacity of the
transponder for transmitting the augmented data by availing use of
bandwidth/connectivity capacity provided by IGL by using equipment. Such
facility was provided by IGL to the applicant and other customers also.

(v) The analogy of TV operations by means of a remote
control was inappropriate, since the ground station was an independent unit
and not an accessory to the satellite.

(vi) The recent ruling of the AAR in the case of Dell
International Services (P) Ltd., (2008) 218 ITR 209 was relied upon to support
that there was availment of standard service provided by the service provider.

(vii) Even though IGL was alleged to have its regional
office in India, no part of the receipts from the applicant could be said to
be attributable to any PE in India and hence, they were not exigible to tax in
India.

levitra

Nirav Shah

Income of foreign company from golf tournaments on remote basis by hiring independent contractors not taxable in India

New Page 1

Part C — International Tax Decisions

4 Golf in Dubai, LLC v. ADIT, In re

(2008) 306 ITR 374 (AAR)

Articles 5 & 7 of India-UAE DTAA

Dated : 13-10-2008

Issue :

Income of a foreign company from organising golf tournaments
on remote basis by hiring independent experienced local contractors is not
taxable in India.

Facts :

The applicant was a company registered in the UAE having its
registered office in Dubai. The applicant was an event organiser and had
affiliations with the European Professional Golf Association. It was engaged in
the business of promoting golf nationally as well as internationally by way of
organising golf tournaments in different countries.

The applicant organised two golf tournaments in India at
Eagleton in Bangalore and at Delhi Golf Club (‘DGC’) in Delhi. The applicant was
granted the right to use the premises to host the events at Bangalore and Delhi
against payment of a consideration. The tournaments were organised by hiring
independent third-party local contractors and service providers.

The applicant received sponsorship fees, management fees and
income from sale of merchandise at the venue and over the Internet.

The issues before the AAR were :

(1) Whether the applicant was having a Permanent
Establishment (‘PE’) in India in terms of Article 5 of India-UAE DTAA ?

(2) Whether Eagleton or DGC could be deemed to be agency PE
of the applicant in India, since the tournaments were held at grounds of each
of these clubs and/or they were providing assistance to the applicant in
organising the golf tournaments ?

(3) If PE is held to have triggered the extent to which
various streams of events-related receipts can be attributed for taxation in
India ?

(4) Lastly, could there be taxation even in absence of PE
trigger either as fees for technical services or otherwise ?

It was the claim of the applicant that there were no tax
implications in India on the following counts :

(a) ‘Fixed place of business’ for PE trigger connotes a
specific geographic location of the enterprise where activities at that
location must endure for more than a temporary period. Since the tournament
lasted only for six to seven days, the requirements of Article 5(1) of the
India-UAE DTAA were not satisfied for emergence of base Rule PE as the
requisite degree of permanence was lacking. The applicant’s business of
organising golf was neither carried on regularly, nor was there certainty that
it will be carried on regularly.

(b) The applicant relied on OECD Commentary to support that
the place of business for PE emergence must be fixed i.e., it must be
established at a distinct place with a certain degree of permanence. In the
present case, the mere access to the place was not sufficient to hold that the
‘place’ was ‘fixed’ and was at the ‘disposal of the applicant’.

(c) There was no service PE as the applicant’s employees or
other personnel had not stayed in India for furnishing services for the
threshold period of 9 months as prescribed in the treaty.

(d) There was no Agency PE as the various third party
vendors with whom the applicant had entered into arrangements for organising
the tournaments were independent contractors who acted in their ordinary
course of business operations.

(e) The sponsorship fees and the management fees were not
‘royalty’, as such fees were not received as consideration for the use of or
right to use any patent, secret formula or information concerning any
industrial or commercial experience. The India-UAE DTAA does not have any
specific Article dealing with FTS and hence there can be no taxation even
assuming receipts are held to be FTS.

The Revenue authorities contended that :

(a) The applicant had a PE in India as it had a ‘fixed
place of business’ at its disposal. Reliance was placed on OECD Commentary to
the effect that if an enterprise has a certain amount of space at its
disposal, which is used for the business activities, it is sufficient to
constitute a place of business even in absence of formal legal right to own
the place. The commentary by Klaus Vogel on Double Taxation Convention was
also referred to contend that regularly maintaining the same pitch in a market
place for weekly market would be enough to constitute a ‘fixed place of
business’.

(b) The service provider with whom the applicant had
entered into agreements, had provided the services for organising the events
and therefore could be regarded as agents of the applicant, thus constituting
an Agency PE for the applicant in India.

(c) The service PE threshold was crossed if the initial
visit of the Vice-Chairman of the applicant-company prior to the organisation
of events was taken into account.

Held :

The AAR ruled as follows :

(i) By organising and conducting golf tournaments at Delhi
and Bangalore for a week’s duration without repetition thereof, did not result
in the applicant carrying on business through a fixed place in India. The
essential ingredients of regularity, continuity and repetitiveness as conveyed
by the word ‘carried on’ were absent. Accordingly, no fixed place PE existed
for the applicant in India.

(ii) As regards the Agency PE, the AAR held that the
independent contractors or third-party vendors were acting in the ordinary
course of their business and were not devoted wholly or almost wholly on
behalf of the applicant in India. The activities of the third-party
contractors were not carried out wholly on behalf of the applicant. Hence,
there was no Agency PE of the applicant in India.

(iii) The service PE did not emerge in absence of ‘furnishing of services’ by a foreign enterprise. The concept of ‘furnishing of services’ is a bilateral concept which necessitates the existence of at least two parties i.e., a provider of services and a recipient of services. The presence of employees for enterprise’s own activities does not trigger service PE.

(iv) Though the event management fees received by the applicant could be brought to tax within the purview of FTS, in absence of specific provision in India-UAE DTAA dealing with FTS, the same could not be taxed. The management fees could not be brought to tax under the residual Article 22 dealing with ‘other income’.

Nirav Shah

On facts, matter remanded to tax officer to determine place of effective management of the company incorporated in Mauritius.

New Page 2

Part C : Tribunal & AAR International Tax Decisions

19 2010 TII 66 ITAT-Del. Intl.

SMR Investment Limited v. DDIT

Article 13 of India-Mauritius DTAA

Dated : 26-3-2010

On facts, matter remanded to tax officer to determine place
of effective management of the company incorporated in Mauritius.

Facts :

The taxpayer, a company in Mauritius (Mauco), earned certain
capital gain on sale of shares of Indian Company. Such gain was claimed exempt
in terms of Article 13(4) of India-Mauritius Treaty.

The tax officer of Mauco called for certain information about
investment decisions, board meetings, etc. The AO also examined and recorded
statement of the director of the share-broking company in India through which
Mauco had purchased and sold shares. Based on such statement, the AO noted that
the decision for purchase and sale of shares was conveyed to the share-broking
firm by one Mr. SR who held 99% shares of Mauco and was also one of the 3
directors of Mauco. The AO therefore asked for copy of passport of Mr. SR as
also the details of board meetings and resolutions passed by Mauco. The AO
denied the benefit of the treaty to Mauco by holding that :

(i) Copy of passport of Mr. SR was not made available
despite specific request to that effect;

(ii) In absence of evidence as to where Mr. SR was when
the investment decisions were made, it could be concluded that effective
management of Mauco was in India.

The AO accordingly held Mauco to be resident of India and
assessed Mauco in respect of capital gains income.

Held :

The Tribunal noted decision of the co-ordinate Bench in case
of Radharani Holdings Private Limited (2007) 110 TTJ 920 (Delhi). In that case,
the Company was held to be resident of Singapore as all the board meetings were
held in Singapore and this was substantiated by the residency certificate
obtained from Singapore Government in addition to furnishing minutes of the
board of directors duly authenticated by the Indian Commission in Singapore. The
Tax Department sought to distinguish applicability of the ruling on the ground
that no such evidence was furnished by Mauco. As against that, the taxpayer was
seeking to place reliance on details of board meetings, presence of other
directors at such board meetings, etc. It was also contended that onus of
proving that control and management of Mauco is not situated in Mauritius is on
the Tax Department.

The ITAT restored the matter to the AO for deciding the issue
afresh/de novo. The Tribunal directed the AO to consider all the documents and
examine the authenticity thereof with regard to claim of board meetings held in
Mauritius. The ITAT observed that :

“After considering all the documents which were either placed
before the lower authorities or before the Bench for the first time, we find
that it is very essential to once again examine the authenticity of the same and
their relevance with regard to board meetings held in Mauritius. For this
purpose, either third party evidence or evidence by any government agency either
situated in Mauritius or in India is required to be brought on record to
substantiate the assessee’s claim. In the interest of justice and fair play, we
restore both the appeals to the file of the AO for deciding the same afresh/de
novo in terms of our observations contained hereinabove.”

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Nirav Shah

S. 80HHC and S. 80IA — Deduction allowed u/s.80IA need not be reduced from the profits of the business in computing deduction u/s.80HHC

New Page 1

8 J. B. Chemicals & Pharmaceuticals Ltd.
v. ACIT

ITAT ‘B’ Bench, Mumbai

Before S. V. Malhotra (AM) and

R. S. Padvekar (JM)

ITA No. 6044/Mum./2002

A.Y. : 1999-2000. Decided on : 30-7-2008

Counsel for assessee/revenue : D. R. Rayani/

Mohit Jain

S. 80HHC and S. 80IA of the Income-tax Act, 1961 — Whether
deduction allowed u/s.80IA is to be reduced from the profits of the business in
computing deduction u/s.80HHC — Held, No.

Per S. V. Malhotra :

Facts :

The issue before the Tribunal was whether the deduction
u/s.80HHC(1) and S. 80IA can be independently allowed subject to the overall
ceiling of 100% of profit of the undertaking. According to the AO, in view of
Ss.(9) of S. 80IA, when the assessee had claimed deduction u/s.80IA, then the
deduction u/s.80HHC was not allowable in respect of that portion of income on
which deduction u/s.80IA had been claimed. In the case of the assessee, since
the business profit after reducing eligible profit u/s.80IA worked out negative,
he disallowed the deduction u/s.80HHC.

On appeal, the CIT(A) directed the AO to independently
compute the deduction u/s.80IA and u/s.80 HHC and restrict the profits and gains
to be excluded from business profit for the purpose of S. 80 HHC only to the
extent of amount allowed as deduction u/s.80IA.

Held :

The Tribunal took note of the following and allowed the
appeal filed by the assessee :

(i) In the assessee’s own case for the A.Y. 1999-2000, the
Tribunal relying on the decision of the Mumbai Tribunal in the case of Ifunik
Pharma Ltd. had rejected the appeal filed by the Revenue and the appeal filed
by the assessee was allowed.

(ii) In the case of V. Chinnapandi, the Madras High Court,
relying on the decision of the M. P. High Court in the case of J. P. Tobacco
Products Pvt. Ltd. (SLP filed against which by the Revenue was dismissed by
the Apex Court), had taken the view that both the Sections were independent,
and hence, the deductions could be claimed u/s.80HHC as well u/s.80I on the
gross total income;

(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

S. 158BE — Limitation period cannot get extended by issuing prohibitory order u/s.132(3).

New Page 1

7 Nandlal M. Gandhi v. ACIT

ITAT ‘E’ Bench, Mumbai

Before G. D. Agrawal (VP)

as Third Member

IT(SS)A No. 11 (Mum.) of 2000

A.Ys. : 1-4-1987 to 28-7-1997. Decided on : 16-6-2008.

Counsel for assessee/revenue : K. Shivaram & Ajay Singh/Rajiv
Nabar

S. 158BE of the Act, 1961 — Time limit for completion of
block assessment — On the day of search (i) panchnama prepared with the remark
that ‘search temporarily concluded for the day to be commenced subsequently’;
and (ii) prohibitory order u/s.132(3) issued — After a period, prohibitory order
revoked and panchnama prepared with the remark ‘search is finally concluded’ —
Whether the period of limitation is to be computed from the date search was
originally initiated or from the later date of panchnama — Held that the period
of limitation is to be computed from the former date.

Facts :

The search u/s.132 was carried out on 28-7-1997 and continued
till 29-7-1997. During the search certain incriminating materials which,
inter alia, included jewellery and shares were found. The search party
prepared an inventory in respect of the material found and a panchnama was
drawn. As per the panchnama, only books of accounts and certain documents were
seized and no seizure was effected in respect of other materials found,
including those of jewellery and shares. In the panchnama it was stated that
search was temporarily concluded for the day to be commenced subsequently.
However, on the same day i.e., 29-7-1997, a prohibitory order was issued
u/s.132(3) in respect of jewellery and shares, which was subsequently revoked on
1-8-1997 and 8-9-1997 in respect of jewellery and shares, respectively. On
8-9-1997, another panchnama was prepared, wherein it was stated that ‘search is
finally concluded’, and no other comments/remarks were recorded therein. During
the period 29-7-1997 to 8-9-1997, certain statements were recorded by the I.T.
authorities.

In response to notice u/s.158BC, the assessee filed his block
return of income declaring undisclosed income of Rs.16.35 lacs which was
assessed by the AO in his order dated 30-9-1999 at Rs.55.69 lacs. Being
aggrieved the assessee challenged the order passed by the AO, on the grounds,
amongst others, that u/s.158BE, the order passed by the AO was beyond the
stipulated period of 2 years from the end of the month in which the warrant of
authorisation of search was executed. However, the CIT(A) did not agree with the
contention of the assessee and upheld the addition made by the AO.

The assessee appealed before the Tribunal. There was a
difference of opinion between the two members, in relation to the assessee’s
ground relating to time limit prescribed u/s.158BE for completion of block
assessment u/s.158BC. Therefore, the matter was referred u/s.255(4) to the Third
Member.

Before the Third Member, the Revenue contended that the
second panchnama drawn on 8-9-1997 was in continuation of the first panchnama
dated 29-7-1997 and therefore, it should be taken that the first panchnama dated
29-7-1997 was finally concluded on 8-9-1997. According to it, the search had
been completed on the date when the prohibitory order u/s.132(3) was revoked,
which in this case was 8-9-1997. It was further submitted that between the
period of first panchnama dated 29-7-1997 and second panchnama dated 8-9-1997,
statements u/s. 132(4)/131 on five different occasions were recorded and after
considering the statements recorded, the authorised officer considered it
appropriate to lift the prohibitory order. Therefore, it was contended that the
search got concluded on 8-9-1997 when finally the prohibitory order u/s.132(3)
was revoked.

Held :

The Tribunal noted that the Department was seeking extension
of time limit for framing the assessment on the strength of prohibitory order
issued u/s.132(3) on 29-7-1997, which was finally revoked on 8-9-1997 and the
panchnama was prepared stating that the search was finally concluded.

Nirav Shah

(2013) 92 DTR 345 (Rajkot)(SB) Bharti Auto Products vs. CIT A.Ys.: 2009-10 & 2010-11 Dated: 06.09.2013

Section 206C: A seller of scrap is liable for collection of tax at source irrespective of the fact that such a seller has not himself generated scrap from manufacture or mechanical working of materials undertaken by him. The mode of sale of scrap need not be necessarily akin to the auction or tender for this purpose but it can be any mode.

Section 206C(6A): First proviso inserted by the Finance Act, 2013 with effect from 01-07-2012, would apply retrospectively.

Facts:
The assessee imported brass scrap and sold it without collecting tax at source. The assessee’s case was that the brass scrap sold by him was not generated from the manufacture or mechanical working of material and therefore, it was not ‘scrap’ within the meaning of Explanation (b) to section 206C. According to him, the provisions of section 206C would be attracted only when scrap was sold to a “buyer”, which is defined as a person who obtains in any sale, by way of auction, tender or any other mode, goods of specified nature. It was submitted that sale of goods by an assessee to a buyer in retail sale of such goods cannot therefore be construed as sale to a buyer as such sale was not by way of auction or tender or any other like mode and therefore such transactions in retail sale between the assessee and his buyer would clearly be outside the scope of section 206C.

The Assessing Officer rejected the assessee’s explanation. He held that since the assessee had failed to collect the tax at source as required by section 206C(6) on the sale of scrap made by him to various dealers, he was liable to pay it u/s. 206C(6) alongwith interest u/s. 206C(7).

Held:
The isues in this case are
a) Is it necessary that the scrap should have been generated by the assessee himself from the manufacture or mechanical working of material undertaken by him in order to apply the provisions of section 206C?

Explanation (b) to section 206C defines ‘scrap’ as ‘waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons’. It is evident that the word ‘scrap’ occurs twice in the said definition. The first part of the definition, namely, ‘waste and scrap from the manufacture or mechanical working of materials’ seeks to cover both ‘waste’ as well as ‘scrap from the manufacture or mechanical working of materials’. In the absence of any definition of the term ‘waste’ in the Act, one has to turn to its meaning as it is understood in common parlance. In common parlance, ‘waste’ is understood as something unusable or unwanted material. According to the Concise Oxford Dictionary, ‘waste’ is something which has been ‘eliminated or discarded as no longer useful or required’. ‘Scrap’, on the other hand, represents something which is left over after the greater part has been used or consumed. ‘Scrap’ thus refers to the incidental residue derived from certain types of manufacture, which is recoverable without further processing. It is in this context that the words ‘from the manufacture or mechanical working of materials’ qualify the preceding word ‘scrap’ and not ‘waste’. The definition of ‘scrap’ as given in Explanation (b) is not limited to scrap fromthe manufacture or mechanical working of materials alone but extends to cover ‘waste’ also. Therefore, the scope of the term ‘scrap’ as defined in Explanation (b) cannot be interpreted so as to restrict its application to scrap from the manufacture or mechanical working of materials alone.

The word ‘and’ in the expression ‘waste and scrap from the manufacture or mechanical working of materials’ has been used to enlarge the scope of ‘scrap’, so as to cover both, i.e., waste as well as scrap from the manufacture or mechanical working of materials.

Section 206C seeks to prevent evasion of taxes. It therefore, needs to be construed in a manner that seeks to achieve the purpose for which it has been enacted.

Further, the use of the words ‘business of trading’ in the head note of section 206C makes it clear that the applicability of section 206C is not restricted to sale of scrap generated from the business of manufacturing undertaken by the assessee himself but covers sale of scrap in the business of trading in scrap also.

b) Should the mode of sale of scrap be akin to auction or tender in order to fall in the definition of “buyer” u/s. 206C?

It was submitted that the provisions of section 206C require a seller to collect the tax at source from the buyer (and from none else) on sale, inter alia, of scrap. Attention was drawn to the definition of ‘buyer’ as given in sub-clause(i) of clause (aa) of Explanation to section 206C, which defines a ‘buyer’ as ‘a person who obtains in any sale, by way of auction, tender, or any other mode, goods of the nature specified in the Table in sub-s. (1) ……’.

Placing reliance on the interpretative tools of noscitur a sociis and ejusdem generis, it was contended that the phrase ‘any other mode’ in the expression ‘a person who obtains in any sale, by way of auction, tender or any other mode …..’ in Explanation (aa)(i) would get its meaning from the words preceding it, namely, ‘by way of auction, tender’ and, therefore, the said phrase, namely, ‘any other mode’ would have to be construed narrowly and in the same sense as something akin to auction or tender.

It was contended that the assessee has sold the scrap in retail trade and not by way of auction or tender or any similar mode or mode akin to auction or tender and, therefore, it was not required to collect tax at source from them u/s. 206C as such purchasers in retail trade were not buyers within the meaning of Explanation (aa)(i) to section 206C.

The principles of ‘noscitur a sociis’ and ‘ejusdem generis’ apply only when meaning of questionable or doubtful words or phrases in a statute is required to be ascertained. If a given provision is plain and unambiguous and the legislative intent is clear, there is no occasion to call in aid those rules.

The use of the word ‘or’ in the aforesaid expression shows that all the three phrases (namely, auction, tender or any other mode) are intended to carry independent meaning without being controlled by each other. The words “any other mode” are words of wide amplitude and, therefore, cover all possible modes of sales in addition to specific modes of sales by way of auction or tender. Hence, they cannot be construed ejusdem generis or as referring to similar sales as those by way of auction or tender.

c) Does the first proviso to section 206C(6A) apply retrospectively?

The attention of Tribunal was also drawn to the first proviso inserted in section 206C(6A) with effect from 01-07-2012 which stipulates that the payer who fails to deduct tax on the payment made to payee shall not be deemed to be an assessee in default if the payee has paid the tax due on his returned income and fulfilled the other conditions specified therein.

In the aforesaid background, the issue that arises for consideration is whether the first proviso to section 206C(6A) is applicable to pending matters also notwithstanding the fact that it has been made effective from 01-07-2012.

Keeping in view the fact that the first proviso to s/s. (6A) of section 206C not only seeks to rationalise the provisions relating to collection of tax at source but is also beneficial in nature in that it seeks to provide relief to the collectors of tax at source from the consequences flowing from non/short collection of tax at source after ensuring that the interest of the revenue is well protected, thus, there is no hesitation to hold that the said proviso would apply retrospectively and, therefore, to both the assessment years under appeal.

Nirav Shah

(2013) 144 ITD 325 (Hyderabad) Vittal Krishna Conjeevaram vs. ITO A.Y. 2009-2010 Dated: 10th July, 2013

Section 54F, read with section 54 – Capital Gains– The expression ‘a residential house’ appearing in sections 54 and 54F has to be understood in the sense that building should be of a residential nature and word ‘a’ should not be understood to indicate a singular number.

Facts:-
The assessee was a co-owner of a residential property. The assessee entered into a development agreement for construction of flats with a developer. As per development agreement the owner had to transfer 50 % of his land for superstructure received as consideration. The assessee received 7 flats towards his share. The Ld AO held that the assessee was entitled to exemption u/s. 54F but only in respect of one flat out of seven flats. CIT (A) also upheld the order of AO.

Held:-
Both the sections, 54 and 54F, speak of either purchase or construction of “a residential house”. Following the decision of the Hon’ble Karnataka High Court in case of. CIT v. Smt. K.G. Rukmini Amma [2011] 331 ITR 211, the Tribunal held that the expression “a residential house” as appears in section 54 of the Act, cannot be interpreted in a manner to suggest that the exemption would be restricted to a single residential unit. “A residential house” as mentioned in section 54(1) of the Act, has to be understood in a sense that the building should be of a residential nature and the word “a” should not be understood to indicate a singular number. Assessee was entitled to exemption u/s. 54F in respect of all the seven flates.

Note:
As the decision of Special Bench, Mumbai in case of ITO vs. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB) has been disapproved by the High Court in case of CIT vs. Syed Ali Adil. [2013] 352 ITR 418, the same was not considered to be a good law and hence not followed. CIT vs. D. Anand Basappa [2009] 309 ITR 329/180 Taxman 4 (Kar.) followed CIT vs. Syed Ali Adil [2013] 352 ITR 418/215 Taxman 283/33 taxmann. com 212 (AP) followed

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Nirav Shah

[2013] 144 ITD 461 (Hyd) S. Ranjith Reddy vs. DCIT AY : 2006-07 Date of order : June 07, 2013

Section 2(47) – joint development agreement – mere signing of agreement without any other performance cannot be termed as transfer for the purpose of capital gains.

Facts :
The assessee had received certain land from his late father. He, alongwith other family members entered into joint development agreement (joint venture) on 28-02-2006 with L constructions which itself held land in the same area. As per the agreement the assessee was to receive developed plots (i.e. constructed properties) in lieu thereof. The assessing officer, relying on the decisions of Chaturbhuj Dwarkadas Kapadia [2003] 260 ITR 491 (Bom.) held that there was a transfer of land on 28-02-2006 itself.

Held:
The Hon’ble tribunal held as under: The joint venture project was in a nascent stage. In the concerned previous year, nothing happened other than the execution of the agreement. The transfer of an immovable property always contemplates transfer of an existing property, i.e., a property in praesenti. . As far as the assessee is concerned, there was only an agreement. The proposed project was still to be born as the offshoot of the assessee.

The assessee was not transferring any right or any property to ‘L’. The assessee assigned its landed property in favour of ‘L’ by the joint venture agreement between the assessee and ‘L’. There cannot be a sale to oneself. Nothing was exchanged in the previous year relevant to the assessment year under appeal. No rights are relinquished. It only proposes to redefine the rights.

The assessing officer has concluded that providing land for the purpose of development is a transfer. The consent given by the assessee to provide its land for developing the housing project is only one of the necessary stipulations of the whole scheme. It cannot be broken into an independent segment so as to conclude the same as transfer. The provision of land to facilitate the implementation of the joint venture is always to be read with other equally important stipulations.

Even though the agreement entered into is an enforceable one, that by itself does not take the character of an immovable property. The agreement speaks about the intentions of the parties. Once the project is completed and all the stipulations are satisfied, the parties may come to declare the final satisfaction of the agreements. Only at that point of time, the question really arises as to whether there was any transfer within the meaning of section 2(47). The housing project was a proposed project. As already stated, a transfer is contemplated only in the case of an existing property. In the present case the property was only in the nature of mutual rights. The project and development are yet to happen. Strictly, speaking, the projects and plans may happen or may not happen.

As far as applicability of section 53A of the Transfer of Property Act is concerned, it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract.

It is clear that willingness to perform for the purposes of section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. It is only elementary that, unless provisions of section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer u/s. 2(47)(v).

Both the developer and the assessee were having the landed property. They pooled together the landed property along with some other parties who were owners of some other landed property and all parties together gave licence to the builder to enter the premises and construct houses. No sale was effected on the date of agreement. No consideration has passed between the parties on signing theagreement. Further from the date of signing of development agreement dated 28-02-2006 to 31-03- 2006, no progress has taken place in the said landed property which is subject-matter of the development agreement. Further, there was no consideration in the form of money that passed between the parties. There was no construction, whatsoever, that took place during the period. Even otherwise, there was a General Power of Attorney given by the assessee to the developer. In such a situation, it is only the actual performance of transferee’s obligation which can give rise to the situation envisaged in section 53A of the TP Act. On these facts, it is not possible to hold that the developer performed its obligation during the period in which the capital is sought to be taxed by the Revenue authorities. Thus, the condition laid down u/s. 53A of TP Act was not satisfied during the period. Once it is concluded that the developer did not perform the stipulation as required by the development agreement during the period under consideration and within the meaning assigned to the expression in section 53A of TP Act it cannot be said that there was a transfer u/s. 2(47)(v) so as to levy capital gain tax.

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Nirav Shah

[2013] 144 ITD 76 (Mum) Mattel Toys (I) (P) Ltd. vs. Dy. CIT, Mumbai A.Y. 2002-2003 Order dated- 12.06.2013

Section 92C – Transfer Pricing
(i) Resale price method is an appropriate method in case where resale takes place without any value addition to product – where the assessee had followed Transactional Net Margin method but later on during the assessment proceedings claimed that Resale Price Method be followed, the same should be considered.

(ii) An internal comparable can be followed for computation of ALP against external comparable where the assessee sends goods back to its associated enterprise (AE) to get a best available price in comparison to the sale made to a third party.

Facts I:
The assessee-company, a subsidiary of a U.S.A. company being its Associated Enterprise (‘AE’), was engaged in marketing and selling of toys and games imported from its AE. The assessee adopted Transactional Net Margin Method (TNMM) in its transfer pricing report and rejected the Resale Price Method (RPM). Further, the assessee claimed that RPM should be followed instead of TNMM which was rejected by the Commissioner as detailed analysis was given in the TP study report as to why RPM was not taken.

Held I:
The assessee is a distributor of toys and resells the same to independent parties without any value addition. In such situation, RPM can be the best method as there is no much alteration to the products which are resold by the assessee. On the other hand, TNMM can be resorted to only if the other methods have been rendered inapplicable. The revenue contended that once the assessee has chosen a method as appropriate then it should not resort to any other method at an assessment or appellate stage. If a particular method will not result in proper determination of the ALP then it will not serve the purpose of transfer pricing. Therefore, it was held that if at any stage of the proceedings, it is found that another method will result in more appropriate ALP then the assessment officers and the appellate Courts cannot reject the plea of the assessee.

Facts II:
The assessee resells the goods which are imported from the associated enterprise. The assessee in this case has sent the goods back to the associated enterprise. These goods were the unsold ones. The assessee preferred to return the goods to the AE as there was no demand for the product due to change in consumer preferences. The Transfer Pricing officer treated these goods as export to the AE.

Held II:
The assessee returned the goods to the assessee due to a negative trend in the market. It was stated that the assessee had suffered a greater loss while making sale in case of third party in comparison to the sale made to the AE. Thus, the margin of export sale to third party i.e internal comparable should be compared to the export sale made to the AE. Therefore, the issue was remanded to the file of the Transfer Pricing Officer for the purpose of carrying out comparability analysis under internal CUP.

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Nirav Shah

2013-TIOL-955-ITAT-PANAJI ACIT vs. Joe Marcelinho Mathias ITA No. 43/PNJ/2013 Assessment Years: 2009-10. Date of Order: 26.04.2013

S/s. 45, 47(xiv) – In a case where an assessee transfers all its assets and liabilities to a private limited company and all conditions of section 47(xiv) are satisfied, AO cannot deny exemption on the ground that sale consideration was higher than the book value.

Facts:
The assessee, an individual, was carrying on business of real estate, as a sole proprietor, by acquiring land, developing the same by sub-dividing the same into plots and selling the said plots. The land was held as stock-in-trade. The net worth of the concern, as per audit report u/s. 50B(3) was Rs. 1.62 crore. On 31-03-2009, vide Deed of Succession, all the assets and liabilities of the proprietory concern were transferred to a private limited company for a consideration of Rs. 963 crore against acquisition of shares of a company at a high premium. The assessee contended that the transfer was covered by section 47(xiv) and therefore, the provisions of section 45 were not attracted.

The Assessing Officer (AO) was of the view that section 47(xiv) does not exempt capital gains if the assets are transferred at a value which is higher than the book value. He held that receipt of additional consideration by way of allotment of shares over and above the proprietor’s capital was in violation of conditions laid down in section 47(xiv). He held that since the assessee got additional income/benefit than what was due as per books of accounts this amounted to receiving any direct or indirect benefit other than by way of allotment of shares and therefore the assessee is not entitled to exemption. The AO taxed the capital gains and denied the benefit of section 47(xiv).

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held :
The assessee has disposed off the industrial undertaking to a private limited company and in exchange thereof, the assessee has received consideration by way of shares in the company. Therefore, this is a clear cut case of a transfer of an undertaking to a private limited company. Section 45 is applicable when there is a profit or gain arising from the transfer. Profit and gains will also include losses. The undertaking has been valued by the assessee more than the net worth, therefore, there is profit and gain and the provision of section 45 was clearly applicable in the case of the assessee. Once a capital gain arises and is chargeable to tax u/s. 45, section 47 provides for certain exceptions according to which certain transactions are not regarded to be transfer.

The only objection on the part of the revenue is that the assessee did not comply with the condition no. 3 of section 47(xiv) since assessee has received consideration by way of allotment of shares in the company and the value of those shares are more than the value of the assets as was disclosed in the books of the proprietory concern. In our opinion, the assessee has duly complied with the condition as stipulated in clause (c) to section 47(xiv). This proviso only requires that same proprietor does not receive any consideration or benefit directly or indirectly in any form or manner other than way of allotment of shares in the company. The words form or manner other than by way of allotment of shares in the company qualify the words `does not receive any consideration or benefit’ as well as `directly or indirectly’. This clearly denotes that proviso (c) permits receiving consideration or benefit directly or indirectly by way of allotment of shares in the company. It is not a case where the assessee has received any other consideration or benefit other than the allotment of shares in the company.

The Tribunal held that receipt of higher value of shares because of revaluation of assets at the time of succession cannot be treated as consideration or benefit received other than by way of allotment of shares. The Tribunal confirmed the order of CIT(A).

This ground of appeal of revenue was dismissed.

levitra

Nirav Shah

2013-TIOL-941-ITAT-DEL Rachna Gupta vs. ITO ITA No. 5527/Del/2012 Assessment Years: 2003-04. Date of Order: 05.07.2013

S/s. 147, 148 – Reassessment cannot be done on the basis of a notice issued at the address mentioned as per PAN data when the new address was available in returns of income filed.

Facts :
On 30-03-2010 the Assessing Officer (AO), with the prior approval of the Additional CIT, issued a notice u/s. 148 requiring the assessee to file return of income for AY 2003-04. The notice was issued at an address taken from PAN data. The address given in the PAN data was address of the employer of the assessee where she was then working. Subsequently, the said employer company had shifted its address and the change in address was intimated to ROC as well. In the return of income filed for AY 2003-04, 2004-05 and 2005-06 (all filed before 30.3.2010) the assessee had stated her new address.

The assessee failed to comply with this notice and no return was filed. Thereafter, AO issued notices u/s. 142(1) on 09-06-2010, 06-08-2010 and 14-09-2010. The assessee claimed that it received first notice on 14-09- 2010. In response, the assessee filed a letter dated 22-09-2010 enclosing acknowledgement of Saral form and further stated that the assessee was not holding the relevant record for the assessment year and also that the initiation of the proceedings after lapse of six years was unjustified.

The AO was of the view that the provisions of the Act require issue of notice within a period of six years and not service thereof. The notice was issued within six years from the end of the assessment year. The AO completed the assessment by making an addition of Rs. 6,15,000.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :
The Tribunal noted that it is not disputed by the Department that notice dated 30-03-2010 u/s. 148 was issued at BE-63, Hari Nagar, New Delhi address. From the copy of returns filed for assessment years 2003-04, 2004-05 and 2005-06 prior to 30-03-2010, it is evident that the address of the assessee was BK- 22, Shalimar Bagh, Delhi – 110 052 which was available with the Department and, therefore, admittedly the notice was issued at the wrong address. The 6 year period from the end of the assessment year expired on 30-03-2010. Therefore, in view of the decision of the Hon’ble Delhi High Court in the case of CIT v. Eshaan Holding (P) Ltd. (2012) 344 ITR 541 (Del), it cannot be said that valid notice was issued u/s 148 to the assessee. The Delhi High Court had held as under:

“The first notice issued on January 29, 2004, by speedpost was said to have been served at the old address at East of Kailash. There was no proof of service on record. Even otherwise, this was not valid service because the assessee had already filed its return on November 28, 2003, and in this return address shown was Panchsheel Park. Thus, the record of the Department already contained the new address of the assessee. Before issuing notice u/s 148, it was expected of the Assessing Officer to have checked up if there was any change of address, because valid service of notice of reopening the assessment is a jurisdictional matter and this is a condition precedent for a valid reassessment.”

Following the ratio of the above mentioned decision, the Tribunal set aside the order of CIT(A) holding that initiation of proceedings u/s. 148 was not legal and, therefore, consequent assessment order framed by AO is quashed.

The appeal filed by the assessee was allowed.

levitra

Nirav Shah

Consortium of members formed for the purpose of joint bid does not constitute AOP if each of the members has specified responsibility independent of the other member and consideration flowing to each of the member is separate. Certain common covenants inc

New Page 1

Part C : Tribunal &
AAR International Tax Decisions

7 Hyundai Rotem Co.
(2009) TIOL 798 ARA-IT
Dated : 23-3-2010

Consortium of members formed for the purpose of joint bid
does not constitute AOP if each of the members has specified responsibility
independent of the other member and consideration flowing to each of the member
is separate. Certain common covenants including agreeing to joint and several
liability for the comfort of the customer does not alter the situation.

Facts :

Five companies (one Korean, two Japanese and two Indian)
entered into a consortium named MRMB to bid for tender floated by Delhi Metro
Rail Corporation (DMRC). The bid was for designing, manufacturing, supplying,
commissioning, training and transfer of technology of 192 numbers of EMUs. The
contract was for a fixed consideration and was apportioned amongst various cost
centres and was linked to various milestones.

Responsibility of each of the member was clearly identified.
For example, Korean company was responsible for mechanical work, the Indian
company 1 was responsible for electric work, etc. Consideration of each one of
the members was clearly identified. Japco 1 was appointed as a consortium
leader. The amount collected from the customer was disbursed by the consortium
leader to the various members as per the pre-agreed ratio.

The tax authorities were of the view that the consortium
constituted an AOP on account of the following features :

(a) Joint participation of the consortium members in the
tender process.

(b) Bid having been submitted by the consortium.

(c) Execution of single contract.

(d) Appointment of common project director for planning,
organising and controlling execution of the project.

(e) Nomination of a consortium leader and its appointment
as a contact point between the customer and the members.

(f) Constitution of the project Board with nominee of each
member for overall planning, organising or controlling the execution of the
project.

(g) Furnishing of joint bank guarantee.

(h) Joint and several liability for the undertaking of the
contract. The overall responsibility of the consortium was to design,
manufacture, supply, etc. of 192 EMUs for which considerations was also
prefixed.

(i) All in all, there were collaborative efforts on the
part of the parties to undertake the contract which in view of the Tax
Department resulted in formation of the AOP.

AAR held :

AAR noted that
there is no definition of AOP in the IT Act or under the general law. It
observed that AOP differs from the partnership and it falls short of a
partnership, but the degree of distinction between the AOP or the firm is not
clear.
The constitution
of AOP is fact-based and there are no hard and fast rules.
In the context of
IT Act, the association must be one the objects of which is to produce income,
profits or gains by deploying assets in a joint enterprise with a view to make
profit.
The facts of the
present case were akin to the facts before the AAR in case of Van Oord Acz BV
(248 ITR 399). In view of the AAR, the present consortium did not constitiute
an AOP on account of the following features :

(a) Nature of work undertaken and capable of being executed
by each member was materially different. Skill-set of each member was
different. Work of one member could not have been relocated to another.

(b) Bid evaluation by the costomer was done keeping in mind
competency of each member. There was no interchangeability or reassignment of
work or overseeing the work of each other.

(c) There was deduction in the original bid amount and the
discount agreed by each member was different. This was indicator of the fact
that economics of each of the members were detemined independently.

(d) In addition to the joint performance guarantee, each
member provided separate guarantee and undertaking.

(e) The agreement specifically clarified that there was no
intent between the parties to create any partnership or a joint venture.

(f) The covenant of joint and several liability was a
safeguard for the client to have better control over the consortium members.

The facts of the case before AAR in GeoConsult ZT GMBH (304
ITR 283) where the arrangement was regarded as giving rise to AOP were
distinguishable. In GeoConsult’s case, there was intention to create a joint
venture; the members had the same skill-set and scope of their work was
overlapping. Also, the members had assisted each other in performance of the
work and the members had unrestricted access to the work carried out by the
other members, etc. The features in the present arrangement were different.

levitra

Nirav Shah

Payments made towards the share of the cost incurred in respect of research and development activities pursuant to cost contribution arrangement (CCA) is not the payment towards fees for technical services or royalty. Such contribution is not liable to ta

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

6 ABB Limited
(2010) TIOL 94 ARA-IT
S. 2(24), S. 195 of the Income-tax Act,
Articles 5 & 7 of India-Switzerland DTAA
Dated : 15-3-2010

Payments made towards the share of the cost incurred in
respect of research and development activities pursuant to cost contribution
arrangement (CCA) is not the payment towards fees for technical services or
royalty. Such contribution is not liable to tax in the hands of the co-ordinating
agency.

There is no obligation of tax withholding if the amount does
not represent income chargeable to tax.

Facts :

The applicant is a company incorporated in India and part of
the ABB Group, which is a leader in power and automation technologies. The Group
has presence in more than 100 countries.

As per Group’s R&D policy, all basic R&D is coordinated and
directed through group entity in Switzerland (Swissco).

The group entities who wish to participate in basic R&D enter
into a CCA with Swissco. As per the terms of CCA, the entire costs of basic R&D
is shared amongst the participants based on a pre-agreed allocation key. The
participating entities are allowed a royalty-free unlimited access to the
research results, including any Intellectual Property Rights (IPRs) generated
from basic R&D. Any revenue earned from third party is reduced from the total
cost recovered from the participants. The research programme and policy is
decided by the research Board which has nominee from the participating entities.
The research Board decides on the research to be undertaken, the budgeted cost,
recovery to be made from various participants based on budget and adjustment to
be made based on the actual cost incurred and third-party revenue earned, etc.
The research Board gets the research carried out through various research
centres to whom the remuneration is paid on cost plus basis.

CCA made it clear that though the economic benefits of
research vest in various participants, for administrative reasons and
convenience, the IPRs generated are legally registered in the name of Swissco.

In addition to the cost contribution payments, each
participant also paid a ‘coordination fee’ to Swissco for its role as
administrator and coordinating agency under the CCA. Such fee was accepted to be
chargeable to tax in India and no question was raised on taxability of such
amount.

The applicant sought the ruling on the tax implications of
the contributions proposed to be made to Swissco. The primary contentions of the
applicant before the AAR were (i) that the CCA was merely a pooling and
coordinating arrangement and represented reimbursement of actual cost incurred
in carrying out the research jointly; (ii) the contribution did not partake the
character of income and was, therefore, not chargeable to tax in India; and
(iii) even if the contribution constituted income, it represented business
income of Swissco, which in absence of PE in India, was not chargeable to tax.

AAR held :

The payments made to
Swissco are not in the nature of FTS since Swissco had not rendered any
managerial, technical or consultancy service to the participants of CCA.
Swissco did not deploy any personnel to perform any services in India.

The contribution was not
payment on account of royalty. It is true that research results in creation of
IPR in the form of information, technical knowledge and experience. However,
payment made to Swissco was not for getting rights to such IPRs. The contract
research organisation through whom the research board got the research carried
out merely works as contractor without retaining IPR or right to commercial
exploitation of the research.

Even though the IPRs
generated from the research were to be registered in the name of Swissco,
their economic benefits and beneficial ownership vested in the contributories.
Admittedly, all participants had royalty-free and perpetual access to IPR.
Also, amounts received from third party or from exploitation of IPR reduced
the cost of the research to the participants. The arrangement was thus for the
benefit of all the participants where the resources were pooled by various
participants for undertaking R&D for common benefit.

The arrangement was such
that each participant reimbursed the actual cost incurred by making the
proportionate contribution. The OECD Guidelines on CCA arrangement also makes
it clear that each participant is effective owner of the IPR generated through
common pool and hence the contribution is not royalty paid to any other
person.

The amount of
reimbursement was not chargeable to tax in India and consequentially not
liable to TDS.

The AAR clarified that
its decision on non-taxability however does not preclude enquiry in
appropriate proceedings about the nature of contribution on an armed-length
basis.

levitra

Nirav Shah

No income arises to the foreign company in India in the course of deputing personnel to an Indian company, who work under the control and supervision of the Indian company and thus become employee of the Indian company. Amount of salary of deputed employe

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

5 DDIT v. Tekmark Global Solutions LLC
(ITA 671/2007) (ITAT-Mum.)
Article 5(2), 7 of India-USA DTAA
Dated : 23-2-2010

No income arises to the foreign company in India in the
course of deputing personnel to an Indian company, who work under the control
and supervision of the Indian company and thus become employee of the Indian
company. Amount of salary of deputed employees reimbursed to the foreign company
is not taxable in India.

Facts :

Lucent Technologies Hindustan Private limited (ICO), an
Indian company, entered into an agreement with the assessee, a tax resident of
USA, to have their personnel deputed as per specifications of ICO.

ITAT considered the following terms of the contract between
ICO and the assessee to conclude that the arrangement between them was not for
providing of services by the assessee through its employees but that of
selecting and offering personnel for working as employees of ICO :

ICO provided
specifications of the employees whom it (ICO) required pursuant to deputation
arrangement.

The deputed personnel
worked under the direction, supervision and control of ICO.

The assessee was not
responsible for the work done or actions taken by the deputed personnel.

The lodging, boarding and
other related expenses of deputed personnel were arranged by ICO.

The agreement made it
clear that the agreement was for providing employees as per specifications of
ICO and not for providing services to ICO.

The ITAT did note that the deputed personnel continued to be
on the payroll of the assessee and that the salary of the deputed personnel was
paid by the assessee for recoupment by way of reimbursement from ICO.

The Tax Department contended that the arrangement involved
rendering of services by the assessee to ICO through its employees in India and
that there was emergence of Service PE of the assessee in India. Accordingly,
the amounts were held chargeable in the hands of the assessee.

ITAT held :

The ITAT held :

No part of technical
services were rendered by the assessee to ICO.

The deputed personnel for
all practical purposes became the employees of ICO and carried out work
allotted to them by ICO. The assessee had no control over the activities or
the work performed by the deputed personnel. ICO alone had the right to remove
the deputed personnel.

When the services
rendered are independent of, and not under the control of, the assessee, the
deputed personnel do not give rise to emergence of PE of the assessee in
India.

In the circumstances, the
amount received was reimbursement of salary which the assessee had disbursed
as advance on behalf of and to the employees of ICO.

Even on an assumption
that there is emergence of PE, there was no income embedded in the
reimbursement of expenses.

levitra

Nirav Shah

Provisions of Section 195 are not attracted where the payment represents reimbursement of expenses having no element of income.

New Page 1

Part C — International Tax Decisions

Cairn Energy India Pty Ltd. vs. ACIT
[2009-TIOL-220-ITAT-MAD] (Chennai)

A.Ys. : 1996-97 to 1999-2000

Date : 20.02.2009

Sections 40(a)(i), 42 and 195.

Issue :

@ Provisions of Section 195 are not attracted where the
payment represents reimbursement of expenses having no element of income.

@ Where income is computed under the special provisions of Section 42, no
disallowance can be made under Section 40(a)(i).

Facts :

Ø The assessee, an Australian company, was engaged in the
business of prospecting for and production of mineral oils in India. Since
the exploration and production activities carried out by the assessee were
covered by Production Sharing Contract (PSC) approved by the Parliament, the
assessee was admittedly covered by provisions of Section 42 of the Act.

Ø The assessee made certain reimbursements to its parent
company outside India in connection with business activity carried on by the
assessee in India. These reimbursements were claimed as expenditure under
Section 42. The AO disallowed the claim on the ground that assessee had
failed to deduct tax at source.

Ø The assessee submitted before the Tribunal that the
expenditure was in connection with petroleum operations and were charged to
the assessee on cost-to-cost basis in terms of the PSC. Since the charge was
at cost without any mark-up, withholding in terms of 195 was not required.
The assessee also argued that Section 42 had an overriding effect and is a
separate code by itself and accordingly the general computational provisions
of the Act cannot be applied. Reliance in this behalf was made to Supreme
Court decision in the case of Enron Oil and Gas India Ltd. [305 ITR 75].
Alternatively, based on judicial precedents it was submitted that there
cannot be any withholding on reimbursement where there was no element of
income.

Held :

Ø The Supreme Court in Enron (referred above) has
analysed the scope of Section 42 and held that the Section is a special
provision, is a code by itself for computing the income in respect of the
business of prospecting, extraction or production of mineral oils.

Ø In terms of Section 42, any expenditure which is
referred to in PSC, whether revenue or capital in nature is allowed as a
deduction. The scheme of Section 42 overrides all general computational
provisions including Section 40(a)(i). Hence, no disallowance can be made in
terms of Section 40(a)(i).

Ø As regards withholding on the payment, the Tribunal
held that the auditors of the parent company had certified that such payment
represented actual expenses and there was no reason to disbelieve such
certificate. Even, PSC provided and regulated that charges shall be equal to
the actual cost of providing services and shall not include any element of
profit. The Tribunal relied on decisions of CIT vs. Industrial Engg.,
[202 ITR 1014] (Delhi) and CIT vs. Dunlop Rubber Company, [142 ITR
493] (Calcutta) and held that no income accrued to the parent company from
payments representing reimbursement of expenses and hence provisions of
Section 195 did not apply.

levitra

Nirav Shah

Whether income earned from transportation of cargo in international traffic by aircraft owned, chartered or leased by other airlines is covered by Article 8 of India-USA Treaty.

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Part C — International Tax Decisions

ADIT vs. Federal Express Corporation, USA
[2009-TIOL-179-ITAT-Mumbai]

A.Y. : 1998-99 to 2000-01

Date : 29.01.2009

Article 8 of India-USA Treaty

Issue :

Whether income earned from transportation of cargo in
international traffic by aircraft owned, chartered or leased by other airlines
is covered by Article 8 of India-USA Treaty.

Facts :

Ø The assessee, a US company was engaged in integrated
air and ground transportation of time sensitive and time definite shipments
to various destinations worldwide (airport to airport services). It also
provided door-to-door delivery service for international shipment
(door-to-door delivery).

Ø The assessee had its own fleet of aircrafts, however,
in case of shipments which required express custom clearance it had entered
into interline arrangement with other airlines.

Ø In India, it was granted approval by the Director
General of Civil Aviation (DGCA) to operate air cargo services to and from
India. During the relevant year, in absence of approval from DGCA, the
assessee entered into interlines arrangement with other airlines for
carrying its cargo to India. In respect of monitoring of movement of cargo
within India, it entered into collaboration with Blue Dart Express which
performed actual pick-up and delivery of cargo. It established branches in
India and operated air cargo services to and from India.

Ø The Assessing Officer held that the assessee was
engaged in courier activities and not in the business of operation of
aircrafts in international traffic. Accordingly he denied benefit of
exemption of Article 8 of India-USA Treaty as claimed by the assessee. The
claim was however accepted by the CIT(A).

Ø The Department preferred appeal on the ground that
unless assessee establishes linkage between transportation of cargo carried
by other airlines with the carriage from the hub by the assessee, it cannot
be allowed the benefit of Article 8. Reliance was placed on Mumbai Tribunal
decision in the case of Cia de Navegacao Norsul [27 SOT 316]. The Department
argued that the term ‘profits from operation of ship or aircraft in
international traffic’ is defined in Article 8(2) of the Treaty and hence no
reference can be made to the commentaries and other support/guidance to
interpret. Article 8(2)(b) includes activities directly connected with
transportation of goods by the owners or lessees or charterers but would not
include cargo carried in international traffic by other airlines or inland
transportation of cargo.

Ø Before the Tribunal, the assessee submitted it had
entered into interline arrangements for transportation of cargo to a hub
from where aircrafts of the assessee were used for transportation of the
same in international traffic under slot arrangement. Reliance was also
placed on Mumbai Tribunal decision in the case of Balaji Shipping (UK) Ltd.
[25 SOT 325], where it was held that the expression ‘Profits from operation
of ships’ in UK Treaty would include not only profits from operation of
ships owned, chartered or leased, but also transportation through other
ships under slot arrangement. It further submitted that services of other
airlines were merely incidental to the main activity and hence covered by
Article 8. Alternatively it was submitted that the arrangements were pool
arrangement providing reciprocal services covered by Article 8(4) of the
Treaty.

Ø As regards inland transportation, assessee contended
that these activities were directly connected to the main activity of
transportation of cargo in international traffic covered by Article 8(2)(b).

Held :

Ø The assessee could be said to be engaged in the
business of transportation of cargo in the international traffic (and not in
courier services) as it is engaged in the business of transporting cargo
through a large fleet of globally-owned aircraft and it was recognised as
such by the authorities in India and in the USA. It was a registered member
of the International Air Transport Association.

Ø In the decision of Balaji, the Mumbai Tribunal referred
to OECD commentary since the term ‘profits from operation of ship’ is not
defined in UK Treaty. However, since the term ‘profits from operation’ has
been defined in Article 8 of US Treaty, relying on its decision in Delta
Airlines, where no reference was made to the commentary, the Tribunal held
that the benefit of Article 8 would be available only to the extent the
activity falls under the definition of Article 8(2).

Ø The transportation by aircraft, which is neither owned
nor leased by assessee would be outside the scope of the term ‘profits from
operation of ships or aircraft’ as defined in Article 8(2) of the US Treaty.
Accordingly, the Tribunal held that the income from operation involving
interline arrangement would not be exempt in India.

Ø The term ‘other activity directly connected with such
transportation’ would only mean transportation as referred in Article 8(2)
and as already concluded, the assessee is not covered by Article 8(2).
Accordingly, relying on decisions of the Mumbai Tribunal in Safamarine
Containers Lines [24 SOT 211] and Delhi Tribunal in KLM Royal Dutch Airlines
[307 ITR 142] (AT), the Tribunal held that inland transportation was also
not connected with the main activity and would be outside the scope of
Article 8.

Ø Where the income is not covered by the provisions of
Article 8, it would be treated as business profits under Article 7 of the
treaty and accordingly, the claim of the assessee would be examined under
Article 7.

Ø In respect of the alternative, claim of exemption under
Article 8(4) as pool arrangement, the Tribunal held that the same could be
examined by ascertaining whether the profits were derived from participation
in a pool, joint business or an international operating agency. Also, as the
claim of the assessee of having chartered the aircraft by booking some space
therein was made for the first time, it would have to be examined by the AO.
Further, as the meaning of the word ‘chartered’ as appearing in the Article
is not clear from the definition itself.

Nirav Shah

Whether royalty income earned by the taxpayer can be said to be ‘effectively connected’ with its permanent establishment (PE) in India, so as to be taxable as per the ‘business income’ article of the India-Australia Tax Treaty (Treaty).

New Page 1

Part C — International Tax Decisions

Worley Parsons Services Pty. Ltd.

[2009-TIOL-06-ARA-IT] (AAR)

Date : 30.03.2009

Article 12 of India-Australia DTAA

Issues :

Whether royalty income earned by the taxpayer can be said
to be ‘effectively connected’ with its permanent establishment (PE) in India,
so as to be taxable as per the ‘business income’ article of the
India-Australia Tax Treaty (Treaty).

Facts :

Ø A company incorporated in Australia (Ausco), is in the
business of providing professional services to the energy and resources
industry. Ausco entered into a contract with Reliance Petroleum Limited, an
Indian Company (ICo) for providing certain services in connection with the
ICo’s project of laying cross-country pipelines for the transportation of
hydro-carbons.

Ø Ausco entered into the following separate contracts
with the ICo :

G Basic Engineering and Procurement Services Contract
(BE&P), which was divided into two phases. Phase I was further divided
into 2 parts, viz., Basic Engineering and Procurement Services. In
respect of Basic Engineering services, 80% of the work was performed in
Australia and the balance was performed in India. In respect of the work
which was performed in India, Ausco’s employee had made short duration
visits to India for inspection, topography study, preparation of route
map, etc.).

G Ausco was entitled to a lump sum consideration for
all components under the BE&P.

G Project Management Services Contract (PMS). For this
Ausco’s employees were present in India for a significant period. The
employees were provided office space by the local engineering contractor,
for the performance of services under PMS.

G In terms of India-Australia Treaty, it was admitted
by the applicant that the amount was chargeable to tax in India under
Article XII of the Treaty as royalty income. The applicant also submitted
that it had PE in India.

Ø In its application, Ausco submitted before the AAR that
both (a) the contract BE&P and PMS were integral part of single contract and
hence entirety of royalty income was ‘effectively connected’ with the PE in
India; (b) In terms Article XII (4) (herein referred to as ‘the PE exclusion
rule’) of the Treaty, the amount was chargeable to tax as business income in
terms of Article VII of the Treaty; and (c) In terms of Article VII, only
that part of the profits, which was attributable to the PE, can be charged
to tax in India. For this, the applicant relied on the SC decision in
Ishikawajima Harima Heavy Industries [288 ITR 408], to contend that where
income is in respect of services rendered outside India, it is not liable to
be taxed in India in terms of the domestic law provisions.

Ø The Tax Department however contended that services
performed outside India in terms of Phase I of the BE&P were not
‘effectively connected’ with the PE of the Taxpayer in India and hence the
PE exclusion rule did not apply. Consequently, the royalty receipts were
taxable in terms of Article XII of the Treaty. The department obtained that
the SC decision in Ishikawajima’s case was distinguishable.

Held :

The AAR considered the taxability of the applicant under
Article XII and Article VII of the Tax Treaty. The AAR held :

1. Article VII (7), which paves way for the operation of
other specific articles of the Treaty, does not dilute the impact of the PE
exclusion Rule contemplated in terms of other Articles of the Treaty. If the
specific Articles provide for taxation of income under Article 7, the
receipt will be taxable as business income in terms of other provisions of
the treaty.

2. In case of royalty, the PE exclusion rule applies
where there is an ‘effective connection’ between the royalty generating
services and the PE. Mere presence of a PE for carrying out some other
activities is not sufficient for establishing an effective connection. For
royalty to be ‘effectively connected’ to the PE, the PE in India should be
engaged in the performance of royalty generating services and should
facilitate performance of such services.

3. ‘Effectively connected’ means ‘really connected’ and
the connection should not only be in ‘form’, but also in ‘substance’. A
pragmatic and purposive approach needs to be adopted for construing whether
or not an ‘effective connection’ exists between the PE and the royalty
income. The set-up, the functions, the purpose and duration of the PE, etc.
are relevant factors for determining this aspect.

4. The words ‘effectively connected with the PE’ are not
words of redundancy and should be given their due meaning. A real and
perceptible connection should exist to fulfil the condition before the
receipt can be treated as effectively connected with PE.

5. For the PE exclusion rule to get triggered, the PE
must have substantial activities and such securities must be carried out
over a period of time. A nominal establishment with skeletal staff,
attending to minimal or negligible work may not be sufficient to trigger the
PE exclusion rule on the ground of ‘effective connection’.

6. In the case of the applicant, BE&P and PMS contracts
are separate contracts covering different phases of the projects having
different rights and obligations. The nature of services and consideration
in respect of each one are separate and distinct. As a result, each
contract, although relating to the same project, needs to be seen
independently for determining the effective connection with the PE.

7. The SC ruling in the case of Ishikawajima cannot be
read to mean that the mere existence of a PE is enough to trigger the PE
exclusion rule and cause royalty income to be assessed as business income.
It does, however, imply that there may be situations where, though the
royalty may be ‘effectively connected’ with the PE, it may still not be
‘attributable’ to the PE.

8. The AAR observed that the SC decision is
distinguishable and not applicable to the facts of the present case. The AAR
held that the SC was concerned with the PE exclusion rule in respect of the
India-Japan Tax Treaty, which gets triggered when ‘right, property or
contract’ is ‘effectively connected.

Nirav Shah

S. 163, and India — Japan Treaty

New Page 16 Masuzawa Punjab Silk Ltd. v.
ACIT

(113 TTJ 878) (Asr)

A.Y. : 2000-01. Dated : 4-12-2007

S. 163 and India-Japan Treaty.

l
Salaries including perquisites provided to NR technical personnel deputed
to Indian JVCO to provide erection and installation services are chargeable to
tax u/s.9(1)(ii) of the Act. In the circumstances of the case, Indian JVCO can
be regarded as an agent of the expatriates u/s.163(1)(c) and u/s.163(1)(b) of
the Act.

l
Reimbursement of actual travel expenses of employees are exempt u/s.10(14).

Facts :

(1) MCL (A company of Japan — herein Japco) entered into
joint venture agreement with another Indian company. The joint venture was
carried through the assessee-company. In terms of the joint venture agreement,
Japco had agreed to supply certain equipments which hitherto were used by Japco
at Japan.

(2) The plant at Japan was discontinued and the equipments
were dismantled for the purpose of refurbishing and installation at the
premises of the assessee-company. In terms of the agreement, Japco had
obligation to refurbish and install the equipments and to ensure that the
plant provided certain minimum production of specified quality.

(3) In terms of the overall arrangement, the Japanese
company had to provide certain technical personnel during the stage of
erection, installation, commissioning as also during the initial years of
plant operation.

(4) During the set-up phase of plant, the responsibility of
meeting cost of the technical personnel was that of Japco.

During the first and the second year of operation of the
plant, the assessee company had obligation to pay certain consolidated charge
towards providing of personnel by Japco. The assessee also had to meet the
cost of travel and accommodation of such personnel. The employees however were
to continue to be employees of Japco and their salary was to be paid by Japco.

(5) During post-installation period, two engineers,
residents of Japan, had stayed in India for a longer duration. The duration
had elongated because the production was not of desired quantity and quality.
In terms of the agreement, the assessee had paid for travel of the employees
and provided accommodation to them. Salary of these two engineers was paid at
Japan by Japco.

(6) It was common ground that the engineers were liable to
tax in India in respect of services rendered in India in view of their long
stay in India. Also, engineers were admittedly employees of Japco and salary
to them was paid by Japco at Japan.

(7) There was difference of opinion on true scope and
interpretation of the agreement as to who was responsible to bear cost of
salary. The assessee’s contention was that since the basic obligation of
setting up plant was of Japco, the cost obligation was of Japco, as the plant
was not set up as desired. As against that, the Department’s contention was
that even during pre set-up period, the assessee had obligation to meet cost
of certain engineers and for the years under reference, and for the two
engineers covered by the notice u/s.163, the assessee was obliged to meet the
cost of such personnel.

(8) The assessee had remitted certain amount to Japco and
had deducted tax at source by treating it to be remittance towards fees for
technical services. The tax so deducted was duly paid. In addition to such
compliance, the Department was seeking to treat the assessee as an agent
u/s.163 in respect of salary taxation of two engineers who were employees of
Japco, on the ground that their salary burden was ultimately borne by the
assessee.

(9) The AO passed order u/s.163 and held the assessee to be
an agent in relation to two engineers. The assessee was held to be an agent
u/s.163(1)(c), on the ground that the assessee was a person from or through
whom the non-resident engineers were in receipt of the income indirectly.

(10) The assessee was also held to be an agent
u/s.163(1)(b), on the ground that the assessee had business connection with
Japco which was carrying on business in India through the medium of the
assessee company.

Held :

l
On factual front, the Tribunal concurred with the Department that the assessee
was responsible for meeting the cost of two engineers for whom it was held to
be an agent u/s.163.

l
The Tribunal also concurred with the lower authorities and held that the
assessee was rightly held to be agent of two non-resident engineers.

l
In the view of the Tribunal, provisions of S. 163(1)(c) are wide enough to
cover income earned directly or indirectly. Though the two engineers deputed
by Japco were employees of Japco, salary received by non-resident engineers
was for services rendered to the assessee and therefore the salary income can
be said to have been received by non-resident engineers through the assessee
who was obliged to meet the cost of such personnel.

l
The Tribunal also concurred with the lower authorities that the assessee can
also be treated as an agent u/s.163(1)(b), on the ground that the assessee had
business connection with the non-resident. The Tribunal held that Japco had
agreed to provide exclusive marketing support and also had equity
participation in the capital of the assessee-company.

l
Apart from proportionate salary, the housing accommodation provided by the
assessee to the non-resident engineers was held chargea

Nirav Shah

India USA Treaty — Article 12(4) of India-US treaty — Scope of fees for included services

New Page 15 ICICI Bank Ltd. v.
DCIT (20 SOT 453) (Mum.)

A.Y. : 1997-98. Dated : 9-10-2007

India-USA Treaty.

Amount remitted to credit rating agency for the purpose of
obtaining rating in respect of issue of Floating Rate Euro Notes (FRENs) is not
fees for included services in terms of Article 12(4) of India-US treaty and is
therefore not chargeable to tax in India.

Facts :

The assessee bank appointed Moody’s Investor Services (MIS),
a credit rating agency of the USA, for the purpose of obtaining rating in
respect of one of its FRENs issues. MIS rendered rating services outside India.
The assessee remitted fees towards such services without deducting tax at
source. The contention of the assessee was that the amount represented charges
towards commercial services chargeable as business income and since the services
were rendered outside India, the same was not chargeable to tax in India.

The AO held that the amount was chargeable to tax in India,
as the same represented fees for technical services covered by S. 9(1)(vii)(b)
of the Act. The AO also concluded that services were covered by Article 12 of
the DTAA and hence payment was subject to withholding tax obligation in India.

Before the Tribunal, the assessee submitted that rating is
required to be done as per international practice for the benefit of investors
and no technical skill or process was transferred to the assessee. The assessee
relied on the following decisions to support its contention that payments for
rating services were not fees for included services and hence were not liable to
taxation in India :

1. Raymond Ltd. v. DCIT, (86 ITD 791) (Mum.)

2. Wockhardt Life Science Ltd. [IT Appeal No. 3625 (Mum.)
of 2000]

3. Gujarat Ambuja Cements Ltd. v. DCIT, (2 SOT 784)
(Mum.)

4. Bajaj Auto v. DCIT, [IT Appeal Nos. 2662 and 2663
(Mum.) of 2000]

5. Wipro Ltd. v. ITO, (1 SOT 758) (Bang.)

6. Mc Kinsey & Co. Inc (Philippines) v. ADIT, (99
ITD 549) (Mum.)

The assessee also relied on Memorandum of Understanding to
India-US DTAA on the scope for fees for included services as also on example VII
given in the said protocol to support the contention that commercial services
were not fees for included services and were not covered by Article 12 of the
treaty.

Held :

l
The Tribunal observed that the rating services were commercial services. In
view of the Tribunal, though skill, expertise, know-how were used by the
service provider for rendering services, the service was not technical in
nature. Also, skill, expertise or know how was not made available to the
assessee, so as to get covered by the scope of fees for included services.

l
The Tribunal referred to and relied on decision of Mumbai Tribunal in the case
of Raymonds and that in case of McKinsey to support that the concept of ‘make
available’ requires that the person acquiring the service is enabled to apply
the technology in his own right to the exclusion of the service provider.

l
Since the amount was not chargeable to tax in India, the assessee had no
obligation to deduct tax at source u/s.195 of the Act.

levitra

Nirav Shah

India Mauritius Treaty — Payment for liasoning with legal and financial advisors — commercial services — Not royalty

New Page 14 Spice Telecom v.
IPO (113 TTJ 502) (Bang.)

A.Y. : 2001-02. Dated : 3-2-2006

India-Mauritius Treaty

l
Payment for liasing with legal and financial advisors and negotiations with
vendors and financial institutions for vendor loans and long-term project
finance are commercial services not liable to source taxation in India as
royalty.

l
Providing of information constitutes royalty if information has perpetual
or extended use. Suggestions on ways and means on the basis of
data/information collected by the assessee itself is not royalty.

Facts :

(1) The assessee was engaged in the business of providing
telecommunication services. For this purpose, it entered into technical and
operating service agreement with one M/s. Distacom of Mauritius [herein Mauco].
Mauco had an obligation of providing certain know-how and other support
services.

(2) The assessee-company remitted certain amounts to Mauco on
account of :

(a) Provision of expertise and training on the
technological aspect of mobile telephony business;

(b) Provision of advisory and support services in respect
of financial and operational aspects of business.

(3) The assessee deducted tax at source in respect of payment
covered by 2(a) above by treating it to be payment of royalty. In respect of
payment covered by 2(b) above, no tax was deducted on the ground that the same
represented remittance towards commercial services rendered by Mauco outside
India.

(4) On further inquiries, it was found that the payment
covered by 2(b) viz. advisory and support services comprised of two
components :

(a) Payment for liaising with legal and financial advisors
and negotiating with vendors and financial institutions for obtaining vendor
credit and long-term project finance.

(b) Providing support for developing sales distribution
channels, promoting brand awareness, promoting customer-care programmes,
formulating marketing strategy, suggestions on pricing strategies billing
systems, etc.

(5) The assessee claimed that the remittance covered by para
4 was towards services provided from Mauritius and was not in respect of royalty
payment. The amount was claimed by the assessee to be not chargeable in the
hands of the recipient in view of India-Mauritius treaty which does not have
specific Article dealing with fees for technical services (FTS). The fee was
claimed to be treated at par with any other offshore business income.

(6) The Department contended that the payment was pursuant to
the know-how contract and was in respect of grant of know-how or for imparting
information concerning industrial, commercial or scientific knowledge of Mauco
and was therefore chargeable to tax as royalty income.

Held :

The Tribunal held :

l
The agreement under reference was for providing of services apart from
providing certain know-how and access to intellectual property rights. The
scope of agreement required Mauco to provide know-how as also give advice and
assistance in technical, administrative, accounting and finance field. Payment
concerning know-how covered by para 2(a) was rightly treated as royalty and
liable to tax as such.

l
The contract for services is different compared to the know-how contract. In
case of any know-how contract, the person uses his already existing knowledge
base and experience which is unrevealed to the public. As against that, in
service contract, the person undertakes to use his customary skills and
executes work himself. In a know-how contract, the supplier has to little
exert while he leverages upon his knowledge and experience, whereas in a
service contract, he undertakes greater level of expenditure of his efforts.

l
Having regard thereto, part of the contract which dealt with legal and
financial advice and negotiations with vendors, financial institutions
represented contract for services. The services were commercial in nature. In
absence of special article in India-Mauritius treaty dealing with fees for
technical services, the amount was chargeable as any other business income.
Since the services were rendered from outside India, the same were not taxable
in India. The payment covered by para 4(a) was held to be not chargeable to
tax in India.

l
As regards the second limb [viz. payment covered by para 4(b) above],
the Tribunal observed that the amount may constitute royalty, depending on the
nature of information and support provided. The Tribunal referred to various
meanings of the term know-how. The Tribunal observed that grant of know-how
will result in access to information which is of perpetual or extended use. As
against that, if Mauco provided support on the basis of facts and information
collected by the assessee, the same would, prima facie, be in the
nature of providing of services, which is not equivalent to grant of access to
know-how. So observing, the Tribunal set aside the matter to ITO to determine
taxability of the payment made in the circumstances gisted at para 4(b).

lev

Nirav Shah

Valid and commercially justifiable presence of recipient of income in treaty favourable jurisdiction cannot be disregarded to tax income in the hands of another ent

New Page 2

Part C : Tribunal & AAR International Tax Decisions

18 2010 TII 58 ITAT-Mum.-Intl.

Satellite Television Asia Region Advertising Sales BV v.
ADIT

India-Netherlands DTAA; CBDT Circular No. 742, dated 2-5-1996
and Circular No. 23, dated 23-7-1969

Dated : 21-5-2010

Valid and commercially justifiable presence of recipient of
income in treaty favorable jurisdiction cannot be disregarded to tax income in
the hands of another entity.

Withdrawal of Circular No. 23, dated 23-7-1969, w.e.f.
22-10-2009 is prospective in its application.

Facts :

The assessee, a Netherlands company, is a wholly-owned
subsidiary of a Hong Kong Company (HKCo) and a second-generation subsidiary of a
company based in British Virgin Islands. The assessee was granted exclusive
right to sell advertising time in India on channels of TV network owned by HKCo.
The assessee engaged an Indian company (ICo) to procure business from Indian
advertisers by paying commission of 15% of receipts from business procured from
India. Based on the CBDT Circular No. 742, dated 2-5-1996, which was applicable
for the year in question, the assessee offered 10% of the advertisement revenues
to tax in India.

The AO held that the assessee was a conduit company and not a
resident of the Netherlands and that the advertisement revenues were taxable in
the hands of HKCo. As a protective measure, the
AO assessed the revenue in the hands of the assessee by estimating 20% of
revenues as income earned in India.

In support of its claim, the assessee submitted that it is
registered in, assessed to tax, and domiciled in, the Netherlands, and all its
business is conducted from the Netherlands. The assessee had also filed tax
resident certificate (TRC) issued by the Netherlands tax authorities, and
submitted that it earned revenue not only from India, but also from other
countries.

The AO contended that the assessee was appointed to sell
advertising time in India because the Netherlands had a favourable tax treaty
with India, whereas there is no tax treaty entered into between India and Hong
Kong, where the parent HKCo is located. The tax treaty between India and the
Netherlands is entered to give benefit and relief to bona fide taxpayers and not
to encourage creation of non-genuine taxpayers for the purpose of tax avoidance.
The Tax Department justified its action by contending that it was a clear case
of treaty shopping and TRC was not sufficient to justify that the assessee had
not been created with a motive to avoid taxes. The AO concluded that the
assessee is a conduit and its real residence is not in the Netherlands. In any
case, HKCo also had permanent establishment (PE) in India though ICo was
ostensibly appointed as an agent of the assessee justifying actual assessment in
the name of HKCo.

The CIT(A) concurred with the AO’s order.

Held :

On further appeal, the ITAT held :

The Department could not disregard the existence of the
assessee and proceed to tax HKCo. The ITAT noted the main contention of the Tax
Department was that the assessee is used as a commercially irrelevant entity
(commonly referred as PE blocker) so as to reduce the tax exposure of HKCo in
India and that as per the Department HKCo is deriving tax advantage by inserting
the assessee as a link in its chain entities was also unacceptable. The ITAT
concluded that the Department’s contention is based on incorrect perception that
HKCo is deriving tax advantage by interposing the assessee. The advertisement
revenues are derived through a commission agent, ICo. ICo has been paid a fair
remuneration for its services. In terms of the CBDT Circular No. 23, dated
23-7-1969, no further income could be taxable in India. Withdrawal of the
Circular in October 2009 is only prospective and does not impact the year in
question.

The group to which the assessee belongs had chosen to
centralise sale of advertisement time to the assessee on a global basis and the
choice was not driven solely by tax considerations.

The evidence produced by the assessee commercially justified
its appointment for selling advertising time and hence its existence could not
be disregarded.

In the assessment proceedings of the assessee, the Tax
Authority cannot determine taxability of the advertisement revenues in hands of
HKCo, which could be decided only after taking into account material on records
available with HKCo.

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Nirav Shah

Royalty payment by one Singapore company to another Singapore company for acquiring right to broadcast live cricket matches from Singapore is not income of the recipient arising in India in terms of source rule of the Treaty. Such royalty income could hav

New Page 2

Part C : Tribunal & AAR International Tax Decisions

17 SET Satellite (Singapore Pte Ltd.) v.
ADIT

ITA No. 7349/Mum./2004

Article 12 of India-Singapore DTAA

Dated : 25-6-2010

Royalty payment by one Singapore company to another Singapore
company for acquiring right to broadcast live cricket matches from Singapore is
not income of the recipient arising in India in terms of source rule of the
Treaty. Such royalty income could have triggered tax in India only if the payer
non-resident had PE in India, in connection with which royalty liability was
incurred and royalty was borne by such PE.

Facts :

The assessee Singapore company (Singco) is engaged in the
business of acquiring television programmes, motion pictures and sports events
and exhibiting the same on its television channels from Singapore. Singco
entered into agreement with GCC (another Singapore company) and acquired right
to live telecast of cricket matches in the territory of India, Pakistan, etc.
Payment made by Singco to GCC was held to be payment in the nature of royalty.

Singco earned revenue from selling advertisement time and
collecting fees from cable operators in India. For such sales and marketing
activity, Singco took assistance of an associate Indian company (ICo), which was
held to constitute agency PE of Singco in India.

The Tax Department held that royalty paid by Singco to GCC
was chargeable in India in terms of IT Act as also the treaty, because :

(i) Singco had a place of business in India and sourced
revenue from India;

(ii) earning of revenue from India had direct nexus with
payment made by Singco to GCC for acquiring broadcasting right; and

(iii) Singco had agency PE in India.

Singco contended that payment made to GCC was not taxable in
terms of India-Singapore Treaty applicable to GCC, because :

(i) Payment was made for acquiring broadcasting rights
outside India;

(ii) Singco had no PE in India to which royalty payment
made to GCC can be related; and

(iii) Presence in the form of agency PE did not result in
income being sourced from India as there was no direct nexus between
marketing activities of the agent and the broadcasting activity carried out
at Singapore for which rights were acquired from GCC.

Held :

The ITAT held :

(1) Royalty income of GCC received from a
non-resident was taxable in India in terms of Article 12(7) of the treaty
only if following cumulative conditions are satisfied :

(a) The payer (Singco) has a PE or fixed base in India.

(b) The liability to pay royalty is incurred in
connection with such PE or fixed base.

(2) Mere existence of agency PE of payer in India does not
lead to a conclusion that royalty arises in India. For tax liability to arise,
royalty should have been paid in connection with PE or fixed base in India and
that such royalty should be borne by PE in India.

(3) Similar condition exists in OECD model for taxability of
interest income. As clarified by OECD commentary, interest can be regarded as
arising in source state only if interest income has economic link with the PE.
In the present case, there is no economic link between royalty payment and
agency PE. The economic link of payment made to GCC is with Singco’s HO in
Singapore. The payment to GCC cannot be said to be ‘in connection’ with the
agency PE in India. The agency PE was not involved in acquisition of right to
broadcast the cricket matches, nor has the PE borne the cost of payment to GCC.
The payments were therefore not liable to tax in India.

levitra

Nirav Shah

Section 50C the Income-tax Act, 1961 —Substitution of full value of consideration in case of transfer of capital assets — Transfer of factory building by exchange of letter sans execution of agreement —Whether the AO justified in applying the provisions o

New Page 1

Shingar India Pvt. Ltd. vs. ITO

ITAT ‘E’ Bench, Mumbai.

Before D. K. Agarwal (J.M.) and D. Karunakara Rao (A.M.)

ITA No. 1785/Mum/2007

A. Ys. 2004-05. Decided on 6.5.2009

Counsel for assessee/Revenue : A. R. Shah/L. K. Agrawal

Per D. Karunakara Rao

Section 50C the Income-tax Act, 1961 —Substitution of full
value of consideration in case of transfer of capital assets — Transfer of
factory building by exchange of letter sans execution of agreement —Whether
the AO justified in applying the provisions of Section 50C — Held : No.

Facts :

The assessee was engaged in the business of cosmetics. In
view of huge debts payable to one of its suppliers amounting to Rs. 69.63 lacs,
the assessee transferred its factory building along with other assets like
plant and machinery, receivables, investments, etc. to the said supplier in
full and final settlement of its dues. The book value of the factory building
which was transferred, was Rs. 1.10 lacs. During the assessment proceedings,
the AO invoked the provisions of Section 50C and also made a reference to DVO
u/s. 50C(2) for valuing the said factory building. Based on the valuation made
by DVO, the AO made an addition of Rs. 14.95 lacs and taxed it as short-term
capital gains. The CIT(A) on appeal refused to accept the contention of the
assessee that the provisions of Section 50C are not applicable and upheld the
order of the AO.

Before the Tribunal the assessee highlighted the fact that
the said factory building was transferred by ‘exchange of letters’ and there
was no formal agreement executed between the assessee and the transferee. The
Revenue on the other hand contended that since the provisions of Sections 50
and 50C contain a reference to Section 48, the same were applicable to a case
of transfer of depreciable assets such as factory building. It was also
contended that the transfer of immovable properties require registration.

Held :

According to the Tribunal, for invoking the provisions of
Section 50C there must exist :

/ The
adoption or assessment by any authority of a State Government i.e.,
stamp valuation authority, for the purpose of payment of stamp duty in
respect of such transfer; and

/ The
consideration received or accruing as a result of the transfer by an
assessee of a capital asset, being land or building or both, was less than
the value so adopted or assessed.

The Tribunal noted that in the case of the assessee the
transfer of the factory building was by way of book entries. There was neither
a sale deed not there was any adoption or assessment by any authority viz.,
stamp valuation authority for the purpose of payment of stamp duty. Under
these circumstances, it held that there was no case for application of the
provisions of Section 50C. For the same reason, it held that the provisions of
Section 50C(2) also does not apply. According to the Tribunal, the decision of
the Jodhpur Bench in the case of Navneet Kumar Thakkar supports the case of
the assessee.

Case referred to :

Navneet Kumar Thakkar (2007) 110 ITD 525 (Jodhpur).

Note :

All the decisions reported above are selected from the website
www.itatindia.com

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Nirav Shah

Section 10A of the Income tax Act, 1961 —Exemption to new undertaking in FTZ — (i) Whether receipt by way of reimbursement of expense eligible for exemption — Held : Yes

New Page 1

Shangold India Ltd. vs. ITO

ITAT ‘E’ Bench, Mumbai.

Before D. K. Agarwal (J.M.) and D. Karunakara Rao (A.M.)

ITA Nos. 6041 & 6568/Mum./2002

A. Ys. 2003-04 & 2004-05. Decided on 6.5.2009

Counsel for assessee/Revenue : A. R. Shah/L. K. Agrawal

Section 10A of the Income tax Act, 1961 —Exemption to new
undertaking in FTZ —

(i) Whether receipt by way of reimbursement of expense
eligible for exemption — Held : Yes

(ii) Whether AO justified in denying the exemption in a
case where export proceeds received after 6 months but within the period of
one year — Held : No.
Section 2(24) r.w. Section 36 of the Income-tax Act, 1961 — Taxability of
delayed payment of employees’ contribution to ESIC — Held it is taxable as
business income and not under the head ‘Income from other sources’.

Per Karunakara Rao

Facts :

The issues before the Tribunal were as under :

1. The assessee was denied exemption u/s. 10A in respect
of Rs. 0.35 lac received from Export Promotion Council by way of
reimbursement of exhibition participation costs. The corresponding expense
was incurred by the assessee in the earlier year. According to the AO, the
receipt cannot be said to have been derived from export activity, hence the
claim for exemption u/s. 10A qua the said receipt was denied by him.
On appeal, the CIT(A) confirmed the AO’s order holding that the proximate
source of the receipt was the grant and was not the export proceeds.

2. Whether the delayed payments towards the employees’
contribution to ESIC u/s. 2(24) r.w. Section 36 were chargeable under the
head ‘Income from other sources’ as held by the AO or as business income as
claimed by the assessee.

3. The assessee was denied exemption u/s. 10A in respect
of the sum of Rs. 21.16 lacs since, the same was received beyond the
specified period of 6 months.

Held :

1. The Tribunal relied on the Delhi Tribunal decision in
the case of Perot System TSI Ltd. It noted that the said decision was in the
context of reimbursement by the EXIM bank. According to the Tribunal, the
decision had generated the legal principle viz., where the expenses
which were reimbursed had direct link with the business of the assessee’s
undertaking, the same were eligible for exemption u/s. 10A. Applying the
said proposition, the Tribunal held that the reimbursed amount received from
Export Promotion Council was directly linked to the business of the
assssee’s undertaking and therefore, entitled to deduction u/s. 10A.

2. The Tribunal agreed with the assessee’s reasoning that
when the contribution was made in time, such payments were allowed as
business expenditure, accordingly, the disallowance if any made in this
regard could only give rise to business income. Accordingly, it was held
that the delayed payments towards the employees’ contribution to ESIC was
taxable as business income.

3. The Tribunal noted that as per Section 10A(3) below
Explanation 1, the RBI was authorised to grant extension to the said period
of 6 months. Accordingly, relying on the Circular No. 28 of 30.3.2001 and
Circular No. 91 of 1.4.2003, the Tribunal agreed with the assessee that for
the unit in the SEZ, the RBI has granted extension period of one year.
Hence, it was held that the export proceeds realised within the extended
period were eligible for exemption u/s. 10A.

Case referred to :

Perot System TSI Ltd. (2007) (16 SOT 350) (Delhi).

levitra

Nirav Shah

Income-tax Act, 1961 — Section 254 — Whether an order of the Tribunal can be recalled on the ground that it has been passed without considering decision cited in the course of hearing — Held : Yes.

New Page 1

Jayendra P. Jhaveri vs. ITO

ITAT ‘B’ Bench, Mumbai.

Before M. A. Bakshi (VP) and Abraham P. George (AM)

MA No. 814/M/08 arising out of ITA No. 68/Mum/2004 and CO
166/Mum/07

A.Y. : Block Period 1.4.1989 to 14.9.1998.

Decided on : 2.4.2009.

Counsel for assessee/Revenue : Dharmesh Shah/R. S.
Srivastava

Income-tax Act, 1961 — Section 254 — Whether an order of
the Tribunal can be recalled on the ground that it has been passed without
considering decision cited in the course of hearing — Held : Yes.

Per Abraham P. George :

Facts :

The assessee had filed an appeal to the Tribunal against
the block assessment order passed in his case. The two issues raised by the
assessee and the direction of the Tribunal thereon were as under :

The first issue was that the notice issued u/s. 158BD gave
the assessee less than 15 days time to file the return and therefore was
invalid. For this proposition the assessee had relied on the decision of
Special Bench (SB) in the case of Manoj Aggarwal. The Tribunal decided this
issue against the assessee by relying on the decision of the Bombay High Court
in the case of Shirish Madhukar Dalvi, where it was held that technical
defects mentioned in a notice u/s. 158BC would stand cured by S. 292B. The
second issue was that a notice u/s. 143(2) was not issued and therefore the
assessment was invalid. For this proposition reliance was placed on twelve
decisions. The Tribunal in its order dealt with only one of the decisions
viz. decision of the Gauhati High Court in the case of Bandana Gogoi and
found it to be contrary to the decision of the Special Bench in Navalkishore &
Sons. It set aside the assessment and remitted it back to the AO for
completing it after observance of procedural law relating to issue of various
notices under the Act.

The assessee filed a miscellaneous application requesting
the Tribunal to recall its order on both the issues. On the first issue the
assessee submitted that the decision of SB in the case of Manoj Aggarwal had
made a distinction between the provisions of S. 158BC and S. 158BD and also
that the decision of the Bombay High Court in Shirish Madhukar Dalvi dealt
with S. 158BC. On the second issue the assessee submitted that the Tribunal
had not considered the other decisions relied upon by the assessee. According
to the assessee, non-consideration of the decisions cited constituted an error
apparent from record. For this proposition reliance was placed on the decision
of the Bombay High Court in the case of Stanlek Engineering Pvt. Ltd. The
assessee vide this miscellaneous application requested that the order passed
by the Tribunal be recalled.

Held :

On the first issue the Tribunal, after noting that there
was an amendment to the provisions of S. 158BD and that the present case was
for a period before amendment of S. 158BD, held that there was a mistake
apparent on record in not considering the correct position of law and the
decision of SB in Manoj Aggarwal’s case in the correct perspective. On the
second issue the Tribunal noted that it had considered only one of the
decisions relied on by the assessee. Following the ratio of the decision of
the Bombay High Court in the case of Stanlek Engineering it held there was an
apparent mistake in the order of the Tribunal. The Tribunal recalled its order
and directed hearing the appeal afresh.

Cases referred :

1 Stanlek Engineering Pvt. Ltd vs. CCE 229 ELT 61
(Bom)(2008).

2 Manoj Aggarwal vs. DCIT 113TTJ 377 (Del)(SB).

3 Shirish Madhukar Dalvi vs. DCIT 287 ITR 242 (Bom).

4 Bandana Gogoi vs. CIT 289 ITR 28 (Gau.)

5 Navalkishore & Sons Jeweller vs. DCIT 87 ITD 407
(Lucknow)(SB).

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Nirav Shah

Income-tax Act, 1961 — Section 2(22)(e) — Whether in a case where a shareholder holding more than 10% of the shareholding in a company in which public are not substantially interested is a debenture holder of such a company and also has current account wi

New Page 1

Anil Kumar Agrawal vs. ITO, 14(2)(1)

ITAT ‘A-1’ Bench, Mumbai

Before R. K. Gupta (JM) and Abraham P. George (AM)

ITA No. 6481/Mum/2007

A.Y. : 2003-04. Decided on : April, 2009.

Counsel for assessee/Revenue : Madhusudhan Saraf & Rajiv
Khandelwal/R. S. Srivastava

Income-tax Act, 1961 — Section 2(22)(e) — Whether in a
case where a shareholder holding more than 10% of the shareholding in a
company in which public are not substantially interested is a debenture holder
of such a company and also has current account with such a company, while
considering whether such a shareholder has taken a loan or advance from the
said company aggregate of balance in debenture account and also current
account needs to be considered —Held : Yes. Whether share premium account
forms part of accumulated profits for the purpose of S. 2(22)(e) — Held : No.

Per Abraham P. George :

Facts :

The assessee was a shareholder of Star Synthetics Pvt. Ltd.
(SSPL) having more than 10% of its shareholding. The assessee had also
subscribed to 4% non-secured convertible debentures issued by SSPL of
Rs.50,00,000. The Board resolution which approved the issue of debentures
provided that a debenture holder could have a current account with the
company, provided that the debit balance in current account could not exceed
the amount of debentures subscribed by the debenture holder. The Assessing
Officer (AO) noted that the assessee had two accounts with SSPL — one in his
individual name and another in the name of his proprietory concern. The
aggregate amount of loans taken by the assessee and his proprietary concern
from SSPL was Rs.23,65,000. SSPL had reserves of Rs.64,28,793. The AO regarded
the aggregate of amounts borrowed by assessee and his proprietary concern as
deemed dividend u/s. 2(22)(e).

Aggrieved, the assessee preferred an appeal to the CIT(A)
where he submitted that the AO ought to have considered the balance in
debenture account alongwith the balance in the current account of the assessee
and his proprietary concern, and if so considered the assessee did not owe any
amount to SSPL. He also submitted that while considering the amount of
accumulated profits of SSPL, the balance of share premium should not be
considered as forming part of accumulated profits. The CIT(A) was of the
opinion that since debentures are for a fixed period and bear a fixed rate of
interest, their nature is different from that of an unsecured loan. He
confirmed the addition made by the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal after considering the meaning of the term
‘debenture’ as per various dictionaries and judicial precedents held that
debenture account is only a loan account and that while considering the amount
of loan taken by the assessee from SSPL the AO ought to have considered all
the three accounts viz. the debenture account, the assessee’s personal
account and the account of his proprietary concern and then concluded whether
the assessee has received any loan from SSPL.

Since upon consideration of the balance in all the three
accounts in aggregate the assessee did not owe any money to SSPL, the addition
made by AO and confirmed by CIT(A) was deleted by the Tribunal.

As regards inclusion of share premium in computation of
accumulated profits, the Tribunal found the issue to be covered in favour of
the assessee by the decision of the Delhi Tribunal in the case of Maipo India.

Cases referred :

1 DCIT vs. Maipo India Ltd., (116 TTJ 791)(Del.)

2 Narendra Kumar vs. UOI, (1960)(47 AIR 0430)(SC).

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Nirav Shah

S. 37(1) : Expenditure pertaining to earlier year period claimed by assessee in the year when demand for same received allowed

New Page 1

(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.)

13 ITO v. Premier Automobiles Ltd.

ITAT ‘E’ Bench, Mumbai

Before K. C. Singhal (JM) and

Abraham P. George (AM)

ITA No. 2049/Mum./2005

A.Y. : 2001-02. Decided on : 17-1-2008

Counsel for revenue/assessee : S. C. Gupta/

Jayesh Dadia

S. 37(1) of the Income-tax Act, 1961 — Business expenditure —
Year of allowability — Expenditure pertaining to the earlier year period claimed
by the assessee in the year when demand for the same received — On the facts
expenditure claimed was allowed.

Per Singhal :

Facts :

During the year under consideration, the assessee had claimed
deduction of Rs.9.4 crore being compensation paid to Fiat India Pvt. Ltd. for
the use of the business premises and certain other facilities by the assessee
during the period from 1-0-1997 to 31-12-2000. According to the AO, the expense
related to earlier years, hence he disallowed the sum of Rs.8.78 crores,
allowing part of the expenditure which related to the year under appeal. On
appeal, the CIT(A) allowed the appeal of the assessee.

Held :

The Tribunal noted that the assessee had transferred its
entire premises to Fiat India, who in turn had allowed the assessee to use
certain portion of the premises as well as certain other services like supply of
power, water, etc. Under the agreement no consideration was fixed for the use of
these facilities. Thus, according to the Tribunal, it cannot be said that any
liability arose under the agreement and consequently, the assessee could not
make any provision in the earlier years. The liability arose only when Fiat
India decided to charge the assessee in respect of the said premises and the
facilities used by the assessee. Therefore, it was held that liability accrued
only in the year under consideration and accordingly, the order of the CIT(A)
was upheld.

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Nirav Shah

S. 30 : Expenditure on glass wall for better look of hotel is revenue expenditure

New Page 1

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

12 Fition Hotel v. ITO

ITAT ‘E’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

Sushma Chowla (JM)

ITA No. 7035/Mum./2003

Decided on : 8-3-2007

Counsel for assessee/revenue : K. Shivaram/

K. Kamakshi

S. 30 of the Income-tax Act, 1961 — Expenditure incurred on
construction of glass curtain wall for better look of hotel building — Whether
allowable as revenue expenditure — Held, Yes.

Per Sushma Chowla :

Facts :

The assessee was engaged in the business of running a hotel.
During the year under consideration it had spent a sum of Rs.7.06 lacs on
construction of glass curtain wall on the front side of the hotel, which was in
addition to the existing building wall. The assessee claimed that the entire
expenditure was revenue in nature which was incurred to improve the look of the
existing building and for trendy and better look to attract customers. According
to the AO, the work done was of enduring nature and held the same to be capital
in nature. On appeal, the CIT(A) observed that the expenses incurred by the
assessee resulted in creation of new assets, as it was an addition to the
existing hotel building.

Held :

According to the Tribunal, the glass curtain did not bring
into existence any new assets. The expenditure incurred was towards the
improvement of the look of the existing building which was about 20 years old.
The Tribunal further noted that the enhancement in the look of the building was
essential, as the assessee was in the business wherein customers are to be
attracted. Accordingly, the Tribunal held that there was no merit in holding
such expenditure as capital in nature and it allowed the expenditure claimed as
current repair.

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Nirav Shah

S. 2(24) : Amount received in consideration of right to telecast films in five years is taxable equally in five years

New Page 1

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

11 Molly Boban v. ITO

ITAT Cochin Bench

Before N. Barathwaja Sankar (AM)

ITA No. 01 /Coch./2007

A.Y. : 2001-02. Decided on : 11-3-2008

Counsel for assessee/revenue : R. Sreenivasan/

T. R. Indira

S. 2(24) of the Income-tax Act, 1961 — Income — Year of
taxability — Amount received in consideration of right to telecast films for
five years — Whether assessee justified in claiming that the amount received is
taxable equally in each of the five years — Held, Yes.

Facts :

The assessee, an individual, was the world satellite telecast
right holder of certain feature films. In consideration for transfer of
exclusive rights to transmit, broadcast, etc. of four feature films to Asianet
for the period of five years, she was paid a sum of Rs.4 lacs. According to the
assessee, since the agreement was for the period of five years, the sum of Rs.4
lacs should be taxed over the said period of five years. However, the AO,
relying on the decision of the Apex Court in the case of Tuticorin Alkali
Chemicals & Fertilisers Ltd., brought to tax the entire sum of Rs.4 lacs in the
year under appeal. The CIT(A) on appeal upheld the order of the AO and held that
the income was in the nature of royalty.

Held :

The Tribunal accepted the contention of the assessee that she
had transferred/sold her rights in the said pictures for a period of five years,
which according to it, showed that the entire sum of Rs.4 lacs was the
consideration for the exercise of the rights by Asianet for a period of five
years. Accordingly, the Tribunal accepted the contention of the assessee that
the sum of Rs.4 lacs had to be assessed in five years and not in the year under
appeal alone.

Case referred to :

Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT, 227
ITR 172 (SC)

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Nirav Shah

Conducting of impact tests on cars amounts to rendering of technical services/information; and amounts paid to a French Company were ‘fees for technical services’, chargeable to tax in India.

New Page 216 Maruti Udyog Ltd vs ADIT [2009] 34 SOT 480 (Del)

Asst. Year: 2005-2006

Sections 9(1)(vii), I T Act ,
Article 13(4), India-France DTAA

31st August 2009

Issue

Conducting of impact tests on cars amounts to rendering of
technical services/information; and amounts paid to a French Company were ‘fees
for technical services’, chargeable to tax in India.

Facts

The assessee was an Indian company (IndCo) engaged in
manufacture of cars. Cars manufactured by it were sold globally. For evaluation
of the safety of the cars, impact tests were required to be done on the cars.
For conducting the tests, IndCo engaged a company which was a tax resident of
France (“FrenchCo”). FrenchCo was in the business of conducting impact rests on
automobiles, and manufacturers from all over the world would approach it for
conducting the tests.

FrenchCo conducted tests on IndCo’s cars only in France. At
the time of the tests, representatives of IndCo were also present. After
conducting the tests, FrenchCo furnished impact testing reports to IndCo. These
reports contained only test results and did not make available or provide any
technical know-how, knowledge or expertise to IndCo.

IndCo applied to the AO for remittance of the amount to
FrenchCo without deduction of tax. According to IndCo:

The payments
were not in the nature of technical services;
There was no
enrichment or gaining of technical knowledge or expertise by IndCo;
FrenchCo had
merely performed its business in France;
FrenchCo had
not transferred any knowledge by which IndCo could carry out testing;
The tests
were required for obtaining regulatory approval; and
Hence, the
payments were not fees for technical services as defined in Explanation 2 to
Section 9(1)(vii) of the Income-tax Act.

However, the AO concluded that FrenchCo had the expertise and
the skill to perform the tests and it had rendered technical services.
Accordingly, the AO directed IndCo to deduct tax @10% from payments being made
to FrenchCo.

In appeal, CIT(A) confirmed that as the testing charges were
paid in consideration for services of technical nature, they were ‘fees for
technical services’ within the meaning of Section 9(1)(vii) of Income-tax Act
and Article 13 of India-France DTAA.

Before the Tribunal, apart from the foregoing contention,
relying on Kolkata Tribunal’s decision in DCIT Vs ITC Ltd [2002] 82 ITD 239 (Kol),
IndCo also contended that the definition of ‘fees for technical services’ in
Article 13(4) of India-France DTAA should be interpreted in the context of other
treaties between India and a member-State of OECD. It submitted that the tests
reports were just like blood test reports of a pathological laboratory and that
there is a vast difference between technical services and a technical report
obtained from a technician. From the test reports, IndCo simply came to know of
the deficiencies in the design of its cars and hence it could not be called
technical services. It also relied on Mumbai Tribunal’s decision in Raymond Ltd
Vs DCIT [2003] 86 ITD 791 (Mum). It further contended that impact testing
charges were paid for use of a standard facility which was provided by FrenchCo
to all those willing to pay and, therefore, it could not be construed as fees
for technical services. In support of this contention, it relied on Skycell
Communication Ltd Vs DCIT [2001] 251 ITR 53 (Mad), CESC Ltd Vs DCIT [2003] 87
ITD 653 (Kol) (TM),) NQA Quality Systems Registrar Ltd. v. Dy. CIT 2 SOT 249
(Del), National Organic Chemical Industries Ltd Vs DCIT [2005] 96 TTJ (Mum) and
DCIT Vs Boston Consulting Group Pte Ltd [2005] 94 ITD 31 (Mum).

The Tribunal referred to definition of ‘fees for technical
services’ in Article 13(4) of India-France DTAA and also in Explanation 2 to
Section 9(1)(vii) of the Income-tax Act. It observed that after excluding the
consideration for construction, etc., project or “salaries” from the definition
in Explanation 2 to Section 9(1)(vii) of Income-tax Act, both definitions were
same and would include payments made to any person in consideration of a
managerial, technical or consultancy services. The Tribunal also referred to
definitions in India-UK DTAA, India-USA DTAA and India-Switzerland DTAA and
observed that in these DTAAs, unless the fees for services were ancillary and
subsidiary, as well as inextricably and essentially linked to the sale of
property which is attributable to a PE and fulfills other requirements under the
business profits Article, they cannot be taxed in a source country. Thus, the
scope of ‘fees for technical services’ in these treaties was much restricted
than that under India-France DTAA.

The Tribunal further observed that the impact tests were not
in the nature of managerial services.

Held:

The impact tests were to be performed so as to pass the
quality tests. The presence of IndCo’s representatives was with an intention of
getting experience. Therefore, they were in the nature of technical services
which enhanced the product development capacity of IndCo. As the test reports
were used by IndCo for modification of its products, it would amount to
rendering of technical services/information and hence, the amounts paid would be
in the nature of fees for technical on consultancy services.

The decision in ITC Ltd was held distinguishable on the
ground that that case involved purchase of equipment. The foreign company did
not have any PE in India to which such income could be attributed. The payments
made for installation and commissioning of equipment were related to technical
services, which were ancillary and subsidiary as well as inextricably and
essentially linked to the sale of the property; and hence, it was held that the
payments were not liable to be taxed in India,

As regards the
taxability under Article 13(4), read with Explanation 2 to Section 9(1)(vii),
the Tribunal
relied on AAR’s ruling in Steffen, Robertson and Kirsten Eng Vs CIT [1998] 230
ITR 206 (AAR) wherein the AAR had held that the statutory test for
determining the place of accrual is not the place where the services for which
the payments are being made are rendered but the place where the services are utilized. Therefore, the payments
made to FrenchCo were chargeable to tax in India. Accordingly, IndCo was liable
to deduct tax at source on such payments.

Nirav Shah

The differential amount on discounting of bills with a non-resident financier are not liable to TDS under Section 195 and hence, Section 40(a)(i) cannot be invoked.

New Page 2

15 ACIT Vs Cargill Global
Trading (I) (P) Ltd [ 2009] 126 TTJ 516 (Del)

Asst. Year: 2004-2005

Sections 40(a)(i), 195, I T Act

9th October 2009

Issue

The differential amount on discounting of bills with a
non-resident financier are not liable to TDS under Section 195 and hence,
Section 40(a)(i) cannot be invoked.

Facts

In the course of its business, an Indian company (“IndCo”)
exported goods out of India. Usually, the exports would on a credit term of up
to six months. IndCo would draw the bill of exchange on the foreign buyer, which
would be accepted by the foreign buyer. After acceptance, IndCo would get the
bill of exchange discounted with its affiliate company, which was a tax resident
of Singapore (“SingCo”). SingCo would immediately remit the discounted amount of
the bill of exchange. The discounting was on ‘without recourse’ basis, i.e.,
even if the buyer does not pay on due date, SingCo cannot recover its value from
IndCo. Thus, SingCo would collect the payment on its own behalf. SingCo was
engaged, among others, in the business of subscribing, buying, underwriting or
otherwise acquiring, owning, holding, selling or exchanging securities or
investments of any kind including negotiable instruments, commercial paper, etc.
Further, in the course of its business, it would draw, make, accept, endorse,
discount, execute and issue promissory notes, bills of exchange, etc. SingCo did
not have a PE in India in terms of Article 5 of India-Singapore DTAA.

The AO concluded that:

The
discounting charges were in the nature of “interest” within the meaning of
Section 2(28A) of the Income-tax Act;
As the
payment of such interest was made to a non-resident, IndCo was required to
deduct tax at source;
As such tax
was not deducted, it was disallowable in terms of Section 40(a)(i) of the
Income-tax Act.

In reaching this conclusion, the AO relied upon Gujarat High
Court’s decision in CIT Vs Vijay Ship Breaking [2003] 261 ITR 113 (Guj).

In appeal, relying on CBDT’s Circular No 65, which provides
that in such a case where a supplier discounts a usance bill with a bank, the
discounting cannot technically be regarded as interest, CIT(A) held that the
discounting charges paid by IndCo were not “interest” as neither any money was
borrowed nor any debt was incurred. Therefore, no tax was required to be
deducted from such payment. Accordingly, the CIT(A) deleted the disallowance.

The Tribunal examined the issue: What is the nature of the
discount? It observed that, according to IndCo, the discount is not in the
nature of interest and hence, it is not disallowable under Section 40(a)(i) of
Income-tax Act, whereas, according to AO, it is in the nature of interest as
defined in Section 2(28A) of the Income-tax Act. The Tribunal then referred to
the definition of “interest” in Section 2(28A) of Income-tax Act (which does not
refer to discount on bill of exchange) and Section 2(7) of Interest-Tax Act
(which specifically refers to discount on bill of exchange). Noticing this
difference, the Tribunal observed that where legislature wanted to, it had
included discount on bill of exchange within “interest”.

Held

Having relevance to the definition of “interest” in Section
2(28A) of the Income-tax Act, CBDT’s Circular No 65, which though was issued in
the context of Section 194A, would be relevant as regards discounting charges,
opining that since the property in the usance bill/hundi passes to the bank and
the collection by the bank being on its own behalf, it is the price paid for the
bill. The Gujarat High Court’s decision in CIT Vs Vijay Ship Breaking
Corporation [2003] 261 ITR 113(Guj) being reversed by the Supreme Court in Vijay
Ship Breaking Corporation Vs CIT [2009] 314 ITR 309 (SC) , the discounting
charges were not in the nature of “interest” paid by the assessee. Further, as
discounting charges were business profits of SingCo and as SingCo did not have
any PE in India, it was not liable to tax in India in respect of such discount
charges. Hence, IndCo did not have any obligation to deduct tax at source under
Section 195 of the Income-tax Act. Accordingly, the amount could not be
disallowed by invoking Section 40(a)(i) of the Income-tax Act.

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Nirav Shah

In the circumstances, reorganization involves transfer of shares of an Indian company for no consideration and hence not chargeable to tax.

New Page 2

Part C — Tribunal & AAR International Tax Decisions

14 Dana Corporation (AAR)
(2009–TIOL-29-ARA-IT)

30 November, 2009

Issues :

In the
circumstances, reorganization involves transfer of shares of an Indian company
for no consideration and hence not chargeable to tax.

Liabilities of the transferor taken over by the transferee as a part of
reorganisation cannot be treated as “consideration”; nor can it be adopted as
measure of “consideration”.

As Section 92 is
not an independent charging provision, if no income arises from an
international transaction, the Transfer Pricing (T.P) provisions are not
applicable.

Facts :

The applicant, a US company (USCo), held shares in three
Indian companies (ICos), two US entities [viz Dana World trade Corporation
(DWTC) and Dana Global Products (DGP)] and other companies outside USA.

As part of a bankruptcy reorganization process, initiated
under the Bankruptcy Code of US, shares held in ICos, together with other
non-Indian assets and liabilities were transferred to DWTC and DGP, wholly owned
subsidiaries of USCo. The transfer was for no consideration and involved
reorganization in that shares which the applicant held directly in ICos (each
with > 50% stake) were now held indirectly through wholly owned subsidiaries.
The liabilities taken over by DHC from DC were more than the assets.

It was explained that one of the reasons for such transfer
was to achieve homogeneity of business in the same or similar products dealt
with by the group entities.

As part of bankruptcy transfers, the following
steps/transactions were undertaken:

Two new
entities DHC and DCLLC were formed by USCo.
An
independent private equity concern infused funds (capital) into DHC in
exchange for shares of DHC.
Additional
shares of DHC were distributed as settlement for certain claims made against
USCo in bankruptcy. DHC thus became publicly held entity.
DC
transferred shares held by it in the three Indian companies to DWTC and DGP.
DC
transferred shares held in DWTC and DGP to DHC.
Finally, USCo
merged with DCLLC.

The basic issue raised before the AAR was whether transfer of
shares of ICOs to DWTC and DGP attracted tax implications in India.

USCo raised the following contentions before the AAR:

The shares of
ICOs were transferred without consideration. As the transfer was part of the
overall reorganization under the Bankruptcy Code, no consideration can be
attributed to such a transfer of shares. In the absence of or
non-determinability of the full value of the consideration, the computation
mechanism stipulated under the Income Tax Act failed and, consequently, the
charge also failed.
Since the
transfer of shares under the proposed reorganization did not result in any
income chargeable to tax under the provisions of the Act, the T.P provisions
cannot be applied.

The tax
department raised the following contentions:

Consideration
did exist for transfer of ICo shares under the proposed reorganization. The
liabilities taken over by DHC can be legitimately taken as consideration for
transfer of shares. The tax department referred to and relied on the
Bankruptcy Court Order which stated that the transfer was for ‘fair value’ and
for ‘fair consideration’.
The applicant
did not provide details of valuation of assets, including shares of the Indian
companies. And whether such values have been considered while agreeing to the
proposed reorganization. It cannot, therefore, be said that there was no
consideration merely because the applicant had failed to identify the
consideration attributable to ICos shares.

• In any case, since the transfer of ICos shares was between
associated persons, the arm’s length price determined under T.P provisions will
form the basis.

Held

Relying on Supreme Court’s judgments in the case of B C
Srinivasa Shetty (128 ITR 294) and Sunil Siddharthbhai (156 ITR 509), the AAR
held that the charging section must be construed harmoniously with the
computation mechanism. If the computation provision cannot be given effect to,
the charging section fails.

The profits taxable as capital gains are those which are
definite, determinable and clearly identifiable. Notional or hypothetical basis
cannot be considered.

The liabilities of the applicant, taken over as part of the
reorganization, cannot be treated as the consideration or a measure of the
consideration for the transfer. When the entire assets and liabilities have been
taken over in order to re-organize the business, it is difficult to envisage
that a proportion of the liabilities constitute the consideration for the
transfer. It cannot be said that the applicant derived profit by transferring
shares of the Indian companies to its US-based subsidiaries. In the
circumstances, the contention that the transfer was without consideration was
accepted to be the correct position.

The Annual Report of the transferees does not support the proposition
that a definite or agreed consideration has been received
by the applicant for transferring the shares of the Indian companies. The
shares may have been notionally valued for the purpose of preparing such financial statements
or to facilitate the reorganization
process. But, it cannot be said that the book value or the market value of the
shares represents the consideration for the transfer or the profit arising from
such a transfer.

The observations of the Bankruptcy Court, in its
order on ‘fair value’ and ‘fair consideration’ are with respect to the
creditors of the applicant and not with reference to the applicant itself or
its share-holders. As part of the reorganization, the claims of the creditors
were compromised and, therefore, the creditors received certain shares of DHC.

The T.P provisions under the Income Tax Law are applicable
only when there is income arising from an international transaction. The T.P
provisions are not independent of
charging provisions. The expression ‘income arising’ postulates that the income has
already arisen under the charging provisions of the Income Tax Law. Therefore, if no chargeable income
has arisen due to failure of the computation mechanism, then the T.P
provisions cannot be applied. In this
context, the AAR referred to its earlier ruling in the case of
Vanenbury Group B.V [289 ITR 464] which held that the T.P provisions are
machinery provisions which do not apply in the absence of liability to tax.

Nirav Shah

(i) Service charges received by company engaged in operation of aircraft from third-party airline companies are not entitled to benefit of Article 8 of India-USA treaty. (ii) Interest on deposit placed to meet possible tax liabilities is not income from o

New Page 2

Part C — International Tax Decisions

17 ADIT v.
Delta Airlines Inc.

(2008) TIOL 646 ITAT (Mum.)

Article 8 of India-USA DTAA

A.Ys. : 1992-93 to 1999-2000. Dated : 29-9-2008

Issues :

(i) Service charges received by company engaged in
operation of aircraft from third-party airline companies are not entitled to
benefit of Article 8 of India-USA treaty.

(ii) Interest on deposit placed to meet possible tax
liabilities is not income from operations and is not entitled to benefit of
Article 8 of India-USA treaty.

Facts :

The assessee, an airline company of the USA, is engaged in
the business of international air transport. In addition to main activity of
operation of aircraft, the assessee earned certain service charges in respect of
the following services :

(1) Security screening services provided to the third-party
airline companies with the help of X-Ray machines. The machines were basically
installed for screening of baggage of the cargo of Delta’s own passengers —
but, were also used for rendering services to other foreign airlines for a
charge.

(2) Third-party charter handling services provided to other
charter companies at the airports in India.

The assessee claimed that the entire income from the above
services was exempt from tax in India on the ground that the same represented
income incidental to operation of aircraft in international traffic and the
right of such taxation exclusively vested in the USA in terms of Article 8 of
India-USA treaty.

The assessee had also earned interest income on certain bank
deposits. As per the advice of the Tax Department, the assessee had held back
certain amount to meet probable tax liability. Interest earned on such deposit
was claimed exempt on the ground that the interest was incidental to the
activity of airline operation.

The Tax Department denied benefit of Article 8 in respect of
the above-mentioned incomes on the ground that the service fees for baggage
screening or third-party charter handling service were not covered by Article 8.
Likewise, the Department held that interest income was covered by Article 11 of
the treaty. The Department supported its view on the basis that Article 8 of
India-USA treaty specifically restricted treaty benefit only to income from
activities which relate to the actual transportation.

Held :

(a) The ITAT noted that : (i) Article 8(2) of the treaty
defines scope of expression ‘profits from operation of aircraft’; (ii) the
scope of India-US treaty is restrictive as compared to the scope of similar
Article of OECD model or that of US model; (iii) Since India-US treaty has
deviated from the model text and has specifically defined the scope of
expression ‘profits from operation of aircraft’, the same needs to be
understood as defined in the treaty; and hence, Commentary on OECD model or
technical explanation on US model cannot be relied upon to understand the
scope of the term defined differently in the treaty.

(b) In terms of Article 8(2) of India-US treaty, the
benefit is available only if income is earned from activity directly connected
with the transportation of passengers, cargo, etc. by the assessee as an
owner/lessee/charterer of the aircraft. The services of baggage screening or
third-party charter handling provided to the third-party airline company or
charterers is not connected with transportation of passengers, goods, etc. by
the assessee. Income is therefore not eligible for treaty benefit.

(c) Interest income earned on deposit made to meet possible
tax demand was not income which was connected with business of operation of
the aircraft and hence was not covered by Article 8 of the treaty.

levitra

Nirav Shah

Transportation of goods in international traffic by ships operated by other enterprises under slot-chartering arrangement is not entitled to the benefit of Article 8 of India-Brazil treaty

New Page 2

Part C — International Tax Decisions

16 DDIT
v. M/s. Cia De Navegacao
Norsul

(2008) TIOL 621 ITAT (Mum.)

Article 8 of India-Brazil treaty

A.Y. : 2001-02. Dated : 25-11-2008

Issue :

Transportation of goods in international traffic by ships
operated by other enterprises under slot- chartering arrangement is not entitled
to the benefit of Article 8 of India-Brazil treaty.

Facts :

In this case, the assessee, a Brazil shipping company, earned
freight income in respect of cargo transported from Indian port to the ultimate
destination in the subcontinent of America.

The assessee was a member of a consortium between various
shipping companies. The members of the consortium owned/leased/chartered various
ships and agreed to a pool arrangement. The assessee had about 2 vessels which
were part of such pool arrangement. The vessels of the consortium members were
operated from hub port to final destination — say, in South Africa to the
subcontinent of America.

The assessee entered into freight arrangement with various
consignors in India and provided bill of lading for transportation from India to
the final destination (say, subcontinent of America). However, for
transportation from India to the hub port, it entered into slot arrangement with
third parties.

The third parties carried the cargo from Indian ports to the
hub port in feeder vessels. The mother vessel operated by the consortium members
carried the cargo onwards to the final destination. The following presents the
information in a schematic manner.

The assessee claimed benefit of India-Brazil treaty on the
ground that the entire income was earned from operation of ship.

The AO asked the assessee to file ship registration
certificate/charter party arrangement of ships operated by it and also to
substantiate that the cargo lifted by the feeder vessel, was on one-to-one
basis, transported further by the mother vessel. Since this requirement of the
AO was not met, the benefit of Article 8 was denied to the assessee. The amount
was taxed as business income in view of presence of agency PE. The amount of
income was calculated @ 10% of the freight under Rule 10.

The CIT(A) granted the benefit on the basis that the assessee
was engaged in the business of operation of ship in international traffic.

Before the Tribunal, the DR contended that the assessee
merely owned/chartered two ships and therefore all the voyages from Indian port
by feeder vessels were not continued by the mother vessel owned or chartered by
the assessee and therefore benefit of Article 8 was not available.

Held :

The Tribunal noted that the profit from operation of ship
would qualify for exemption in terms of India-Brazil treaty which grants
exclusive right of taxation to country of residence.

The Tribunal noted that unlike OECD Model, India-Brazil
treaty defined the term ‘operation of ships’ as under :

“The term ‘operation of ships or aircraft’ shall mean
business of transportation of persons, mail, livestock or goods carried on by
the owners or lessees/charterers of the ships or aircraft, including the sale
of tickets for such transportation on behalf of other enterprises”.

Having noted the above and having referred to the decision of
DDIT v. Balaji Shipping (UK) Ltd., (12 DTR 93) (Mum.), the Tribunal
concluded :

(1) Since the term operation of ship is specifically
defined in India-Brazil treaty, the same will need to be given the meaning as
defined and the scope of expression cannot be extended beyond the definition.
The OECD or other commentaries dealing with undefined terms are of no
assistance on interpretation of defined term.

(2) The expression ‘operation of ship’ as defined in
India-Brazil DTAA is restrictive to include business of transportation only by
the owner, lessee or charterer of the ship. The definition requires both the
conditions viz. (i) the business of transportation by ship, and (ii)
the assessee has to be a person who owns/leases/charters the ship.

(3) The transportation from Indian port to the hub port
pursuant to the slot arrangement is not covered by Article 8, as the feeder
vessel is not owned/leased/chartered by the assessee. The benefit was denied
in respect of feeder activity.

(4) The benefit of the treaty was restricted to the profit
attributable to transportation by mother vessel. The Tribunal noted that
Article 8(3) of India-Brazil treaty specifically made the Article applicable
to profits from the participation in a pool, a joint business or an
international operating agency. Accordingly, the consortium arrangement
pursuant to which the mother vessels were available at the disposal of the
assessee pursuant to pool arrangement were accepted to be the ships which
could be regarded as owned/leased/chartered by the assessee.

(5) Since the evidence about the ships owned/
leased/chartered were not available, the matter was restored to the file of
the CIT(A) with the direction that the benefit of Article 8 was to be
restricted only to the extent of transportation by the ships which were
owned/leased/chartered by the consortium members.

levitra

Nirav Shah

Operations of Hong Kong company in India through its liaison office confined to purchase of goods for export from India is not taxable in terms of provisions of clause (b) of Explanation 1 to S. 9(1)(i) of the Income-tax Act.

New Page 2

Part C — International Tax Decisions

15 Ikea Trading Hong Kong Ltd. In Re

(2008) TIOL 23 ARA IT (AAR)

S. 9(1)(i) of Income-tax Act

Dated : 19-12-2008

Issue :

Operations of Hong Kong company in India through its liaison
office confined to purchase of goods for export from India is not taxable in
terms of provisions of clause (b) of Explanation 1 to S. 9(1)(i) of the
Income-tax Act.

Facts :

The Ikea Group, a multi-national retailer of furniture and
home furnishing products, marketed goods under the brand name of Ikea. It
purchased products from suppliers worldwide including India. The applicant, the
Ikea Group Company, was a tax resident of Hong Kong. The applicant had
established a liaison office in India.

Certain functions of the Group were performed in a
centralised manner from outside India. For example, the group entity at Sweden
undertook research and development, designing, determination of range of
products, quality, etc. One of the group entities at Switzerland performed the
function of acting as central treasury and made payments to various vendors on
behalf of the group concerns.

After verifying diverse details, the AAR proceeded on the
basis of the following fact pattern :

(1) The applicant company purchased goods from India.

(2) The liaison office in India provided support in the
form of identifying potential suppliers, collecting information and samples,
quality check, acting as communication channel between applicant and Indian
exporters, etc.

(3) The goods were exported by the vendors from India
directly in the name of the applicant – though, the goods were delivered
outside India for and on behalf of the group entity which purchased goods from
the applicant.

(4) The applicant received sale price of such goods outside
India. The applicant therefore did not have tax liability in India in terms of
S. 5(2) of the Act on the basis of receipt of money in India.

(5) The tax liability of the applicant was, if at all,
attracted u/s.9 of the Act.

Before the AAR, the applicant claimed that entirety of its
operations in India were confined to purchase of goods for the purposes of
export and hence in terms of clause (b) of Explanation 1 to S. 9(1)(i), no part
of the income was chargeable to tax in India.

The Tax Department contended before the AAR that the
purchases from India were not for the purpose of export by the applicant, but
were really the transactions of purchase by the associates of the applicant in
respect of which the applicant earned service fee and that the applicant merely
acted as a procurement agent. The Department therefore contended that such
income was not covered by the exception carved out in clause (b) of Explanation
1 to S. 9(1) and was accordingly chargeable to tax in India.

Held :

The AAR accepted the contention of the applicant and held
that based on the representation and the facts submitted before it, the
applicant cannot be subjected to tax in India. Since the activities of the
applicant in India were confined to purchase of goods for export from India, the
AAR held that there cannot be any income attributable or apportioned towards
such operations by virtue of exception provided in terms of clause (b) of the
Explanation to S. 9(1)(i) of the Act.

levitra

Nirav Shah

Transportation of goods in international traffic by ships operated by other enterprises under slot-chartering arrangement is entitled to benefit of Article 9 of India-UK treaty where treaty provision matches with that of OECD Model.

New Page 2

Part C — International Tax Decisions

14 DDIT v. Balaji Shipping (UK
Ltd.)

(12 DTR 93) (Mum.)

Article 9 of India-UK treaty

A.Ys. : 2001-02, 2002-03. Dated : 13-8-2008

Issue :

Transportation of goods in international traffic by ships
operated by other enterprises under slot-chartering arrangement is entitled to
the benefit of Article 9 of India-UK treaty where the treaty provision matches
with that of the OECD Model.

Facts :

The assessee, UK Company, is a shipping company engaged in
transportation of goods in international traffic. The appeal relates to two
assessment years viz. A.Y. 2001-02 and A.Y. 2002-03. For both the years,
the assessee computed income on presumptive basis @ 7.5% of the total freight
receipt. Relying on Article 9 of India-UK treaty, it claimed that no part of the
income was taxable in India as Article 9 granted exclusive right of taxation to
UK.

For A.Y. 2001-02 (Year 1), the Assessing Officer found that
from out of the total freight receipts of about Rs.40 Cr.,1
only a small amount of freight receipt of Rs.1.7 Cr. was on account of the
freight carried in the vessels chartered by the assessee. The AO noted that
major part of the freight was in respect of cargo lifted from Indian ports
pursuant to the carrier agreement which the assessee had signed with a shipping
company at Mauritius (Mauco or Carrier). The carrier offered service of
container slot space to the assessee for transportation of cargo from Indian
port to the hub port at Dubai, Singapore, etc. (hub port).

The assessee collected cargo from Indian ports from the
consignors at its own risk and issued bill of lading for the entire
transportation from the port of loading to the port of destination. The Mauco
provided service bill of lading in respect of the containers carried in the
feeder vessel. The AO denied benefit of treaty in respect of freight earned
pursuant to carrier arrangement, but accepted computation of income @7.5% of the
total freight.

In year 2, the AO observed that the assessee did not furnish
evidence about the ships operated by it pursuant to the charter or similar
arrangement. The AO noted that the assessee had containers which were used in
transportation of cargo pursuant to the carrier arrangement. The benefit of
Article was denied in respect of the entire income on the ground that the
assessee did not operate any ship and did not bear risk of operating ship. The
AO denied benefit of the treaty and computed income @10% of the total freight
receipt. For both the years, the AO held that the assessee had PE in India in
view of Agent’s presence and hence the amount of income so determined was
chargeable under Article 7.

The CIT(A) admitted the benefit of treaty in respect of
entire freight receipts for both the years. The CIT(A) concluded that to qualify
for the treaty benefit, it was not necessary to examine whether every operation
was performed through the ship owned or chartered by the appellant. If the
assessee was engaged in operation of ship, the benefit of the treaty was
available in respect of all the ancillary and auxiliary activities connected
with the business even though they were performed through the ship belonging to
and operated by others.

Before the ITAT, the DR assailed the order of the CIT(A) by
raising following contentions :

(a) The assessee can be said to be engaged in the operation
of ship only if the ship is placed at the disposal of the assessee and the
assessee performed all the functions necessary for the purpose of running and
operating the ship in the business of transportation and earning the profit.

(b) OECD Commentary as also Klaus Vogel Commentary grants
benefit of the Article only in respect of profit obtained from ‘operation of
ship’ i.e., the ship should be in possession and at the disposal of the
assessee either on account of ownership, lease or charter arrangement and risk
of operation should be on the assessee.

(c) The activity of the assessee pursuant to the carrier
arrangement is in the nature of trading activity viz. that of purchase
of slot space and resell thereof and therefore the activity conducted pursuant
to slot arrangement does not amount to operation of ship.

(d) In the case of the assessee, almost entire income was
from purchase of space on slot basis and hence not from operation of ship. The
activity was thus not incidental or auxiliary to overall shipping operations.
In the circumstances, the activity was an independent activity and the main
business of the assessee. Since the slot charter arrangement constituted main
source of income, the activity was not eligible on the ground of it being
ancillary to the business of operation of the ship.

On the other hand, the AR supported the order of the CIT(A)
and supported eligibility to the treaty benefit by contending :

(a) The slot arrangement is an integral part of business of
operation of the ship in the international traffic.

(b) Since the term operation of ship is not defined in the
India-UK treaty, reference can be made to the OECD and other commentaries.
OECD Commentary and Klaus Vogel Commentary was relied to contend that the term
operation of ship needs to be understood in a broader sense to include even
slot arrangement.

Held :

ITAT held :

(1) Any expression defined in the treaty needs to be
understood in the sense as given in the treaty definition. If the term is not
defined in the treaty, it needs to be understood as per definition, if any, in
the local law of the contracting state as of the date the treaty is signed. If
the term is undefined, the same needs to be understood in accordance with the
rule of contemporaneous thinking. For the purpose of ascertaining
contemporaneous thinking, guidance can be taken from provisions of domestic
law or from the various commentaries available at the time of signing of DTAA.

(2) India-UK treaty does not define scope of expression
‘operation of ship’. The definition provided in Chapter XII-G introduced in
2005 in domestic law is not of relevance for interpretation of India-UK treaty
signed in year 1993.

Nirav Shah

(2012) 150 TTJ 590 (Pune) Dy.CIT vs. Magarpatta Township Development & Construction Co. ITA No.822 (Pune) of 2011 A.Y.2007-08. Dated 18-09-2012

Section 80-IB(10) of the Income-tax Act 1961 – Assessee is entitled for deduction u/s. 80-IB(10) on enhanced income resulting from statutory disallowance u/s. 40(a)(ia), 43B and 36(1)(va).

Facts

For the relevant assessment year, the Assessing Officer did not allow assessee’s claim u/s. 80-IB(10) on the enhanced income resulting from statutory disallowances u/s. 43B, 40(a)(ia) and 36(1)(va). The CIT(A) allowed the claim of the assessee.

Held

The Tribunal, relying on the decision in the case of S.B.Builders & Developers V. ITO (2011) 136 TTJ 420 (Mum.)/(2011) 50 DTR (Mumbai) (Trib) 299, allowed the assessee’s claim. The Tribunal noted as under:

It is held by the jurisdictional High Court in the case of CIT vs. Gem Plus Jewellery India Ltd. (2010) 233 CTR (Bom) 248/(2010) 42 DTR (Bom) 73 that the claim of deduction u/s. 10A was to be allowed on enhanced profit resulting from disallowance u/s. 43B/36(1) (va).

It is held by the Ahmedabad bench in the case of ITO vs. Computer Force [(2011) 136 TTJ 221 (Ahd.)/(2011) 49 DTR (Ahd.)(Trib) 298, ITA Nos.1636/Ahd./2009, 2441/Ahd./2007, 2442/Ahd./2007 and 1637/Ahd./2009 order dt.30.07.2010] that enhanced income due to disallowance u/s. 40(a)(ia) was eligible income under the head `Profits and gains of business or profession’, on which claim u/s. 80-IB was allowable.

In view of the ratio of these decisions, it is abundantly clear that in the appellant’s case also deduction u/s. 80-IB(10) was liable to be allowed in case there was enhanced income on account of statutory disallowances u/s. 43B, 40(a)(ia) and 36(1) (va) etc. as mentioned above. Since the nature of receipts on the credit side of P&L a/c. for the eligible housing project u/s. 80-IB(10) was the same and the disallowance was of the expenditure on the debit side for the same eligible housing project, it would result into enhancement of the net profit of the said eligible housing project. Therefore, the appellant’s claim is to be allowed.

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Nirav Shah

(2012) 150 TTJ 581 (Mum.) Dy.CIT vs. Ranjit Vithaldas ITA No.7443 (Mum.) of 2002 A.Y.1998-99. Dated 22-06-2012

54 is allowable where capital gains arising from sale of two residential houses are invested in a single residential house.

Facts

The assessee sold one residential flat in A.Y.1997-98 and another residential flat in 1998-99. He invested part of the capital gain arising from sale of these two flats for construction of a residential house and paid tax on the balance (uninvested) amount. He claimed exemption u/s. 54 in respect of the amount invested. The assessee contended that though the two flats were not contiguous, both had been used as one residential house and, therefore, it was submitted that the same should be treated as one house in view of judgment of the Honourable Allahabad High Court in the case of Shiv Narain Chaudhari vs. CWT 1977 CTR (All) 149: (1977) 108 ITR 104 (All).

The Assessing Officer did not accept the claim of the assessee that both flats constituted one residential house. The Assessing Officer also observed that section 54 allowed exemption in respect of one residential house, the income from which was chargeable under the head “Income from house property”. In this case, the assessee owned two residential houses and exemption from house property income was available only in respect of one house as self-occupied property. The assessee had claimed exemption u/s. 54 in respect of the first flat in the A.Y.1997-98, meaning thereby that the said flat had been treated as selfoccupied property. Therefore, the income from the second flat was chargeable to tax but since the assessee had not declared any income under the head “Income from house property” in respect of the said flat, the assessee had treated the flat as being used for the purpose of business because only in such a case, the income from the property is not chargeable. The Assessing Officer, therefore, held that since the second flat had been used for the purpose of business, income from the same was not chargeable to tax under the head “Income from house property”. Hence, the exemption u/s. 54 was not available. He, therefore, held that the assessee was not entitled to exemption u/s. 54 in the A.Y.1998-99.

The CIT(A) allowed the contentions of the assessee and allowed the exemption u/s. 54.

Held

The Tribunal allowed the exemption u/s. 54, but it was unable to agree with the view taken by the CIT(A) that the two flats constituted one residential house. The flats were located in two different buildings owned by the two different housing societies and were situated on two different roads. These flats were acquired in two different years. There was no common approach road to the buildings. Therefore, the two flats cannot be treated as one residential property only on the ground that two buildings in which the flats were located were within walking distance, as claimed by the learned Authorised Representative. The judgment of the Honourable Allahabad High Court in the case of Shiv Narain Chaudhari (supra) is distinguishable and not applicable to the facts of the present case. Therefore, the CIT(A) has wrongly placed reliance on the judgment of the Honourable High Court of Allahabad (supra) which is not applicable to the facts of the present case.

Having held that the two flats were two different residential houses, the Tribunal proceeded to examine whether the assessee was entitled for exemption u/s. 54 of the Act in respect of the sale of more than one residential house. The Tribunal noted as under:

No restriction has been placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if the assessee sells more than one residential house in the same year and the capital gain is invested in a new residential house, the claim of exemption cannot be denied if the other conditions of section 54 are fulfilled.

In section 54, there is an in-built restriction that capital gain arising from the sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential house cannot be invested in one residential house. In case capital gain arising from sale of more than one residential house is invested in one residential house, the condition that capital gain from sale of a residential house should be invested in a new residential house gets fulfilled in each case individually, because the capital gain arising from sale of each residential house has been invested in a residential house. Therefore, even if two flats are sold in two different years and the capital gain of both the flats is invested in one residential house, exemption u/s. 54 will be available in case of sale of each flat provided the time-limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.

The assessee had shown no income from the second flat because the assessee had treated both the flats as one residential house which had been used as a self-acquired property. Therefore, only on the ground that the assessee had not shown any income from the second property, it cannot be concluded that the flat had been used for the purposes of business when there is no material to support the said conclusion. Even at the time of hearing before the Tribunal, the Departmental Representative did not produce any material to show that the second flat had been used for the purposes of business. Therefore, the flat had to be treated as residential house, the income from which is chargeable to tax under the head “Income from house property”.

The only requirement of section 54 is that income should be chargeable to tax under the head “House property income” and it is not necessary that income should have been actually charged. Therefore, capital gain arising from the sale of the second flat would be eligible for exemption u/s. 54 subject to fulfillment of other conditions.

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Nirav Shah

(2012) 150 TTJ 444 (Mum.) Kishore H.Galaiya vs. ITO ITA No.7326 (Mum.) of 2010 A.Y.2006-07 Dated 13-06-2012

Section 54 of the Income-tax Act 1961 – Amount exceeding capital gains arising from sale of old residential house having been paid by assessee to a builder within three years for construction of new residential house, assessee was entitled to exemption u/s.54 notwithstanding that assessee obtained possession after three years and also failed to deposit capital gains in the capital gains account scheme before due date of fling return of income u/s.139 (1) for relevant year.

Facts

The assessee’s claim for exemption u/s. 54 of long term capital gain on sale of a residential house was denied by the Assessing Officer. The CIT(A) confirmed the disallowance.

Held

The Tribunal, relying on the decisions in the following cases, held that the assessee was entitled to exemption u/s. 54 :
a. Asst. CIT vs. Smt. Sunder Kaur Singh Gadh (2005) 3 SOT 206 (Mum.)
b. ITO vs. Mrs. Hilla J.B. Wadia 113 CTR 173 (Bom.)/ (1995) 216 ITR 376 (Bom.)
c. Jagan Nath Singh Lodha vs. ITO (2004) 85 TTJ 173 (Jd.)
d. CIT vs. Mrs. Jagriti Aggarwal (2011) 245 CTR 629 (P&H)/(2011) 64 DTR 333 (P&H)/(2011) 339 ITR 610 (P&H)
e. Jagtar Singh Chawla vs. Asst. CIT ITA No.4923 (Del.) of 2010 dated 30-06-2011

The Tribunal noted as under:

The assessee had booked a new residential flat with the builder jointly with his wife and he had paid booking amount of Rs.1,00,000 to the builder before the due date of filing of the return of income u/s. 139(1) for the A.Y.2006-07 and the balance amount had been paid in instalments after the said date. The builder was to handover the possession of the flat after construction. It has, therefore, to be considered as a case of construction of new residential house and not purchase of flat. This position has been clarified by the CBDT in Circular No.672, dated 16-12-1993 in which it has been made clear that the earlier Circular No.471, dated 15-10- 1986 in which it was stated that acquisition of flat through allotment by DDA has to be treated as a construction of flat, would apply to co-operative societies and other institutions. The builder would fall in the category of “other institutions”. Thus, in the present case, the period of three years would apply for construction of new house from the date of transfer of the old flat.

The assessee had invested the capital gains in construction of a new residential house within a period of three years and this should be treated as sufficient compliance of the provisions of the Act. It is not necessary that the possession of the flat should also be taken within the period of three years. The taking of the possession may be delayed because of many factors not under the control of the assessee due to default on the part of the builder and, therefore, merely because the possession had not been taken within the period of three years, the exemption cannot be denied. Within the period of three years, the assessee had invested more than the amount of capital gain in the construction of new residential house. Therefore, the claim of the exemption in this case cannot be denied on the ground that the possession of the flat had not been taken within the period of three years.

The other objection raised by the Revenue is that the assessee had paid/utilised only a sum of Rs. 1 lakh towards the construction of flat till the due date of filing of the return of income u/s. 139(1) for the relevant year, and, therefore, the balance amount of capital gain was required to be deposited in the Capital Gains Account Scheme which had not been done. This is only a technical default and on this ground, the claim of exemption cannot be denied particularly when the amount had been actually utilised for the construction of residential house and not for any other purpose.

The assessee has also made a point that the due date of filing of the return of income u/s. 139(1) for the purpose of utilisation of the amount for purchase/ construction of residential house has to be construed with respect to the due date prescribed for filing of the return u/s. 139(4). In the present case, the capital gain earned by the assessee was Rs. 9.98 lakh and the assessee had utilised a sum of Rs. 13.50 lakh towards the construction of residential house by 05-07-2007, which was within the extended period of filing of the return u/s. 139(4) till 31-03-2008 for the A.Y.2006-07. The assessee had, thus, utilised the amount which was more than capital gain earned towards construction of new residential house within extended period u/s. 139(4) and, therefore, there was no default in not depositing the amount under the Capital Gains Account Scheme.

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Nirav Shah

S. 32 r.w. S. 43(1) : Depreciation allowable on second-hand vehicle on original cost to previous owner

New Page 1

8 Shashikant Janardan Kulkarni v.
ITO

ITAT Pune Bench SMC, Pune

Before Mukul Shrawati (JM)

ITA No. 1357 /PN/2005

A.Y. : 2001-02. Decided on : 27-4-2007

Counsel for assessee/revenue : Arvind Kulkarni/

Vilas Shinde

S. 32 read with Explanation 3 to S. 43(1) of the Income-tax
Act, 1961 — Depreciation on second-hand vehicle — Previous owner had not used
the vehicle for the purpose of business, nor claimed any depreciation — Vehicle
transferred to the assessee at the original cost to the previous owner — Whether
the present owner justified in claiming depreciation on its original cost to the
previous owner — Held, Yes.

Facts :

A vehicle in question was purchased by the assessee’s HUF in
the year 1997 at Rs.3.87 lac. It was brought to the business by the assessee in
his individual capacity in the previous year relevant to the A.Y. 2001-02 at the
original cost of Rs.3.87 lac and depreciation @ 25% was claimed thereon. The
assessee justified his action on the ground that no depreciation was claimed by
the HUF till the time it remained its owner. However, applying Explanation 3 to
S. 43(1) of the Act, the AO held that the assessee had claimed excessive
depreciation by enhancing the cost. He therefore, reduced the cost to Rs.2 lac
and computed the depreciation accordingly. The CIT(A) on appeal confirmed the
AO’s action.

Held :

According to the Tribunal, as per Explanation 3 to S. 43(1),
the AO is empowered to substitute the cost of vehicle only if the following two
conditions were satisfied viz. :

à
The asset in question was at any time used by any person for the purpose of
business; and

à
He is satisfied that the assessee had taken resort to a subterfuge or a device
in order to avoid tax or acted fraudulently or the transaction was colourable.

It also agreed with the view expressed by the CIT(A) that the
vehicle being three years old, ought to have been subjected to wear and tear.
However, it noted that the applicable provisions did not take into account such
a situation and did not give discretion of any kind to the AO. Thus, since the
vehicle in question had not been used by the HUF for the purpose of business and
no depreciation thereon was claimed in the past on such vehicle, the Tribunal
held that the AO had no jurisdiction to substitute the value by any other
figure.

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Nirav Shah

2011-TIOL-748-ITAT-Mum. ITO v. Taj Services Pvt. Ltd. A.Y.: 2003-04. Dated: 16-9-2011

Section 48(i) — Compensation paid by the assessee to lessee to terminate the leasehold rights and surrender possession of the aircraft to the purchaser of the aircraft from the assessee is eligible for deduction while computing capital gain.

Facts:
The assessee-company, engaged in the business of travel-related services, gave an offer to Mafatlal Finance Co. Ltd. (MFL) for purchase from MFL an aircraft which MFL owned and was leased by MFL to Megapode Airlines Ltd. (MAL), for a period of 7 years commencing on 30-12-1994 and ending on 29-12-2001, under a lease agreement dated 30-12-1994, with an option to renew the lease for an indefinite period of time. The terms of sale of air-craft by MFL to the assessee were that the assessee would pay MFL a consideration of Rs.43,75,000 and sale would be subject to the rights of the lessee (MAL) under the lease agreement dated 30-12-1994 and in particular the right of MAL to extension of the tenure of the lease. In addition to the consideration, the assessee was also to pay to MAL a sum of Rs.3.18 crores spent by MAL to refurbish the aircraft to make it air-worthy. On 15-1-2002, MFL raised an invoice on the assessee for sale of aircraft. On 1-3-2002, the Directorate General of Civil Aviation issued a certificate of registration, registering the assessee as the owner of the aircraft. This certificate also recognised MAL as the operator of the aircraft. According to the assessee, it acquired the aircraft on 28-12-2001.

The assessee informed MAL that since it proposed to sell the aircraft without any encumbrances, the assessee proposed to foreclose the lease and requested MAL to handover the aircraft. The assessee gave 3 months’ notice of termination and informed MAL that the termination would be effective 6-5-2002.

Consequent to various negotiations which took place between the assessee and MAL, it was agreed by the assessee with MAL that the assessee would give Rs.4.70 crore to MAL as compensation for premature closure of the lease agreement and MAL agreed to deliver the aircraft in good working condition on or before 6-5-2002. Also, by lease agreement dated 25-2-2002 between the assessee as owner and lessor of the aircraft and MAL as the lessee, the lease period of the aircraft to MAL was extended by 5 years effective from 30-12-2011.

The assessee sold the aircraft without any encumbrances for a consideration of Rs.8,92,87,147. While computing short-term capital gains arising on transfer of aircraft, the assessee inter alia claimed a deduction of Rs.4,70,00,000, being amount of compensation paid for premature termination of the lease agreement, u/s.48(i) of the Act, as being expenditure incurred wholly and exclusively in connection with transfer of capital asset.

The AO while assessing the total income of the assessee did not allow this amount as a deduction on the ground that also that MFL having earned Rs.17.51 crore as lease rentals from MAL till date of sale could have sold the aircraft to MFL or MAL for a consideration of Rs.43.75 lakh and the amount which would have been taxable in that case would have been greater; the assessee and MAL were part of the same group and that MAL was suffering losses and therefore payment for foreclosure of lease agreement was to avoid tax liability. Also, the transaction was not a genuine transaction since the termination of lease by the assessee was on 6-2-2002, whereas the renewal agreement with MAL was entered only on 25-2-2002 and even this lease agreement did not contain clauses for termination of the lease and the monetary compensation quantified and agreed between the parties.

Aggrieved, the assessee preferred an appeal to the CIT(A) who distinguished the decisions relied upon by the AO and allowed the appeal filed by the assessee on the ground that once it is established that the assessee was under a contractual obligation to provide the aircraft free of any encumbrances for which it had paid compensation to MAL, such compensation is inextricably incidental to transfer and, hence, allowable as deduction u/s.48(i) of the Act.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal held that the compensation paid to MAL for surrendering its pre-existing rights as the lessee is inextricably connected to the transfer of the aircraft as one of the condition for sale of the aircraft by the assessee was surrender of possession to the purchaser free from all encumbrances. It noted that the renewal agreement had to be signed between the assessee and MAL on 25-2-2002 so that possession of the aircraft by MAL till delivery to the purchaser is made remains lawful. It also held that there can be no complaint regarding compensation paid to MAL being excessive. It is for the parties to the agreement to decide on the rightful compensation. There is no material available on record to show that there was any ulterior motive in paying the sum of Rs.4.70 crore as compensation by the assessee to MAL for surrendering leasehold rights and delivering possession of the aircraft. It also observed that the alternative computation filed by the assessee clearly demolishes the case of the AO that there was any motive to avoid tax.

This ground of appeal filed by the Revenue was dismissed.

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Nirav Shah

2011-TIOL-735-ITAT-PUNE Glaxosmithkline Pharmaceuticals Ltd. v. ITO (TDS) A.Ys.: 2006-07 to 2008-09. Dated: 7-10-2011

Sections 9(1), 194C, 194J — Security services are not technical or professional services. Hence, payment made in lieu of such services is not covered u/s.194J but u/s.194C.

Facts:
The assessee, engaged in manufacturing of medicines was subjected to survey action u/s.1333A of the Act on 21-11-2007 by the ITO (TDS) (AO). The AO noticed that in respect of payments made by the assessee towards security charges, the assessee was deducting tax at source @ 2.26% u/s.194C. The AO was of the view that the payments for security charges are covered u/s.194J. He passed an order u/s.201 and 201(1A) r.w.s. 194J and demanded payment of TDS and interest on TDS for the 4 assessment years 2005-06 to 2008-09.

Aggrieved the assessee preferred an appeal to the CIT(A) who held that security personnel were rendering skilled services to the assessee and can be categorised as professional or technical services as per the Explanation to section 194J of the Act. He upheld the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal having considered the answer of the CBDT to Q No. 28 of Circular No. 715, dated 8-8-1995 held that an electrician is also a skilled person and if the services of an electrician provided by a contractor are treated by the CBDT under the provisions of section 194C vis-àvis section 194J, then it gives strength to the argument that security services provided by a contractor will also come under the provisions of section 194C, because the security guards are also skilled persons as an electrician. The services provided by security personnel under a contract with the agency cannot be categorised as technical service unless the provisions of clause (vi) to Explanation 2 to section 9(1) are fulfilled. In order to rope in any service provider within the net of section 194J, it is of paramount importance to check the true nature of service provided on the touchstone of the mandate of this provision alone. Clause (vii) to Explanation 2 to section 9(1) defines fees for technical services, as consideration for rendering of any ‘managerial, technical or consultancy services’, the word ‘technical’ is preceded by the word ‘managerial’ and is succeeded by the word ‘consultancy’. Following the view of the decision of the Mumbai Bench in the case of ACIT v. Merchant Shipping Service (P) Ltd. and Others, (135 TTJ 589) (Mum.) it held that as both managerial and consultancy services are possible with human endeavour, the word ‘technical’ should also be seen in the same light. To be more precise, any payment for technical services in order to be covered u/s.194J, should be a consideration for acquiring or using technical know-how simplicitor provided or made available by human element. There should be direct and live link between payment and receipt/use of technical services/information. If the conditions of section 194J r.w.s. 9(1), Explanation 2 clause (vii) are not fulfilled, the liability under this section is ruled out. The payments made by the assessee for security services are covered u/s.194C.

The Tribunal allowed the appeal filed by the assessee.

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Nirav Shah

(2011) 131 ITD 84 (Hyd.) Sri Venkateswara Bhakti Channel v. ACIT, Circle-1(1) Dated: 26-11-2010

Section 12A — Can a section 25 company be registered u/s.12A of Income-tax Act — Held, Yes.

Facts:

The assessee-company was registered u/s.25 of the Companies Act, 1956 and was engaged in producing religious feature films, serials for a temple. It applied for registration u/s.12A with the Commissioner. The application was rejected on the grounds that the assessee was a private limited company.

Held:
The provisions of section 11 deal with the exemption of the total income of a ‘person’ who derives income from property held under trust for charitable or religious purposes. The plain reading of the definition of person also includes a company. The word institution is also not defined anywhere in section 12AA, but the meaning as given in Oxford Dictionary nowhere suggests that company is not an institution. The company being a person in accordance with the scheme of the Act is entitled to benefit of section 12A.

Thus the test whether an assessee could be registered u/s.12A is not the status of the ‘person’, but on the basis that whether the person (assessee) was established for charitable or religious purpose.

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Nirav Shah

(2011) 131 ITD 1 (Ahd.) ITO Ward-2(4), Ahmedabad v. Chandrakant R. Patel A.Y.: 2006-07. Dated: 8-4-2011

Section 55A r.w.s. 48 — Reference to DVO can be made under specific circumstances prescribed u/s.50C and fair market value determined by DVO cannot be replaced for full value of consideration.

Facts:

The assessee had shown long-term capital gain on sale of land. There was a common sale deed executed along with co-owners in respect of two plots. The assessee had showed sale consideration of Rs.41,860 per sq.mt. The ‘Jantri’ rate as per ‘Stamp Duty Authority’ was Rs.4500 and Rs.7000 per sq.mt. respectively, for the plots. The AO considering the area of the property referred valuation of the same to the DVO. The valuation report of the DVO valued the same at Rs.45,000 per sq.mt. The AO on the basis of report of DVO made the addition.

On appeal the assessee contended that reference made u/s.50C was illegal. The CIT(A) opined that reference to the DVO can be made u/s.142A, or u/s.55A, or u/s.50C. The CIT(A) was of opinion that section 142A has a limited scope for reference to Valuation cell i.e., for estimating an investment as prescribed u/s.69 and u/s.69B for certain assets (bullion, jewellery, valuable articles). Section 55A is in respect of ascertaining the fair market value for purpose of determining the cost of acquisition u/s.55(2)(b). As per section 50C reference is possible only if sale consideration is less than the stamp duty value fixed by stamp valuation authority. Thus, the CIT(A) held that addition made by the AO was not lawfully sustainable.

Aggrieved the Revenue appealed before the ITAT.

Held:
(1) The language in section 55A does not refer ‘value of consideration’ but only uses the term ‘Fair market value’. So, the scope of the section gets confined to determine the fair market value of a capital asset only. Thus, considering the language of section 48 the value so determined cannot be substituted for ‘Full value of consideration’.

(2) Section 50C states that the AO can refer to the DVO u/s.55A only if the assessee claims that the value adopted by the stamp valuation authority exceeds their fair market value or the value so adopted by stamp valuation authority has not been disputed by any authority, Court or High Court.

(3) Thus, the valuation made by the DVO and the consequential addition as made by the AO was reversed and the view taken by the CIT(A) was upheld.

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Nirav Shah

(2011) 129 ITD 200 (Delhi) Honda Siel Cars India Ltd. v. ACIT A.Y.: 2003-04. Dated: 16-5-2008

Section 37(1) — Nature of payment made for acquiring technical know-how is capital or revenue expenditure depends upon whether payment is made to acquire any proprietary rights in technical know-how or right to use same for the business for limited period of time.

Section 92 — Transfer Pricing Officer (TPO) is not concerned, nor is he competent to decide as to whether payment for technical rights is capital or revenue — Tribunal decision regarding nature of payment for technical rights by assessee could not be deferred at the request of Department till TPO determines arm’s-length price. Such course was not contemplated by law.

Section 37(1) — Expenditure incurred on advertisement is undisputedly business expenditure —Assurance given by assessee to give away car at its own cost to winner of advertisement scheme launched by paint company might be beneficial to the assessee in the long run and allowable as business expenditure.

Facts: I

The assessee paid Rs.29.40 crore being lump-sum fee for technical know-how and Rs.18.55 crore being royalty to Honda Motor Company Ltd. (HMCL) under technical collaboration agreement. Under the said agreement the assessee acquired right to use technical information provided by HMCL and ownership rights continued to remain with HMCL. As the assessee got only limited right to use and exploit know-how and did not acquire any intellectual property, he claimed the expenditure as revenue. However AO did not accept the assessee’s contention to treat the expenditure as revenue. He disallowed the same and treated the same as capital expenditure on the ground that know-how was crucial for setting up of the assessee’s business and not towards running an existing business.

Facts: II

Reference was made by the Revenue to TPO, to determine arm’s-length price of the amount paid for technical know-how and royalty. The Revenue requested ITAT that it should not give any finding on nature of the above payment till TPO determines its arm’s-length price.

Facts: III

Nerolac Paint launched a sales promotion scheme where the winner would get Honda City car. The assessee-company agreed to bear the cost of the car.

The Revenue disallowed the above advertisement expenditure in the books of the assessee as they were of the opinion that Nerolac Paint stood to benefit from the campaign and not the assessee.

Held: I

In order to ascertain whether payment made for acquiring technical know-how is capital or revenue expenditure, test that is to be applied in such case is whether the assessee got any proprietary/ownership rights or he merely got right to use the same for his business, irrespective of whether expenditure was incurred at the time of initiation of business or at any point of time subsequent thereto.

After noticing all the terms of technical know-how agreement, the ITAT held that on payment for technical know-how the assessee did not become owner of the same. HMCL continued to retain ownership rights in the technical know-how. HMCL merely granted licence to the assessee for manufacture of cars. The manufacture of the cars was the business for which the company was established. Payment made to HMCL was not in connection with setting up of plant but to enable the assessee to manufacture Honda cars in India which formed part of its stock in trade.

Therefore the payment of lump-sum fees for technical know-how and the royalty were treated as part of revenue expenditure.

Held: II

The function of TPO under the provisions of section 92 to 92C is to determine arm’s-length price and he is not concerned with deciding whether it is capital or revenue, nor is he competent in law to decide such question.

The ITAT held that it is first necessary to determine nature of payment and if it is held to be capital then it is not allowable as deduction and determination of arm’s-length price by TPO may not be necessary. However if it held to be revenue, then while giving effect to the order, the AO may, if so advised, refer the question of determination of arm’s-length price to TPO. But decision of tribunal regarding nature of payment cannot be deferred till determination of arm’s-length price by TPO. Such path was not contemplated by law.

Therefore, the request made by the Revenue was rejected.

Held: III

Any expenditure which is not capital or personal nature is allowable as deduction provided it is incurred wholly and exclusively for the purpose of the business according to section 37(1). Expenditure incurred wholly and exclusively for the purpose of the business does not cease to be so merely because it also benefits some other person.

As long as the expenditure benefits the assessee it should be allowed as deduction. Assurance of giving away Honda car at its own cost to the winner of Nerolac Paint promotion scheme may be beneficial to the assessee’s business in long run and is business expenditure. Hence, the expenditure incurred on advertisement should be allowed.

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Nirav Shah

(2011) 62 DTR (Mum.) (Trib.) 349 Free India Assurance Services Ltd. v. DCIT A.Ys.: 2001-02 to 2004-05. Dated: 30-3-2011

Bogus purchases — Assessee made payments by cheques to two parties, received cash against the cheque payments and utilised such cash to purchase cloth from the grey market and the same has been recorded in the closing stock — Such purchases are allowed as deduction and cannot be treated as bogus.

Facts:

At the time of search and seizure, it was found that the assessee had made purchases amounting to Rs.30,80,730 for which the assessee had issued cheque and in lieu thereof he received cash. The assessee admitted the fact that such cash received was actually used to purchase fabric from the grey market. Thus the purchase bills were taken from parties to cover up the purchase actually made in the grey market. The fabric was purchased in the previous year and was lying in stock as on the last day of the previous year. The AO treated the same as bogus purchases and disallowed the same. The CIT(A) stated that as long as the stock is reflected in the books of account to that extent the credit for fabrics purchased ought to be given. But the CIT(A) disallowed 20% of total purchase u/s.40A(3) on the ground that the assessee had admitted that the purchases were from grey market.

Held:
In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than the purchases or the entry recorded in the closing stock is found to be fictitious or false, the assessee has made cash purchases of Rs.30,80,730 and the same needs to be allowed since they were undisputedly found recorded in the inventory of the assessee.

Regarding the application of provisions of section 40A(3), no such material was found to show that the assessee had made cash payments in the violation of section 40A(3). Disallowance cannot be merely based on a presumption basis.

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Nirav Shah

2013-TIOL-720-ITAT-MUMBAI ITO vs. Wadhwa and Associates Realtors Pvt. Ltd. ITA No. 695/Mum/2012 Assessment Year: 2008-09. Dated: 03-07-2013

S/s. 194I, 201(1) – Lease premium paid to acquire leasehold land is not rent and tax on such payment, made by the assessee to MMRDA, is not deductible u/s. 194I.

Facts:
The assessee, a private limited company dealing in real estate, during the previous year under consideration paid a sum of Rs. 949.92 crore for allotment of a plot of land namely C-59 in ‘G’ Block of Bandra Kurla Complex, Bandra (E), Mumbai as per lease deed dated 22-11-2004 and also for additional FSI in respect of the said plot. The lease premium was paid without deduction of tax at source u/s. 194I. The Assessing Officer (AO) held that this payment attracted provisions of section 194I and since the assessee failed to deduct tax at source it has committed default within the meaning of section 201(1) of the Act and therefore, he treated the assessee to be an assessee in default and directed the assessee to make payment of interest along with TDS totaling to Rs. 314.26 crore.

Aggrieved, the assessee filed an appeal to CIT(A) where it contended that the payment under consideration was not covered by the term `rent’ u/s. 194I but was made to MMRDA (a) for additional built-up area and (b) for granting free-of-FSI area of Rs. 4 crore. The CIT(A) observed that the amount charged by MMRDA as lease premium was equal to the rate prevalent as per stamp duty recovery for acquisition of the commercial premises. These rates are prescribed for transfer of property and not for use as let-out tenanted property. He also observed that even the additional FSI was given for additional charges as per Ready Reckoner rates only. He found that the whole transaction towards grant of leasehold transaction rights to the assessee is nothing but a transaction of transfer of property and the lease premium is the consideration for the purchase of the said leasehold rights. Relying on the ratio of the decision of Mumbai Tribunal in the case of M/s. National Stock Exchange of India Ltd. (ITA Nos. 1955/M/99, 2181/M/99, 4853/M/04, 4485/M/04, 4854/M/04, 356/M/01and 5850/M/00) he decided the appeal in favour of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal observed that a careful reading of the lease deed shows that the premium is not paid under a lease but is paid as a price for obtaining the lease, hence it precedes the grant of lease. Therefore, by any stretch of imagination, it cannot be equated with the rent which is paid periodically. It also noted that the payment to MMRDA is also for additional built-up area and also for granting free-of-FSI area, such payment cannot be equated to rent. It held that the assessee has made payment to MMRDA under Development Control for acquiring leasehold land and additional builtup area. Considering the precedents relied upon by the CIT(A) and the definition of the term `rent’ as provided in section 194I, the Tribunal confirmed the order of the CIT(A) and decided the issue in favour of the assessee.

The appeal filed by the Revenue was dismissed.

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Nirav Shah

2013-TIOL-764-ITAT-INDORE DCIT vs. Roop Singh Bagga ITA No. 44/Ind/2013 Assessment Year: 2009-10. Dated: 31-05-2013

S/s. 40(a)(ia), 271(1)(c)–Disallowance u/s. 40(a) (ia) does not attract penalty u/s. 271(1)(c). Making an incorrect claim in law does not tantamount to furnishing of inaccurate particulars of income. Levy of penalty is not justified merely because the assessee has claimed certain expenditure that expenditure is not eligible in view of the provisions of section 40 (a)(ia) of the Act and for that reason, expenditure is disallowed.

Facts: The Assessing Officer (AO) while assessing the total income of the assessee, a transport contractor, found that payment of freight was made without deducting tax at source. Accordingly, he disallowed the freight u/s. 40(a)(ia). The assessee did not challenge the addition and paid tax thereon. The AO also levied penalty u/s. 271(1)(c) with reference to the disallowance so made by him. Aggrieved, the assessee preferred an appeal to the CIT(A) who following the decisions of the Hyderabad `A’ Bench of the Tribunal in the case of ACIT vs. Seaway Shipping Ltd. (ITA No. 80H/2011, order dated 11th June, 2010) and Ahmedabad `D’ Bench of the Tribunal in the case of L.G. Chaudhary (2012-TIOL-205-ITAT-AHM) deleted the penalty.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held: The Tribunal noted that—

(a) the default for non-deduction of tax in respect of payment for freight charges was accepted by the assessee himself by filing letter dated 21-12- 2009 before the Assessing Officer;

(b) the Supreme Court has in the case of Suresh Chand Mittal (supra) observed that additional income offered by the assessee to buy peace and to come out of vexed litigation would be treated as bona fides;

(c) the issue with regard to levy of penalty u/s. 271(1)(c) on the plea of non-deduction of tax u/s. 40a(ia) has been considered by the coordinate Bench in the case of Seaway Shipping Ltd and L.G. Choudhary (supra) wherein exactly on the similar issue, levy of penalty was held to be not justified;

(d) Supreme Court in the case of Reliance Petro Products (P) Ltd. (322 ITR 158)(SC) has categorically observed that “By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars”.

The Tribunal confirmed the order passed by CIT(A) and decided the issue in favour of the assessee.

The appeal filed by the revenue was dismissed.

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Nirav Shah

2013-TIOL-746-ITAT-DEL ACIT vs. Delhi Public School ITA No. 4878 & 4879/Del/2012 Assessment Year: 2008-09 & 2009-10. Dated: 24-05-2013

S/s. 194C, 194I–Payments made by school to bus
owners/contractors for transportation of students from their home to
school and back qualify for deduction of tax at source u/s. 194C and not
u/s. 194I.

Facts:
The assessee, a school, had
taken on hire vehicles which were used for carrying students from their
homes to school and back. In view of the contracts entered into by the
assessee with the bus owners, the assessee deducted tax u/s. 194C.
Before the Assessing Officer (AO) the assessee submitted that
considering the fact that the contract provided for transportation of
children, drivers and conductors were appointed by the contractor, after
school trips were over the contractor was free to utilise the vehicle
for any manner and purpose, tax was deductible u/s. 194C. However, the
AO held that since the name of the school was written on the buses and
also that the buses were in exclusive possession of the school, the
transporter cannot ply buses for any purpose other than for the school.
He, accordingly, held that the payments made qualify for deduction of
tax u/s. 194I and not u/s. 194C. The AO calculated the difference in
amount deductible u/s. 194I and the amount deducted u/s. 194C.

Aggrieved,
the assessee preferred an appeal to CIT(A). The CIT(A) noted that the
contract was on a per trip basis for specified route. The rates per trip
were frozen for a period of one year. The vehicle i.e., the school bus
remains in possession of the transporter and the staff required to
operate the vehicle was also engaged by the transporter. All costs
incurred for running and maintenance of buses including the salaries of
driver and conductor were to be incurred by the transporter. Once the
trips made by these buses for carrying and dropping children from/to
school are complete, the transporter is at liberty to use the vehicle in
any manner. Following the ratio of the following decisions he held that
the contract was a works contract and provisions of section 194I were
not applicable.

a) Lotus Valley Education Society vs. ACIT (TDS) Noida 46 SOT 77 (Delhi) (URO)

b) Ahmedabad Urban Development Authority vs. ACIT 46 SOT 75 (Ahd) (URO)

c) ACIT (TDS) vs. Accenture Services Pvt. Ltd. 44 SOT 290 (Mumbai)

d) ITO vs. Indian Oil Corporation (15 Taxmann. com 210)(Delhi ITAT)

He decided the appeal in favour of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the issue is covered by various cases decided by
the Tribunal. It also noted that the facts are similar to the facts in
the case of Lotus Valley Education Society vs. ACIT (TDS), which was
decided by Delhi Bench in ITA No. 3254 & 3255 /Del/2010. Relying
upon the observations in para 6 of the said order the Tribunal decided
the issue in favour of the assessee.

The appeal filed by the revenue was dismissed.

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Nirav Shah

S. 69C—If there is a dispute of the source of the expenditure, then addition can be made u/s.69C — Merely because labour charges are shown as outstanding cannot be a ground to make addition u/s.69C.

New Page 1

(Full text 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.)

14 Muscovite Construction v. ACIT
ITAT ‘I’ Bench, Mumbai
Before R. S. Padvekar (JM) and Rajendra Singh (AM)
ITA No. 2856/Mum./2009
A.Y. : 2005-06. Decided on : 21-5-2010
Counsel for assessee/revenue : C. N. Vaze/Rajnesh Dev Buvman.

S. 69C—If there is a dispute of the source of the
expenditure, then addition can be made u/s.69C — Merely because labour charges
are shown as outstanding cannot be a ground to make addition u/s.69C.

Per R. S. Padvekar :

Facts :

The assessee was carrying on business of civil construction
contract work and labour contract. It filed its return of income declaring an
income of Rs.14,29,579. In the course of assessment proceedings the Assessing
Officer (AO) noticed that the assessee had debited labour charges of Rs.1.10
crores in the P & L Account and in the balance sheet out of the said expenditure
a sum of Rs.54,56,235 was shown as outstanding. The outstanding labour charges
were for the months of Jan, Feb and March 2005. In response to the show cause
notice issued by the AO asking the assessee to explain why outstanding labour
charges/ wages should not be treated as unexplained, the assessee submitted that
it was facing a financial crunch in the business and the break-up of monthly
wages in respect of each type of labour like carpenter, mason, etc. was
furnished. The AO, not being satisfied with the explanation furnished, added the
amount of Rs.54,56,235 as unexplained expenditure u/s.69C.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that nothing has been brought on record by
the AO to show that the assessee has used the money which was not reflected in
the books of account. It also noted that in the immediate next year the assessee
has paid the outstanding wages/labour charges and also that in the assessment
order for A.Y. 2006-07 the AO has discussed the issue. The Tribunal held that as
per the language used by the Legislature in S. 69C, if there is a dispute of the
source of the expenditure, then the addition can be made. Since the payment of
outstanding wages has been accepted by the AO in the next year, hence no
addition can be made u/s.69C of the Act. It also noted that it was not that the
expenditure was bogus or non-genuine and the AO has also not examined any of the
labourers to support his case. It held that merely because labour charges are
shown as outstanding that cannot be a ground to make the addition u/s.69C.

The Tribunal deleted the addition and decided the ground in
favour of the assessee.

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Nirav Shah

S. 73—Any speculation loss computed for A.Y. 2006-07 and later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006 by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent assessment years applies only to such loss.

New Page 1

13 Virendra Kumar Jain v. ACIT
ITAT ‘B’ Bench, Mumbai
Before R. V. Easwar (Sr. VP) and
A. L. Gehlot (AM)
ITA No. 1009/Mum./2010
A.Y. : 2006-07. Decided on : 31-5-2010

Counsel for assessee/revenue : Vijay Mehta/ K. K. Das

S. 73—Any speculation loss computed for A.Y. 2006-07 and
later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006
by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent
assessment years applies only to such loss.

Per R. V. Easwar :

Facts :

In A.Y. 2001-02 the assessee suffered a speculation loss of
Rs.4,55,30,494 which loss was allowed to be carried forward to subsequent years
u/s.73(2) of the Act. In the return filed for A.Y. 2006-07 the assessee claimed
that speculation loss brought forward from A.Y. 2001-02 should be set off
against speculation profits for the A.Y. 2006-07. The Assessing Officer (AO)
denied the claim of the assessee on the ground that u/s.73(4) no loss shall be
carried forward for more than four assessment years immediately succeeding the
assessment year for which it was first computed. He held that speculation loss
for A.Y. 2001-02 cannot be carried forward beyond A.Y. 2005-06.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

It is a settled rule of interpretation that a vested right
can be taken away only by express language or by necessary implication. This is
settled by the decision of the Privy Council in Delhi Cloth & General Mills
Company Ltd. v. CIT, AIR 1927 (PC) 242 and the same has been cited with approval
by the Supreme Court in the case of Jose Dacosta v. Bascora Sadashiv Sinai
Narcomin, AIR (1975) SC 1843. The assessee had a vested right to carry forward
the speculation loss for a period of eight assessment years as per S. 73(4) as
it stood before the amendment made by the Finance Act, 2005. That such a right
is a vested right cannot be doubted after the judgment of the Supreme Court in
the case of CIT v. Shah Sadiq & Sons, 166 ITR 102 (SC). In S. 73(4) or in any
other provision there is no express language or any implication to the effect
that the right of the assessee to carry forward the speculation loss for a
period of eight subsequent assessment years has been taken away.

Any speculation loss computed for the A.Y. 2006-07 and later
assessment years alone would be hit by the amendment and such loss can be
carried forward only for four subsequent assessment years. The vested right of
the assessee has not been taken away.

The amendment made by The Finance Act, 2005 w.e.f. 1-4-2006
is merely to substitute the words ‘four assessment years’ for the words ‘eight
assessment years’ in Ss.(4) of S. 73. Ss.(4) of S. 73 refers only to the loss to
be carried forward to the subsequent years. It does not say anything about the
set-off of the speculation loss brought forward from the earlier years. There is
a distinction between a loss brought forward from the earlier years and a loss
to be carried forward to the subsequent years. The sub-section deals only with
the speculation loss to be carried forward to the subsequent years and in the
very nature of the things, it cannot apply to speculation loss quantified in any
assessment year before the A.Y. 2006-07.

The Tribunal made a reference to the Income-tax Rules
prescribing form of return of income and noted that the form in ITR 4 makes a
distinction between loss brought forward and loss to be carried forward. It held
that since in the present case it was concerned with the assessee’s right to set
off the brought forward speculation losses against speculation profits for A.Y.
2006-07, Ss.(4) of S. 73 has no application.

The Tribunal allowed the appeal filed by the assessee.

levitra

Nirav Shah

Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether reduction in the liability availed by the assessee on the basis of One Time Settlement Scheme in respect of its outstanding term loans is to be treated as taxable u/s.28(iv) or u/s.41(1) — 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.)

17. Accelerated Freez & Drying Co. Ltd. v. Dy.
CIT

ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 971/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

C. Karthikeyan Nair

Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether
reduction in the liability availed by the assessee on the basis of One Time
Settlement Scheme in respect of its outstanding term loans is to be treated as
taxable u/s.28(iv) or u/s.41(1) — Held, No.

Per Dr. O. K. Narayanan :

Facts :

The assessee company, engaged in the business of sea food
exports, had availed term loans from three banks, viz. ICICI Bank Ltd.,
Standard Chartered Bank Ltd., and Sumitomo Mitsui Banking Corporation,
Hongkong. These term loans were availed by the assessee for the purpose of
acquiring capital assets to be deployed in the manufacturing system of the
assessee company. Due to bad financial position the assessee defaulted on
payment of installments and interest. The total amount of loans that remained
payable to the banks amounted to Rs.3486.03 lakhs.

During the previous year relevant to the assessment year
under appeal, the assessee reached an agreement with the three bankers for One
Time Settlement (OTS) of its loan liability whereby the loan liability of
Rs.3486.03 lakhs was settled on payment of Rs.2450 lakhs resulting in a waiver
of loan amount of Rs.1036.03 lakhs. This principal amount of loan waived by
the banks was credited by the assessee to General Reserve Account and was not
offered for tax.

The AO held that waiver resulted in earning gain for the
assessee company in the course of carrying on of its business. He further held
that u/s.2(24)(i) both ‘profits’ and also ‘gains’ are income; it is a mandate
of S. 28 to levy income-tax not only on the profits of the business but even
on the gains of a business. He, therefore, held that In the light of the
definitions attributed to the expressions ‘income’ and ‘gains’, the waiver
benefit enjoyed by the assessee company should be treated as income of the
assessee from business. The AO relied on a decision of the Supreme Court (SC)
in the case of T. V. Sundaram Iyengar & Sons. He, accordingly, included the
amount of Rs.1036.03 lakhs in computation of assessable income under the head
‘Income from Business’.

The CIT(A) held that waiver amount was rightly charged
u/s.28(iv) of the Act. She also observed that the decision of the SC in the
case of T. V. Sundaram Iyengar & Sons is analogous in facts and the ratio of
the said decision was applicable to the assessee’s case. She dismissed the
appeal.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal stated that the facts of the assessee’s case
are quite different from the facts considered by the SC in the case of T. V.
Sundaram Iyengar and Sons Ltd. and therefore the said decision does not become
applicable to the present case of the assessee.

The Tribunal noted that the Bombay High Court while
delivering its judgment in the case of Solid Containers Ltd. has not dissented
in any way from the earlier decision in the case of Mahindra and Mahindra Ltd.
It observed that in the case of Solid Containers Ltd. the Court has reiterated
the ratio laid down in the judgment of the High Court of Bombay in the case of
Mahindra and Mahindra Ltd., that the loan availed for acquiring capital
assets, when waived, cannot be treated as assessable income. Therefore, it
held that it is not possible to hold that as far as the loan waiver of capital
account is concerned, the decision of the Bombay High Court in the case of
Solid Containers Ltd. clashes with the judgment of the same court in the case
of Mahindra and Mahindra Ltd.

The Tribunal held that since the loan waiver amount
credited by the assessee in its general reserve account is covered by the
judgment of the Bombay High Court in the case of Mahindra and Mahindra Ltd.,
the said waiver amount cannot be held as taxable.

The Tribunal noted that the SC has in the case of Polyflex
(India) Pvt. Ltd. examined the constitution of S. 41(1) and categorically
ruled that the words ‘remission or cessation thereof’ apply only to a trading
liability. Since the term loans availed by the assessee from the three banks
were not in the nature of trading liability but were in the nature of capital
liability, it held that the waiver thereof would not become income u/s.41(1)
on the ground of remission or cessation thereof. It also noted that the
assessee never had the benefit of deduction of the term loan availed by it
from the banks on capital account. Also, the term loans availed were not in
the nature of any loss or expenditure. Therefore, it held that S. 41(1) had no
application to the present case.

The Tribunal found the issue raised to be squarely covered
by the judgment of SC in the case of Polyflex (India) Pvt. Ltd., the decision
of the Bombay High Court in the case of Mahindra and Mahindra Ltd., decision
of the Delhi High Court in the case of Phool Chand Jiwan Ram and the decision
of the jurisdictional High Court in the case of Cochin Co. Ltd.

Nirav Shah

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether trade discount allowed to a customer constitutes commission liable for deduction of tax u/s.194H — 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.)

16. S. D. Pharmacy Pvt. Ltd.

v. Dy. CIT

ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 948/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

V. M. Thyagarajan

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether
trade discount allowed to a customer constitutes commission liable for
deduction of tax u/s.194H — Held, No.

Per Dr. O. K. Narayanan :

Facts :

The assessee company was engaged in the business of
manufacture and sale of ayurvedic products. In the course of assessment
proceedings the AO noticed that the total sales of the assessee were
Rs.4,82,12,960 and corresponding trade discount amounted to Rs.1,42,43,565.
This trade discount was given to four concerns of which one was a sister
concern of the assessee. The amount of trade discount to the sister concern
was Rs.1,34,24,839 since the major sales of the assessee were to its sister
concern.

The AO disallowed the amount of trade discount of
Rs.1,42,43,565 u/s.40(a)(ia) since he held that the discount fell within the
ambit of S. 194H of the Act and since the assessee had not deducted tax at
source the same was not allowable.

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

On an appeal by the assessee to the Tribunal it was pointed
out to the Tribunal that the products sold were billed at gross amount and
trade discount was given at the rate of 50% or 30% or 17.20%, as the case may
be. Trade discount allowed was reduced from the gross invoice value and net
amount was shown as net price payable by the parties. Sales tax was collected
on the net amount so payable by the parties. In the accounts, the customer’s
account was debited with the net amount and the amount of trade discount was
debited to Trade Discount A/c which was transferred to the debit of Trading
Account. Sales turnover was a gross amount. The property in the goods passed
to the customer on delivery of the goods. It is only the net amount which was
receivable from the customer for the goods sold. Reliance, on behalf of the
assessee, was placed on the decision of Delhi Bench of the Tribunal in the
case of Mother Dairy India Ltd.

Held :

The Tribunal found this to be a case of outright sale on a
principal to principal basis at the net amount. The trade discount was held to
be margin that the dealers could enjoy in retail trade. The Tribunal noted
that there was nothing on record to show that dealers and buyers were not
acting on their own behalf and since the sales were made on principal to
principal basis there was no question of assessee paying any commission or
brokerage or similar amounts to parties for the services rendered by them. The
Tribunal also took note of the fact that the assessee was not crediting the
discount to the account of the customer/dealer but was directly debiting it to
Trade Discount A/c.

The Tribunal following the ratio of the decision of the
Kerala High Court in the case of M. S. Hameed and Ors. held that since the
assessee was not making any payment of commission or brokerage to the parties
nor was it crediting the accounts of the parties for similar amounts there was
no occasion to deduct the tax as contemplated u/s.194H.

The Tribunal also noted that the Kerala High Court has in
the case of Kerala Stamp Vendors Association held that discount given on price
by the seller to the purchaser cannot be termed as ‘commission’ or ‘brokerage’
for services rendered in the course of buying and selling of goods as the act
of buying does not constitute rendering of any service.

Considering the facts and following the ratio of the two
decisions of Kerala High Court the Tribunal held that trade discount debited
by the assessee in its accounts is not covered by the provisions of S. 194H of
the Act. Since there was no liability on the part of the assessee to deduct
any tax on the amount of trade discount given to its dealers the disallowance
of Rs.1,42,43,565 was deleted.

Cases referred :

(1) Mother Dairy India Ltd. v. ITO, ITA No.
2975/Del./2008 dated 12-12-2008

(2) M. S. Hameed and Ors. v. Director of State
Lotteries and Ors., 249 ITR 186 (Ker.)

(3) Kerala Stamp Vendors Association v. Office of the
Accountant-General and Ors., (282 ITR 7) (Ker.)

levitra

Nirav Shah

S. 2(22)(e) : Balance in share premium account cannot be considered as part of accumulated profit.

New Page 1

(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 DCIT v. MAIPO India Limited

ITAT ‘A’ Bench, New Delhi

Before R. V. Easwar (VP) and

K. D. Ranjan (AM)

ITA No. 2266/Del./2005.

A.Y. : 1996-97. Decided on : 7-3-2008

Counsels for revenue/assessee : A. K. Singh/

Rano Jain

S. 2(22)(e) of the Income-tax Act, 1961 — Deemed dividend —
Whether balance in share premium account can be considered as part of
accumulated profit — Held, No.

Per R. V. Easwar :

Facts :

The assessee had received an advance of Rs.25.43 lacs from
another company ‘G’, wherein it held 40% of the shares. Before the year end, the
assessee had repaid the sum of Rs.14.31 lacs. The AO assessed the balanced sum
of Rs.11.12 lacs u/s.2(22)(e) of the Act. In the books of G, the aggregate sum
of reserves and surplus of Rs.1.95 crore included the sum of Rs. 1.9 crore of
share premium. The issue was whether the balance in share premium account could
be considered as accumulated profit.

According to the Revenue, Explanation 2 to S. 2(22)(e) did
not provide for exclusion of capital profit expressly, and secondly, unlike
other clauses of S. 2(22) which contained the expression ‘whether capitalised or
not’, clause (e) did not contain the said expression. Therefore, it was
contended by it that the balance in share premium account was part of
accumulated profit.

Held :

The Tribunal noted that as per the provision in the Companies
Act, 1956, application of the proceeds of the share premium account, for
purposes other than those given in S. 78 of the Companies Act, was treated as a
reduction of the company’s share capital. The said purposes were :

To pay up fully paid-up bonus shares;

To write off preliminary expenses;

To write off share issue expenses;

To pay premium on redemption of redeemable shares/debentures;

To purchase its own shares/securities.

The above position was also confirmed by the Apex Court in
the case of Allahabad Bank Ltd. Thus, according to the Tribunal, not only was
there a prohibition on the distribution of the share premium account as dividend
under the Companies Act, but the same was treated as part of the share capital
of the company. Further, relying on another decision of the Apex Court in the
case of Urmila Ramesh, it observed that the expression ‘whether capitalised or
not’ (as referred to by the Revenue in its submission), could have an
application only where the profits are capable of being capitalised. The same
were not applicable where the receipts in question formed part of the share
capital.

Based on the above and also relying on the ratio of the
decision of the Apex Court in the case of P. K. Badiani, the Tribunal upheld the
decision of the CIT(A) and dismissed the appeal filed by the Revenue.

Cases referred to :

(1) CIT v. Allahabad Bank Ltd., AIR 1969 SC 1058
(SC)

(2) CIT v. Urmila Ramesh, (1998) 230 ITR 422 (SC)

(3) P. K. Badiani v. CIT, (1976) 105 ITR 642 (SC)

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Nirav Shah

What constitutes ‘teaching in or by educational institutions’ under Article 12(5)(c) of India-USA DTAA ?

New Page 2

Part C — Tribunal & International Tax Decisions

Sri Ramachandra Educational and Health Trust

(2009 TIOL 13 ARA IT) (AAR)

Article 12(5)(c) read with MOU, India-USA DTAA; S. 9, S.
195, Income-tax Act

Dated : 29-5-2009

Issue :

What constitutes ‘teaching in or by educational
institutions’ under Article 12(5)(c) of India-USA DTAA ?

Facts :

The applicant was registered u/s.12AA of Income-tax Act. It
had two institutions — a medical college (which was a deemed university) and a
hospital (which was a university hospital). The applicant had executed an
agreement with an American medical institution (‘US Med’) for transfer of
knowledge and experience in the field of medical sciences. US Med was a
tax-exempt entity in USA. The applicant applied to AAR for determination of
the issue whether, having regard to Article 12(5) of India-USA DTAA, the
applicant would be required to deduct tax at source u/s.195 on the annual fee
payable to US Med, especially when both the payer and the payee are not liable
to tax in their respective countries.

The applicant stated that :

US Med
would be rendering the services from USA. Being non-resident, it was not
liable to tax u/s.9 of the Act in respect of services rendered in USA.

As the
payments were for teaching in or by educational institution, they would be
excluded from Article 12(5)(c) of India-USA DTAA. The applicant supported
this proposition with examples 10 & 11 in the MOU appended to India-USA DTAA
in respect of fees for included services in Article 12 (‘the MOU’).

As US Med
was not liable to tax in India, the applicant had no obligation to deduct
tax at source.

The tax authorities stated that :

Though
the applicant was exempt u/s.12AA, US Med was not so exempt under the Act.

Fees
payable by the applicant to US Med fall within the purview of S. 9(1)(vii)
of the Act, read with the explanation below S. 9(2).

The fee
paid was described as ‘annual alliance development
administrative/maintenance fee’, which showed that it was not wholly for
teaching in or by educational institution. Hence, the payment was outside
the purview of Article 12(5)(c) of India-USA DTAA.

Correspondence from US Med showed that tuition fee paid was to be covered
under ‘program deliverables’, which showed that the consideration was paid
for making available technical knowledge, experience, skill, know-how or
processes. As such, it was covered under Article 12(4) and example 10 of the
MOU explaining the scope of exemption for teaching in educational
institutions.

The AAR noted that, US revenue authorities had granted
exemption to US Med under US Revenue Code. It was also noted that US Med was
an incorporated entity which was exempt from tax in USA and as such, it could
invoke provisions of DTAA. The tax authorities did not dispute this position1.

The AAR observed that, as the question of tax deduction
would arise only if income is chargeable to tax, it was necessary to ascertain
the taxability of the fees paid. For this purpose, the AAR reviewed the
agreement. It observed that :

US Med
was to provide educational and teaching services.

Specific
services were to be agreed and decided in annual plan. These services were
termed ‘deliverables’ for which fixed annual fee was to be paid.

Additional services were termed ‘additional deliverables’ for which
additional payment was to be made.

US Med
had granted non-exclusive, non-transferable licence to the applicant for use
of copyright, trade mark, trade secrets, patent, etc. (‘intellectual
property’) owned by it. The AAR observed that though the agreement clarified
that no royalty was to be paid for use of Intellectual Property, the
substances of the arrangement was to the contrary.

Based on
information provided by the applicant, the AAR noted that following actual
activities were conducted during the years 2004 to 2006.

Various
programmes and workshops called ‘CME Programmes (comprising medical
education).

Faculty
student exchanges where the applicant’s representatives were deputed to US
Med for doing clerkship.

Tele-medicine, which was a continuing program of monthly tele-medical
education, e-learning and providing help in applicant’s institution-building
through programmes in education, clinical care and research.

The AAR then referred to Article 12 of DTAA and examples 10
and 11 of the MOU appended to DTAA. It also referred to the legal definitions
of the terms ‘technical’ and ‘teaching’. It observed that the terms were
defined in their widest sense. The AAR then discussed examples 10 and 11 of
the MOU as also the connotations of the terms ‘technical’ and ‘teaching’.

Held :

The AAR stated that as clear picture of the activity and
payments did not emerge from the facts, it would lay down broad guidelines. In
respect of each of the activities, the AAR held that :

Workshops and seminars are conducted from time to time. Generally, the speakers are from US Med. Medical teachers and professional from different places participated in these events. However, it was not known whether the workshops and seminars had any connection to a particular course conducted by the medical college of the applicant and whether it was meant for the benefit of students. These activities could be covered in Article 12(S)(c) : only if faculty from US Med participated in them; some of the participants benefiting from the activities were pursuing medical courses in the applicant’s institution; and seminar/workshop has substantial connection with the course of studies in the college.

Tuition fees paid in respect of scholars deputed to complete course in USA were covered by example 10 of the MOU and consequently, were covered under Article 12(S)(c). Accordingly, they were excluded from the purview of fees for included services.

Tele-conferencing and e-Iearning were part of teaching methodology. Hence, payments made for them would qualify for exclusion under Article 12(S)(c).

Payment to faculty for teaching through tele-conferencing and e-learning would be covered under Article 12(S)(c).

Consideration for use of intellectual property would not be covered under Article 12(5)(c)2.

The AAR held that as the applicant made lump sum payment for various services, it was not possible for AAR to relate the payment to individual services which are exempt and those which relate to consideration for use of IPR. In the light of the above observations, AAR declined to give a ruling to the effect that the applicant was not at all liable to deduct tax at source in respect of payments to US Med and hence directed applicant to make an application before the tax authorities for determination of appropriate portion chargeable to tax in India.

Nirav Shah

On facts, the assessee is an employer responsible for tax deduction u/s.192.

New Page 2

Part C — Tribunal & International Tax Decisions

Dolphin Drilling Ltd. v.
ACIT

[2009] 121 TTJ (Del.) 433

S. 10(6)(viii), S. 40(a)(i), S. 40(a)(iii), S. 192, S. 195,
Income-tax Act

A.Y. : 2004-2005. Dated : 30-1-2009

Issue :

On facts,
the assessee is an employer responsible for tax deduction u/s.192.

Amount paid to non-resident
towards reimbursement of employees’ salaries disbursed as an agent is not
subject to tax withholding u/s.195.

Facts :

The assessee was a UK company (‘UKCo’). UKCo had entered
into a contract with ONGC to charter duly manned deep water drilling rig
together. UKCo entered into contract with another group company in Norway for
procuring crew to operate the drillship. As per the agreement with the
Norwegian company, the Norwegian company was to procure/supply crew. Norwegian
company was to disburse the salary of the crew. UKCo was to, reimburse the
salary of the crew and also pay 5% of the reimbursed amount as handling fee to
the Norwegian company.

Additionally, UKCo also paid fixed fees to Norway Company
towards meeting personnel, office, administration and other costs. The crew
were employees of UKCo. UKCo had issued appointment letters to the crew and
UKCo was responsible to secure work permits and security passes for crew as
well as to provide housing and transportation to crew. UKCo also deducted tax
at source u/s.192 of the Act from the income of the crew after considering
exemption u/s.10(6)(viii) of the Act and deposited the same with the
Government.

UKCo deducted tax u/s.195 on the fixed fee and the handling
fee paid to Norwegian company.

The AO held that the amount reimbursed by UKCo to Norwegian
company for disbursement of crew salaries was ‘fees for technical services’
and hence, tax should have been deducted u/s.195 on the entire amount. Since
the tax was not deducted, the AO disallowed the payment u/s.40(a)(i) of the
Act.

On appeal, CIT(A) confirmed the order of the AO.

Held :

The Tribunal held that the obligation for payment of
salaries to the crew was of UKCo and Norwegian company disbursed the salaries
only for the convenience of the parties.

The reimbursement of crew salaries was chargeable under the
head ‘Salaries’ and hence, the payments would not be covered u/s.40(a)(i) but
would be covered by S. 40(a)(iii). Since S. 10(6)(viii) exempts remuneration
for employment on a foreign ship if total stay in India does not exceed 90
days, tax would not be deductible in case of employees whose stay did not
exceed 90 days.

levitra

Nirav Shah

Sections 32 read with section 72 – Brought forward unabsorbed depreciation is allowed to be set off against long term capital gains

1. (2012) 54 SOT 450 (Mumbai)
Suresh Industries (P.) Ltd. vs. Asst.CIT
ITA No.5374 (Mum.) of 2011
A.Y.: 2007-08. Dated: 10.10.2012

Sections 32 read with section 72 of the Income Tax Act, 1961 – Brought forward unabsorbed depreciation is allowed to be set off against long term capital gains.

For the relevant assessment year, the assessee’s claim for setting off current year’s unabsorbed depreciation and brought forward unabsorbed depreciation against current year’s long term capital gains was rejected by the Assessing Officer and by the CIT(A). The Tribunal allowed the assessee’s claim.

The Tribunal held as under: The law regarding set off of unabsorbed depreciation up to 01-04-1996 was very liberal and set off was allowable against any income. This was also upheld by the Supreme Court in the case of CIT vs. Virmani Industries (P.) Ltd. [1995] 216 ITR 607/83 Taxman 343. However, the law regarding such set off was changed by the Finance Act (No. 2) of 1996 and from assessment years 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses u/s. 72.

However, the status quo has been restored from assessment year 2003-04 and, therefore, the ratio laid down by the Supreme Court in the case of Virmani Industries (P.) Ltd. (supra) once again holds good and, therefore, now unabsorbed depreciation can be set off against any income. Because of the legal fiction created by the provisions of section 32(2), brought forward unabsorbed depreciation merges with current year’s depreciation.

The treatment given to current year’s depreciation is equally applicable to brought forward unabsorbed depreciation. Therefore, brought forward unabsorbed depreciation is also allowed to be set off against long term capital gains.

levitra

Nirav Shah

S. 271(1)(c) : Denial of claim for deduction resulting into higher assessed income cannot be ground for imposition of penalty

New Page 1

(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
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16 Nasu Properties Pvt. Ltd. v. ITO

ITAT ‘I’ Bench, Mumbai

Before K. C. Singhal (JM) and

D. K. Srivastava (AM)

ITA Nos. 1160 and 1161/Mum./2006

A.Ys. : 2000-01 and 2001-02. Decided on : 21-1-2008

Counsels for assessee/revenue : Jayesh Dadia/Ashima Gupta

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for
concealment of income — Claim for deduction denied resulting into higher
assessed income — Whether AO justified in imposing penalty — Held, No.

Per D. K. Srivastava :

Facts :

The assessee’s claim for deduction of Rs.5 lacs towards
diminution in the value of investment was disallowed by the AO and confirmed in
appeal by the CIT(A) as well as the Tribunal.

In response to the show-cause notice with reference to the
penalty u/s.271(1)(c), the assessee contended that full facts necessary for the
assessment were disclosed in the return of income filed. Therefore, it did not
amount to concealment of income. However, the AO levied the penalty which was
confirmed by the CIT(A).

Held :

The Tribunal noted that the assessee had furnished all the
relevant particulars in its return of income. Thus, the charge of furnishing of
inaccurate particulars of income by the assessee was not established. According
to it, simply because the Departmental authorities had not accepted the claim of
the assessee or the assessee had lost appeals filed against the orders of the
Departmental authorities, dismissing the claim of the assessee, cannot ipso
facto lead to the establishment of charge of furnishing of any inaccurate
particulars of income. Accordingly, the penalty levied was cancelled by the
Tribunal.

levitra

Nirav Shah

S. 9(1)(vii), 40(a)(i), 195 — Payments made for purchase of Internet bandwidth and TDS — Not FTS, not subject to TDS

New Page 19 DCIT
v. M/s. Estel
Communications Pvt. Ltd. (Delhi ITAT) (Unreported)

S. 9(1)(vii), S. 40(a)(i), S. 195
of the Act

A.Y. : 2003-04. Dated : 10-3-2008

Issue :

Disallowance u/s.40(a)(i) of the Act for
non-deduction of tax u/s.195 of the Act from payments made for purchase of
internet bandwidth and TDS.

Facts :

The assessee-company had entered into a reseller
agreement with a non-resident company. In terms of the agreement, the
non-resident company was to provide various internet services on non-exclusive
basis to the assessee-company for resale of these services to the end-user
customers in the territory. The Internet services pertained to provisions of
bandwidth with certain minimum performance speed. The privity of contract was
between the assessee-company and the non-resident company and there was no
privity of contract between the non-resident company and the end-user customers.
In terms of the agreement, the assessee-company had made certain payments to the
non-resident company. While making the payments, the assessee-company had not
deducted any tax at source. According to the AO, the assessee-company was
required to deduct tax u/s.195 of the Act, but since it had not deducted the
tax, he disallowed such payments u/s.40(a)(i) of the Act.

In the assessee-company’s appeal before him, the
CIT(A) observed that the issue was identical to the decision in Wipro Ltd. v.
ITO, (2003) 80 TTJ 191 (Bang). In that case, the Bangalore Tribunal had held
that the agreement was for use of standard facility and standard services; the
payments were for utilisation of customer-based circuits; the payments were not
fees for technical services u/s.9(1)(vii) of the Act and were not subject to
deduction u/s.195 of the Act. The CIT(A) therefore held that the payments were
not subject to TDS u/s.195 of the Act and that the disallowance u/s.40(a)(i) of
the Act was not warranted.

The Department preferred an appal to the Tribunal
against the order of the CIT(A). The Tribunal referred to several clauses of the
reseller agreement and observed that the assessee-company was not paying any
fees for technical services but making payment for the purchase of internet
bandwidth. Even though sophisticated equipment was being used and though the
Internet connectivity was through satellite link, the assessee-company cannot be
said to be availing technical services. Further, the Tribunal also noted that in
the assessee-company’s case for A.Y. 2001-02, the Tribunal had considered
similar issue of disallowance and held in favour of the assessee.

Held

Following the order of
the Bangalore Tribunal in the aforementioned case, the Tribunal upheld the Order
of the CIT(A) and held that :

(i) The payment made
by the assessee-company was not towards rendering of any managerial, technical
or consultancy services, but was merely for use of Internet access facility
and accordingly, the payment was not subject to tax u/s.9(1)(vii) of the Act.

(ii) As such the
assessee-company was not required to deduct tax at source u/s.195 of the Act.

(iii) Since there was
no liability to deduct tax u/s.195 of the Act, the amount could not be
disallowed u/s.40(a)(i) of the Act.

levitra

Nirav Shah

S. 195 — Reimbursement of expenses incurred by non-resident promoters outside India — Not subject to TDS.

New Page 18 Bangalore
International Airport Ltd. v.
ITO (2008) 6 DTR (Bang.) (Trib.) 15

S. 195 of the Act

A.Y. : 2006-07. Dated :
17-12-2007

Issue :

Whether reimbursement of expenses incurred by
non-resident promoters prior to their participation in joint venture company is
subject to tax deduction u/s.195 of the Act ?

Facts :

The assessee-company was a joint venture company
established for development of international airport at Bangalore, having equity
participation from certain non-resident companies, which were also the promoters
of the assessee. The non-resident promoters had incurred various expenses
towards technical and other consultations. These consultations were undertaken
outside India prior to the award of the contract to the non-resident promoters
and payments were also made by the non-resident promoters outside India. The
shareholders’ agreement pertaining to the assessee-company provided for
reimbursement of development cost to the promoters. In pursuance thereof, the
Board of Directors of the assessee-company passed a resolution to the effect
that “The offshore expenses shall be advanced by private promoters. All
expenses will be reimbursed and capitalised after financial close“. The
reimbursement of the expenses was to be limited to 50%. Accordingly, the
assessee-company reimbursed 50% of the expenses to the non-resident promoters.

In his order u/s.195 of
the Act, the AO had accepted the fact that the amount was being paid much after
the incurring of the expenses by the promoters. However, since the expenses
included element of technical services and since they were incurred after the
execution of shareholders agreement, he was of the opinion that tax should have
been deducted or should be deducted. In this context, the assessee-company
brought to the attention of the AO the decision in Hyder Consulting Ltd., In
re (1999) 236 ITR 640 (AAR) and also contending that reimbursement of
expenses in no way involves any element of profit and further since the expenses
were incurred by the non-resident in respect of services rendered by another
non-resident outside India, TDS provisions were not attracted. The AO, however,
did not accept this contention and concluded as follows and proceeded to compute
the tax to be withheld by the assessee-company.

(a) The foreign
shareholders of the applicant company had provided certain services to the
applicant company.

(b) The contention
that part of these services were obtained from other parties is of no
consequence.

(c) All these services
which are proposed to be paid for by the applicant company now, have been
utilised by the applicant company in India.

(d) All these services
called by the applicant as ‘consultancy services’ fall squarely within the
meaning of fees for technical services, as provided for in Article 12 of both
the relevant DTAAs as also the IT Act.

(e) Thus, the
consideration payable for such services is chargeable to tax, even if its
nomenclature is ‘reimbursement’, as the income is deemed to accrue or arise in
India.

(f) Hence, withholding
provisions of S. 195 are clearly invoked.

(g) The rate of
withholding tax is 10% as per the respective DTAAs, in view of the fact that
it is the rate beneficial to the payees.

(h) The above
conclusions, based on the facts and information as provided by the applicant,
are to be seen in the context of S. 195 of the IT Act. The provisions of S.
195 are necessarily summary and are only for the purpose of determining the
issue and quantum of withholding tax. It follows that the said tentative
conclusion is subject to the test of final determination at the stage of
assessment.

In appeal by the assessee-company, the CIT(A) noted
the agreement and arrangement between the share-holders and also the arguments
of the assessee-company. CIT(A) did not dispute assessee-company’s claim of it
being a case of reimbursement of expenses and also that the reimbursement was
only to the extent of 50% of the actual expenses. However, observing as follows,
he held that the AO was justified in his conclusions :

(i) The nature of
services are such as would be prima facie covered by the definition of
FTS in IT Act as well as respective DTAAs.

(ii) Adequate support
in respect of quantification of costs reimbursed has not been furnished by the
appellant.

In appeal before the Tribunal, the Tribunal noted that the expenses were incurred by the non-residents out of India in their capacity as promoters and at the relevant time, S. 5 or S. 9 was not applicable, since it was not a payment by a resident to a non-resident. The payment by the assessee-company to the non-resident promoters was a case of reimbursement of expenses incurred and such reimbursement was limited to 50%, which could not be equated to amount paid for technical services. As such it would not involve any profit element. The expenses were incurred to ascertain the feasibility and viability of the project for the promoters to decide whether to participate in the project. One of the bidders whose bid was not accepted had also incurred certain expenses, 50% of which were reimbursed and the Department had permitted such reimbursement without any TDS. The Tribunal noted that there was no difference between the bidder whose bid was not accepted and the bidder whose bid was accepted.

Held:

The Tribunal held that on facts and circumstances, the reimbursement of 50% of the expenses incurred by the non-resident promoters outside India did not attract provisions of S. 195(2) of the Act.

Nirav Shah

India-USA DTAA — Examination fee paid to US Company — Not taxable

New Page 17 KnoWerX Education (India) Private

Limited, In re
(AAR) (unreported)

Articles 1, 4, 5, 7 of India-USA DTAA;

Sections 4, 5, 9, 195 of the Act

Dated : 30-4-2008

Issues :

(i)
Examination fee
collected in India by resident on behalf of American professional
organisations and remitted to them outside India — Taxability thereof :

(a) in terms of
the Act; and

(b) in terms of
India-USA DTAA.

(ii)
Characterisation of the income mentioned in (i) above.

(iii)
TDS obligations of the resident
in respect of the income mentioned in (i) above

Facts :

The applicant was an Indian company which had
entered into agreement with an American entity for promotion of professional
certification programmes and examinations conducted by the American entity. It
was also in the process of entering into agreement with another American entity
for the same purpose. Under both the agreements, the applicant was to act as
their agent. The applicant would carry out promotional and marketing activities;
collect registration forms and fees from candidates in India desirous of
enrolling for the programmes/examinations; and remit the fees to the American
entities after deducting certain administration expenses and commission. The
American entities would conduct examinations either through the applicant or
through other entities in India; evaluate answer sheets; award certificates to
the candidates; forward these certificates to the applicant; and the applicant
would in turn distribute them to the candidates.

The AAR considered the
following questions :

1. (a) Whether
examination fees collected by the applicant in India on behalf of the
American entities and remitted to them were their ‘income’ liable to tax in
India ?

(b) If answer to (a)
is in affirmative, how should that income be classified — as business
income, royalty or fees for technical services ?

2. Whether the
applicant was required to deduct tax at source in respect of the remittances
and if so, at what rate ?

The AAR first examined the questions in light of S.
5 of the Act and observed that in terms of S. 5(2), income of a non-resident
includes income which accrues, arises or is received in India, or which is
deemed to accrue, arise or to be received in India, from any source in India. In
this context, the AAR referred to the Supreme Court’s decisions in CIT v.
Ahmedbhai Umarbhai and Co., (1950) 18 ITR 472 (SC), CIT v. Ashokbhai
Chimanbhai, (1965) 56 ITR 42 (SC) and Seth Pushalal Mansinghka (P) Ltd.
v. CIT, (1967) 66 ITR 159 (SC) and observed that while the income did not
accrue or arise, nor was it deemed to accrue or arise in India, it was received
in India as an agent of the American entities in India. It further observed that
the income was in the nature of business income. The applicant was receiving
income in India on behalf of the American entities as their agent. Hence, in
terms of S. 4 and S. 5 of the Act, the examination fee collected by the
applicant on behalf of the American entities would be taxable in India.

The AAR then considered the questions in light of
India-USA DTAA. The applicant had stated in his application that the American
entities were non-profit organisations, which were determined by American tax
authorities as ‘tax exempt organisations’. In response, the Department had
contended that since these were ‘tax exempt organisations’, they could not be
regarded as tax residents of the USA and consequently, provisions of India-USA
DTAA could not apply. For this purpose, the Department relied on the provisions
of Articles 1 and 4 of India-USA DTAA. The Department also contended that
partnerships, trusts, etc. were regarded as ‘transparent entities’ in the USA
and were not liable to pay tax there. In response, the applicant filed
additional documents and submissions to prove that the American entities were
corporations incorporated in the USA; were not ‘transparent entities’; were
liable to pay tax in the USA; but being in certain specified category, were
exempted from payment of tax. The AAR, therefore, held that they were tax
residents of the USA and provisions of India-USA DTAA would apply.

The Department also put forth the argument that the
applicant should be treated as PE in India of the American entities. After
examining the provisions of Articles 7 and 5 of India-USA DTAA, the AAR found
that the applicant did not conclude any contract on behalf of the American
entities and the admission of candidates for programme/examination was solely
done by them. Further, the applicant did not carry on any of the other
activities mentioned in Article 5 (such as storage of goods, etc.); on facts, it
could not be considered as dependent agent; it had liberty to have similar
relationship with others; it was not wholly or substantially dependent on the
American companies; it appeared to carry on promotion in the ordinary course of
its business; and it was not subject to any control of the American entities
with regard to the manner of carrying on it.

Nirav Shah

Indian company engaged Chinese company for testing of bauxite and providing test reports— Testing done entirely in China—Issue of taxability of payment by Indian company for services—Held : (i) After amendment to S. 9, irrespective of the place of utilisa

New Page 2

16 Ashapura
Minechem Ltd. v.
ADIT
(2010) 5 Taxman.com 57 (Mum-ITAT)
Article 7, 12(4) of India-China DTAA
S. 9, S. 195 of Income-tax Act
Dated : 21-5-2010

Indian company
engaged Chinese company for testing of bauxite and providing test reports—
Testing done entirely in China—Issue of taxability of payment by Indian company
for services—Held : (i) After amendment to S. 9, irrespective of the place of
utilisation or rendition and territorial nexus, payment was chargeable as FTS
under Income-tax Act; and (ii) As per source rule under India-China DTAA, place
of rendition is not material and FTS is deemed to accrue in country where payer
is resident.

Facts :

The taxpayer
was an Indian company (‘IndCo’), in the process of building an alumina refinery.
It engaged a Chinese company (‘ChinaCo’) for testing of bauxite to be mined by
IndCo in India. ChinaCo was to test bauxite in its laboratories in China and
prepare test reports so that IndCo could define the process parameters for
processing of bauxite. The test reports were to provide complete chemical
composition of bauxite, performance tests, etc. IndCo agreed to pay certain
payment to ChinaCo for these services.

According to
IndCo : testing charges were in the nature of business profits subject to
Article 7 of India-China DTAA; ChinaCo did not have any PE in India; and hence,
no taxes were required to be withheld u/s.195. Accordingly, it applied for
certificate for no withholding of tax.

According to
the tax authorities, the payments were for services and were taxable as ‘Fees
for Technical Services’ (FTS).

The CIT(A)
upheld the order of the tax authority.

The Tribunal
referred to and relied on its earlier order in case of Hindalco Industries Ltd
v. ACIT, (2005) 94 ITD 242 (Mum.) which laid down certain principles of
interpretation of tax treaties, stating that the language used in a tax treaty
need not be examined in literal sense and a departure from plain meaning is
permissible where the context so requires.

Held :

The Tribunal held that :

As regards taxability
under the Income-tax Act :
Payments received by
ChinaCo were covered within the definition of FTS under the Income-tax Act.
In light of the amendment
to S. 9 by the Finance Act, 2010, the legal proposition regarding utilisation,
rendition and territorial nexus is no longer good in law. Income of ChinaCo
for services rendered to IndCo is taxable as FTS under the Income-tax Act.
As
regards taxability under India-China DTAA :

The definition of FTS
covers payments for provision of managerial, technical or consultancy
services by a resident of one country in the other country. The expression
‘provision of services’ is not defined or elaborated anywhere in the tax
treaty.

As per the source rule,
FTS will be deemed to have accrued in the country where the payer is a
resident and place of rendition of technical services is not material.

Literal interpretation
of definition of FTS to mean rendition of service would render the source
rule meaningless.

Literal interpretation
to a tax treaty, which renders treaty provisions unworkable and which is
contrary to the clear and unambiguous scheme of the treaty, has to be
avoided.

he payments made to
ChinaCo were taxable as FTS under India-China DTAA as well as under the
Income-tax Act and hence, IndiaCo was liable to deduct tax from these
payments.

levitra

Nirav Shah

UK company had contractual obligation to provide repair and overhaul support and components to an Indian aircraft operator—maintained stock of components with Indian operator—consideration from Indian company for repair and overhaul and use, or right to u

New Page 2

15 Airlines Rotables Ltd v. Jt. DIT (Unreported)
ITA No. 3254/Mum./2006
Article 5, 7, 13 of India-UK DTAA
A.Y. : 1998-99. Dated : 21-5-2010

UK company had contractual obligation to provide repair and
overhaul support and components to an Indian aircraft operator—maintained stock
of components with Indian operator—consideration from Indian company for repair
and overhaul and use, or right to use, of component—repair and overhaul of
component only outside India. Held : (i) UKCo did not have PE in India; (ii)
even if PE, no profit could be attributed to that PE; (iii) stock maintained
with Indian company was not for delivery on behalf of UK companY—even if Indian
company assumed to be agent, no agency PE constituted.

Facts :

The taxpayer was a company incorporated in the UK (‘UKCo’),
and a tax resident of the UK. Principal business of UKCo was to provide spares
and component support to aircraft operators. UKCo entered into an agreement with
an Indian company (‘IndCo’) for providing certain support services for aircraft
operated by IndCo. Under the agreement, UKCo was required to repair or overhaul
a component when IndCo discovered that such components had become operationally
unserviceable. In such case, UKCo was also required to provide replacement of
the component. UKCo was also required to ensure that airworthiness directives in
respect of such component (whether replaced, repaired or overhauled) were fully
complied with. The consideration received by UKCo comprised two parts. One, for
repair and overhaul of the component. Two, for use or right to use, replacement
component. To ensure timely availability of the component, UKCo maintained stock
of replacement component at the operational bases of IndCo in India and also in
the UK at its depot. IndCo was forbidden from loaning, pledging, selling,
exchanging or encumbering any items from the stock.

Before the AO, UKCo contended that it did not have any PE in
India and hence, its business profits were not taxable in India. However, the AO
inferred that the stores staff of IndCo was acting as agent of UKCo and since
UKCo maintained stock of goods in India, in terms of Article 5.4(b) read with
Article 5.5 of India-UK DTAA, PE of UKCo came into existence. The AO estimated
10% of gross receipts of UKCo as profits attributable to PE.

The CIT(A) concurred with the view of the AO.

The Tribunal observed that in terms of Article 5(1) (i.e.,
the basic rule), a PE is said to exist in the other contracting state when an
enterprise of one of the contracting state has a fixed place of the business in
that contracting state through which the business of the enterprise is wholly or
partly carried out. There are three criteria embedded in this definition (i)
physical criterion (i.e., existence of physical location); (ii) subjective
criterion (i.e., right to use that place); and (iii) functionality criterion
(i.e., carrying out of business through that place). Only when these three
criteria are satisfied, a PE can come into existence.

Thus, it is necessary that for PE to exist not only should
there be a physical location through which the business of the foreign
enterprise is carried out, but also that such place should be at its disposal.

Held :

The Tribunal held that :

Even though
the stock of UKCo was stored at a specified physical location, it was under
the control of IndCo and UKCo did not have any place at its disposal in the
sense that it could carry out its business from that place. As the physical
location was under the control of IndCo, UKCo did not have any place at its
disposal. Thus, it cannot be said to constitute PE of UKCo in India.
Even if there is a PE,
only profit attributable to that PE can be taxed in India. Hence, as entire
repair and overhaul work was done outside India, no part of the profit could
be taxed in India.
A dependent agent PE
(‘DAPE’) under Article 5(4)(b) of India-UK DTAA can come into existence only
when business of UKCo is carried through that DAPE. It would be absurd to
contend that IndCo is dependant agent of UKCo, which the tax authorities have
not established. Even if IndCo is regarded as an agent, the maintenance of
stock by it was for IndCo’s business. Further, even if it is assumed that
IndCo is an agent, it would be an independent agent. Also, it maintained the
stock for stand by use and not for delivery on behalf of UKCo. Therefore, UKCo
does not have PE in India.
As part of the
consideration pertains to use, or right to use, of components, taxability
under Article 13(3)(b) (i.e., ‘equipment royalty’) should be examined.
Non-taxability under Article 7 would still require consideration of
application of Article 13. As these aspects had not been heard by the lower
authorities, the matter was remanded to the CIT(A) for limited adjudication
only on this aspect.

levitra

Nirav Shah

Indian company purchasing shares of another Indian company from non-resident—Non-resident assessed to tax—AO treated Indian company as agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is not a bar to order u/s.163; (ii) there is

New Page 2

14 Hindalco Industrial Ltd v.
DCIT
AIT 2010 211 ITAT-Mum.
S. 163 of Income-tax Act
A.Y. : 2001-02. Dated : 14-5-2010

Indian company purchasing shares of another Indian company
from non-resident—Non-resident assessed to tax—AO treated Indian company as
agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is
not a bar to order u/s.163; (ii) there is no time limit u/s.163; and (iii) same
income cannot be assessed simultaneously in hands of non-resident as well as
agent.

Facts :

The taxpayer was an Indian company (‘IndCo’). IndCo purchased
shares of another Indian company from a foreign company. the foreign company was
a non-resident in terms of the Income-tax Act. The non-resident applied to the
AO u/s.197 of the Income-tax Act for lower withholding tax on the sale proceeds
of the shares. The AO issued certificate for lower withholding tax. Based on
this certificate, IndCo withheld and deposited the tax. Pursuant to the transfer
of the shares, the non-resident was chargeable to capital gains tax.

The non-resident furnished the return of its income. In the
course of assessment, the AO while assessing the non-resident, also issued
notice u/s.163 of the Income-tax Act to IndCo as representative assessee of the
non-resident, because the non-resident was in receipt of income from IndCo.
IndCo contended before the AO that as per the scheme and intent of the
Income-tax Act and particularly the provisions of S. 160(1)(i) read with S.
161(1), S. 162 and S. 163, no person could be treated as ‘Agent’, in relation to
a non-resident after the expiry of previous year corresponding to the assessment
year in question. The AO however, treated IndCo as Agent on the basis of plain
reading of S. 163(1), S. 160(1)(i) and S. 149(3).

The CIT(A) dismissed the appeal of IndCo.

Held :

The Tribunal held that :

The non-resident received
income from IndCo. Therefore S. 163(1)(c) was attracted. Liability is not
fastened on the representative assessee merely on passing of order u/s.163.
The fact that the agent
had withheld tax u/s.195 cannot be a bar to pass order u/s.163.
The Income-tax Act does
not contemplate any time limit for initiating proceeding u/s.163. The purpose
of S. 163 is to secure payment of taxes by the non-resident. The proceedings
were also not time-barred under the
Income-tax Act. Hence order u/s.163 was valid.
In a similar issue in
Saipem UK Ltd v. DDIT, (2008) 298 ITR (AT) 113 (Mum.), the Mumbai Tribunal has
held that the same income cannot be assessed simultaneously in the hands of
the non-resident as well as the agent, since such double taxation militates
against the cardinal principles of taxation. Hence, once the assessment in the
case of principal becomes final, the assessment of the same income in the
hands of the agent cannot be made. Therefore the assessment of capital gain of
the non-resident in the hands of IndCo was not proper.

levitra

Nirav Shah

Mauritius company performing contract for transportation and installation of platforms to be used in mineral oil exploration—Part of income pertained to activities carried on outside India— Whether entire income taxable in India—Income under presumptive t

New Page 2

13 JDIT v. J. Ray McDermott Eastern Hemisphere Ltd.
(2010) TII 41 ITAT (Mum.-INTL)
Article 4 of India-Mauritius DTAA;
S. 5, S. 9(1)(i), S. 44BB of Income-tax Act
A.Y. : 2003-04. Dated : 30-4-2010

Mauritius company performing contract for transportation and
installation of platforms to be used in mineral oil exploration—Part of income
pertained to activities carried on outside India— Whether entire income taxable
in India—Income under presumptive tax provision can be taxed only if it is
otherwise chargeable to tax.

Facts :

MCo, a tax resident of Mauritius, undertook and executed a
contract for transportation and installation for certain well platform projects
to be used in mineral oil exploration. The contract was undertaken and performed
with an Indian company. Certain portion of the receipts of MCo pertained to work
carried on outside India.

While furnishing its return of income, MCo did not offer the
receipts pertaining to the work carried on outside India on the ground that in
terms of Explanation (a) to S. 9(1)(i) of the Income-tax Act, they were not
chargeable to tax. MCo also contended that, alternatively, such receipts cannot
be attributed to its PE in India.

While assessing the income, the AO held that : income
pertained to work to be carried out in India; source of income is related to
work to be carried out in India; and hence the entire receipts are taxable in
India. Further, S. 44BB does not distinguish between income for activities
carried on in India and for those carried on outside India.

The CIT(A) reversed the order.

The Tribunal relied on the decision on Saipem SPA v. DCIT,
(2004) 88 ITD 213 (Delhi ITAT) and McDermott ETPM Inc v. DCIT, (2005) 92 ITD 385
(Mumbai ITAT).

Held :

The Tribunal held that :

Only the income which is
reasonably attributable to operations carried on in India is taxable in India.
Income computed on
presumptive basis can be taxed in India only if it is otherwise chargeable
under the provisions of the Income-tax Act.

levitra

Nirav Shah

Whether a liaison office in India involved in collecting and transmitting of information for a Korean company would, by virtue of Article 5(4) of India-Korea DTAA, not constitute a PE ?

New Page 2

Part C — Tribunal & International Tax Decisions

M/s. K. T. Corporation

(2009 TIOL 12 ARA IT) (AAR)

Articles 5(1), 5(2), 5(4), 13,

India-Korea DTAA;

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

Dated : 29-5-2009

Issue :

Whether a liaison office in India involved in collecting
and transmitting of information for a Korean company would, by virtue of
Article 5(4) of India-Korea DTAA, not constitute a PE ?

Facts :

The applicant was a Korean company (‘KorCo’). KorCo had
obtained RBI’s permission for opening a liaison office (‘the LO’) in India for
the sole purpose of acting as a communication channel between the head office
and companies in India. While granting its permission, RBI had stipulated
various conditions and parameters subject to which the LO was to function.

The issue before the AAR was whether the LO of KorCo would
constitute its PE in India. Together with its application, KorCo had furnished
copy a Reciprocal Carrier Service Agreement (‘RCSA’), which it had executed
with an Indian company (‘IndCo’) after opening of its LO. Both KorCo and IndCo
were telecom carriers/resellers and had agreed to provide inter-connection
services to each other. IndCo was to provide and maintain connecting
facilities in India and KorCo was to do the same outside India. Each party was
to raise invoice on the other party in respect of the traffic terminated on
its side during each calendar month.

On the merits of the application, the tax authorities had
commented that the applicant had not sought ruling on the question of
taxability of payment made by IndCo to KorCo but had sought ruling only on the
limited issue whether the LO would constitute a PE. The tax authorities
mentioned that unless the applicant furnishes its reply on the following four
specific questions, it was not possible to conclude the issue :

(i) What was the role of LO in pre-bid survey carried out
before entering into the Agreement ?

(ii) How was the feasibility report prepared, did the LO
play any role in it ?

(iii) Were the employees of the LO involved in the
technical analysis of the project ?

(iv) Is the LO involved in the technical analysis of the
project or the execution of any part of the contract ?

Further, the tax authorities contended that independent of
the issue under consideration, the payments received by KorCo from IndCo were
taxable u/s. 9(1)(vi)/(vii) of the Act and Article 13 of India-Korea DTAA3.

By a supplementary statement of facts, KorCo furnished
information on the questions raised by the tax authorities. It submitted that
the LO was to act only as a communication channel within the restrictions
imposed by RBI. While it was a fixed place of business, its purpose was only
to collect information and to carry out preparatory and auxiliary activities
such as :

(i) Holding of seminars/conferences.

(ii) Receiving trade inquires from customers.

(iii) Advertising about the technology used by the
applicant in its wired/wireless services and replying to queries of
customers.

(iv) Collecting feedback from perspective customers.

The LO had not played any role in the pre-bid survey nor
had it involved itself in the technical analysis of any project before KorCo
executed agreement with IndCo. The applicant also furnished affidavit of the
general manager of the LO to this effect. The affidavit also stated that the
LO did not have permission/authority to conclude, nor had it executed, any
trade contract. Similarly, LO did not procure any order nor did it conclude
any negotiation. The counsel for the applicant emphasised that the LO was only
a representative office acting within the restrictions imposed by RBI and had
not undertaken any trading activity, nor had it executed any business
contract, nor had it rendered consultancy or any other services. Thus, the LO
was not a fixed place of business through which the business of KorCo was
wholly or partly carried on but it was a fixed place which had undertaken only
preparatory or auxiliary work. Hence, it could not be regarded as a PE under
Article 5(1), 5(2) read with clauses (d), (e) and (f) of Article 5(4) of
India-Korea DTAA.

Held :

The AAR referred to : paragraphs 1, 2 and 4 of Article 5 of
India-Korea DTAA; definition of ‘liaison office’ as per FEMA; the permitted
activities for a liaison office as per FEMA; and legal definition of the term
‘auxiliary’.

The AAR expressed its view that collecting information for
an enterprise by a liaison office can be considered to be an auxiliary
activity unless collection of information is primary purpose of the
enterprise. In case of KorCo, collection of information was not its primary
purpose and hence, collecting and transmitting of information by the LO to the
Head office was auxiliary activity particularly when the LO had no connection
with telecom services and network and the contracts related thereto. Hence, LO
could not be considered as PE in terms of Article 5(4)(d), (e) of India-Korea
DTAA. The AAR supported its view with certain extracts from the commentary on
OECD Model Convention, which inter alia, stated that the decisive criterion is
whether the activity of fixed place of business in itself was an essential and
significant part of the activity of the enterprise as a whole.

The AAR held that, as per the facts available, the LO had not performed ‘core business activity’ but had confined itself only to preparatory and auxiliary activity and as such the LO was covered within the exclusion in Clauses (e) and (f) of Article 5(4) of India-Korea DTAA. Hence, it could not be regarded as a PE in terms of Article 5(1). Reliance in this regard was made by the AAR on the Supreme Court’s decision in DIT (International Taxation) v. Morgan Stanley and Co Inc, (2007) 292 ITR 416 (SC) and Delhi High Court’s decision in UAE Exchange Centre v. UOI, (2009) 223 CTR 250 (Del.).

Nirav Shah

S. 36(1)(vii) : Unrealisable amount due to a share broker from client allowable as bad debts

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7 ACIT v. Olympia
Securities Ltd.

ITAT ‘G’ Bench, Mumbai

Before K. P. T. Thangal (VP) and

V. K. Gupta (AM)

ITA No. 4053/Mum./2002

A.Y. : 1997-1998. Decided on : 21-12-2006

Counsel for revenue/assessee: T. Shivkumar/

Rajiv Khandelwal

S. 36(1)(vii) of the Income-tax Act, 1961 — Bad
debts — Assessee, a share broker — Payments made towards purchase price of
shares on behalf of client turned bad — Whether allowable as bad debts — Held,
Yes.

Per V. K. Gupta :

Facts :

The assessee was a share broker. It had made
certain payments to the stock exchange on the day of settlement in respect of
purchases and sale of shares made through it by its clients. However, the client
failed to make payment and the assessee wrote off Rs.27.04 lacs as bad debts.
According to the AO, the assessee had failed to prove that the debt had become
bad. Accordingly, he disallowed the claim of the assessee, both as bad debts and
as trading loss u/s.28. On appeal, the CIT(A) deleted the addition and held that
the claim of the assessee was allowable both, u/s.36(1)(vii) as bad debts and as
trading loss u/s.28.

Before the Tribunal, the Revenue contended that the
assessee had not fulfilled the conditions of S. 36(2) viz., that the
amount claimed as bad debts had not been taken into account in computing the
income of the assessee for the previous year or any other earlier years.
Secondly, unlike banking company or money lender, the brokerage income earned by
the assessee was not of the category of interest on loan, hence, the loss
arising out of non-payment of amount by the clients was a capital loss. Further,
it relied on the decisions of the Mumbai Tribunal in the case of Harshad J.
Choksi and B. N. Khandelwal.

Held :

The Tribunal noted that as per the provisions of S.
36(2), the deduction of bad debt or part thereof can be allowed only when such
debt or part thereof has been taken into account in computing the income of
the assessee.

According to the Tribunal, the income of any
assessee was not the gross receipts, but it was the excess of gross receipts
over the expenditure. Thus, in the case of share brokers or agents, gross income
by way of brokerage or commission was credited in the profit and loss account
against which the expenses were claimed. To further explain, it gave an
hypothetical example wherein the assessee credits Rs.105 in profit and loss
account and debits the same in the client’s account. Simultaneously, the
assessee debits profit and loss account with Rs.100 being the value of shares,
treating the purchases of shares on behalf of the client as on its own account
and the sale thereof, by including the brokerage amount in the sale price, as
its gross margin. In that situation, according to the Tribunal, all the
conditions of S. 36(2) would stand satisfied as per the Revenue. However,
according to the Tribunal, even the crediting of only gross brokerage amount of
Rs.5 in profit and loss account would reflect the transaction from which it
emerged and the transaction of creating a debt which was taken into account
impliedly or notionally in computing the income of the assessee. Thus, the
Tribunal opined that the conditions of S. 36(2) stand satisfied even in cases
where only income had been credited in the profit and loss account. According to
the Tribunal, the provisions of allowing the claim in case of money-lending or
finance business as provided in S. 36(2) further support the view expressed
above. Since the claim of the assessee was allowed u/s.36(1)(vii), no finding
was given about the allowability of the claim u/s.28 of the Act.

Cases referred to:

1. Harshad J. Choksi v. ACIT, (1995) 52
ITD 511

2. ACIT v. B. N. Khandelwal, (2006) 101
TTJ (Mum.) 717

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Nirav Shah

S. 148 : When time limit for issuance of notice u/s.143(2) not expired, notice u/s.148 invalid.

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(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.)

15 B. R. Industries v. ITO

ITAT ‘A’ Bench, Jaipur

Before I. C. Sudhir (JM) and B. P. Jain (AM)

ITA No. 988/J.P./2006

A.Y. : 2003-04. Decided on : 31-12-2007

Counsels for assessee/revenue : Mahendra Gargieya/L. R. Meena

S. 148 of the Income-tax Act, 1961 — Validity of issuance of
Notice — When time limit for issuance of notice u/s.143(2) had not expired,
whether Assessing Officer was justified in issuing notice u/s. 148 — Held, No.

Per B. P. Jain :

Facts :

The assessee had filed return of income on 2-12-2003, which
was processed u/s.143(1)(a) on 10-3-2004. Thereafter a notice u/s.148 was issued
on 8-4-2004 and served on 9-4-2004. The assessee was also served a notice
u/s.143(2) on 29-7-2005. The assessee challenged the validity of the notice
u/s.148 of the Act which was rejected by the AO and the CIT(A) as well.

The assessee contended that once the AO was having the
statutory time available with it for the issuance and service of a notice
u/s.143(2), during the pendency and availability of such time, he could not have
issued the notice u/s.148. The original return of income was filed on 2-12-2003
and as per the proviso below S. 143(2) of the Act, such a notice could have been
issued validly on or before 31-12-2004. The AO however, without waiting until
the expiry of the said period i.e., up to 31-12-2004, issued a notice
u/s.148 on 8-4-2004.

Held :

The Tribunal agreed with the assessee that when the statutory
time limit was a available with the AO for issuance of notice u/s.143(2) of the
Act, then the notice u/s.148 cannot be issued during the pendency of the
proceedings. Further, it observed that the notice u/s.143(2) could be served
within 12 months from the end of the month in which the return was furnished as
per proviso to S. 143(2) of the Act and since in the present case, the notice
u/s.143(2) was served on 29-7-2005 i.e., after the expiry of 12 months
from the end of the month in which the return was furnished, the same was also
not valid. Further, relying on the decisions listed below, the Tribunal allowed
the appeal of the assessee.

Cases referred to :

(1) DCIT v. Krishan Lal Leela, 34 TW 40 (Jp)

(2) R. B. Securities Ltd. v. JCIT, 141 Taxman 49
(Digest) (Del.)

(3) Bapa Lal Exports Co. v. JCIT, (2007) 289 ITR 371
(Mad.)

(4) KLM Royal Dutch Airlines v. ADI, (2007) 159
Taxman 191 (Del.)

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Nirav Shah

S. 23(1)(b) : Stamp duty and brokerage paid by the landlord allowable as deduction from rent received.

New Page 1

(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.)

14 Govind S. Singhania v. ITO

ITAT ‘K’ Bench, Mumbai

Before R. K. Gupta (JM) and

V. K. Gupta (AM)

ITA No. 4581/Mum./2006

A.Y. : 2002-03. Decided : on 3-4-2008

Counsels for assessee/revenue : Vijay Mehta/

L. K. Agarwal

S. 23(1)(b) of the Income-tax Act, 1961 — Income from house
property — Annual letting value — Whether Stamp Duty and brokerage paid by the
landlord-assessee allowable as deduction from the rent received — Held, Yes.

Per V. K. Gupta :

Facts :

The assessee gave his premises at Mittal Towers on lease and
incurred expenses of Rs.30,000 for Stamp Duty and Rs.85,000 for payment of
brokerage on account of renewal of Lease Agreement. The Assessing Officer,
however, held that the expenses were not allowable against the income from house
property, because the expenses allowable therefrom had been specified by the
Legislature and these expenses did not fall in that category. On appeal, the
CIT(A) also, confirmed the action of the Assessing Officer.

The assessee contended before the Tribunal that without
incurring these expenses, he could not have earned the rental income, because
Stamp Duty had to be paid as per the provisions of the Stamp Duty Act, which was
a mandatory requirement and since the premises was let out through the broker,
there was also an obligation on the part of the assessee to pay the brokerage.
The assessee further contended that he could have asked the tenant to pay the
same and adjust the same from the rent and in that event the assessee would have
got only net rent.

Held :

The Tribunal agreed with the assessee that without incurring
these expenses, the assessee would not have earned the rental income. It further
noted that the assessee had computed the annual letting value u/s.23(1)(b) of
the Act. Hence, according to it, such rent had to be net of these expenses. The
Tribunal also found substance in the alternative argument of the assessee that
had these expenses been borne by the tenant, then only the net amount would have
been the annual letting value within the meaning of S. 23(1)(b) of the Act.
Further, the case laws relied on by the assessee (listed below) also support
this view. In this view of the matter, the Tribunal held that the annual letting
value should be taken net of Stamp Duty and brokerage paid by the assessee.

Cases referred to :

(1) Varma Family Trust v. Sixth ITO, 7 ITD 392
(Mum.)

(2) Sharmila Tagore v. JCIT, 93 TTJ 483 (Mum.)

(3) Realty Finance & Leaseing (P) Ltd. v. ITO, 5 SOT
348 (Mum.)

(4) Nandita Banerjee v. ITO, (ITA. No.
1360/Mum./2000) dated 8-4-2004.

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Nirav Shah

Explanation (aa) to S. 80HHC — Date of export out of India — Held that the relevant date was the date when the goods were dispatched and cleared by the customs and not the date as per the bill of lading.

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22. Dy. CIT v. Vallabh Metal Inc..

ITAT ‘H’ Bench, Delhi

Before I. P. Bansal (JM) and

Shamim Yahya (AM)

ITA No. 2564/Del./2009

A.Y. : 2004-05. Decided on : 27-11-2009

Counsel for revenue/assessee : Piyuash Kaushik/

N. K. Chand

Explanation (aa) to S. 80HHC — Date of export out of India
— Held that the relevant date was the date when the goods were dispatched and
cleared by the customs and not the date as per the bill of lading.

Per Shamim Yahya :

Facts :

One of the issues before the tribunal was regarding the
year in which the exports made by the assessee under certain invoices fall.
The AO noted that exports under Invoice Nos. 435 to 444, though dated March,
the corresponding bills of lading were dated April. The assessee contended
that during the financial year itself the goods were dispatched and the custom
clearance was obtained. However, the AO held that these goods cannot be
considered as export of the current year. On appeal the CIT(A) held that the
AO’s view that the bill of lading was the date of sale was absolutely contrary
to the provisions of explanation (aa) of S. 80HHC.

Before the Tribunal the Revenue submitted that the bill of
lading was the authoritative document for dealing with the period of export
sales. It was further submitted that those goods had been exported on FOB
(Free on Board) wherein risk passes to buyer, once goods were delivered on
board of the ship by the seller.

Held :

The Tribunal noted the following facts :

(a) it had been regular system of accounting wherein
exports were accounted according to the date of export invoices;

(b) the goods had been dispatched from the factory
premises of the assessee and had been duly cleared by the customs during the
financial year;

Further, referring to Explanation (aa) to S. 80HHC defining
‘export out of India’ and relying on the decision of the Apex Court in the
case of Silver and Arts Place which explains what is ‘export out of India’,
the Tribunal upheld the order of the CIT(A).

Case referred to :

CIT v. Silver and Arts Place, 259 ITR 684 (SC).

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Nirav Shah

S. 37(1) — Capital or revenue expenditure — Cost of tools and dies — Allowed as expenditure on its issue for production.

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21. Central Electronics Ltd. v. AO

ITAT ‘B’ Bench, New Delhi

Before R. P. Tolani (JM) and

R. C. Sharma (AM)

ITA. Nos. 233 & 1821/Del. of 2009

A.Ys. : 2004-05 & 2005-06. Decided on : 27-11-2009

Counsel for assessee/revenue : R. S. Singhvi/Ashima Nab &
Manish Gupta

S. 37(1) — Capital or revenue expenditure — Cost of tools
and dies — Allowed as expenditure on its issue for production.

S. 145A — Valuation of inventory in accordance with the
method of accounting regularly followed — Assessee justified in valuing three
years old inventory at nil value.

Per R. P. Tolani :

Facts :

The assessee was engaged in the business of developing and
producing various electronic components, sophisticated systems, solar
photovoltaic cells and other allied items for defence and other government
departments. In its accounts it used to treat items of loose tools and small
dies used in production as consumables. At the time of purchase of tools/dies
the same were entered in the stock as consumable tools and were charged to
consumption as and when issued for production activities. However, the AO
treated the same as of capital nature subject to depreciation @ 25%, the rate
applicable to plant and machinery.

Out of the other issues before the Tribunal — the one was
regarding allowability of Rs.50.2 lakhs claimed by the assessee towards
provision for slow moving inventory. As per the method of accounting regularly
followed, the assessee used to write off all inventories which were more than
three years old. According to the AO — the writing off was premature and was
not allowable under the Act. The assessee justified its method of accounting
on the ground of obsolescence resulting from change and/or upgradation in
technology with the passage of time. It was submitted that the inventory so
written off had no market value and for all practical purposes had only scrap
value. The same was shown as income in the year of sale.

Held :

The Tribunal noted that the assessee was a Government
undertaking and the accounting policy was being followed consistently. Its
accounts were audited by CAG. Further, relying on the judgment of Rajasthan
High Court in the case of Wolkem India Ltd., it allowed the claim of the
assessee.

Case referred to :

CIT v. Wolkem India Ltd., 221 CTR 767 (Raj.)

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Nirav Shah

Explanation to S. 73 — Speculation business — Assessee company earning income from the sale of shares — AO holding that income earned was from speculation — On the facts held that income earned was in the nature of capital gains.

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20. Axis Capital Markets (India) Ltd. v. ITO

ITAT ‘A’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

R. K. Panda (AM)

ITA No. 4098/Mum./2007

A.Y. : 2004-05. Decided on : 30-11-2009

Counsel for assessee/revenue : Rajan R. Vora and Sheetal
Shah/Vikram Gaur

Explanation to S. 73 — Speculation business — Assessee
company earning income from the sale of shares — AO holding that income earned
was from speculation — On the facts held that income earned was in the nature
of capital gains.

Per R. K. Panda :

Facts :

The assessee was a public limited company engaged in the
business of investment, dealing in shares/ securities/bonds, etc. The assessee
during the impugned assessment year had shown income under the head capital
gain at Rs.22,98,229 the break-up of which was as under :

Rs.

Long-term capital
gains

41,85,744

Less :

Adjusted b/f
long-term capital loss

18,80,681

Less :

Short-term capital
loss

6,834

22,98,229

On being questioned the assessee explained that in the
current year no shares were purchased or sold as stock in trade. It was only
the shares held as investment that were sold during the year. However, the
Assessing Officer did not accept the contention of the assessee on account of
the reasons, amongst followings :

(a) The assessee had claimed deduction of entire expenses
on share dealings as business expenses though the transactions shown were
for sale of investments;

(b) In earlier years also the assessee had not shown any
stock in trade, even though, shares were acquired for resale;

(c) Memorandum of Association of the assessee company
showed that it was formed with the main objective of carrying on the
business of share trading along with other activities mentioned therein.

(d) As per Note in Part I of Schedule VI of the Companies
Act — for an investment company, shares take the character of stock in trade
and as such, shares shown as investment in the balance sheet could be
stock-in-trade also. The Companies Law does not differentiate between the
capital or revenue nature of transactions of investments and stock-in-trade.

Further, relying on a couple of decisions, the Assessing
Officer concluded that Explanation to S. 73 of the Act was applicable to the
transactions in question. He accordingly treated the net result of the profit
and loss of such transactions as arising out of speculation business. He
further did not allow any set-off of the brought forward long-term capital
loss of the preceding year against the income of the current year.

Before the CIT(A) the assessee submitted that the original
intention of the assessee at the time of entering into share transactions was
to earn dividend and hold them for appreciation in value. The shares were held
as investment and not as stock-in-trade. However, the CIT(A) held that the
claim of the assessee cannot be sustained on the following reasons :

(a) Although the appellant admitted that in the earlier
years as well as in the subsequent year, transactions in share trading were
carried out but not during the current year, in earlier years also no
stock-in-trade of shares was shown in the balance sheet. Shares were always
shown as investments only;

(b) All the expenses incurred on transactions in share
investments were claimed as business expenses in the Profit and Loss A/c.;

(c) The appellant had shown short-term capital loss of Rs.6,834. It means that it was engaged in frequent purchase and sale of shares during the year under consideration, which fact clearly proves the intention of the appellant for dealing in shares as stock-in-trade.

Held :

The Tribunal found merit in the submission of the assessee that the provisions of Explanation to S. 73 were not applicable to the facts of the present case for the reasons that :

   a) In the assessment order passed u/s.143(3) of the Act for the A.Ys. 2005-06 and 2006-07, the Assessing Officer in the orders had considered the income from sale of shares as income from long-term capital gain/short-term capital gain and not as speculation business.

   b) There is no purchase or sale of shares during the year and the assessee has sold the shares/units of mutual funds which were shown under the head investment.

   c) The shares were held for a long period and no borrowed fund had been utilised by the assessee for purchase of shares/units.

As regards the Assessing Officer disallowing the expenses of Rs.4 lakhs out of the total expenses of Rs.6.16 lacs on the ground that the same could have been incurred for earning of speculation income, the Tribunal agreed with the assessee’s contention that the entire expenditure relates to maintaining the corporate entity of the assessee. Accordingly it held that no part of expenditure was disallowable.

Nirav Shah

S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation O

19. Abbas T. Reshamwala v. ITO

ITAT ‘A’ Bench, Mumbai

Before N. V. Vasudevan (JM) &

R. K. Panda (AM)

        ITA No. 3093/Mum./2009

        A.Y. 2006-07. Decided on 30-11-2009

        Counsel for assessee/revenue : Ajay R. Singh/

Vikram Gaur

        S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation Officer to determine fair value.

        Per R. K. Panda :

        Facts :

During the year the assessee had sold an industrial gala for a consideration of Rs.20 lakhs. Based thereon the assessee had offered to tax the sum of Rs.18.73 lacs by way of capital gains. The Assessing Officer noted that the stamp duty authorities had valued the said property at Rs.44.62 lakhs. The assessee brought to the notice of the AO the various negative factors. He also filed a valuation report of the registered valuer, according to which, the value of the said premises was Rs.18.66 lakhs. He also requested the Assessing Officer if the valuation report was not accepted, then the same may be referred to the DVO u/s.50C of the Act.

However, the Assessing Officer did not accept the contention of the assessee. He was of the opinion that since the assessee had not taken objection before the Registrar in the initial stages when the property was sold and it was only during the stage when objection was raised, the assessee filed a valuation report of registered valuer after giving second thought. Therefore, he was not under obligation to refer the matter to the DVO. He accordingly adopted the value determined by the stamp duty authorities at Rs.44.62 lakhs u/s.50C and made the addition of Rs.25.88 lakhs as short-term capital gain being the difference between the amount declared by the assessee and the amount finally determined by him. In appeal the learned CIT(A) upheld the action of the Assessing Officer.

Before the Tribunal the Revenue submitted that the Assessing Officer can refer the matter to the DVO only if the assessee claims that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property on the date of transfer and the value adopted or assessed by the stamp valuation authority had not been disputed in any appeal or revision or no reference had been made before any authority. According to it, in the absence of the word ‘or’ between sub clause (a) and (b) of S. 50C(2), both the conditions, as per clauses (a) and (b) of S. 50C(2), are to be fulfilled before referring the matter to the DVO.

Held :

According to the Tribunal, the word ‘may’ used in Ss.(2) of S. 50C had to be read as ‘should’ and the Assessing Officer had no discretion but to refer the matter to the DVO for the valuation of the property when the assessee had raised an objection that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property. Accordingly, the matter was referred back to the file of the Assessing Officer with a direction to refer the matter to the DVO and decide the issue afresh as per law.

Nirav Shah

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