Tribunal News: Part A-Domestic Taxation Archives

S. 115JA — Stock borrowing charges not debited to P & L Account as required under Schedule VI of the Companies Act can be claimed as revenue expenditure even in the case of an assessee who is mandatorily bound to follow the accounting standards as prescri

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ITO v. Cyril Traders Pvt. Ltd.

ITAT ‘G’ Bench, Mumbai

Before A. L. Gehlot (AM) and

R. S. Padvekar (JM)

ITA No. 5297/Mum/2004

A.Y. : 1998-99. Decided on : 28-7-2009

Counsel for revenue/assessee : S. B. Prasad/

J. D. Mistry

S. 115JA — Stock borrowing charges not debited to P & L
Account as required under Schedule VI of the Companies Act can be claimed as
revenue expenditure even in the case of an assessee who is mandatorily bound
to follow the accounting standards as prescribed.

Per R. S. Padvekar :

Facts :

The total income of the assessee, assessed u/s.143(3) of
the Act, was a loss of Rs.55,37,760. Subsequently vide order passed u/s.143(3)
r.w. S. 147 the AO inter alia disallowed Rs.53,55,000 towards stock
borrowing charges incurred by the assessee and claimed in its computation of
total income but were not debited to its Profit & Loss Account. The AO held
that not debiting the expenditure to P & L Account was in violation of clause
(xii)(b) of Rule 3 of Part II of Schedule VI and hence the same was not
allowable.

The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the provisions of Minimum
Alternate Tax as contained in S. 115J were considered by the Apex Court in the
case of Apollo Tyres Ltd. It observed that the scheme of S. 115JA is identical
with that of S. 115J. It held that if the P & L Account prepared by the
assessee was not in accordance with the provisions of Part II and Part III of
Schedule VI to the Companies Act, 1956, then to that extent the AO can make
the corrections and adjustments, but the AO cannot make disallowance in
respect of expenses which are otherwise allowable but are not debited to P & L
Account. The Tribunal held that the stock borrowing charges were rightly
allowed as a deduction by the CIT(A).

The appeal filed by the Revenue was dismissed.

Cases referred to :

1. Kedarnath Jute Manufacturing Co. Ltd. v. CIT,
(82 ITR 363) (SC)

2. Tuticorin Alkali Chemcials and Fertilisers Ltd. v.
CIT, (227 ITR 172) (SC)

3. DCIT, Cir 3(1) Mumbai v. Adbhut Trading Co. Pvt
Ltd., (ITA No. 3597/Mum./2002), dated 25-7-2005

4. ITO v. Adbhut Trading Co. Pvt Ltd., (ITA No.
2869/Mum./2004), dated 25-4-2007

5. ITO v. Vicraze Investments & Trdg. Co. P. Ltd.,
(ITA No. 6276/M/2004), dated 24-4-2007.

6. Apollo Tyres Ltd. v. CIT, (255 ITR 273) (SC)

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Nirav Shah

S. 68 — Cash credit — Loan amount received in earlier year converted into gift — Valid gift.

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Haresh A. Dhanani v. ACIT

ITAT ‘SMC’ Bench, Mumbai

Before A. L. Gehlot (AM)

ITA No. 5850/M/2008

A.Y. : 2002-03. Decided on : 22-5-2009

Counsel for assessee/revenue : R. Ajay Singh/

Malati Sridharan

S. 68 — Cash credit — Loan amount received in earlier year
converted into gift — Valid gift.

Facts :

During the year under appeal the assessee had claimed to
have received gift of Rs.2.5 lacs from his uncle on the occasion of his
marriage anniversary. As per the facts noted, the said amount had been shown
by the assessee in his balance sheet as loan from his uncle up to 31-3-2001.
During the year under consideration, the said loan was converted into gift
vide gift deed dated 6-1-2002. The assessee passed necessary journal entry and
the amount was transferred to his capital account from the loan account.
According to the AO since the gift was not received by actual delivery of
cash/cheque, it cannot be considered as valid gift and he treated the said
amount as unexplained cash credit in the hands of the assessee u/s.68 of the
Act. The CIT(A) on appeal relied on the decision of the Apex Court in the case
of Dr. R. S. Gupta and upheld the order of the AO.

Held :

According to the Tribunal, the case relied on by the CIT(A)
was distinguishable on the facts. In the case of Dr. R. S. Gupta, the amount
was deposited with a third person while in the case of the assessee, the loan
amount was with him only which was converted as gift. Further, it observed
that even if the gift was not considered as genuine gift, the addition of
Rs.2.5 lacs was not warranted u/s.68 because the credit entry as loan was
there as on 31-3-2001 with the assessee himself and there was no fresh cash
credit during the year.

Case referred to :

CIT v. Dr. R. S. Gupta, 165 ITR 36 (SC)

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Nirav Shah

S. 37(1) — Capital or revenue expenditure — Expenditure incurred on launching of a new model of car — Held as revenue expenditure.

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Premier Ltd. v. DCIT

ITAT ‘C’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

Asha Vijayaraghvan (JM)

ITA No. 2091/Mum./2008

A.Y. : 2004-05. Decided on : 30-6-2009

Counsel for assessee/revenue : Jayesh Dadia/

Yeshwant V. Chavan

S. 37(1) — Capital or revenue expenditure — Expenditure
incurred on launching of a new model of car — Held as revenue expenditure.

Per S. V. Mehrotra :

Facts :

The assessee was carrying on the business of manufacture
and sale of automobiles and machine tools. During the year under appeal, it
had incurred expenditure of Rs.2.93 crore on van project. In its return of
income the same was claimed as revenue expenditure though in its books of
account, the same was capitalised and shown as ‘Capital work in progress’. The
AO rejected the claim of the assessee for reasons amongst others, as under :

The expense incurred was for development of a new car and hence cannot be
termed as revenue expenditure;

As per the Annual Report of the assessee — the project was under
implementation and ready to launch. Therefore, the expense incurred up to the end of the previous year
had rightly been capitalised by the assessee in its books of accounts.

The CIT(A) on appeal confirmed the action of the AO,
observing that the project was new business and not the expansion of an
existing business.

Before the Tribunal, the Revenue justified the orders of
the lower authorities and further contended that :

The assessee had enhanced the capacity by installing new assembly line; and

The expenditure was for manufacturing of altogether a different car.

Held :

According to the Tribunal the moot point for consideration
was whether the expenditure incurred in launching a new model could be treated
as expansion of same business or a new business. It referred to the CIT(A)’s
observation that if the assessee had incurred expenditure for expansion of the
production capacity of its Premier Padmini car or any of the cars which it was
already manufacturing, it would amount to a case of expansion. According to
the CIT(A), the product sought to be manufactured was a totally new product,
even if it was a car. The Tribunal did not agree to it. According to it, the
test to be applied for deciding whether a particular project was an expansion
of the existing line of business or a new business was to determine whether
there was unity of control and management and interlacing of funds or not. It
noted that those two aspects in the case of the assessee had not been disputed
by the Revenue. Therefore, it held that the expenditure incurred on the van
project was revenue in nature being for expansion of the business.
Accordingly, the appeal filed by the assessee on this ground was allowed.

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Nirav Shah

[2012] 138 ITD 278 (Pune) Ramsukh Properties vs. DCIT A.Y. 2007-08 Dated: 25th July, 2012

Assessee entitled to benefit u/s. 80(IB)(10) in respect of partially complete housing project if project could not be completed in specified time for reasons beyond its control.

Facts:
The assessee was a firm engaged in the business of builders and promoters. Its housing project consisted of six buildings having 205 flats. The housing project was not fully completed in time as specified under 80(IB)(10)(a) and hence it received completion certificate for 173 flats only. The assessee claimed deduction u/s. 80-IB(10) in respect of all the 205 flats as the project has been substantially completed and as such the completion certificate was obtained. The Assessing Officer rejected the claim of the assessee for granting whole deduction in respect of whole project as well as alternative claim with regard to the proportionate deduction on the ground that the project was not completed within the stipulated period of time. On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer.

Held:
Out of 205 flats, completion certificate was obtained and furnished before the AO for 173 flats only. The request for granting whole deduction in respect of whole project has rightly been rejected because deduction u/s. 80-IB(10) could not be granted to assessee on incomplete construction at relevant point of time. However, the fault of noncompletion of construction was not attributable to assessee. In case such a contingency emerges which makes the compliance with provisions of section 80- IB(10) impossible, then benefit bestowed on an assessee cannot be completely denied. Such liberal interpretation should be used in favour of assessee when he is incapacitated in completing a project in time for reasons beyond his control. The phrase “completion” is a relative and not absolute term. Accordingly, even part completion must be construed as completion. The provisions of taxing statute should be construed harmoniously with the object of statue to effectuate the legislative intention.

Hence, it was held that the assessee is entitled for benefit u/s. 80IB(10) of the Act in respect of 173 flats completed before prescribed limit.

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Nirav Shah

(2013) 87 DTR 346 (Bang) Tata Teleservices Ltd. vs. DCIT A.Y.: 2006-07 to 2008-09 Dated: 27th November 2012

Section 194H – Service fees against credit cards is not commission and hence provisions of section 194H not applicable

Facts:
The assessee, a company engaged in the business of telecom services has arrangement with several banks whereby the customers of the assessee holding credit card can make payment for services utilised by them through credit card. When a customer makes payment by credit card, bank processes payment after retaining fees for processing payment. The Assessing Officer treated such processing charges as commission and raised demands u/s. 201(1) and 201(1A). The CIT(A) rejected the Assessing Officers stand and upheld the claim of the assessee. The Department went into appeal.

Held:
The Honourable Tribunal held that commission paid to the credit card companies cannot be considered as falling within the purview of section 194H. Even though the definition of the term “commission or brokerage” used in the said section is an inclusive definition, it is clear that the liability to make TDS under the said section arises only when a person acts on behalf of another person. In the case of commission retained by the credit card companies however, it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transactions for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchant establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission or brokerage for acting on behalf of the merchant establishment.

Thus there is no requirement for making TDS on the commission retained by the credit card companies since payments to bank on account of utilisation of credit card facilities would be in the nature of bank charges and not commission within meaning of section 194H.

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Nirav Shah

[2012] 134 ITD 463 (Mum.) Siam Commercial Bank PCL vs. DCIT (International taxation)-2(1), Mumbai A.Y. 2000-2001 Date of Order – 25th February 2011

Section 5 – Accrual of income – Discounting charges of next year shall not accrue as income in current year. Section 36(1)(vii) – Section 36(1)(viia) – Claim of bad debts is to be restricted by amount of opening balance in ‘provision for bad and doubtful debts’ account instead of closing balance and then deduction u/s. 36(1)(viia) is to be allowed

Facts I:
The assessee, a foreign bank, following mercantile system of accounting did not offer discount received on bills discounted which were relating to period after 31-03-2000, for A.Y. 2000-01. The same was brought under tax by A.O. in A.Y. 2000-01.

Held I:
The period of bill is relevant as it requires the divesting of funds by the lender for such period entailing the incurring of interest expenditure for such period. The quantum of discounting charges has direct nexus with the due date of the bill, which, in turn, determines the period for which the bank is deprived of its funds in discounting the bill. As the interest cost, of funds invested, for the subsequent year shall not become deductible in the current year, naturally the corresponding income in the form of discounting charges for the next year shall also not accrue as income in the current year.

Facts II:
For A.Y. 2000-01, the assessee claimed deduction of Rs. 1,57,46,917/- for bad debts u/s. 36(1)(vii), being the amount of bad debts written off in current year at Rs. 1,88,87,553/- less provision allowed u/s. 36(1)(viia) of A.Y. 1999-2000 at Rs. 31,40,636/-. It also claimed separate deduction in respect of provision for bad and doubtful debts of Rs. 35,02,564/- made during the current year. The AO held that the bad debts deduction should be allowed only in excess of the balance at the end of the year and not at the beginning of the year.

Held II:
In each year ordinarily there are two types of deductions, viz., firstly on account of provision made at the end of the current year by limiting it to the adjusted total income for the year and secondly the amount of bad debts actually written off. The Commissioner (Appeals) was justified in directing the AO to restrict the claim of bad debts by the amount of opening balance in the provision for bad and doubtful debts account as at the beginning of the instead of closing balance and then allowing deduction u/s. 36(1)(viia).

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Nirav Shah

(2012) 134 ITD 269 (Visakha) Transstory (India) Ltd. vs. ITO Assessment Year: 2006-07 Date of order: 14th July, 2011

Section 80 IA – Assessee was acting through joint venture and consortium for executing eligible contracts, whether eligible to claim deduction u/s 80 IA. Joint venture was only a de jure contractor but the assessee was a de facto contractor – Joint venture or the consortium was only a paper entity and has not executed any contract itself – Assessee is entitled for the deductions u/s. 80-IA(4) on the profit earned from the execution of the work awarded to JV and consortium.

Facts:
The assessee is a company and it formed joint venture named “Navayuga Transtoy (JV)” which bid for the contract. The Irrigation Department of Andhra Pradesh awarded the contract to JV, which became entitled to execute works worth Rs. 664.50 crore. As per the terms of the JV, the assessee was to execute 40 per cent of the work in the JV, the other constituent partner was to execute 60 per cent of the works awarded. Both the constituent partners of the JV raised bills on the JV for quantity of work as certified by technical consultant appointed by the State Government. The JV in turn raised a consolidated bill on the Irrigation Department of Andhra Pradesh Government without making any additions. The Irrigation Department makes the payments to the JV, which shares the payment in accordance with the bills raised by each. The JV files its IT returns separately but does not claim any deduction u/s. 80-IA(4).

The assessee had also formed a consortium along with one M/s Corporation Transtroy, OJSC, Moscow, with the understanding that the assessee would execute 100 per cent of the works which were awarded to the consortium by the Government of Karnataka. During the year assessee executed works valued worth Rs. 31.09 crore. The assessee claimed deduction u/s. 80- IA(4) on the profits derived out of the aforesaid works. But it was disallowed by the AO on the ground that the work was not awarded to the assessee.

Held:
The joint venture and consortium was formed to obtain contract from Government Bodies. As per the joint venture, the project awarded to the joint venture was to be executed by the joint venturers or the constituents. Once the project was awarded to the joint venture or consortium it was to be executed by venturers or constituents in the ratio agreed upon by them. It was the assessee who executed the work contract or project given to the joint venture. Whatever bills were raised by the assessee for the work executed on JV and consortium, the joint venture and consortium in turn raised the further bill of the same amount to the Government. Whatever payment was received by the joint venture, it was accordingly transferred to their constituents. The joint venture is an independent identity and has filed the return of income and was also assessed to tax but neither offered any profit/ income earned nor claimed any exemption/deduction u/s. 80 IA. The joint venture was contractor only as per law, in factual terms the assessee was the contractor. All other conditions u/s. 80IA have been fulfilled. The dispute arose only with the fact of the contract being awarded only to the joint venture and not the assessee and therefore the assessee was not allowed the deduction. U/s. 80-IA the legislature has also used the word consortium of such companies meaning thereby the legislature was aware about the object of formation of consortium and joint venture. Therefore, the mere formation of the consortium or joint venture for obtaining a contract cannot debar the venture from claiming exemption.

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Nirav Shah

Trademark/Brand registered in India and nurtured and used in business in India represents property situated in India — Capital gain arising on its transfer taxable in India.

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11 Fosters Australia Ltd., In re

170 Taxman 341 (AAR)

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

India-Australia Treaty

A.Y. : 2007-08. Dated : 9-5-2008

Issues :

l
Trademark/Brand registered in India and nurtured and used in business in India
represents property situated in India. Capital gain arising on transfer of
such property is taxable in India in the hands of non-resident transferor,
irrespective of the situs of the execution of contract and irrespective of
situs of delivery of such IPR.

l
Gain arising on transfer of technology and intellectual property in the form
of technology manuals, brewing IP, process, etc. vesting in NR transferor
abroad and delivered outside India is not taxable in India.

l
The assessee can rely on independent valuation report for determination of
that part of the composite consideration which is taxable in India.

Facts :

The applicant Australian Company (herein called FAL or Ausco)
was engaged in the business of brewing, processing, marketing and promoting and
selling beer products in Australia and abroad. Ausco owned various brands
including Foster’s brand and related logo which were in use in the marketing of
products. The technology and know-how, including recipe and brewing
specifications, were also owned by Ausco.

Ausco had registered its brand ‘Foster’ in India in the year
1993. Later on, some further brands were also registered in India.

Somewhere in 1997, Ausco entered into Brand Licence Agreement
with Foster India (ICO), a Group Company in India. Entire share capital of ICO
was held by companies in Mauritius which in turn were held by another group
company in Mauritius called Dismin. ICO was given an exclusive right to use
various brands of Ausco and was also given access to brewing technology and
know-how. For such licence, ICO was paying royalty after deducting suitable tax
at source.

On 4-8-2006, Ausco and Dismin entered into Sale & Purchase
(S&P) Agreement with SAB Miller Ltd., a UK Company, (herein SAB). The S&P was a
composite agreement for sale of Mauritius companies which held shares of ICO by
Dismin and sale by Ausco of trademarks, brand and assignment of contract for
grant of exclusive and perpetual licence in respect of brewing technology for
the territory of India. For all these (including for shares of ICO) items, SAB
was required to pay a sum of US $ 120 M.

In terms of the S&P Agreement, SAB UK nominated SKOL India,
subsidiary of SAB Group as the entity which purchased all the assets which were
subject matter of the S&P Agreement. The S&P Agreement was actually implemented
by execution of certain definitive agreements which included transfer of shares
by Dismin of its holding in the other Mauritius companies which held shares of
ICO. Ausco executed assignment agreement in September 2006 for transfer of
brands and trademark for use by SKOL in the territory of India. It also gave
perpetual licence for use of brewing intellectual property by delivery of
brewing manual and other related literature also for use within territory of
India. The assignment agreement was executed in Australia. It was claimed that
all deliverables in terms of the agreement were given to SKOL at Australia. A
nominal consideration of US $ 100 was stated to be the consideration of
assignment.

The applicant Ausco filed application before the AAR, seeking
advance ruling on the question whether receipt arising to it from the transfer
of its right, title and interest in and to the trademarks, brand IP and for
grant of exclusive perpetual licence of brewing technology was taxable in India.
The other related question raised before the AAR was that if the amount was held
taxable, whether the applicant was required to pay tax on the gain computed,
based on consideration as per independent valuation obtained by the applicant.

At the outset, the applicant’s counsel made it clear that
taxability of income arising from transfer of shares effected by Dismin (Mauco)
was not an issue before AAR.

On the aspect of non-taxability of gain arising from transfer
of brand and technology IPR, the applicant contended that these intangibles were
located at the domicile of the owner (i.e., at Australia). The applicant
relied on the terms of original brand licence agreement of 1997 signed by it
with ICO to contend that soon upon contemplated change of ICO’s ownership, the
licence agreement stood terminated. As a consequence, the assets reverted back
and were not situated in India as on the date on which
the same were transferred to SKOL. The applicant also contended that since
assets situated outside India stood transferred outside India, no part of
capital gains was chargeable to tax in India. By relying on decision of the
Supreme Court in the case of CIT v. Finlay Mills Ltd., (AIR 1951 SC 464),
it was the claim of the applicant that registration of trademark was merely for
protection of IPR and did not impact the situs or location of IPR. The assessee
also relied on AAR ruling in the case of Pfizer Corporation, in. Re
(2004) (271 ITR 101). In this case, Pfizer Corporation had granted access and
licence of technology use and trademark to another group company in India. The
licence agreement was terminated by paying compensation to ICO. After such
termination, Pfizer Corporation had transferred technology dossier to a Danish
company. The AAR had in that case accepted Pfizer’s contention that this
represented transfer of asset located outside India.

Nirav Shah

S/s. 40(a)(ia), 80IB(10), – In case of an undertaking qualifying for deduction u/s. 80IB(10), amount disallowed u/s. 40(a)(ia) is allowable as deduction u/s. 80IB(10).

34. 2013-TIOL-146-ITAT-MUM
ITO vs. Dharti Enterprises
A. Y.: 2007-08, Dated: 18- 1-2012

S/s. 40(a)(ia), 80IB(10), – In case of an undertaking qualifying for deduction u/s. 80IB(10), amount disallowed u/s. 40(a)(ia) is allowable as deduction u/s. 80IB(10).

Facts

The assessee was in the business of construction. It filed return of income declaring total income at Rs. Nil after claiming deduction u/s. 80IB(10) of the Act. In the course of assessment proceedings, the AO noticed that the profit as per P & L Account was Rs. 51,34,648 and to this, the assessee had added the amount of Rs. 13,35,990 being the amount of expenditure on which TDS was deposited later than the due date and Rs. 81,81,030 being amount of expenditure on which TDS was not deposited as per tax audit report. Thus, on a gross total income of Rs. 1,46,51,668, the assessee claimed deduction u/s. 80IB(10) of Rs. 1,46,51,668.

On being asked as to why deduction u/s. 80IB(10) should not be disallowed on Rs. 95,17,020 the assessee submitted that no disallowance u/s. 40(a)(ia) was called for and even if the amount is disallowed the assessee is eligible for deduction u/s. 80IB(10) on the entire amount of profit derived from the housing project as computed under the Act, which is included in the gross total income of the assessee.

The AO after considering the decision of the Apex Court in Liberty India vs. CIT 317 ITR 218 (SC) held that the assessee has wrongly claimed the deduction u/s. 80IB(10) on the amount of Rs. 95,17,020 which is not a profit of the eligible enterprise, but has to be taxed because of the violation of the provisions of section 40(a)(ia) of the Act. He disallowed the claim of deduction u/s .80IB(10) on the amount of Rs. 95,17,020.

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

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted the ratio of the following decisions –

(i) S B Builders & Developers vs. ITO (ITA No. 1245/ Mum/2009)(AY 2006-07) order dated 14-5-2010;

(ii) ITO vs. Shri Ganesh Developers and Builders (ITA No. 4328/Del/2009)(AY 2006-07) order dated 11-3-2011; and

(iii) ACIT vs. Sri Lakshmi Builders and vice versa in ITA No. 244/Vizag/2008 and in ITA No. 323/Vizag/2010 (AY 2005-06) order dated 22-11-2010.

It noted that in the case of Sri Lakshmi Builders (supra) on the issue of disallowance of deduction u/s. 80IB(10) on the amount disallowed u/s. 40(a)(ia) it has been held by the Tribunal that the disallowance so made can only be treated as income derived from the impugned business activity, when the income after making the said disallowance is subjected to tax as the business profit.

Applying the ratio of the abovementioned decisions to the facts of the assessee’s case, the Tribunal held that since the AO had treated the disallowance u/s. 40(a) (ia) of Rs. 95,17,020 as income from business and it is not the case of the Revenue that the income derived by the assessee is other than the business income from developing and building housing project, the assessee is entitled to deduction u/s. 80IB(10) in respect of total profits including the profits of Rs. 95,17,020 computed as business profits of the housing project for the year under appeal. The Tribunal upheld the order of the CIT(A).

The appeal filed by the Revenue was dismissed.

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Nirav Shah

S/s. 50C, 271(1)(c) – The mere fact that the AO had invoked section 50C(2) and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for imposing penalty.

33. 2013-TIOL-39-ITAT-MAD
C Basker vs. ACIT
A. Y.: 2007-08, Dated: 12-10-2012

S/s. 50C, 271(1)(c) – The mere fact that the AO had invoked section 50C(2) and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for imposing penalty.

Facts

The assessee filed its return of income which return of income was subsequently revised. In the original return of income as also in the revised return of income, the assessee had computed and offered for taxation capital gains arising on sale of land. The capital gains were computed by adopting the consideration as per sale agreement to be full value of consideration. In the course of assessment proceedings, the AO noticed that the sale consideration as per agreement was Rs. 28,54,200, whereas the value of the property as per guideline value was Rs. 95,40,000. He assessed total income by computing capital gains by adopting the guideline value to be full value of consideration. He also initiated penalty proceedings. The assessee did not file any appeal against the application of guideline value by the AO. The AO levied penalty u/s. 271(1)(c) of the Act inter alia on the ground that but for information obtained by him from AIR data, correct capital gains would have escaped assessment as the assessee failed to disclose the same either in original return of income or in the revised return of income filed subsequently.

Aggrieved by the levy of penalty, 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 it was not the case of the AO that the assessee has received consideration in excess of the amount stated in the sale deed. The mere fact that the AO had invoked section 50C(2) of the Act and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for the purpose of computing capital gains. The Tribunal noticed that the Mumbai Bench of the Tribunal in the case of Renu Hingorani vs. ACIT has held that penalty merely on the basis of invoking section 50C(2) of the Act cannot be sustained. It further observed that the same law has been reiterated in the case of Shri Chimanlal Manilal Patel vs. ACIT (ITA No. 508/Ahd/2010) and DCIT vs. Japfa Comfeed India Private Limited (2011-TIOL-703-ITAT-DEL). The Tribunal held that section 50C(2) is only a deeming provision which cannot be taken as to be an understatement for the purpose of imposing penalty. In order to attract imposition of penalty, the assessee must be held to have concealed particulars of income or furnished inaccurate particulars. In the instant case, there were no such allegations against the assessee. The Tribunal held that the CIT(A) erred in confirming the penalty imposed by the AO. The Tribunal decided the appeal in favour of the assessee.

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Nirav Shah

S/s. 139(1), 139(5), 142(1), 143(2), 145 – Even in cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income. Even in the case of an assessee following cash system of accounting, return of income can be revised and the amount received and offered as income can be eliminated to give effect to the decision of the High Court, rendered after the end of the financial year, holding that the said amount is not taxable.

32. 2013-TIOL-141-ITAT-DEL
ACIT vs. Dexterity Developers A. Y. : 2008-09, Dated: 18-1-2013

S/s. 139(1), 139(5), 142(1), 143(2), 145 – Even in cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income. Even in the case of an assessee following cash system of accounting, return of income can be revised and the amount received and offered as income can be eliminated to give effect to the decision of the High Court, rendered after the end of the financial year, holding that the said amount is not taxable.

Facts

The assessee firm, following cash system of accounting, had filed its return of income, declaring the total income to be Rs. 5,36,83,629. In the original return filed, the assessee had disclosed profit of Rs. 9,73,36,034 on sale of land for a total consideration of Rs. 20,55,78,119 on 11-2-2008. contention of the DR that since the The plot of land under consideration originally belonged to Ambika Mills Ltd., a company under liquidation. The Gujrat High Court constituted a committee, headed by the Official Liquidator as the Chairman, for disposal of the assets of the company in liquidation. On the basis of the report of the Official Liquidator and the open bid in the Court, the highest bid of Rs. 14.30 crore made by M/s Bheruji Estate, was accepted by the Court by order dated 23-12-2003. As the auction purchaser subsequently could not make the full payment, he requested that the freehold land be registered in the name of his nominee, Mr. Manubhai M. Patel, who would make the balance payment. However, M/s Bheruji Estate subsequently went back on this request. On 8-8-2005, the Honourable Court directed the Official Liquidator to execute sale deed in favour of Manubhai Patel, subject to the outcome of the appeal filed by M/s Bheruji Estate. On 19-10-2007, the assessee entered into an MoU with Shri Manubhai Patel for sale of freehold land, and also acted as a mediator between the two parties i.e. M/s Bheruji Estate and Shri Manubhai M. Patel. The consent terms between the disputing parties were taken on record by the Appellate Court, and the final order was passed on 23-1-2008 disposing of the appeal by M/s Bheruji Estate. In the meantime, on 29-10-2007, the Official Liquidator executed the sale deed of the freehold land in favor of Shri Manubhai M. Patel. On 11-2-2008, a registered sale deed was executed by Shri Manubhai Patel, as vendor, the assessee as confirming party and M/s Sential Infrastructures Ltd., as purchaser for a consideration of Rs. 55,67,78,119, out of which Rs. 21,60,28,119 was to be received by the assessee.

Subsequently, one of the original bidders of the auction sale of 2003, Shri Jayesbhai Patel filed an appeal against the original sale made by the Official Liquidator in favour of M/s Bheruji Estate, and on his appeal, the Gujrat High Court vide order dated 9-3-2009 held that the sale effected on 11-2-2008 should be treated to have been made by the Official Liquidator in favour of M/s Sential Infrastructure Ltd., and the intervening parties, i.e. M/s Bheruji Estate, Shri Manubhai Patel and the assessee were only entitled to their expenditure to the extent of actual investments, services rendered and cost of litigation. It was directed that the assessee was liable to return the amount of Rs. 20 crore to the Official Liquidator within one month from the date of the order, retaining only Rs. 1,60,28,119. On the basis of this High Court order dated 9-3-2009, the assessee firm filed its revised return of income showing nil income, enclosing a profit & loss account in which no sale of land was disclosed and the liability of Rs 20 crore was disclosed in its balance sheet.

The Assessing Officer held that the assessee was not entitled to revise its return on the basis of events which had occurred after the close of the previous year as it followed cash system of accounting. He held that the effect of the Court order dated 9-3-2009 could only be reflected in AY 2009-10.

Aggrieved, the assessee preferred an appeal to CIT(A) who accepted the assessee’s contention and directed the AO to accept the revised return which was filed within time and was within four corners of law.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the only dispute of the Revenue was that there was no omission or wrong statement in the original return which may be revised. The Tribunal noted that the High Court had held that the assessee was not entitled to the profit on sale of land, but was entitled only to the expenditure to the extent of actual investment and the cost of litigation. Therefore, the assessee was not entitled to the amount credited to its profit & loss account towards profit on sale of land. The Tribunal held that there was certainly an omission in the original return of income. Though the order of the High Court was subsequent to the end of the relevant previous year, it effected the transaction entered into during the previous year which was liable to be taxed in the assessment year under consideration. Since the assessment of the said year was still pending, the Tribunal held that the assessee was fully justified in revising its return in the light of the decision of the Honourable Jurisdictional High Court.

As regards the AO’s reliance on the method of accounting followed by the assessee being cash, the Tribunal held that after the order of the High Court, when the assessee is not entitled to any profit from the sale of land, the nature of the amount received from the buyer of the land cannot be considered as sale proceed or profit in the hands of the assessee, but its nature would be only an amount received in trust which the assessee is liable to refund as per the direction of the Court. Even in the cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income.

As regards the contention of the DR that since the assessee had preferred an appeal against the order of the High Court, in the event of the decision being reversed in appeal, how would the Department be able to recover the tax on such income from sale of land, the Tribunal held that if any such event happens, the Revenue would be at liberty to take appropriate action in accordance with law. The Tribunal noted that as on date of its decision, the decision of the Jurisdictional High Court holds good and is binding on the parties. The assessment of the income of the assessee cannot be made, ignoring the above decision of the Honourable Jurisdictional High Court.

The Tribunal held that the CIT(A) was justified in directing the AO to consider the revised return. It upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue.

The appeal filed by the revenue was dismissed.

levitra

Nirav Shah

Amount received on transfer of carbon credits is a capital receipt

31. (2013) 81 DTR 173 (Hyd)
My Home Power Ltd. vs. DCIT A.Y.: 2007-08, Dated: 2-11-2012

Amount received on transfer of carbon credits is a capital receipt

Facts

The company, engaged in the business of power generation, received carbon emission reduction certificates (CERs) popularly known as ‘carbon credits’ for the project activity of switching off fossil fuel from naphtha and diesel to biomass. The part of CERs was sold and sale proceeds of Rs. 12.87 crore were treated as capital in nature and not taxable. The Assessing Officer held the same to be a revenue receipt, since the CERs are a tradable commodity and even quoted in stock exchange. The CIT(A) confirmed the order of the Assessing Officer.

Held

The carbon credit is in the nature of “an entitlement” received to improve world atmosphere and environment by reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business, but it accrues due to “world concern”. It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that, the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, carbon credits cannot be considered as a by-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one’s business and it is a credit for reducing emissions.

The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one’s negative point carbon credit. The amount received is not received for producing and/or selling any product, by-product or for rendering any service for carrying on the business. Carbon credit is entitlement or accretion of capital and hence, income earned on sale of these credits is capital receipt. The carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business, but it is generated due to environmental concerns. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission. However, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income.

levitra

Nirav Shah

Interest-free loans advanced to overseas wholly-owned subsidiaries cannot be regarded as quasi equity capital.

New Page 1

Tribunal News

Part C — Tribunal & AAR International Tax Decisions

Geeta Jani
Dhishat B. Mehta
Chartered Accountants

20 Perot Systems vs DCIT

2010-TIOL-51-ITAT-DEL

Section 92,

Dated: 30.10.2009

Issues:

Interest-free loans advanced to overseas
wholly-owned subsidiaries cannot be regarded as quasi equity capital.

Notional arm’s length interest on a loan to
an AE can be taxed having regard to applicable transfer pricing provisions.

Facts:

The assessee, a company
incorporated in India, is engaged in the business of developing and designing
technology for business solutions and also providing business consultancy
services.
The assessee advanced
interest-free foreign currency loans to its two wholly-owned subsidiaries (WOS)
situated in Bermuda and Hungary. The funds were used by the WOS for making
long-term investments in step down operating subsidiaries.
During the course of the
assessment proceedings, the tax authorities held that the loan was an
international transaction and grant of interest-free loan was inconsistent
with the arm’s length principles of section 92 of the Income Tax Act.
The assessee resisted the
notional assessment by contending that:

(a) The overseas entities were 100% subsidiaries. The
assessee had neither any intention nor had earned any interest, and that it
was commercially expedient to extend such interest-free loans to WOS.

(b) Interest-free loans were in the form of quasi equity as
the subsidiaries had very small capital base. Further, unavailability of easy
borrowing means to the newly set up WOS was one of the main reasons for the
funding.

(c) Requisite approval of the RBI was obtained by the
assessee for such remittance. The Income Tax Act and the OECD Guidelines
support the contention that the effect of government control/intervention
should be considered while determining ALP

(d) Reliance was placed on Para 1.37 of 1995 OECD
Guidelines to support proposition that it is legitimate to consider the
economic substance of a transaction. The thin capitalisation rules of Hungary
were also referred to support the view that debt in excess of three times the
equity of the subsidiary is to be treated as equity.

(e) Relying on the Supreme Court’s Judgments in CTV. KRMTT
Thiagaraja Chetty & Co. 24 ITR 525 and Morvi Industries Ltd v CIT 82ITR835 it
was contended that the term income includes real income and not fictitious
income, and notional income assessment was not justified.

Held:

The ITAT upheld the contentions of the tax department and
held:

(a) The agreements between the parties indicate that the
assistance to the WOS was in the nature of loans and not in the nature of
capital.

(b) The concept of real income cannot be applied in respect
of international transactions covered by transfer pricing provisions.

(c) Reliance by the assessee on OECD guidelines and thin
capitalisation norms of the source country was not apt as they dealt with the
issue from the perspective of the borrower and the recipient country, and not
from the perspective of the lender. In any case, the thin capitalisation norms
of Hungary only regulated admissibility of interest expenditure in the hands
of the payer.

(d) Interest-free loans granted in Bermuda (situated in a
tax haven) would result in higher income in the hands of the AE and the
taxpayer’s income in India would reduce by the corresponding amount. This
would result in reduction of the overall tax incidence of the group, resulting
in a case of violation of the TP norms where profits are shifted to lower tax
regimes to bring down the aggregate tax incidence of multinational groups.

(e) The approval of the Reserve bank of India does not
validate or approve the true character of the transaction from a TP
perspective. RBI regulations could not be applied for the purpose of TP under
the Income Tax Act.

(f) Based on the above, the ITAT upheld the order of the
CIT(A) and held that the transaction to provide interest-free loans was an
international transaction subject to the TP guidelines, and income thereof,
arising from such transaction, should be determined under the provisions of
Income Tax Act.

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Nirav Shah

Payments received from the supply of software products cannot be considered as ‘royalties’, taxable under the provisions of the Income-tax Act, 1961 or under India-Japan tax treaty.

New Page 1

19 Dassault Systems K. K

2010-TIOL-02-ARA-IT

Articles 5, 7 and 12, India-Japan DTAA; Section 9(1)(vi),
Dated: 29.01.2010

Issues:

Payments received from the supply of software
products cannot be considered as ‘royalties’, taxable under the provisions of
the Income-tax Act, 1961 or under India-Japan tax treaty.
In absence of a Permanent Establishment (PE)
of non-resident in India, business income from distribution of software
through independent distributors cannot be taxed in India.

Facts:

The applicant, a company
incorporated in Japan, was engaged in the business of providing ‘Products
Lifecycle Management’ (PLM) software solutions, applications and services. The
applicant was marketing software products through a distribution channel
comprising of Value Added Resellers (VAR).
The VAR were independent
third party resellers engaged in the business of selling software to
end-users. The applicant entered into a General VAR Agreement (GVA) with the
VAR, authorising them to act as resellers of the products on a non exclusive
basis. As per the business model, software solutions were sold to VAR for a
consideration based on the standard list price, after deducting the agreed
discount. The VAR, in turn, sold the products to end-users at a price
independently negotiated between them and the end-users. Upon receipt of the
order from end user, the VAR placed a back-to-back order on the applicant. The
end-users entered into End User License Agreement with the applicant (with the
VAR being a party) containing the terms of software license. The applicant
thereupon provided a license key via e-mail so that the customer could
download the product, hosted on a server located outside India through the web
link. After download of the product, the end-user activated the software on
the customer’s designated machine, using the license key.
The issue before the AAR
was whether the payments received by the applicant on sale of the software
products were taxable as business profits under Article 7 of the tax treaty or
‘royalty’ as defined in article 12 of the tax treaty.
The applicant contended
that:

(a) What was transferred to the end-user was copyrighted
software. The copyright of the software continued to be with the applicant and
was neither made available to the VAR or end-users.

(b) Limited right to use the copyrighted products is not
equivalent to use of copyright for commercial exploitation — and consideration
for use of copyright for commercial exploitation alone could constitute
royalty.

(c) Each VAR was a distinct legal and independent entity
who acted as a non- exclusive distributor on a principal-to-principal basis.
Such entity did not constitute agency PE.

The tax authority claimed
that the payments by the VAR were royalty payments by contending that:

(a) The payments made by the end-users were for transfer of
rights in respect of the copyright of the software, i.e., for use of the
computer programme.

(b) The Copyright Act makes a distinction between the
copyright of a literary work like a book and a computer programme. The right
to sell, in relation to a computer programme, is specifically treated as the
use of copyright under the Copyright Act.

(c) The concept of “copyrighted article” is apt for a book
or music CD, but is inapt for software where one or more rights in copyright
need to be necessarily transferred to make the same workable

(d) The End User License Agreement (EULA) makes it clear
that software use is licensed for a fee.

(e) In any case, consideration can be treated as royalty as
it is for the right to use the process.

(f) The VAR constituted agency PE as they were
substantially controlled and directed by the applicant.

Held:

The AAR accepted the contentions of the applicant and held
that there was no payment of royalty as:

(a) Computer software enjoys protection under the Copyright
Act. The term copyright needs to be understood as per the Copyright Act.

(b) Assignment of a right of the owner of a copyright is
essential to trigger royalty taxation. A non-exclusive and non-transferable
license for enabling the use of the copyrighted product is not equivalent of
the authority to enjoy the rights of the copyright owner.

(c) Parting of the IPR, inherent and attached to the
software product, in favour of the licensee is a mandatory requirement of the
Income Tax Act and the tax treaty to trigger royalty taxation.

(d) The right to copy, reproduce or store given to the
end-user is incidental to providing use of the copyrighted product. The
end-user has to use the license within the limitation of non-exclusive
self-user license. Section 52(aa) of the Copyright Act does specifically
permit the lawful possessor of the copy of computer programme to use the same
for self use, take back-up for archival purposes or protect against loss,
destruction, etc. This also supports the view that the license to the end-user
offered a limited right of use of the copyrighted product and was not meant
for commercial exploitation.

(e) The payments for the software could not be construed as
royalty, as the use of the programmes contained in the software could be
construed as the use of the process or acquisition of any rights in relation
thereto.

Nirav Shah

Capital gains arising on transfer of Indian assets by way of amalgamation of overseas companies with an Indian company, is exempt from tax in the hands of the overseas amalgamating companies under section 47(vi), read with section 2(1B) of the Act.

New Page 1

18 Star Television Entertainment Limited

(AAR) (2010–TIOL-01-ARA-IT)

Sections 47(vi), 47(vii), 2(1B)

Dated: 21.01.2010

Issues:

Capital gains arising on transfer of Indian
assets by way of amalgamation of overseas companies with an Indian company, is
exempt from tax in the hands of the overseas amalgamating companies under
section 47(vi), read with section 2(1B) of the Act.
Shareholders of overseas amalgamating companies
are entitled to exemption under section 47(vii), read with section 2(1B) of
the Act.
Taxpayers are entitled to plan affairs so as to
avail of the benefit of tax exemptions and are not precluded from minimising
their tax burden. Only a sham or a nominal transaction or a transaction which
is a contrived device, solely for tax avoidance, can be ignored.

Facts:

The applicants — three
group entities of the Star Group — were foreign companies registered in UAE/BVI.
These companies (herein Amalgamating Companies) owned Indian telecasting
channel rights, as also certain overseas assets. The Amalgamating Companies
disposed of their non-Indian assets and proposed a scheme of amalgamation with
another group company in India (viz. SIPL). SIPL is held by two Mauritius
companies.
The main reason for the
amalgamation was stated to be to obtain operational synergies, enhanced
flexibility and to create a strong base for future growth of the entities.
Upon amalgamation, SIPL was to issue shares to the shareholders of the
Amalgamating Companies, based on a fair swap ratio determined by the valuer.
The scheme of amalgamation
was filed with the Bombay High Court for approval, as required under the
provisions of sections 391 and 394 of the Companies Act, 1956. The application
to the AAR was filed at the time when the amalgamation petition was pending
before the High Court for approval.
The issue before AAR was
whether the scheme of amalgamation would result in any capital gains tax
liability in the hands of the Amalgamating Companies or their shareholders.
The applicant’s
contentions before the AAR were:

(a) The conditions stipulated for exemption under sections
47(vi) and (vii), read with section 2(1B) were fulfilled and, hence, capital
gains were exempt from tax.

(b)
The scheme of amalgamation
had specifically provided that all liabilities including arrears of tax dues
of the Amalgamating Companies would vest in and would be ultimately recovered
from the assets of the amalgamated Indian company. As a result, the interests
of the tax department were not likely to be prejudiced.

The tax
department contended that the application was to be rejected as:

(a) The object of the scheme of amalgamation was to avoid
capital gains tax arising on the transfer of business by the Amalgamating
Companies.

(b) Had the parties directly transferred the shares of the
amalgamating companies to the amalgamated company, capital gains arising on
such transfer would have attracted tax in India.

(c) The scheme of amalgamation should be kept on hold until
the high court has accorded its sanction, as the tax department would then be
able to present its case before the court on the adverse financial
repercussions of merger.

(d) There was no business or commercial purpose for the
proposed amalgamation. The object of the scheme was primarily to avoid payment
of taxes and it was a plan to artificially inflate profits and reduce
liability of the amalgamating companies.

Held

The AAR accepted the applicant’s contentions and held:

(a) Capital gains arising due to the proposed amalgamation
would be exempt from tax in the hands of the Amalgamating Companies as well as
their shareholders, as the conditions prescribed under section 47 (vi)/(vii)
of the Income Tax Act would be fulfilled.

(b) The contention of the tax department that acceptance of
the application should be kept in abeyance until the high court has accorded
its approval, cannot be accepted as it would lead to the AAR, a statutory
authority, refusing to exercise jurisdiction vested in it by law. The Ruling
was sought and was also provided on the basis that the scheme will have
approval of the Court. The ruling would take effect only after the court’s
approval. The AAR can provide its ruling on the proposed transaction in the
interest of providing a firm idea of tax implications in India.

(c) The scheme is not
likely to jeopardize the interests of the tax department as all tax dues of
the amalgamating companies vest in and can be recovered from SIPL.

(d) The application cannot be rejected on the ground that
it is a pure and simple design to avoid capital gains tax. Relying on the Apex
Court’s decision in the case of Azadi Bachao Andolan and the Gujarat High
Court’s decision in the case of Sakarlal Balabhai , the AAR held that it was
possible for a taxpayer to enter into a transaction in such a manner that
legitimate tax exemptions are availed of and the tax liability is reduced. The
AAR also observed that:

Nirav Shah

Consolidated return filed after due date in S. 139(1), held valid as in substance, a relevant provision complied with

New Page 1

Part C — Tribunal and International Tax Decisions

21 Nicholas Applegate South East Asia Fund
Ltd. v. ADIT

(2009 TIOL 74 ITAT Mum-TM]

S. 139, 292B, Income-tax Act

A.Y. : 2001-02. Dated : 9-1-2009

Issue :

On facts, consolidated return filed after the date prescribed
in S. 139(1), held valid as in substance and in effect the relevant provision
was complied with.

Facts :

The assessee was a company incorporated in Mauritius under
the Protected Cells Companies Act. It had four Cells. For A.Y. 2001-02, it filed
separate returns of income of four Cells. These returns were filed on 30th
October 2001, i.e., within the time prescribed u/s.139(1) of Income-tax
Act. The assessee subsequently realised that being a single entity (company), it
was required to file consolidated return at entity level i.e., for all
four Cells. Accordingly, on 29th October 2002 it filed a consolidated return for
all four Cells.

The assessee had derived income from dividend (which was
claimed exempt u/s.10(33) of the Income-tax Act) and short-term capital loss,
which the AO had found in order. However, the AO issued show-cause notice to the
assessee to explain why consolidated return filed on 29th October 2002 should
not be considered as original return and four separate returns filed on 30th
October 2001 should not be considered invalid.

The assessee explained that it filed separate returns for
four Cells as it was of the view that the Cells had separate legal existence.
Further, the original returns of four Cells did not suffer from any defect
mentioned in S. 139(9) of the Income-tax Act and hence the subsequent
consolidated return filed on 29th October 2002 was only a revised return. The
AO, however, held that the earlier returns were invalid and only the subsequent
return was valid. Therefore, he did not allow carry forward of loss. The CIT(A)
upheld the order of the AO.

On account of differences in the views of Tribunal members,
the case was referred to the Third Member. The assessee put forth the following
propositions :

(i) Provisions of S. 139(1), S. 139(3) and S. 139(4) must
be harmoniously construed.

(ii) S. 139 is a machinery provision as against a fiscal
provision, and must be interpreted in a liberal and equitable manner.

(iii) The original returns filed by the Cells have only
been consolidated in the subsequent returns dated October 29, 2002 and as
observed by this Tribunal, there is no mala fide intention on the part
of the appellant in doing so.

(iv) Benefit u/s.139(5) cannot be denied on technical
grounds.

(v) The information contained in the revised return dated
October 29, 2002 is congruent to the information provided in the four separate
returns filed by the Cells and there is no variance whatsoever, hence there is
no loss of revenue. Further, information contained in the belated return
cannot be held as invalid so as to be overlooked by the Assessing Officer.

(vi) It is provided u/s.292B of the Income-tax Act that no
return of income furnished or made shall be invalid or shall be deemed to be
invalid merely by reason of any mistake, defect or omission in such return of
income, if such return of income is in substance and effect in conformity with
or according to the intent and purpose of this Act.

(vii) The ‘purpose’ of the Income-tax Act, as is evident
from S. 292B of the Income-tax Act, is to achieve/determine the correct total
income and when correct total income was given in four returns filed
simultaneously and later in the return consolidating figures were given, the
original four returns filed were valid.

The tax authorities contended that there was difference,
though minor, between the earlier four returns and the subsequent consolidated
return. Further, u/s.139(3) of the Income-tax Act, only a valid return can be
revised.

Held :

The Tribunal referred to the decisions in CIT v. Kulu
Valley Transport Co. P. Ltd., (1970) 77 ITR 518 (SC) and State Bank of
Patiala v. S. K. Sharma, (1996) 3 SCC 364 and held that as all the relevant
and correct information was given in prescribed time, the four Cells filing four
separate returns had complied in substance and in effect with the intent and
purpose of the Income-tax Act and that the subsequent consolidated return was
not revised return but mere consolidation of the four earlier returns.

Compilers note :

The issue whether a Protected Cell Company should file a
consolidated return or different returns for each cell was neither raised before
the Tribunal, nor was it examined by the Tribunal.

levitra

Nirav Shah

Concept of economic employer — Reimbursement under Secondment Agreement to legal employer on actual cost basis represented salary paid to secondee — No tax was required to be deducted at source.

New Page 1

Part C — Tribunal and International Tax Decisions

20 IDS Software Solutions (India) Pvt Ltd
v. ITO

(2009 TIOL 82 ITAT Bang.)

S. 195, S. 9(1)(vii), Income-tax Act; Article 12(4),

India-USA DTAA

A.Y. : 2006-07. Dated : 21-1-2009

Issue :

Concept of economic employer and that reimbursement under
Secondment Agreement to legal employer on actual cost basis represented salary
paid to secondee, wherein no tax was required to be deducted at source.

Facts :

The assessee was wholly-owned subsidiary of an American
company. The assessee was engaged in software development business. To assist it
in its business, the assessee executed Secondment Agreement with its parent
company (which was an American company) for providing services of certain
personnel (‘secondee’). The secondee was to report to, and be responsible to,
the assessee and was to act in accordance with assessee’s instructions and
directions. Though the American company remained the legal employer of the
secondee as per the agreement, the secondee was appointed as per the articles of
association of the assessee and was to act in accordance with reasonable
requests, instructions and directions of the assessee. The assessee was obliged
to reimburse to the American company the entire remuneration (including bonus
and other incidental costs) of the secondee on actual cost basis without any
mark-up. The assessee was also obliged to indemnify the American company for all
claims that may arise as a consequence of any act or omission committed by the
secondee. The American company hired a qualified person and seconded him as
managing director to the assessee.

The assessee applied u/s.195 to the AO for reimbursement of
remuneration to the American company without deduction of tax, on the ground
that for all practical purposes, the secondee was assessee’s employee and salary
received by him from the American company was offered to tax in India in his
individual capacity. The AO held that payment by the assessee to the American
company cannot be considered as mere reimbursement exempt from tax and further
that in absence of employer-employee relationship, the proposed remuneration
cannot be considered as salary. Accordingly, remuneration would be considered as
Fees for Technical Services (‘FTS’) in terms of Explanation 2 to S. 9(1)(vii) of
the Income-tax Act. The assessee’s contention that no technical services were
made available was rejected by the AO who directed it to deduct tax @10%. The
CIT(A) upheld the order of the AO.

Before the Tribunal, the assessee contended that for all
practical purposes, the secondee was an employee of the assessee and
employer-employee relationship existed between the assessee and the secondee.
Accordingly, payment made by the assessee to the American company was only
reimbursement of ‘salary’ cost. The assessee relied on the decisions in CIT
v. Lady Navajbai R. J. Tata, (1947) 15 ITR 8 (Bom.), K. R. Kothanda-raman
v. CIT, (1966) 62 ITR 348 (Mad.), Lakshmi-narayan Ram Gopal and Son Ltd.
v. Government of Hyderabad, (1954) 25 ITR 449 (SC), Anderson v. James
Sutherland, (1941) SC 203 (Scottish Court of Sessions) and Ram Prashad v.
CIT, (1972) 86 ITR 122 (SC) and also certain extracts from Professor Klaus
Vogel’s Commentary to support its contention of employer-employee relationship.

On facts of the assessee’s case, the Tribunal observed that
the assessee was ‘economic employer’ of the secondee. The secondee was rendering
services to the assessee under the control and supervision of the assessee, the
salary costs were borne by the asseesse by way of cross charge, the asseesee
could have terminated the services of the secondee as per articles and the
assessee could regulate the powers and duties of the secondee.

The Tribunal then considered the issue whether the amount
paid to the American company could be considered as FTS. The Tribunal held that
certain terms in Secondment Agreement, like indemnification and duties of the
secondee being mentioned clearly indicated that the secondee was an employee and
— usually not found in an agreement for rendering technical services. These
facts went against the tax authorities’ contention that the payment was FTS.

Held :

Payment by the assessee to the American company under
Secondment Agreement was not FTS, but represented reimbursement of salary paid
by the American company to the secondee. The agreement represented an
independent contract of service in respect of employment of the secondee even
though the agreement was per se between the assessee and the American
company. Since tax was deducted at source from salary and was remitted to the
tax authorities in India, the assessee was not liable to deduct tax from the
amount reimbursed to the American company.

levitra

Nirav Shah

Although services under Secondment Agreement constituted provisions of services of technical personnel, as the essence of transaction was for mutual business development and not to derive income for service, no FTS can be said to have accrued to foreign

New Page 1

Part C — Tribunal and International Tax Decisions

19 Cholamandalam MS General Insurance Co.
Ltd. In re

(2009 TIOL 02 ARA IT)

S. 9(1)(vii), Income-tax Act; Article 13.4,

India-Korea DTAA

Dated : 29-1-2009

Issue :

Although services under Secondment Agreement constituted
provisions of services of technical personnel, as the essence or substance of
transaction was for mutual business development and not to derive income for
service and the parties never contemplated payment of FTS, no income in the
nature of FTS can be said to have been accrued to the foreign employer.

Facts :

The applicant is an Indian company, which is engaged in
non-life insurance business. It is interested in developing business
relationship with Indian affiliates of Korean and Japanese companies. For this
purpose, it requires persons who are well-versed with insurance business,
respective language, etc.

To this end, the applicant executed Secondment Agreement with
a Korean company for deputation of Korean company’s employee (‘secondee’) for a
period of two years. The terms of the arrangement for secondment were for mutual
interests. As far as the applicant was concerned, it would benefit from the
services of seconded employees, whereas from the perspective of Korean provider
company, the arrangement would not only promote its business in India but also
that wherever possible, the reinsurance business would be placed with the Korean
company.

In terms of the agreement, the applicant was to reimburse
Korean company for only a part of the salary and other benefits and no payment
was to be made by the applicant to the secondee. The Korean company continued to
remain legal employer of the secondee and pay salary to him. It also deducted
tax from his salary and the tax was deposited with the tax authorities.

The services to be performed by the secondee were defined to
mean : (a) introduce applicant to potential business contacts; (b) assist
applicant to develop insurance products for Indian market; (c) furnish applicant
with necessary expertise to establish and develop business; and (d) to provide
applicant with inputs on design of reinsurance programmes.

Secondment Agreement provided for consideration by way of
reimbursement of the secondee’s salary and benefits, which was not to exceed
those applicable to the applicant’s employees of the same or equivalent grade.
AAR noted that the secondee had no right or authority to conclude any contract
on behalf of the applicant and that the Korean company was not in the business
of supply of manpower.

The tax authorities had initially contended that the secondee
could be regarded as the Korean company’s agent and consequently, it had an
agency PE in India. However, this contention was not pursued. Factually, it was
noticed that reimbursement by the applicant constituted about 55% of salary,
house rent, etc. paid by the Korean company to the secondee.

The AAR referred to definition of Fees for Technical Services
(‘FTS’) in Explanation 2 to S. 9(1)(vii) and Article 13.4 of India-Korea DTAA
and observed that the definitions were substantially similar.

In this background, the issues before the AAR were :

(i) Whether amount payable by the applicant to the Korean
company was in the nature of income requiring deduction of tax at source under
Income-tax Act ?

(ii) If answer to (i) is in affirmative, what should be the
rate of tax to be deducted at source ?

(iii) Whether the Korean company could be considered to
have PE in India requiring attribution of income to that PE ?

The AAR admitted that it is debatable whether the term
‘including provision of services of technical or other personnel’ is independent
of, or integral part of, the term ‘managerial, technical or consultancy
services’. Applying the ratio of decisions in Intertek Testing Services India P
Ltd. In re (2008) 307 ITR 418 (AAR) and G V K Industries Ltd. v.
Income-tax Officer, (1997) 228 ITR 564 (AP), it held that the secondee’s
services were technical in nature involving specialised knowledge and expertise
in insurance business. Accordingly, the Korean company did provide services of
technical personnel.

The AAR then considered the question whether amount paid by
the applicant could be construed as ‘consideration’ for the provision of
services of technical personnel. It observed that the agreement represented a
mutually beneficial arrangement and its essence or substance was not to derive
income by way of fee for service, but only partial reimbursement of the cost.
Thus, no income in the nature of FTS was generated. Viewed in this light, the
parties never contemplated payment of FTS, either under Income-tax Act or under
DTAA.

The AAR examined the ratio of the decisions in CIT v.
Dunlop Rubber Co Ltd., (1983) 142 ITR 493 (Cal.) and CIT v. Industrial
Engineering Projects (P) Ltd., (1993) 202 ITR 1014 (Del.) wherein nature of
receipt of reimbursement of expenses were considered and the respective Courts
had, on facts, held that reimbursement of expenses did not constitute income.

The tax authorities had relied on AAR’s rulings in A T & S
India P Ltd., In re (2006) 287 ITR 421 (AAR) and Danfoss Industries P
Ltd., In re (2004) 268 ITR 1 (AAR), wherein similar payment for
deputation of technical personnel under secondment agreement and for rendering
services to group companies was considered as FTS. The AAR distinguished these
rulings on facts and particularly because in the present case the details
furnished showed that it was only partial reimbursement of cost incurred by the
Korean company.

Nirav Shah

Purpose of DTAA may be relevant also in cases involving discrimination. (ii) India-Germany DTAA, Indian subsidiary of German parent company listed on German Stock Exchange considered ‘company in which public are substantially interested’.

New Page 1

Part C — Tribunal and International Tax Decisions

18 Daimler Chrysler India (P) Ltd. v.
DCIT

(2009) 120 TTJ 803 (Pune)

S. 2(18), S. 79, S. 90(1)(a), Income-tax Act; Article 24(4),
India-Germany DTAA

A.Y. : 1999-2000. Dated : 21-1-2009

Issues :

(i) Purpose of tax treaty may be relevant not only in
case of double taxation and prevention of fiscal evasion, but also in cases
involving discrimination.

(ii) Due to ‘ownership non-discrimination’ protection
under Article 24(4) of India-Germany DTAA, Indian subsidiary of German parent
company listed on German Stock Exchange would be considered a ‘company in
which public are substantially interested’.

Facts :

The assessee is an Indian company (‘I Co’) in which Daimler
Benz AG (‘DBAG’), a German company held 81.33% equity share capital. DBAG was
listed on stock exchange in Germany.

During the relevant year, DBAG and Chrysler Corporation USA,
an American company decided to merge their respective businesses. Hence, a new
company, namely, Daimler Chrysler AG (‘DCAG’) was incorporated in Germany. DBAG
and Chrysler Corporation became wholly-owned subsidiaries of DCAG. Thereafter,
DBAG merged into DCAG. Thus, all the assets and liabilities of DBAG were
transferred to DCAG. Inter alia, these included DBAG’s shareholding in I
Co.

In terms of S. 2(18) of the Income-tax Act, I Co was not a
‘company in which public are substantially interested’.

S. 79 of Income-tax Act disentitles carry forward of losses
of a company in case shares having not less than 51% of the voting power are
transferred.

I Co had suffered loss in its business for several years and
had substantial carried-forward losses. Since DBAG’s shareholding in I Co was
transferred to DCAG, and since DBAG was not listed on stock exchange in India,
the AO proposed to apply provisions of S. 79 to I Co. In respect of the
immediately succeeding year, S. 79 was amended with a view to exempt all cases
similar to that of I Co from the rigours of S. 79. I Co contended that the
amendment was clarificatory and having retrospective effect and requested the AO
to hold that S. 79 was not attracted. The AO however did not accept the
contention and held that I Co was not entitled to carry forward and set off the
accumulated losses. The CIT(A) confirmed the decision of the AO.

Before the Tribunal, I Co also put forth the additional
ground for invoking of ‘ownership non-discrimination’ under Article 24(4) of
India-Germany DTAA.

The tax authorities contended that there was no question of
treaty override or treaty applicability since there was no double taxation of
any income. The Tribunal referred to S. 90(1)(a) of the Income-tax Act and noted
that Clause (a) of S. 90 was substituted with effect from 1st April 2004, to
grant relief even in respect of income only in one jurisdiction and the relief
could be with a view to ‘promote mutual economic relations, trade and
investment’.

The next issue before the Tribunal was whether a resident
assessee could qualify to access protection under DTAA. The Tribunal referred to
Article 24 of India-Germany DTAA and observed that excepting the case of
invoking of PE non-discrimination, it is not necessary that the assessee seeking
treaty protection in one country must belong to or be resident of or be national
of the other country.

To seek protection under Article 24(4) in India, it is
necessary that taxation or any requirement connected therewith in India should
not be other or more burdensome (for a company which is wholly or partly owned
or controlled by a German resident) than the taxation and connected requirements
to which similar Indian enterprises may be subjected. This requires examination
of a ‘similar Indian company’ and ‘taxation or any requirement connected
therewith’ applicable to such similar Indian company. The Tribunal noted that
the basis of differentiation was the stock exchange on which the shares of DBAG
were listed, since if they were listed on a stock exchange in India, S. 79 would
not be attracted. Further, considering that S. 21 of the Securities (Contract)
Regulation Act, 1956 and draft listing agreement indicate that listing agreement
is possible only with ‘a company duly formed and registered under the Indian
Companies Act’, it would not be possible for the German parent company to list
its shares on a stock exchange in India. The Tribunal thereafter observed that
while there were no judicial precedents in India, there were several judgments
by foreign judicial bodies. While such precedents cannot have binding values,
they do deserve due and careful consideration. The Tribunal did refer to these
decisions.

Held :

(i) Provisions of tax treaty may be relevant even when
income is not taxed in the hands of assessee. Substitution of Clause (a) of S.
90(1) reflects the ground realities and rightly indicates that in today’s
world, the role of treaties is not only confined to avoiding double taxation
or to give relief in respect of doubly taxed income. Tax treaties are seen as
instruments of fostering economic relations, trade and investment. Treaty
override, even before amendment in 2004, covered all the provisions of the tax
treaties, including the provisions relating to non-discrimination.

(ii) It is not necessary that the assessee seeking treaty
protection in one country must belong to or be resident of or be national of
the other country, and a resident assessee would qualify for protection under
DTAA. As per Article 24(4) of the treaty, it is not necessary that the
taxpayer, in whose cases non-discrimination is invoked, should be a resident
of the other contracting state. Since the capital of the taxpayer is
substantially owned by a resident of Germany, the coverage criteria under the
enterprise non-discrimination clause of the treaty is satisfied.

(iii) Having regard to the provisions of Article 24(4), the
disability [u/s.79 read with S. 2(18)], of carry forward and set off of
accumulated losses on account of change in shareholding pattern, cannot be
extended to Indian subsidiaries of German parent companies so long as German
parent companies are listed on a German stock exchange recognised under their
domestic laws. To this extent, the rigours of the domestic law relating to
carry forward of losses must stand relaxed due to treaty overriding domestic
tax.

Nirav Shah

Fees received by non-resident for performing services in India through a PE are taxable in accordance with Article 7 of DTAA. If Article 7 applies, S. 9(1)(vii), S. 44D and S. 115A would not apply.

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

12 Rio Tinto Technical Services v.
DCIT [Unreported]
[ITA No. 3399/Del./2002, 5372/Del./2003& 4742/Del./2004]
Article 7, India-Australia DTAA; S. 5, S. 9(1)(vii), S. 44D, S. 115A, Dated :
19-3-2010

Counsels : Salil Kapoor & Ors. (for taxpayer)
Y. S. Kakkar & Other (for Revenue)

Fees received by
non-resident for performing services in India through a PE are taxable in
accordance with Article 7 of DTAA. If Article 7 applies, S. 9(1)(vii), S. 44D
and S. 115A would not apply.

Facts :

The taxpayer was
PE in India of an Australian Company (‘AusCo’). AusCo had entered in to contract
with an Indian Company for evaluation of coal deposit and feasibility study for
transportation of extracted coal. The taxpayer received approval of RBI for
establishing a project office in India. After completion of that project, AusCo
entered into another contract with another Indian company for evaluation of iron
ore deposit and feasibility study for transportation of iron ore. The taxpayer
received approval of RBI for establishing project office for this contract.

The PE received
consideration for performing the services under the contracts. The AO held that
the consideration was in nature of fees for technical services. The AO
considered it to be subject to S. 9(1)(vii) and accordingly, he taxed it @20% of
the gross receipts of the PE. In appeal, the CIT(A) upheld the order of the AO.

The Tribunal
perused the agreement between AusCo and Indian Company and noted that the
services to be provided were not simple technical and consultancy services, but
specific activities required to be done on site. Hence, AusCo had established a
PE in India.

Held :

When taxing a
non-resident, it should be first ascertained whether income is taxable u/s.5 or
9. If it is so taxable, and if the taxpayer qualifies to access DTAA, the option
would be with the taxpayer whether to prefer to be governed by provisions of
DTAA or the Income-tax Act.

Income of the PE
was taxable u/s.5(2) and AusCo had opted to be taxed as per India-Australia DTAA.
Income of the PE was ‘Business Profits’. Hence, Article 7 would apply. Article
7(2) provides that the PE should be treated as a distinct and independent
enterprise, and Article 7(3) provides that deductions in accordance with the
Income-tax Act shall be allowed. Since Articles 7 applies, S. 9(1)(vii), S. 44D,
S. 115A would not apply.

levitra

Nirav Shah

Execution of a contract for transportation and installation work for mineral oil exploration platforms—Whether receipts for services outside India, taxable in India u/s 44BB. Presumptive income can be taxed only if it is otherwise taxable under Income-tax

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

11 DCIT v. J Ray McDermott Eastern
Hemisphere Ltd.
(2010) TII 41 ITAT (Mum.-INTL)
S. 44BB

Execution of a contract for transportation and
installation work for mineral oil exploration platforms—Whether receipts for
services outside India, taxable in India u/s 44BB. Presumptive income can be
taxed only if it is otherwise taxable under Income-tax Act.

Facts :

The taxpayer was a company incorporated in, and tax
resident of, Mauritius (‘MCo’). MCo was engaged in the business of designing,
fabrication, construction and installation of platforms, docks, pipelines,
jackets and other similar services which are used in the exploration and
production of mineral oil. MCo undertook and executed a contract for
transportation and installation work for certain well platforms to be used in
mineral oil exploration. While furnishing its tax return, MCo did not offer for
tax receipts pertaining to activities carried on outside India.

S. 44BB provides for presumptive taxation @10% of
the gross receipts in respect of the services that are used in prospecting,
extraction or production of mineral oil. The AO concluded that u/s.44BB, income
is computed on presumptive basis, w.r.t. all receipts and therefore the
distinction between activities carried on in India and those carried on outside
India is not relevant. He accordingly applied presumptive rate to entire gross
receipts of the contract for determining taxable income.

The CIT(A), accepted contentions of the taxpayer.

Before the Tribunal, MCo contended that the income
pertaining to installation and transportation activities carried on outside
India is not taxable under the Income-tax Act. Alternatively, the income
pertaining to such activities or work carried on outside India cannot be
attributable to a PE in India.

Held :

The Tribunal referred to the following decisions
wherein it was held that before computing income on presumptive basis, it should
be ensured that such income falls within the scope of charging provisions :

Saipem SPA v. DCIT,
(2004) 88 ITD 213 (Delhi)

McDermott ETPM Inc v.
DCIT, (2005) 92 ITD 385 (Mum.)

The Tribunal held
that only the income which is reasonably attributable to operations carried on
in India is taxable in India. Therefore, income computed on presumptive basis
can be taxed in India only if such income is otherwise chargeable to tax under
general provisions of the Income-tax Act.

levitra

Nirav Shah

Mauritius company executing 3 contracts in India. Whether the duration of each contract should be considered separately or should be aggregated —DTAA applied test of PE to each construction site separately—The 3 contracts were not inextricably interconnec

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

10 ADIT v. Valentine Maritime Mauritius Ltd. (2010)
TIOL 195 (ITAT-Mum.)
Article 5(2)(i), India-Mauritius DTAA
A.Y. : 2001-02. Dated : 5-4-2010

Mauritius company executing 3 contracts in India.
Whether the duration of each contract should be considered separately or should
be aggregated —DTAA applied test of PE to each construction site separately—The
3 contracts were not inextricably interconnected and interdependent—Hence, the
duration of 3 sites cannot be aggregated—Since none of the contracts exceeded
the threshold period, there was no PE.

Facts :

The taxpayer was a company incorporated in
Mauritius (‘MCo’). The Mauritius tax authority had issued tax residency
certificate to MCo, which qualified MCo to access India-Mauritius DTAA (‘the
DTAA’). MCo was engaged in the business of marine and general engineering and
construction. During the relevant assessment year, the taxpayer executed the
following three different contracts in India :

Contract	Activity	Duration
1.	Replacement of main deck with temporary deck	100 days
2.	Charter of barge for accommodation	137 days
3.	Charter of barge for power project together with technical personnel	225 days

In respect of contract 2, the taxpayer had applied
for lower withholding of tax order u/s.197. The AO considered the hire charges
as income u/s.44B. Accordingly, the taxpayer accepted the liability @7.5% on
gross basis.

Subsequently, the taxpayer contended that in terms
of Article 5(2)(i) of the DTAA, a building site or a construction or assembly
project or supervisory activities in connection therewith, would constitute a PE
(Construction PE), only if it continues for a period of 9 months. Since income
from the contracts was ‘business profits’ of MCo, under Article 7 of the DTAA,
such income could be taxed in India only if MCo had a PE in India. As none of
the 3 contracts continued for more than 9 months, no Construction PE of MCo was
constituted in India. Accordingly, the profits from the execution of the 3
contracts were not taxable in India.

The AO concluded that to determine existence of a
Construction PE, time spent on all contracts should be aggregated. As aggregate
time spent on the 3 contracts was more than 9 months, MCo had a PE in India and
its income from all the contracts was taxable in India.

The CIT(A), however, held that to determine the
existence of a Construction PE, the time spent on each contract should be
separately considered.

The main issue before the Tribunal was, whether MCo
had a Construction PE in India.

The Tribunal considered the relevant provisions of
the DTAA, OECD Commentary and various case laws.

Held :

As regards ‘fixed place PE’ :

To constitute a fixed place PE, there must be a
fixed place through which business of the enterprise is carried on. The business
of MCo is that of giving barge on hire and business activity is not carried on
at the barge hired out. Since the business is not carried on at a fixed place,
the barge cannot be held to be a PE of MCo.

As regards relationship between ‘fixed place PE’
and ‘Construction PE’ :

In terms of the specific treaty provision, PE,
inter alia, includes a building or construction project if such project
continues for a period of more than 9 months. Thus, the ‘duration test’ for a
Construction PE limits the general principle of permanence under the fixed place
PE rule.Hence, even if a PE is constituted under the fixed place PE rule, if the
activity is that specified in Article 5(2)(i), the PE would not be constituted
if the specified activity does not cross the prescribed time threshold.

As regards ‘duration test’ for a ‘Construction PE’
:

For the following reason, activity of each
site/project should be considered separately and all the activities in a country
are not to be aggregated :

Reference to
Construction PE is in singular and the DTAA does not specifically provide for
aggregating number of days spent on all sites/projects. Also, activities of
MCo at different locations are not so inextricably interconnected that they
should be viewed as a coherent whole.

Large number of India’s
DTAAs specifically provide for aggregation of sites/projects for computing
threshold time period under ‘duration test’.

If DTAA does not
specifically mention aggregation principle, the same cannot be inferred or
applied.

Both OECD and UN Model Commentaries provide for application of ‘duration
test’ to each site/project.

OECD Commentary recognises possible abuse of duration test by
splitting of one contract into several parts. However, the onus is on the tax
authorities to establish artificial splitting of contract.

OECD Commentary recognises that even if a building site is based on
several contracts, it should be regarded as a single unit if commercially and
geographically it forms a coherent whole.

The test of geographical coherence and commercial coherence are only
vague tests. They cannot be applied universally or conclusively due to various
ambiguities. They are also unworkable in practical situation.

The true
test is, (in addition to geographical proximity and commercial nexus,)
interconnection and interrelationship.

The Tribunal did not
find that the 3 contracts were inextricably interconnected, interdependent or a
coherent whole in conjunction with each other. Hence, it held that as the
duration of the 3 contracts executed by MCo cannot be aggregated for
determining the existence of a PE, no PE of MCo in India was constituted.

Nirav Shah

(2012) 54 SOT 44 (Hyd.) J.V.Krishna Rao vs. Dy. CIT ITA Nos.1866 & 1867 (Hyd.) of 2011 A.Y.2008-09. Dated 15-06-2012

Sections 54F – Exemption is available even if borrowed funds are used for investment.

Facts

For the relevant assessment year, the assessee’s claim for exemption u/s. 54F was denied by the Assessing Officer on the ground that the assessee’s deposit in the `Capital Gains Accounts Scheme’ included borrowed funds. The CIT(A) upheld the disallowance.

Held

The Tribunal, relying on the decisions in the following cases, allowed the exemption u/s. 54F :

a. Muneer Khan V. ITO (2010) 41 SOT 504 (Hyd.)

b. Sita Jain V. Asst. CIT (IT Appeal Nos.4754, 4755 and 5036 (Delhi) of 2010, dated 20-5-2011

c. Bombay Housing Corpn. vs. Asst. CIT (2002) 81 ITD 545 (Mum.) d. Mrs.Prema P.Shah vs. ITO (2006) 100 ITD 60 (Mum.)

The Tribunal noted as under :

The capital gains earned by the assessee can be utilised for other purposes and as long as the assessee fulfils the condition of investment of the equivalent amount in the asset qualifying for relief u/s.54F by securing the money spent out of the capital gains from other sources available to him, either by borrowing or otherwise, he is eligible for relief u/s. 54F in respect of the entire amount of capital gains realised.

In this case, even though part of those capital gains were utilised for other purposes, the assessee made deposits of the amounts equivalent to the capital gains in Capital Gains Account Scheme, by borrowing the amount equivalent to such utilised funds. Therefore, he is entitled to relief u/s. 54F as ultimately the assessee deposited the requisite amount in the Capital Gains Account Scheme within the time stipulated by the statute.

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Nirav Shah

(2012) 150 TTJ 159 (Mumbai) BSEL Infrastructure Realty Ltd. vs. Asst. CIT ITA No.6559 (Mum.) of 2011 A.Y.2007-08 Dated 13-04-2012

Section 271(1)(c) of the Income-tax Act 1961 – Penalty cannot be levied when additions were made while computing the total income under normal provisions of the Income-tax Act but finally the assessee’s income was determined on the basis of book profit u/s. 115JB.

Facts

For the relevant assessment year, the Assessing Officer made disallowances/additions to the assessee’s income as per normal provisions of the Income Tax Act. Finally, however, income was determined and tax was computed u/s. 115JB. The Assessing Officer, thereafter, levied penalty on all the disallowances/additions. The CIT(A) deleted the penalty on certain additions, while confirming the same on other additions.

Held

The Tribunal, relying on the decisions in the following cases, deleted the penalty:
a. CIT vs. Nalwa Sons Investments Ltd.(2010) 235 CTR (DEL.) 209/(2010) 45 DTR (Del.) 345/(2010) 327 ITR 543 (Del.)
b. Ruchi Strips & Alloys Ltd. vs. Dy. CIT ITA Nos.6940 & 6941 (Mum.) 2008 The Tribunal noted as under:

1. If book profits are deemed to be the total income of the assessee in terms of section 115JB and is more than income under the normal provisions of the Act, then by legal fiction such a book profit will be deemed to be the total income of the assessee.

2. Therefore, if tax has been imposed and collected on the deemed income u/s. 115JB in the assessment, then the tax under the normal provisions/computation is not leviable or charged.

3. Therefore, if any addition or disallowance has been made in the normal provisions/computation of the Income Tax Act and finally assessment has not been completed or tax has not been levied on such normal computation, then such additions/disallowances cannot be a subject matter of penalty because no tax has been levied on such additions/disallowances.

4. When income tax is paid on the book profits by a legal fiction, such a legal fiction has to be taken to its logical conclusion and it cannot be held that for the purpose of penalty, normal computation would be considered even though tax has not been levied under the normal provision/ computation. Therefore, penalty u/s. 271(1)(c) cannot be imposed because there was no tax sought to be evaded.

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Nirav Shah

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

2 JDIT v. M/s. Krupp Uhde Gmbh
(2009 TIOL 78 ITAT Mum.)
Article 5(2)(i) of India-German Double Tax Avoidance Agreement (treaty)
A.Y. : 1998-99. Dated : 7-1-2009

Issue :

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

The assessee, a German company (herein GermanCo), was engaged in the business of providing technical know-how/licence, basic engineering services, and supervisory services in connection with construction or installation of specified machineries/assembly projects. The assessee rendered services to various Indian companies. A large part of the services was rendered on offshore basis. In connection with on-shore supervisory activities involving various projects, personnel of the GermanCo were present in India in aggregate for more than 6 months duration — though, presence in respect of each project was of less than 6 months. The GermanCo offered the amount for taxation as fees for technical services chargeable @ 10% on gross basis in terms of Article 12 (2) of India-Germany DTAA.

The Assessing Officer (AO) rejected the contention of the assessee and held that the GermanCo had PE in India. In view of the AO, for determining whether or not Supervisory PE emerged, duration of all the projects in a particular year had to be aggregated. In view of the AO, since the German Co had PE in India, the benefit of concessional rate of 10% provided in the treaty was not available and the amount had to be assessed under domestic law @ 30% by applying provisions of S. 115A of the Act.

On further appeal, the CIT(A) accepted GermanCo’s contention that offshore services are not chargeable to tax in India. The Department did not object to this aspect in further appeal before the Tribunal. The controversy before the Tribunal was therefore confined to taxation of onshore services.

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

(ii) since none of the project sites involved presence of more than 6 months, no PE emerged for GermanCo; (iii) in absence of PE, the fees for Supervisory activities was chargeable @ 10% in terms of Article 12 of DTAA.

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

(a) The Tribunal referred to Construction and related PE provisions of India-Germany DTAA. It also referred to similar provisions of India’s treaties with China, USA, Canada and Italy. It concluded that unlike similar treaty provisions of India with China, USA, Canada and Italy, there is nothing in the language of India-Germany treaty to indicate that different sites on which work is carried on by the assessee can be considered together in determining whether or not the Construction/Supervisory PE has emerged for the German Co.

(b) Reference was made to commentary of Klaus Vogel and the book ‘Principles of International Taxation’ to conclude that each project site duration needs to be considered separately, particularly when different contracts have no effective interconnection with each other.

(c) The Tax Department contended that overall project duration needs to be considered for determining length of supervisory project of GermanCo. The Tribunal rejected the contention of the Revenue that the date of commencement or the duration of the project should be considered for determining trigger of supervision PE for the assessee. According to the Tribunal, such reckoning would lead to absurd results since there could be instances where contracts for construction of building, supply of plant and machinery, installation, commissiong in respect of a project may be awarded to independent parties and each party may have involvement of differing duration.

(d) After considering the language of the treaty, the Tribunal held that the intervening period caused on account of factors such as seasonal shortage of material, labour difficulties, time needed for material to dry, etc cannot be excluded.

(e) One of the contentions of the taxpayer was that since income-tax is linked to a given assessment year, the threshold of construction PE needs to be considered for each year separately. The assessee claimed that Supervisory PE was not triggered if work during a given tax year involved period of less than 6 months though the overall project duration exceeded 6 months. The Tribunal rejected the contention and held that the prescribed period of 6 months has to be computed, irrespective of the tax years involved. For instance, where an activity starts in January and ends in July, total period is 6 months – though period falling in each of the two financial years is less than 6 months.

Nirav Shah

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

2 JDIT v. M/s. Krupp Uhde Gmbh
(2009 TIOL 78 ITAT Mum.)
Article 5(2)(i) of India-German Double Tax Avoidance Agreement (treaty)
A.Y. : 1998-99. Dated : 7-1-2009

Issue :

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

Nirav Shah

Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

1 Lucent Technologies International Inc v. DCIT

(2009 TIOL 161 ITAT Del)/(28 SOT 98) Section/Article : Article 5 India — USA Double Tax Avoidance Agreement A.Ys. : 1997-98 to 2000-01. Dated : 19-12-2008

Issue :

Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.

Facts :

The assessee, US Company (USCO), is a leading supplier of hardware and software used for GSM cellular radio telephone system. The USCO supplied telecommunication hardware and software to its customers in India. USCO had an Indian subsidiary (herein WOS) which undertook the work of installation and providing after-sales services to the customers of USCO in India.

USCO had entered into a contract with one Indian telecom company by name Escotel Mobile Communications Ltd. (herein Escotel). In terms of the agreement between USCO and Escotel, USCO was to supply hardware and software to Escotel while the services of installation were to be provided by WOS. In terms of the contract with Escotel, USCO had the responsibility of designing, manufacturing, supplying and delivering all hardware and software. The contract also required USCO to undertake installation, testing, commissioning and achieve final acceptance of the system by the customer. A part of responsibility of the inspection, installation and supervising the testing and commissioning was that of the Indian WOS. To some extent there was an overlap of responsibilities of USCO vis-à-vis that of WOS. As part of the supply contract, the assessee also provided licence for use of computer software which was required for the purposes of functioning of GSM network.

For enabling the WOS to discharge its obligation, USCO made available to WOS personnel who were the employees of the affiliates of USCO. Such employees were under the control of USCO and the WOS was required to pay remuneration to USCO. USCO claimed that it incurred no tax liability in India as the hardware was supplied from outside India. The assessee also claimed that payment received for the licence agreement for use of computer software was business income and was not royalty chargeable in terms of Article 12 of DTAA. Reliance for this was placed on the decision of Special Bench in case of Motorola Inc v. DCIT, (96 TTJ 1) (Delhi SB). The AO claimed that the USCO attracted tax liability in India on the ground that, in the circumstances of the case, USCO had PE in India. The AO claimed that (i) USCO had PE in the form of WOS being its dependent agent; (ii) that premises of WOS were available at the disposal of the employees who were deputed by USCO; (iii) that negotiation and conclusion of the contract happened in India. In respect of software supply, the Department claimed that software licence fees was chargeable as royalty income.

Held :

The ITAT accepted the department’s contention and held that USCO had PE in India on account of the following features :

(1) Having regard to the terms of the contract with the customer, not only Indian WOS but also USCO was responsible for turnkey functioning of the project of the GSM network. The ITAT noticed that the agreements with customer in India made USCO and WOS responsible for the turnkey completion of the GSM project individually and severally. The responsibility to Escotel was such that USCO had to complete installation should WOS fail in any manner. Conversely, WOS had responsibility of arranging for hardware and software should USCO fail in its responsibility. Having noted this, the ITAT concluded that the arrangement was ‘in short a consortium or partnership’ between USCO and WOS.

(2) The ITAT noted that the terms of agreement between Escotel and USCO and WOS also required of WOS to provide warranty in respect of the hardware supply made by USCO. This, according to the Tribunal, supported that the WOS was acting on behalf of USCO.

(3) The ITAT noted that USCO made available the personnel (though employees of the affiliates of USCO) to WOS for the purpose of enabling the WOS to discharge the responsibility of installation, commissioning, etc. of the GSM equipments. Such personnel were made available for remuneration. The ITAT concluded that in terms of the treaty, the service PE was triggered when the USCO provided services to its affiliate WOS even for a day. Since USCO provided services to ICO with the help of personnel who were under USCO’s control, the ITAT concluded that the USCO had service PE in terms of Article 5(2)(l)(ii) of the treaty.

(4) On the aspect of taxation of consideration received for software licence agreement, the ITAT noted that the facts of the case of USCO were at par with the facts which operated in the case of Motorola (supra). Relying on the Special Bench decision, the ITAT accepted the assessee’s contention that the licence fee was business income and was not royalty.

Compilers’ remarks :

The ITAT was not concerned with nor has dealt with the aspect of determination of income which is attributable to USCO’s activities in India to the extent the ITAT concluded that USCO had PE in India.

Nirav Shah

Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.

1 Lucent Technologies International Inc v. DCIT

(2009 TIOL 161 ITAT Del)/(28 SOT 98) Section/Article : Article 5 India — USA Double Tax Avoidance Agreement A.Ys. : 1997-98 to 2000-01. Dated : 19-12-2008

Issue :

Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.

Facts :

Held :

The ITAT accepted the department’s contention and held that USCO had PE in India on account of the following features :

Compilers’ remarks :

Nirav Shah

S. 9 and Article 5 & 7, India-Italy DTAA : Supply of machinery and raw material to WOS, no PE

New Page 2

DCIT v. Perfetti SPA

(2008) 113 TTJ 701 (Del.)

A.Y. : 1997-98. Dated : 31-10-2007

3. S. 9, Income-tax Act; Articles 5 & 7, India-Italy DTAA.

Issues :

(i) Whether business connection and income taxable in
India ?

(ii) Whether PE having taxable income in India ?

Facts :

The assessee company was a resident of Italy. It had a
wholly-owned subsidiary company in India. Managing Director of the WOS was
appointed by the assessee company, which also paid part of his salary outside
India. The assessee company had supplied machinery and raw materials to its WOS
and had not filed return of its income in India, on the ground that in terms of
India-Italy DTAA, its income was not taxable in India.

The AO issued notice u/s.163(1)(a) of the Act to the WOS
asking the assessee company to file return. After considering the
representations of the assessee company, the AO observed that the assessee
company had business connection in India and its income was deemed to have
accrued and arisen in India, since :

(i) It had supplied machinery on a continuous basis over a
long period;

(ii) By virtue of payment of salaries of Managing Director
and other expatriates, the assessee company had total control over management
and affairs of the WOS;

(iii) Orders for machinery were placed from India without
any written contract or negotiations, which showed business connection between
the assessee company and the WOS;

(iv) The machinery was overinvoiced; and

(v) The supply was made on CIF basis and hence the assessee
company was required to supply the goods in India.

Before CIT(A), the assessee company had contended that it did
not carry out any business activity in India as : the order for supply of
machinery and raw material was placed at Italy; the goods were also shipped at
airport in Italy; it did not retain any right in the disposal of goods; and it
sent technicians, food technologists and process specialists for developing
products and processes best suited for Indian environment and these personnel
were not connected with installation or running of machinery. The Customs
authorities had not raised any objection regarding the valuation of the goods,
which supported the assessee company’s contention that the supply was made on
principal-to-principal basis.

As regards control over management and affairs of the WOS,
the assessee company had submitted that the WOS acts as an independent legal
entity and takes its own decisions in day-to-day financial matters and that the
AO had not confronted it with the material brought on record. The CIT(A)
concluded that the contract was executed at Italy.

The Tribunal observed that having regard to the facts brought
on record, it appeared that findings of the AO were merely based upon
presumptions. He had not brought any evidence on record, either that the
employees of the assessee company installed machinery for the WOS, or that the
assessee company had used its dominant position to over-invoice the machinery.
The findings of the CIT(A) were also not disputed. Based on facts and
circumstances, since the contract was executed in Italy and the sale was made on
principal-to-principal basis at arm’s length, it was covered by CBDT’s Circular
No. 23, dated July 23, 1969. Mere existence of business relation does not give
any right to the AO to assess any income in India. The AO had also not brought
any evidence to prove the assessee company’s PE in India or as to what business
was conducted by it during the assessment year in question or what profit or
income was earned by it on supply of machinery and raw material. Thus, the
findings of the AO were presumptuous. The AO had not discharged the onus upon
him. The Tribunal further observed that under Article 5 of India-Italy DTAA, the
term PE includes several kinds of places. However, the AO had not proved
existence of any such place vis-à-vis the assessee company. Also, Article
5(6) of India-Italy DTAA clarifies that mere control of one enterprise over the
other does not constitute a PE. The AO merely presumed 20% as the profit on the
supplies, but did not bring any evidence to prove it.

Held :

(i) S. 9(1) of the Act was not attracted as the assessee
company had merely supplied machinery and raw material on
principal-to-principal basis on arm’s length price to the WOS.

(ii) In the absence of the PE of the assessee company in India, Articles 5
and 7 of India-Italy DTAA were not attracted and hence, no part of its income
taxable in India.

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Nirav Shah

136 ITD 315 (Mum.) Arrow Coated Products Ltd. vs. ACIT A.Y 2006-07 Dated : 14th March, 2012

Section 36(1)(vii)—Deduction of bad debts available when debited to P&L Account—In order to claim deduction on account of bad debts, it is not necessary that individual debtor’s account has to be closed by crediting said account—a mere reduction in loans and advances/debtors account to extent of provision for bad and doubtful debt is sufficient

Facts:
The assessee had made provision for bad and doubtful debts in books of accounts in AY 2004-05 of Rs. 70 lakh. The provision was debited to Profit and Loss Account and also correspondingly reduced from gross total sundry debtors in the balance sheet. The individual ledger of debtor account was not written off by the amount of doubtful debts. In the return of income the assessee had not claimed deduction of provision of doubtful debts for AY 2004-05. In AY 2005-06 & 2006-07, the assessee wrote off the provision of doubtful debts of Rs. 20,36,000 (being part of Rs. 70 lakh) from the individual account of debtors thereby closing debtors account. The AO held that as the amount of doubtful debts was not transferred to P&L Account, the claim cannot be allowed. The CIT(A) upheld the order of the AO.

Held:
After insertion of Explanation to section 36(1)(vii), the taxpayer is now required to debit Profit and Loss Account and also simultaneously reduce debtors account to the extent of corresponding amount. It is not necessary that individual debtors account be closed in order to claim deduction of bad debts. In the present case the assessee had not claimed deduction on account of bad debts in AY 2004-05. It is not required for the assessee to actually close the individual account of each debtor.

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Nirav Shah

(2012) 135 ITD 233 (Mumbai) Pranik Shipping & Services Limited vs. ACIT (Mumbai ITAT) ITA No.5962 /Mum/2009 18th January, 2012

Section 36(1)(iii)- Interest free loans given to sister concerns—if assessee held interest free funds and also interest bearing funds, presumption would be that investments were made from interest free funds available with assessee.

Section 40(a)(ia) and section 194A—Business expenditure—assessee claimed deduction of interest expenditure for which no accounting entry was passed in books of account— the event for deduction of tax at source arises when the amount of interest is credited to the account of the payee or when it is paid, whichever is earlier—Since the said interest was neither credited in the books of account nor paid in the year, section 194A cannot be attracted—Once there is no liability to deduct tax at source u/s. 194A, the provisions of section 40(a)(ia) cannot be attracted.

Facts I:
The assessee had given interest-free funds to its sister concerns. The AO observed that no interest was charged on such advances to sister concerns whereas substantial interest was paid on borrowed funds. In absence of any nexus between the interest-free funds advanced and interest-free funds available with the assessee, the AO made disallowance by applying 15% rate of interest. The CIT(A) also upheld the AO’s action.

Held I:
The Tribunal observed that the interest-free funds available at the disposal of the assessee were far in excess of the interest-free loans advanced to the sister concerns. Relying on the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Reliance Utility and Power Limited [(2009) 313 ITR 340 (Bom.)], the Tribunal held that if the assessee has interest-free funds as well as interest-bearing funds at its disposal, it shall be presumed that investments were made from interest-free funds available with the assessee. The addition was deleted.

Facts II:
Assessee claimed deduction of interest expenditure in the computation of total income for which no accounting entry was passed in the books of account. The AO held that assessee followed cash system of accounting in respect of accounting of interest expenditure and as assessee had not made any payment of interest, the same was not deductible. The Ld CIT(A) held that the assessee had not deducted TDS on interest payable and hence u/s. 40(a)(ia) the deduction was not allowed.

Held II:
The Ld. AO was not justified in applying hybrid system of accounting i.e., applying cash system for accounting of interest expenditure and mercantile system for accounting for all other items. As per section 145, income under the head ‘Profits and gains of business or profession’ is to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The assessee was regularly following mercantile system of accounting.

In the mercantile system of accounting, deduction is allowed on accrual of liability and it is not material whether the amount is paid or not or whether or not it is recorded in the books of account. Assessee’s similar claim of deduction of such interest expenditure was allowed in earlier assessment years also.

As per sections 40(a)(ia) and 194A, the event for deduction of tax at source arises when the amount of interest is credited to the account of the payee or when it is paid, whichever is earlier. The assessee did not credit such interest in the books of account under any account and further such interest had not been paid during the year. The deduction had been claimed on the basis of mercantile system of accounting straightway in the computation of income, without routing it through books of account, which had been held by us to be allowable. Hence, the mandate of section 194A cannot be attracted. As there is no liability to deduct tax at source u/s. 194A, the provisions of section 40(a)(ia) cannot be attracted.

This loophole was probably not contemplated by the Legislature while enacting the relevant provisions, which has been exploited by the assessee as a measure of tax planning.

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Nirav Shah

(2011) 135 ITD 398 (Pune) Patni Computer Systems Ltd vs. DCIT A.Y 2002-03 & 2003-04. Dated : 30th June, 2011

Section 92B—Transfer Pricing—Extension of credit to the Associated Enterprises (‘AEs’) beyond the stipulated credit period vis-a-vis others cannot be construed as an “international transaction” for the purposes of section 92B(1) so as to require adjustment for ascertaining the ALP.

Section 92B—Transfer pricing—Adjustment for cost of consultancy fees paid for undertaking study for the purpose of restructuring the assessee’s organisational structure—Apportionment of impugned cost is permissible only in a situation where there exists a “mutual agreement or arrangement” between two or more AEs for apportionment of cost.

Section 10A—Establishment of three new units at three different locations, with investments in fixed assets is not mere expansion and would be eligible for deduction u/s 10A.

Facts I:
Assessee had international transactions with AEs and on this count, the AEs had some outstandings due to the assessee. Such outstandings were overdue and no interest was charged by the assessee on such amounts. The TPO has considered non-charging of interest as an ‘international transaction’ requiring adjustment to determine the ALP on the basis that the normal period of credit allowed to the AEs was 90 days, and to the other similarly placed customers the credit period allowed was 30 to 45 days. The fundamental question raised by the assessee was as to whether extending the credit limit can be considered as “international transaction” under section 92B(1) of the Act.

Held I:
Relying on the judgement of the Mumbai Bench Tribunal in case of Nimbus Communications Ltd. vs. Asst. CIT. ITA No. 6597/Mum/2009, it was held that a continuing debit balance is not an international transaction per se, but is a result of international transaction. The commercial transaction, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, has to be examined for the purpose of arm’s length price.

Facts II:
The assessee had undertaken a study for the purpose of restructuring the organisational structure. According to the TPO, changes proposed in the study would also give benefits to the AEs and thus an arm’s length allocation of cost of consultancy expenses paid for study was required to be made. According to the Revenue, it was imperative for the assessee to have recovered such costs from the AEs and since the assessee had not done so, certain expenditure was allocated by the TPO on this score.

Held II:
Apportionment of impugned cost is permissible only in a situation where there exists a “mutual agreement or arrangement” between two or more AEs for apportionment of cost. There existed no such agreement or arrangement in the given case. The study reports may bring certain intangible benefits in the form of enhanced productivity to the businesses of the AEs, however, this would not ipso facto justify the apportionment of the cost incurred, where the use of such studies by the AEs is not obligated in terms of any mutual agreement or arrangement between the assessee and the AEs, but the use is only discretionary on the part of the foreign AEs.

Moreover, there would not be any justification for apportioning the expenditure unless it is shown that the expenses incurred on such activities was disproportionate and the benefit which accrued to the AEs in the form of increased business productivity was not merely incidental, but was tangible and concrete. There was no material to show that any tangible and concrete benefit has accrued to the AEs as a result of the expenditure incurred by the assessee in obtaining consultancy.

Facts III:
The AO noted that the assessee has treated three new units as separate independent units for the purpose of deduction u/s. 10A of the Act. The AO further noted that approval from STPI reflected the new units as expansion of existing units. On the basis of this the AO concluded that the profitability of the aforesaid three units was liable to be combined with that of the corresponding old units and thus the eligible period for deduction u/s. 10A of the Act with respect to the said three units would be reckoned from the first year of the eligibility of the corresponding old units. The CIT(A), however, held that the assessee fulfilled all the conditions prescribed u/s. 10A(2) of the Act. All the three units had their own plant and machinery having substantial investment and substantial turnover and were located in different premises.

Held III:
For claim of deduction u/s. 10A of the Act, examination as to whether the three units are independent units and whether they fulfil the conditions prescribed u/s. 10A(2) of the Act is important. There is no prohibition that an expansion in the same line of business achieved by setting up a new independent unit would lead to denial of deduction u/s. 10A of the Act. The assessee would not be disentitled to deduction u/s. 10A merely due to the fact that the requisite permissions from STPI refer them as expansions of the existing units.

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Nirav Shah

S. 195, S. 245N, S. 245R, and Articles 5, 7, 12 of India-USA DTAA : TDS on hardware and software contracts

New Page 2

Airports Authority of India, In re (AAR)
[Unreported]

Dated : 28-2-2008

2. S. 195, S. 245N, S. 245R, Income-tax Act; Articles 5, 7,
12, India-USA DTAA.

Issue :

Obligation to deduct tax and rate for deduction of tax on
Hardware Contract and Software Contract.

Facts :

The applicant was a PSU operating airports in India. It had
entered into two separate contracts, named Hardware Repair Support Contract
(‘Hardware Contract’) and Software Maintenance Support Contract (‘Software
Contract’), with an American company. In respect of contracts having
substantially similar terms and conditions, the applicant had sought ruling of
AAR earlier (see 273 ITR 437). The possible reasons for seeking a fresh ruling
were that technically the transaction is a separate transaction and that in case
of the American company, the tax authorities had taken a different view in the
course of its assessment proceedings.

The Hardware Contract provided that : the applicant shall
send the hardware to the American company outside India; the American company
shall repair the hardware outside India; and the applicant shall take delivery
of hardware duly repaired by the American company outside India.

In the context of the Hardware Contract, the issues raised
for determination were :

(a) Whether the payment received by the American company
was liable to tax in its hands in India, and

(b) If the payment was taxable in the hands of the American
company, what should be the rate at which tax should be deducted by the
applicant ?

In the context of the Software Contract, the issues raised
for determination were :

(a) Whether deputation of engineers by the American company
to India for installation and testing of required software constituted its PE;

(b) Whether the payment received by the American company
was liable to tax in its hands in India; and

(c) If the payment was taxable in the hands of the American
company, what should be the rate at which tax should be deducted by the
applicant ?

In its earlier ruling, the AAR had held that the American
company did not have a PE in India (which was also conceded by the counsel for
the Revenue). In respect of Hardware Contract, the payment received by it was
not income from furnishing services as defined in Article 12 of India-USA DTAA,
but it was business profits within the meaning of Article 7(7) of India-USA DTAA
and since it did not have a PE in India, it was not taxable in India. In respect
of the Software Contract, the applicant had contended that the defects in the
software would also be attended to outside India and that the visit of the
American company’s engineer is only for a short period and incidental. Hence,
amount paid for repair of software should also represent business income and
should not be chargeable to tax in India. Even if the payment was treated as
‘fees for included services’, as per MOU appended to India-USA DTAA, the visit
would not be covered within the meaning of ‘included services’. Even if the
amount is so treated, in view of limited number of visits, it may be apportioned
between ‘fees for included services’ and ‘business income’. The Revenue had
contended that the payment was ‘fees for included services’ under Article
12(4)(a), as well as ‘royalty’ under Article 12(3(a), of India-USA DTAA, since
the applicant’s agreements of 2003 are only supplementary to the original
agreements of 1993. The AAR had then proceeded to consider Article 7 and Article
12, and had concluded that insofar as software and documentation were concerned,
the applicant had acquired a right to use the same subject to certain
conditions, and as regards repair of software, payment received by the American
company would be ‘fees for included services’ under Article 12(4)(a) and would
be outside the purview of Article 7(7). Accordingly, in view of Article 12(2)
the payment would be taxable in India.

In case of the present ruling, the Revenue contended that for
earlier ruling, the AAR was not apprised of the facts relating to PE and that
its counsel had wrongly conceded and further that subsequent investigation in
the course of assessment proceedings revealed the existence of PE. To satisfy
itself about prima facie sustainability of the Revenue’s contention, the
AAR examined the assessment orders relating to the American company. It observed
that there was no definite finding supported by reasons on the existence of PE.
The fact that the American company admitted having an installation PE had no
bearing on the aspect whether a PE was set up in the context of the Hardware
Contract and the Software Contract. The AAR expressed the probability that since
the entire activity of hardware repair took place outside India and as the
hardware was sent outside India and its delivery after repair was also taken
outside India by the applicant, there was very little part which the liaison
office could have played. Further, from the sporadic visits of a few days by the
American company’s personnel, it was difficult to draw the inference of
existence of PE.

As regards the Revenue’s contention about the American
company having a dependent agent PE, the AAR observed that there was nothing in
the agreement which indicated that the agent was assigned any role or
responsibility under the Hardware Contract. The AAR did not get any satisfactory
reply from the counsel of the Revenue on the request to clarify whether any
activity related to the contract was undertaken by the so-called PE. The AAR
declined to reconsider its earlier ruling on the ground that the Revenue’s
counsel had wrongly conceded or that the applicant had not made proper
disclosure on the issue of PE.

The AAR then considered the Revenue’s contention about the maintainability of the application and the AAR’s jurisdiction in view of the embargo in proviso (i) to S. 245R(2), on the ground that the question raised in the application was already pending before the Income-tax authority. The AAR observed that the question of tax deduction cannot be said to be pending before the Income-tax authority and hence, the application was not hit by the embargo. It further observed that the issue relating to tax deduction at source was ‘in relation to’ the tax liability of the American company and therefore, it was within the purview of the definition of ‘advance ruling’ in S. 245N(a) and (b).

The counsel for the applicant stated that it was desirous of getting answer to the second question regarding its obligation to deduct tax at source and once that was answered, it was not desirous of getting answer to the first question. Hence, the AAR treated the first question as withdrawn by the applicant. Similarly, in respect of the Software Contract, only the question regarding the rate of tax deduction survived as other questions were not pressed.

Held:
(i) As regards the Hardware Contract, the applicant was not legally required to deduct tax on payments made by it to the American company.
(ii) As regards the Software Contract, the tax was required to be deducted @ 10%.

Nirav Shah

(2012) 54 SOT 263 (Bangalore) ITO vs. Mahaveer Calyx ITA Nos.153 & 998 (Bang.) of 2011 A.Ys.2007-08 & 2008-09. Dated 31-08-2012

Section 80-IB of the Income-tax Act 1961 – Deduction available even if sold area exceeds approved area and assessee has not paid fees to regularise the same.

Facts

For the relevant assessment year, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80-IB since the built-up area sold by the assessee was in excess of the sanctioned area. The Assessing Officer, therefore, held that the project constructed by the assessee was not an approved housing project. Before the CIT(A), the assessee contended that though it had not made payment of the compounding fee for regularisation of the excess area constructed, it could not be said that the housing project was not approved. The CIT(A) held that the assessee was entitled for deduction u/s. 80IB(10).

Held

The Tribunal, relying on the decisions in the following cases, held that the CIT(A)’s order in favour of the assessee was in accordance with law: a. Petron Engg. Construction (P.) Ltd. V CBDT (1989) 175 ITR 523/(1988) 41 Taxman 294 (SC) b. Pandian Chemicals Ltd. V CIT (2003) 262 ITR 278/129 Taxman 539 c. CIT V N.C. Budharaja & Co. (1993) 204 ITR 412/10 Taxman 312 d. IPCA Laboratories Ltd. V Dy. CIT (2004) 266 ITR 521/135 Taxman 594 The Tribunal noted as under : It was clear that the assessee has fulfilled the conditions mentioned in section 80-IB(10). The assessee has obtained approval of the concerned local authorities for construction of a housing project. The fact that the compounding fee for regularisation of the excess area constructed by the assessee has not yet been paid would not mean that the housing project constructed by the assessee is unlawful. Thus, there was no violation of the provisions of section 80-IB.

The incentive provisions must be interpreted in a manner which advances the object and intention of Legislature. The fact that the assessee has obtained approval for the housing project cannot be lost sight of. As for the excess area constructed, it is for the local authority to look into the violations, if any, in the construction of the housing project. That, however, does not authorise the Assessing Officer to hold that the assessee has not got approval for the housing project or that the conditions laid down in section 80-IB(10) violated.

Therefore,the assessee was entitled to deduction u/s. 80-IB(10).

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Nirav Shah

S. 115C, S. 115D, S. 115E : Interest on NRO deposit with banking company is investment income : TDS at 20%.

New Page 2V. Ravi Narayanan,
In re (AAR)

(Unreported)

A.Y. : 2008-09. Dated : 3-3-2008

1. S. 115C, S. 115D, S. 115E, Income-tax Act.

Issues :

(i) Whether deposit in NRO account made with convertible
foreign exchange is ‘foreign exchange asset’ ?

(ii) Whether interest earned on such deposit is ‘investment
income’ qualifying for benefit u/s. 115E of the Act ?

(iii) What should be the rate of TDS on such interest ?

Facts :

The applicant had left India during the relevant previous
year and was a non-resident during that year. He proposed to open a Non-Resident
Ordinary (‘NRO’) account with a bank in India. The intended source of deposits
in the NRO account was remittances from outside India. He contended that the
interest earned on such deposits would be ‘investment income’ u/s.115C of the
Act and accordingly, applicable rate of tax should be 20% u/s.115E of the Act.
He was informed that since banks in India do not treat this as ‘investment
income’, tax would be deducted @ 30%.

The AAR considered the provisions of S. 115C, S. 115D and S.
115E of the Act, which are contained in Chapter XIIA of the Act. The AAR
observed that the applicant is a citizen of India, who is a non-resident. Hence,
he would qualify to claim benefit u/s.115E of the Act. Thereafter, the AAR
considered the provisions of the Companies Act, 1956 and the Banking Regulation
Act, 1949 in order to test whether NRO deposit would constitute ‘specified
asset’ being deposits with Indian company. The AAR concluded that an Indian bank
governed by the Banking Regulation Act is also a company which is not a private
company as defined in the Companies Act, 1956 and therefore, a deposit made with
it would be a ‘specified asset’ within the meaning of S. 115C(f)(iii) of the
Act.

The representative of the Revenue had contended before the
AAR that :

(a) though NRO deposit is acquired with convertible foreign
exchange, its maturity proceeds are not repatriable;

(b) hence such a deposit does not constitute a ‘foreign
exchange asset’ u/s.115C of the Act;

(d) since it is not ‘investment income’, tax should be
deducted @ 30%.

The AAR observed that the question is whether repatriability
of the deposit was a requirement and found that it was not a requirement under
Chapter XIIA of the Act.

Held :

(i) Deposit made in NRO account with a banking company,
which is not a private company, by remitting convertible foreign exchange,
would be ‘foreign exchange asset’ u/s.115C(b) of the Act.

(ii) Interest earned on deposit in NRO account mentioned in
(i) above would be ‘investment income’ u/s.115C(c) of the Act and would be
subject to tax @ 20% u/s.115E.

(iii) Deposit with a banking company is a ‘specified asset’
u/s.115C(f) of the Act.

(iv) Banks paying interest on the deposit in NRO account
mentioned in (i) above are required to deduct tax @ 20%.

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Nirav Shah

Income-tax Act, 1961 — S. 28, S. 37 — Exchange fluctuation loss in respect of unmatured forward contracts on the last date of the accounting period on the basis of rate of foreign exchange prevailing on that date is allowable as a deduction.

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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.)

Part B : UNREPORTED DECISIONS

17 DCIT v. Bank of Bahrain &
Kuwait

ITAT ‘C’ Bench, Mumbai (SB)

Before D. Manmohan (VP),

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

ITA Nos. 4404 & 1883/Mum./2004

A.Ys. : 1999-2000 & 1998-99

Decided on : 13-8-2010

Counsel for revenue/assessee :
Ajit Kumar
Sinha/F. V. Irani

Income-tax Act, 1961 — S. 28, S.
37 — Exchange fluctuation loss in respect of unmatured forward contracts on the
last date of the accounting period on the basis of rate of foreign exchange
prevailing on that date is allowable as a deduction.

Per S. V. Mehrotra :

Facts :

The assessee was a non-resident
company carrying on banking business in India. It entered into forward contracts
with its clients to buy or sell foreign exchange at an agreed price on a future
date. On the date of maturity, the execution of the contract resulted in profits
or losses to the assessee. There was no dispute as regards losses arising on
execution of the contracts within the same year. However, in cases where the
date of maturity of the contract fell beyond the end of the accounting period,
the assessee evaluated the unmatured forward contract on the last day of the
accounting period on the basis of rate of foreign exchange prevailing on that
date and booked the profit or loss accordingly. The Assessing Officer (AO) taxed
the profit so booked but did not allow the assessee’s claim of loss, by relying
on the decision of the Madras High Court in the case of Indian Overseas Bank
(183 ITR 200), on the ground that the loss is incurred on the date of maturity
of the contract and there cannot be any loss prior to such date. In other words,
he held such loss to be notional.

Aggrieved the assessee preferred
an appeal to the Commissioner of Income-tax (Appeals) who allowed the assessee’s
appeal.

Aggrieved the Revenue preferred
an appeal to the Tribunal.

The assessee supported its claim
by relying on the decision of the Mumbai Tribunal in the case of Deutsche Bank
A.G., 86 ITD 431 (Mum.). The Tribunal noted that in the case of Deutsche Bank
(supra) the decision of the Madras High Court was distinguished on the ground
that the Court was concerned with the issue as to whether notional or
anticipated loss could be allowed as deduction or not, while the Tribunal was
concerned with the valuation of stock-in-trade. The Bench referred the matter,
since the assessee, as a banker, only entered into contract to sell/buy the
foreign currency at a future date, but did not buy or sell such contracts from
or in the market. It observed that the assessee was not holding these contracts
as stock-in-trade and, therefore, the decision in the case of Deutsche Bank was
not applicable.

The Bench framed the following
question of law for reference :

“Whether on facts and
circumstances of the case, can it be said that where a forward contract is
entered into by the assessee to sell the foreign currency at an agreed price at
a future date falling beyond the last date of accounting period, the loss is
incurred to the assessee on account of evaluation of the contract on the last
date of the accounting period i.e., before the date of maturity of the forward
contract.”

Held :

The Special Bench of the
Tribunal decided this ground in favour of the assessee and held :

(1) Deduction is allowable
under the Act in respect of those liabilities which crystalise during the
previous year. Therefore, the concept of crystalisation of liability under
the Income-tax Act assumes significance vis-à-vis commercial principles in
vogue. As per the commercial principles of policy of prudence, all
anticipated liabilities have to be accounted, but as per Income-tax Act,
only that liability will be allowed which has actually accrued. Due
weightage must be given to commercial principles in deciding such issues.

(2) Anticipated liabilities
which are contingent in nature are not allowable, but if an anticipated
liability is coupled with present obligation and only quantification can
vary depending upon the terms of the contract, then a liability is said to
have crystalised on the balance sheet date.

(3) A contingent liability
depends purely on the happening or not happening of an event, whereas if an
event has already taken place, which, in the present case, is of entering
into the contract and undertaking of obligation to meet the liability, and
only consequential effect of the same is to be determined, then, it cannot
be said that it is in the nature of contingent liability.

4. The issues relating to accrual of income cannot be decided on the same footing and considerations on which the issues relating to loss/expense is to be decided. In case of loss/expense, it is the concept of reasonable certainty to meet an existing obligation which comes into play which in legal terminology is said to be ‘crystalisation of liability’. When outflow of economic resources in settlement of present obligation can be anticipated with reasonable accuracy, then it is to be recognised as a crystallised liability. This is in consonance with the principle of prudence as considered by the Supreme Court in the case of Woodward Governor of India Pvt. Ltd.

5. The Revenue’s contention that liability can arise only when contract matures is completely divorced of principles of commercial accounting and, therefore, cannot be accepted. Both legal obligation and commercial principles have to be taken into consideration for deciding such issues.

6. The anticipated losses on account of existing obligation on 31st March, determinable with reasonable accuracy, being in the nature of expenditure/accrued liability, have to be taken into account while preparing financial statements.

7. The elements of financial statement can be broadly divided into the following five groups, viz. assets, liabilities, equity, income/gains and expenses/loss. These items are recognised in a financial statement if both the following criteria are met :

a) future economic benefit will be there from the said events,

b) the event can be measured in monetary terms.

In the present case, the AO himself has observed in the assessment order that at the time of entering into the contract, the assessee has recorded the income/loss on the basis of difference between the contracted rate and spot rate. Thus, to say that the contract was incapable of being recognised in the books of account, is not correct. The assessee recorded only the net effect of the transaction and not the entire transaction. Whether the deduction is allowable or not, therefore, cannot be guided by this factor.

8. The AO cannot reject the method of accounting followed by the assessee merely on the ground that a better method of accounting could be the alternate one. However, in the present case, though observations have been made by the AO to this effect, but actual disallowance has been made by treating the impugned amount as contingent liability.

9. Accounting Standard 11 issued by ICAI is mandatory and mandates that in a situation like in the present case, since the transaction is not settled in the same accounting period, the effect of exchange difference has to be recorded on 31st March.

10. The foreign exchange currency held by the assessee bank is its stock-in-trade. On facts, this contract was incidental to the assessee’s holding of the foreign currency as current assets. Therefore, in substance, it cannot be said that the forward contract had no trappings of stock-in-trade.

11. Profits are considered only when actual debt is created in favour of the assessee, but in case of anticipated losses, if an existing binding obligation, though dischargeable at a future date, is determinable with reasonable certainty, then the same is allowable.

12. The principle that the liability in paraesenti is an allowable deduction but a liability in futuro, which for the time being is only contingent is not allowable has to be applied keeping in view the principles of prudence and applicable Accounting Standards.

13. When profits are being taxed by the Department in respect of such unmatured foreign exchange contracts, then there was no reason to disallow the loss as claimed by the assessee in respect of the same contracts on the same footing.

Nirav Shah

S. 40(a)(ia) read with S. 194C of the Income-tax Act, 1961 — Tax deductible for the year deducted belatedly on the last day of the accounting year and paid before the due date for filing of return — Whether AO justified in disallowing the expenditure u/s.

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Part B : UNREPORTED DECISIONS

16 Bapusaheb Nanasaheb Dhumal v.
ACIT

ITAT ‘B’ Bench, Mumbai

Before P. M. Jagtap (AM) and

Vijay Pal Rao (JM)

ITA No. 6628/Mum./2009

A.Y. : 2005-06. Decided on :
25-6-2010

Counsel for assessee/revenue :
Anil J. Sathe/

S. S. Rana

S. 40(a)(ia) read with S. 194C
of the Income-tax Act, 1961 — Tax deductible for the year deducted belatedly on
the last day of the accounting year and paid before the due date for filing of
return — Whether AO justified in disallowing the expenditure u/s.40(a)(ia) —
Held, No.

Per Vijay Pal Rao :

Facts :

During the year, the assessee
had paid various sums to contractors but the tax was deducted only on 31-3-2005.
According to the AO, as per the provisions of S. 194C, the assessee was required
to deduct and pay the tax regularly in each month when the contractors were
paid. Since the assessee had deducted full amount of the tax only on 31-3-2005,
he restricted the allowance of deduction only in respect of payments made during
the month of March and disallowed the deduction in respect of the payments which
were credited and made during the period other than the month of March 2005. On
appeal the CIT(A) upheld the order of the AO.

Before the Tribunal the Revenue
submitted that the assessee had failed to deduct and pay tax as required
u/s.194C. According to it, S. 40(a)(ia) grants relaxation of time period in
depositing the TDS only in a case when the tax was deductible and deducted in
the last month of the previous year — where the time for deposit of tax is
allowed till the due date of filing of the return u/s.139(1). In cases where the
tax is deductible prior to the month of March, then the same has to be deducted
before the end of the last month of the previous year and paid by the due date
as given in S. 194C. According to it, since the assessee had failed to deduct
and pay tax as required u/s.194C and other provisions of Chapter XVII of the
Act, the AO was justified in disallowing the expenditure claimed. It also relied
on the decision of the Supreme Court in the case of Madurai Mills and Co. Ltd.
(89 ITR 445).

Held :

According to the Tribunal the
controversy revolves around the applicability of the provisions of S. 194C while
disallowing the expenditure u/s. 40(a)(ia). According to it, the provisions of
S. 194C are relevant only for the purposes of ascertaining the deductibility of
the tax from the payments made. Once it is determined that the nature of payment
falls under the provisions of Chapter XVII, the disallowance for non-compliance
with TDS provisions would be governed by the provisions of S. 40(a)(ia).
According to it, the proviso to S. 40(a)(ia) makes it further clear that even in
the case when the tax has been deductible as per the provisions of Chapter XVII,
but deducted in the subsequent year or deducted during the last month of
previous year, but paid after the due date u/s.139(1) or deducted during the
other months of the previous year, but paid after the end of the said previous
year, then the said sum would be allowed as deduction in the previous year in
which the tax is paid. According to it, if the conditions of deduction and
payment prescribed under Chapter XVII are applicable for disallowance of
deduction, then the provisions of S. 40(a)(ia) would be rendered as meaningless.
It further added that as per S. 40(a)(ia) when the tax is deducted, even
belatedly, and deposited belatedly, then deduction is not denied and is
allowable in the previous year in which the tax was deposited. According to it,
the provisions of Chapter XVII were relevant only for ascertaining the
deductibility of the tax at source and not for the actual deduction and payment
for attracting the provisions of S. 40(a)(ia).

Therefore, since the assessee
had deducted the tax in the last month of the previous year and deposited the
same before the due date of filing of the return, it allowed the claim of the
deduction of the assessee. It further observed that the case relied on by the
Revenue is not relevant.

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Nirav Shah

S. 147 — AO cannot assess other income noticed in proceedings

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26 ITO v. Smt. Darshan Kaur

w/o S. Adesh Singh

ITAT Amritsar Bench, Amritsar (SMC)

Before Sh. Joginder Pall (AM)

ITA No. 282/ASR/2007

A.Y. : 2001-02. Decided on : 16-11-2007

Counsel for revenue/assessee : M. S. Minhas/

P. N. Arora

S. 147 — Reassessment — When no addition is made on the
ground for which reassessment was initiated, can the AO assess any other income
which comes to his notice in the course of such proceedings — Held, No.

Facts :

The assessee filed return of income for A.Y. 2001-02,
declaring total income of Rs.32,180, which was processed u/s.143(1)(a) of the
Act. Subsequently, based on tax evasion petition, the Assessing Officer
initiated proceedings u/s.147 allegedly on the ground that the assessee had
purchased ½ share of land with one room, on 15-11-2000, for a consideration of
Rs.1,19,250 from undisclosed income. Thus, reassessment proceedings were
initiated to bring to tax unexplained investment in property. In response to
notice u/s.147, the assessee filed return of income declaring total income to be
the same as that shown in his original return. Along with this return of income,
he filed copy of capital account indicating opening capital of Rs.4,56,298. The
assessee had shown withdrawals of Rs.1,25,000 from the said opening capital as
being invested in purchase of property. The assessee explained the source of
opening capital to be accumulated savings of the past. The Assessing Officer
observed that income earned in the past must have been utilised for purchase of
property from which rental income is being shown in the returns. Thus, the
Assessing Officer allowed credit of Rs.1,00,000 of past savings and made an
addition of Rs.3,56,298 on account of opening capital shown in the return. No
addition on account of unexplained investment in purchase of property for which
proceedings were initiated u/s.147 was made. The CIT(A) quashed the order passed
by the Assessing Officer on the ground that no addition in respect of ground for
which proceedings u/s.147 were initiated has been made by the Assessing Officer.
Aggrieved by the order of CIT(A), the Revenue preferred an appeal to the
Tribunal.

Held :

The Tribunal dismissed the appeal filed by the Revenue on the
ground that since the Assessing Officer has not made any addition, in respect of
which proceedings were initiated, he was not competent to bring to tax the
opening capital during the course of completing the reassessment. The Tribunal
observed as under :

(a) No doubt, the amended provisions of S. 147 empower the
AO to assess or reassess the income chargeable to tax, which has escaped
assessment and also any other income chargeable to tax, which has escaped
assessment which comes to his notice subsequently during the proceedings
u/s.147. However, the question of bringing to tax any other income chargeable
to tax, which comes to his notice subsequently during the course of
reassessment proceedings would arise only if the ground for which proceedings
u/s.147 were initiated was found valid.

(b) Since in this case, the AO has not made any addition in
respect of ground for which proceedings were initiated, he was not competent
to bring to tax the opening capital during the course of completing the
reassessment. The AO was competent to initiate separate proceedings u/s.147 to
bring to tax the unexplained capital by dropping the proceedings already
initiated, provided such action was within the time allowed.

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Nirav Shah

S. 80JJA — Subsidy received from State Government qualifies for deduction.

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25 Arvind Gupta v. ITO

ITAT ‘B’ Bench, Jaipur

Before I. C. Sudhir (JM) and

B. P. Jain (AM)

ITA No. 799/JP/07

A.Y. : 2003-04. Decided on : 31-3-2008

Counsel for assessee/revenue : Mahendra Gargieya & Sharvan
Gupta/D. P. Gupta

S. 80JJA of the Income-tax Act, 1961 –– Whether subsidy
amount received from the State Government qualifies for deduction u/s.80JJA —
Held, Yes.

Facts :

During the previous year relevant to A.Y. 2003-04, the
assessee was granted subsidy aggregating to Rs.26.16 lacs by the Government of
Rajasthan. The assessee’s claim for deduction u/s.80JJA of the Act, included the
said amount of subsidy. The AO was of the view that the subsidy is not derived
from the specified business and therefore he disallowed the claim of deduction
u/s.80JJA. The CIT(A) upheld the action of the AO.

Held :

The Tribunal noted that the certificate of the Additional
Director of Agriculture made it evident that subsidy was not given to the
manufacturer, but it was a subsidy to the cultivators. As per the procedure laid
down by the Government, the assessee had to receive a part of the sale price
from the Government. Thus, the subsidy was only a part of the selling price and
hence was a trading receipts. The Tribunal agreed with the contentions of the
assessee that the subsidy granted was nothing but a part of the sale price of
the product, which was realised. The Tribunal further observed that u/s.80JJA,
the subjected profit is not confined merely to the undertaking, but profit and
gains should be derived from any business of an undertaking, thus giving it a
wider meaning.

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Nirav Shah

S. 32(1) read with S. 43(6) — WDV of block brought forward from preceeding year to be reduced by WDV of assets discarded.

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24 Yamaha Motors India Pvt. Ltd. v. ACIT

ITAT ‘G’ Bench, Delhi

Before C. L. Sethi (JM) and

Deepak R. Shah (AM)

ITA No. 1986 (Del.) 2005

A.Y. : 2000-01. Decided on : 23-5-2008

Counsel for assessee/revenue : Ved Jain/

Surkesh K. Jain

S. 32(1) read with S. 43(6) of the Income-tax Act, 1961 —
Depreciation — Block of assets — certain assets forming part of block of assets
were discarded — Whether WDV of the block brought forward from the immediately
preceding previous year needs to be reduced by the WDV of the assets which have
been discarded — Held, the scrap value of the assets discarded needs to be
reduced from the WDV of the block of assets brought forward.

Facts :

The assessee had capitalised certain assets at Rs.4,71,51,016
on 1-11-1996. WDV of these assets as on 31.3.1999 was Rs.2,32,07,141. These
assets were discarded and written off by the assessee in the books of accounts
during the previous year relevant to A.Y. 2001-02. The discarded assets were not
disposed of or sold during the relevant financial year. The assessee while
computing the WDV of the block of assets qualifying for depreciation did not
reduce the WDV of the block brought forward from immediately preceding previous
year by the WDV of the assets discarded. The AO disallowed a sum of Rs.58,01,785 being depreciation on assets written off in the books of accounts,
on the ground that these assets have not been used for the purpose of the
business of the assessee. The CIT(A) confirmed the action of the AO. The
assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the scheme of depreciation effective
from 1-4-1988 has done away with the assetwise depreciation by substituting the
same by the scheme of block of assets by putting all the assets entitled to the
same rate of depreciation in one block of assets. The WDV of the block can now
be adjusted only in the manner provided in Ss.(6) of S. 43 of the Act. The
action of the AO in reducing the WDV of a block of assets by WDV of individual
assets by working out the same on the basis of asset-wise depreciation was held
by the Tribunal to be not in accordance with the provisions of S. 43(6)(c) of
the Act. The Tribunal held that what needs to be reduced from WDV of a block of
assets in the present case is only the scrap value of assets which have been
discarded during the year under consideration.

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Nirav Shah

S. 14 — Income from redemption of deep discount bonds taxed as capital gains

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23 C. S. Gosalia v. ITO

ITAT ‘A’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

V. K. Gupta (AM)

ITA No. 1373/Mum./2006

A.Y. 2002-03. Decided on : 30-7-2008

Counsel for revenue/assessee : Ajay C. Gosalia/

S. Srivastava

S. 14 of the Income-tax Act, 1961 — Heads of income — Deep
discount bonds held as investment — Taxability of gains earned on redemption
thereof — Held that income arising therefrom is taxable as capital gains and not
as income from other sources.

Per V. K. Gupta :

Facts :

The assessee had purchased 64 deep discount bonds between
February 1999 and April 1999 through Bombay Stock Exchange for a total cost of
Rs.4.9 lacs. The same were held by the assessee as investment and he had not
offered to tax any income thereon in the year of holding. The said bonds were
redeemed by IDBI on 31-3-2002, resulting into gain of Rs.2.78 lacs. The said
gain was offered to tax by the assessee as long-term capital gain.

According to the AO, the income was liable to be taxed as
‘Income from other sources’ as per the Board Circular dated 15-2-2002. The
asssessee’s contention that the Circular relied on by the AO was applicable to
bonds issued after 15-2-2002 and his case was covered by the earlier Circular
dated 12-3-1996 was rejected. On appeal, the CIT(A) confirmed the action of the
AO.

Held :

The Tribunal agreed with the assessee and held that the
subsequent Circular issued by the Board was not retrospective in nature and the
case of the assessee was covered by the earlier Circular of the Board viz.,
the Circular dated 12-3-1996. It also took note of the fact that the
assessee was holding the bonds as investment. Accordingly, the assessee’s appeal
was allowed.

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Nirav Shah

S. 115JA — Capital gains credited directly to capital reserve in balance sheet not to be considered in book profit.

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22 ACIT v. Vijay Furniture Mfg. Co. Pvt. Ltd.

ITAT ‘F’ Bench, Mumbai

Before Sushma Chawla (JM) and

Abraham P. George (AM)

ITA No. 7104/Mum./2005

A. Y. 2000-01. Decided on : 9-7-2008

Counsel for revenue/assessee : B. K. Singh/

Jayesh Dadia

S. 115JA of the Income-tax Act, 1961 — Capital gain earned
during the year was directly credited to capital reserve in balance sheet —
Whether AO justified in adding such gain to the book profit — Held, No.

Per Sushma Chawla :

Facts :

During the year under consideration the assessee had earned
capital gain of Rs.8.81 crore. In the accounts the said capital gain was
credited directly to the capital reserve in the balance sheet. The as-sessee had
claimed the capital gain as exempt u/s. 54E of the Act.

As per the accounts of the assessee, there was a book loss.
However as per the Assessing Officer, the capital gain was required to be
credited to the profit and loss account. Thus, according to him, there was a
book profit u/s.115JA. Applying the ratio of the Bombay High Court decision in
the case of Veekaylal Investment Co. Ltd., he assessed the income at Rs.2.66
crore, after adjusting the book loss disclosed in the Profit and Loss Account
against the capital gains.

The CIT(A), relying on the Apex Court decision in the case of
Appollo Tyres Ltd. and of the Mumbai High Court decision in the case of Kinetic
Motor Co. Ltd., held that the Assessing Officer had no power to recast the
profit disclosed in the audited accounts. Accordingly, the appeal filed by the
assessee was allowed.

Held :

The Tribunal relying on the decisions of the Apex Court in
the case of Appollo Tyres Ltd. and of the Mumbai High Court in the case of
Akshay Textile Trading & Agencies Pvt. Ltd. agreed with the CIT(A) and held that
the AO has no power to recast the profit once the same was certified by the
statutory auditors, and only those adjustments which are permitted by
Explanation to Ss.(2) of S. 115JA of the Act, can be made.

Cases referred to :

1. Appollo Tyres Ltd. v. CIT, 255 ITR 273 (SC)

2. CIT v. Akshay Textile Trading & Agencies Pvt. Ltd.,
203 Taxation 303 (Bom.)

3. Kinetic Motor Co. Ltd. v. DCIT, 262 ITR 330
(Mum.)

4. CIT v. Veekaylal Investment Co. Ltd., 249 ITR 330
(Bom.)

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Nirav Shah

S. 272A(2)(e) — Delay in return due to non-availability of accounts condoned.

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21 ADIT (E) v. Shri Vardhaman Sthanakvasi Jain
Sangh

ITAT ‘G’ Bench, Mumbai

Before R. K. Gupta (JM) and R. K. Panda (AM)

ITA Nos. 961 to 965/Mum./2006

A.Y. 1998-99 to 2002-03. Decided on : 16-5-2008

Counsel for revenue/assessee : Malathi Sridharan/ K. Shivaram
and Paras Savla

S. 272A(2)(e) of the Income-tax Act, 1961 — Penalty for delay
in furnishing of return — Delay was on account of non-availability of the
accounts — Whether cause of the delay was reasonable to condone the delay —
Held, Yes.

Per Bench :

Facts :

In respect of the years under appeal there was delay in
filing of returns of income which ranged between 553 days to 1,649 days. The
delay according to the assessee, was due to non-availability of accounts which
were taken by the accountant of the assessee and which could be obtained by the
assessee after long persuasion, in the year 2003-04. This resulted into delay in
finalisation of accounts and in auditing thereof. However, according to the
Assessing Officer, there was no reasonable cause for the failure to file the
return within the stipulated time and relying on the Bombay High Court decision
in the case of Malad Jain Yuvak Mandal Medical Relief, levied a penalty
u/s.272A(2)(e) of the Act, which aggregated to Rs.6.44 lacs computed @ Rs.100
for each day of default. On appeal, the CIT(A) relied on the decisions listed at
S. Nos. 2 to 4 below and deleted the penalty.

Being aggrieved, the Revenue went in appeal before the
Tribunal and relied on the order of the Assessing Officer, and the Bombay High
Court decision relied on by the Assessing Officer.

Held :

The Tribunal agreed with the CIT(A). Further, according to
the Tribunal, the returns filed by the assessee were non-est returns.
Therefore, relying on the Tribunal decision in the case of Rupam Cut Piece
Centre, it held that no penalty can be imposed.

Cases referred to :

1. Rupam Cut Piece Centre, 42 TTJ 533

2. CIT v. Sulekha Works Pvt. Ltd., 156 ITR 190
(Cal.)

3. CIT v. Vishnu Brass Parts Works Taxation, 48(1)
Guj.

4. CIT v. Maheshprasad Gupta, 178 ITR 468 (MP)

5. DIT (Exemption) v. Malad Jain Yuvak Mandal Medical
Relief, 250 ITR 488 (Mum.)

levitra

Nirav Shah

Consideration paid by Indian Company to American Company under assignment agreement was not capital gains but business profits – Since American Company did not have PE in India, consideration not chargeable to tax in India. Payer not required to withhold

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

9 Laird Technologies India Pvt. Ltd.
(2010) 323ITR598(AAR)
Article 7, India-USA DTAA; S. 195
Dated : 18-2-2010

Consideration paid by Indian Company to American
Company under assignment agreement was not capital gains but business profits –
Since American Company did not have PE in India, consideration not chargeable to
tax in India. Payer not required to withhold tax u/s.195.

Facts :

The applicant Indian Company (‘IndCo’) was a group
company of a UK company (‘UK Co’). USCo was another group company of UK Co.
IndCo was engaged in the business of design and manufacture of antenna and
battery packs for mobile phones. USCo was a globally known designer and
manufacturer of antenna, etc. USCo had entered into a global Product Purchase
Agreement (‘PPA’) with Nokia for supply of products in respect of Nokia’s
requirements. Inter alia, PPA stipulated that “neither party shall assign any of
its rights or obligations under this agreement without prior written consent of
the other party”. USCo and IndCo entered into an Assignment Agreement under
which, USCo assigned all its beneficial rights, title, interest, obligations and
duties under PPA in favour of IndCo for a period of 5 years for certain lump sum
consideration.

IndCo applied to AAR for its ruling on the
following issues :

Whether amount received
by USCo as assignment fee from IndCo was taxable under the Income-tax Act or
under India-USA DTAA ?
Whether IndCo was
required to withhold tax even if the assignment fee was not taxable in the
hands of USCo ?

Held :

The AAR ruled as follows :

As regards taxability as capital gains :

An inference could not be
drawn that Nokia had consented to ratify the Assignment Agreement, nor was it
known whether Nokia was apprised of all the terms of Assignment Agreement.
Further, mere fact of Nokia accepting goods from IndCo would not lead to the
inference that assignment had approval of Nokia. Therefore, there was no valid
assignment in the eyes of law.

In the absence of any
valid assignment, the contention of IndCo that there was legal transfer of
capital asset and that consideration should be deemed to be capital gain cannot
be accepted. However, the fact remained that IndCo paid certain amount to USCo
which was received by USCo in its bank account. Thus, irrespective of the
validity of the Assignment Agreement, amount received by USCo can be examined
for ascertaining tax implications for USCo. Amount received on assignment was
business profits of USCo.

As regards constitution of PE :

There was nothing on
record that USCo had any role to play in regular manufacturing and business
activities of IndCo. IndCo did not constitute USCo’s PE in India. As per facts
on record, fixed place of PE of USCo is ruled out. USCo was not in picture after
IndCo started manufacture and supply of goods. The tax authorities did not
elaborate in what manner IndCo was dependent on USCo and hence, that contention
is not sustainable.

In absence of agency or
fixed rule PE, business income is not taxable in India.

As regards taxability and withholding tax :

As USCo had not derived
any income chargeable in India, IndCo was not required to withhold tax u/s.195
of the Income-tax Act.

levitra

Nirav Shah

ITO vs. M/s. Kirtilal Kalidas Diamond Exports (Mumbai) (Unreported). [ITA No 1868/Mum/2005].

New Page 1

Part C — International Tax Decisions

ITO vs. M/s. Kirtilal Kalidas Diamond Exports
(Mumbai) (Unreported). [ITA No 1868/Mum/2005].

A.Y. : 2001-2002

Sections
40(a)(i), 195, I T Act; India-UK DTAA

Dtd. : 30th
September 2008

Issue

Commission paid to non-resident agent for purchase of raw materials is not
taxable in India, either under I T Act or under India-UK DTAA.

Facts

The
assessee was engaged in the business of export of cut and polished diamonds.
For its business, it was importing rough diamonds. During the relevant year,
it imported rough diamonds through a non-resident agent and paid commission to
that agent. While making payment of commission to the non-resident agent, the
assessee did not deduct any tax at source.

Before the AO, the assessee contended that: the non-resident had rendered the
services outside India; the assessee had paid commission outside India; the
non-resident did not have any establishment in India; and hence, the income of
the non-resident was not chargeable to tax in India.

The
AO held that the assessee was required to deduct tax at source under Section
195 of the Act and since it failed to deduct such tax, provisions of Section
40(a)(i) of the Act were attracted. Accordingly, the AO disallowed the
commission while computing the income of the assessee.

On
appeal the CIT(A) deleted the disallowance.

Held

The
Tribunal observed that the Department had not countered the facts, namely :

(i)
the services were rendered outside India;

(ii) the assessee had paid commission outside India;

(iii) the non-resident did not have any establishment in India. On these
facts, it held that no income accrued to the non-resident in India.

Even under India-UK
DTAA, business profits, cannot be charged to tax in India in absence of
permanent establishment in India.

levitra

Nirav Shah

Worley Parsons Services Pty. Ltd. 312 ITR 317 (AAR)

New Page 1

Part C — International Tax Decisions

Worley Parsons Services Pty. Ltd. 312 ITR 317 (AAR)

Article 5 (3) and Article 12 of
India-Australia DTAA

Dtd. : 23rd April, 2009

Issue

In the facts of the applicant’s case, for the
purpose of determining threshold under the service PE, presence in respect of
all the contracts is to be taken into account.

The services involving preparation of technical plan amounts to royalties
within the meaning of Article XII of India-Australia treaty.

The services involving review of the designs prepared by the third party,
assisting in the bid process, making suggestion on optimisation of resources,
etc., do not meet the test of ‘make available’, etc., and is therefore not
royalty within the meaning of Article XII of India Australia treaty.

Facts

Worley Parson, a company registered in Australia,
(AUSCO) is engaged in the business of providing professional services
including engineering, procurement and project management services to various
players engaged in the business of energy and resource industry.

AUSCO entered into six separate service contracts
with ONGC. The contracts were entered into in respect of two offshore projects
of ONGC. One of the six contracts (contract no.5) involved the work of
preparing design, provide lay out and cost optimisation scheme along with the
process designs for the new process platform of ONGC. The consideration paid
pursuant to contract no.5 was admitted to be the payment in the nature of
royalty as it involved consideration for development and transfer of technical
plan.

In respect of the balance 5 contracts, the
applicant provided the following services :

1. Reviewing the design and engineering
documents prepared by the third party consultants engaged directly by ONGC.

2. Reviewing technical and commercial bid
document floated by ONGC for the purpose of inviting tender from the
interested parties.

3. Reviewing the proposals of optimisation and
cost savings presented by ONGC.

4. Reviewing the existing facilities and making
recommendations.

5. Assisting ONGC in procurement phase of one
of the offshore projects.

Services in respect of these contracts were
rendered partly in India and partly in Australia. The aggregate presence of
employees pursuant to various contracts (other than contract no. 5) exceeded
period of 90 days in 12-month period reckoned for two financial years.

Before the AAR, the applicant claimed that :

The services rendered under the various contracts except contract no. 5
cannot be regarded as royalties as defined in the treaty.

For the purpose of determining the service PE trigger threshold, each
contract should be viewed separately;

There was no service PE trigger except under contract 6 since in each of the
contracts seen individually the time spent by the employees of the applicant
did not exceed the threshold of 90 days in 12-month period provided in the
treaty.

Relying on SC decision in the case of Ishikawajima-Harima Heavy
Industries Ltd. vs. DIT, (288 ITR 408), it was submitted that offshore
services cannot be taxed in India even in respect of contract no. 5.

The Department contended that the entire amount was taxable as royalty and
hence no distinction is required for onshore & offshore services. Further all
the contracts should be seen together in order to ascertain whether service PE
has emerged or not.

Held :

The AAR held :

Consideration for contract no. 5 was taxable as royalty income. For the
purpose of determining number of days of presence for service PE, the
presence of employees pursuant to contract no.5 is to be excluded in view of
specific provisions of Article V(3)(c) of the treaty.

Services rendered pursuant to other contracts were not royalty within the
meaning of Article XII of the treaty. The services rendered pursuant to the
contracts had a technical content and recommendation for use by ONGC.
However, the services and the input did not result in the recipient of
service getting equipped with the knowledge and expertise of the applicant.
The services were project specific and ONGC could not make use of such
services for unrelated project to the exclusion of the applicant. The
services therefore did not make available technology to ONGC so as to be
regarded as royalty within the meaning of Article XII(3)(g) of the treaty.

The AAR also rejected the contention of the Department that the services of
reviewing designs of third party and suggesting recommendations thereon
resulted in development of technical plan or design for transfer by the
applicant. The AAR observed that the payment was not royalty as the
applicant did not evolve and transfer plan or design to ONGC.

Nirav Shah

Mahindra and Mahindra Limited (M&M) vs. DCIT [ITA Nos. 2606, 2607, 2613 and 2614/Mum/2000] (Mumbai SB).

New Page 1

Part C — International Tax Decisions

Mahindra and Mahindra Limited (M&M) vs.
DCIT [ITA Nos. 2606, 2607, 2613 and 2614/Mum/2000] (Mumbai SB).

A.Y. : 1998-99

Section 9(1)(vii), 191, 195,
200, 201 of the Income- tax Act and Article 13 of India-UK DTAA

Dtd. : 9th April, 2009

Issue

(1) Proceedings under Section
201 are akin to assessment/reassessment and time limit available for
initiating and completing assessment/reassessment proceedings are as equally
applicable to it.

(2) In terms of Section 195, a
payer is required to withhold taxes only where the payment includes a sum
chargeable to tax in India.

(3) No order treating a person
as an assessee in default can be passed if the Department has not taken any
action against the recipient to treat the income as taxable.

Facts

M&M had come out with 2 Euro issues in November
1993 and July 1996. In this connection, M&M had availed services of Lead
Managers (LM) of UK. M&M was obliged to pay management, underwriting and
selling commission to LM. In addition, certain expenses of LM were also
reimbursed by M&M. LM had retained their commission from out of proceeds of
the issue. No taxes were withheld in respect of payments retained by LM.

The Department had initiated action against the
payer (M&M) for failure to withhold taxes and treated M &M to be assessee in
default.

The primary contention of M&M was that there was
no obligation to withhold tax as the payment was not towards technical
services but was for subscription of capital. In any case, the fees were
retained by the service provider and there was no separate remittance so as to
attract obligation of TDS.

By way of an additional ground, M&M raised the
aspect of applicability of time limit to S.201 proceedings; it also challenged
the validity of proceedings by contending that :

.
Section 201 (1)/ 201 (1A) proceedings apply only where taxes are withheld
but have not been remitted to the Government. The proceedings had no
application where the payer had not withheld taxes.

.
The payer cannot be treated as an assessee in default unless the Department
has assessed or initiated action for assessment of income in the hands of
the recipient.

.
As no time limit has been prescribed for initiating action, the proceedings
need to be exercised within a reasonable time. As judicial precedents have
held that 4 years is a reasonable time for initiating and completion of the
proceedings under Section 201(1)/(1A), the same needs to be adhered to. In
the present case, since this limitation period was crossed, no action can be
taken against the payer for not withholding taxes.

As
against the above, the Department contended :

–
Services offered by LM were in the nature of FTS and hence taxable in India.
Retention of amount by LM in effect amounted to making of payment.

–
M&M did not file any application to the Department for determination of the
amount to be withheld on its payments to LM. In absence of lower/nil tax
deduction certificate, taxes were necessarily required to be withheld by
M&M.

–
Section 201(1)/201(1A) proceedings apply to both the categories of
defaulters, i.e., one who has withheld taxes but not remitted it to
the Government and also to those who have not withheld taxes from the
payment.

–
Assessment of recipient is not a pre-condition for enforcing a withholding
tax liability on the payer. The withholding tax provisions are separate and
operate independent of the assessment proceedings of the recipients. For
this, the Tax Department relied on provisions of Sections like 115A , 115AC,
115BBA, 115G, etc. to support the proposition that under certain situations,
the recipients have no obligation of filing the return if there is suitable
tax withholding.

–
Where no provision for limitation is present in a statute, the Courts cannot
artificially introduce a limitation.

Held

The Special Bench admitted the additional ground on the question of limitation
which was raised for the first time before it. It held that the issue involved
a question of law and needed no fresh investigation of facts.

Nirav Shah

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.

New Page 1

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.

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.)

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.

levitra

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

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.)

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.).

levitra

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.

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.)

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

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.)

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.

New Page 1

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.

levitra

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.

New Page 1

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).

levitra

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

New Page 1

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).

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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).

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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.

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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.

levitra

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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

New Page 1

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

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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.

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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

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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

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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).

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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.

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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

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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

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