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Category: Tribunal News: Part A-Domestic Taxation

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

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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.



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

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New Page 1

Part C — International Tax Decisions




  1. 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.


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

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New Page 1

Part C — International Tax Decisions




  1. 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.

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).

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New Page 1

Part C — International Tax Decisions



  1. 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.

S. 163, and India — Japan Treaty

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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

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

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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.


 


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

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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).


 


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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

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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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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.

(c) The royalty is borne by 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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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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  1. Shingar India Pvt. Ltd. vs. ITO


ITAT ‘E’ Bench, Mumbai.

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

ITA No. 1785/Mum/2007

A. Ys. 2004-05. Decided on 6.5.2009

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

Per D. Karunakara Rao

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

Facts :

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

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

Held :

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


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


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


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

Case referred to :

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

Note :

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


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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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  1. Shangold India Ltd. vs. ITO


ITAT ‘E’ Bench, Mumbai.

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

ITA Nos. 6041 & 6568/Mum./2002

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

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

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

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

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


Per Karunakara Rao

Facts :


The issues before the Tribunal were as under :

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

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

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


Held :



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

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

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


Case referred to :

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




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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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  1. Jayendra P. Jhaveri vs. ITO


ITAT ‘B’ Bench, Mumbai.

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

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

A.Y. : Block Period 1.4.1989 to 14.9.1998.

Decided on : 2.4.2009.

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

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

Per Abraham P. George :

Facts :

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

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

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

Held :

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

Cases referred :



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

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

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

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

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




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


ITAT ‘A-1’ Bench, Mumbai

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

ITA No. 6481/Mum/2007

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

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

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

Per Abraham P. George :

Facts :

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

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

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

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

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

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

Cases referred :



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

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




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

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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.)




13 ITO v. Premier Automobiles Ltd.


ITAT ‘E’ Bench, Mumbai

Before K. C. Singhal (JM) and

Abraham P. George (AM)

ITA No. 2049/Mum./2005

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

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

Jayesh Dadia

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

Per Singhal :

Facts :

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

Held :

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

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

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New Page 1

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




12 Fition Hotel v. ITO


ITAT ‘E’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

Sushma Chowla (JM)

ITA No. 7035/Mum./2003

Decided on : 8-3-2007

Counsel for assessee/revenue : K. Shivaram/

K. Kamakshi

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

Per Sushma Chowla :

Facts :

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

Held :

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


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

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New Page 1

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



11 Molly Boban v. ITO


ITAT Cochin Bench

Before N. Barathwaja Sankar (AM)

ITA No. 01 /Coch./2007

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

Counsel for assessee/revenue : R. Sreenivasan/

T. R. Indira

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


Facts :

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

Held :

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

Case referred to :


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


levitra

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

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

Asst. Year: 2005-2006

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

31st August 2009

Issue

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

Facts

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

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

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

  • The payments
    were not in the nature of technical services;

  • There was no
    enrichment or gaining of technical knowledge or expertise by IndCo;

  • FrenchCo had
    merely performed its business in France;

  • FrenchCo had
    not transferred any knowledge by which IndCo could carry out testing;

  • The tests
    were required for obtaining regulatory approval; and

  • Hence, the
    payments were not fees for technical services as defined in Explanation 2 to
    Section 9(1)(vii) of the Income-tax Act.

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

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

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

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

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


Held:

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

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

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

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

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

Asst. Year: 2004-2005

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

9th October 2009

 


Issue

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

Facts

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

The AO concluded that:

  • The
    discounting charges were in the nature of “interest” within the meaning of
    Section 2(28A) of the Income-tax Act;

  • As the
    payment of such interest was made to a non-resident, IndCo was required to
    deduct tax at source;

  • As such tax
    was not deducted, it was disallowable in terms of Section 40(a)(i) of the
    Income-tax Act.

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

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

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

Held

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

levitra

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

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Part C — Tribunal & AAR International Tax Decisions


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

30 November, 2009

 

Issues :


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


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



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


Facts :

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

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

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

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

  • Two new
    entities DHC and DCLLC were formed by USCo.

  • An
    independent private equity concern infused funds (capital) into DHC in
    exchange for shares of DHC.

  • Additional
    shares of DHC were distributed as settlement for certain claims made against
    USCo in bankruptcy. DHC thus became publicly held entity.

  • DC
    transferred shares held by it in the three Indian companies to DWTC and DGP.

  • DC
    transferred shares held in DWTC and DGP to DHC.

  • Finally, USCo
    merged with DCLLC.

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

 

USCo raised the following contentions before the AAR:

  • The shares of
    ICOs were transferred without consideration. As the transfer was part of the
    overall reorganization under the Bankruptcy Code, no consideration can be
    attributed to such a transfer of shares. In the absence of or
    non-determinability of the full value of the consideration, the computation
    mechanism stipulated under the Income Tax Act failed and, consequently, the
    charge also failed.

  • Since the
    transfer of shares under the proposed reorganization did not result in any
    income chargeable to tax under the provisions of the Act, the T.P provisions
    cannot be applied.

The tax
department raised the following contentions:

  • Consideration
    did exist for transfer of ICo shares under the proposed reorganization. The
    liabilities taken over by DHC can be legitimately taken as consideration for
    transfer of shares. The tax department referred to and relied on the
    Bankruptcy Court Order which stated that the transfer was for ‘fair value’ and
    for ‘fair consideration’.

  • The applicant
    did not provide details of valuation of assets, including shares of the Indian
    companies. And whether such values have been considered while agreeing to the
    proposed reorganization. It cannot, therefore, be said that there was no
    consideration merely because the applicant had failed to identify the
    consideration attributable to ICos shares.

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

Held

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

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

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

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

 

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



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

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

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Part C — International Tax Decisions


17 ADIT v.
Delta Airlines Inc.

(2008) TIOL 646 ITAT (Mum.)

Article 8 of India-USA DTAA

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

Issues :




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


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


 


Facts :

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

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

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

 


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

 

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

 

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

 

Held :



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

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

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


levitra

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

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Part C — International Tax Decisions


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

(2008) TIOL 621 ITAT (Mum.)

Article 8 of India-Brazil treaty

A.Y. : 2001-02. Dated : 25-11-2008

Issue :

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

 

Facts :

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

Held :

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

 

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

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

 


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

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

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

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

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

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


levitra

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

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Part C — International Tax Decisions


15 Ikea Trading Hong Kong Ltd. In Re


(2008) TIOL 23 ARA IT (AAR)

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

Dated : 19-12-2008

Issue :

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

 

Facts :

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

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

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

(1) The applicant company purchased goods from India.

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

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

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

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

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

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

Held :

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

levitra

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

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Part C — International Tax Decisions


14 DDIT v. Balaji Shipping (UK
Ltd.)

(12 DTR 93) (Mum.)

Article 9 of India-UK treaty

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

Issue :

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

 

Facts :

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

 


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

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

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

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

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

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

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

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

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

 


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

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

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

 


Held :

ITAT held :

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

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

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

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

Facts

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

Held

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

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

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

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

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

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

Facts

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

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

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

Held

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

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

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

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

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

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

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

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

Facts

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

Held

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

The Tribunal noted as under:

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

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

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

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

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

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New Page 1

8 Shashikant Janardan Kulkarni v.
ITO

ITAT Pune Bench SMC, Pune

Before Mukul Shrawati (JM)

ITA No. 1357 /PN/2005

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

Counsel for assessee/revenue : Arvind Kulkarni/

Vilas Shinde

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

 

Facts :

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

 

Held :

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


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

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

 


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

 

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

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

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

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

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

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

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

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

Aggrieved the Revenue preferred an appeal to the Tribunal.

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

This ground of appeal filed by the Revenue was dismissed.

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

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

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

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

The Tribunal allowed the appeal filed by the assessee.
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(2011) 131 ITD 84 (Hyd.) Sri Venkateswara Bhakti Channel v. ACIT, Circle-1(1) Dated: 26-11-2010

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Section 12A — Can a section 25 company be registered u/s.12A of Income-tax Act — Held, Yes.

Facts:

The assessee-company was registered u/s.25 of the Companies Act, 1956 and was engaged in producing religious feature films, serials for a temple. It applied for registration u/s.12A with the Commissioner. The application was rejected on the grounds that the assessee was a private limited company.

Held:
The provisions of section 11 deal with the exemption of the total income of a ‘person’ who derives income from property held under trust for charitable or religious purposes. The plain reading of the definition of person also includes a company. The word institution is also not defined anywhere in section 12AA, but the meaning as given in Oxford Dictionary nowhere suggests that company is not an institution. The company being a person in accordance with the scheme of the Act is entitled to benefit of section 12A.

Thus the test whether an assessee could be registered u/s.12A is not the status of the ‘person’, but on the basis that whether the person (assessee) was established for charitable or religious purpose.

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(2011) 131 ITD 1 (Ahd.) ITO Ward-2(4), Ahmedabad v. Chandrakant R. Patel A.Y.: 2006-07. Dated: 8-4-2011

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Section 55A r.w.s. 48 — Reference to DVO can be made under specific circumstances prescribed u/s.50C and fair market value determined by DVO cannot be replaced for full value of consideration.

Facts:

The assessee had shown long-term capital gain on sale of land. There was a common sale deed executed along with co-owners in respect of two plots. The assessee had showed sale consideration of Rs.41,860 per sq.mt. The ‘Jantri’ rate as per ‘Stamp Duty Authority’ was Rs.4500 and Rs.7000 per sq.mt. respectively, for the plots. The AO considering the area of the property referred valuation of the same to the DVO. The valuation report of the DVO valued the same at Rs.45,000 per sq.mt. The AO on the basis of report of DVO made the addition.

On appeal the assessee contended that reference made u/s.50C was illegal. The CIT(A) opined that reference to the DVO can be made u/s.142A, or u/s.55A, or u/s.50C. The CIT(A) was of opinion that section 142A has a limited scope for reference to Valuation cell i.e., for estimating an investment as prescribed u/s.69 and u/s.69B for certain assets (bullion, jewellery, valuable articles). Section 55A is in respect of ascertaining the fair market value for purpose of determining the cost of acquisition u/s.55(2)(b). As per section 50C reference is possible only if sale consideration is less than the stamp duty value fixed by stamp valuation authority. Thus, the CIT(A) held that addition made by the AO was not lawfully sustainable.

Aggrieved the Revenue appealed before the ITAT.

Held:
(1) The language in section 55A does not refer ‘value of consideration’ but only uses the term ‘Fair market value’. So, the scope of the section gets confined to determine the fair market value of a capital asset only. Thus, considering the language of section 48 the value so determined cannot be substituted for ‘Full value of consideration’.

(2) Section 50C states that the AO can refer to the DVO u/s.55A only if the assessee claims that the value adopted by the stamp valuation authority exceeds their fair market value or the value so adopted by stamp valuation authority has not been disputed by any authority, Court or High Court.

(3) Thus, the valuation made by the DVO and the consequential addition as made by the AO was reversed and the view taken by the CIT(A) was upheld.

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(2011) 129 ITD 200 (Delhi) Honda Siel Cars India Ltd. v. ACIT A.Y.: 2003-04. Dated: 16-5-2008

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Section 37(1) — Nature of payment made for acquiring technical know-how is capital or revenue expenditure depends upon whether payment is made to acquire any proprietary rights in technical know-how or right to use same for the business for limited period of time.

Section 92 — Transfer Pricing Officer (TPO) is not concerned, nor is he competent to decide as to whether payment for technical rights is capital or revenue — Tribunal decision regarding nature of payment for technical rights by assessee could not be deferred at the request of Department till TPO determines arm’s-length price. Such course was not contemplated by law.

Section 37(1) — Expenditure incurred on advertisement is undisputedly business expenditure —Assurance given by assessee to give away car at its own cost to winner of advertisement scheme launched by paint company might be beneficial to the assessee in the long run and allowable as business expenditure.

Facts: I

The assessee paid Rs.29.40 crore being lump-sum fee for technical know-how and Rs.18.55 crore being royalty to Honda Motor Company Ltd. (HMCL) under technical collaboration agreement. Under the said agreement the assessee acquired right to use technical information provided by HMCL and ownership rights continued to remain with HMCL. As the assessee got only limited right to use and exploit know-how and did not acquire any intellectual property, he claimed the expenditure as revenue. However AO did not accept the assessee’s contention to treat the expenditure as revenue. He disallowed the same and treated the same as capital expenditure on the ground that know-how was crucial for setting up of the assessee’s business and not towards running an existing business.

Facts: II


Reference was made by the Revenue to TPO, to determine arm’s-length price of the amount paid for technical know-how and royalty. The Revenue requested ITAT that it should not give any finding on nature of the above payment till TPO determines its arm’s-length price.
Facts: III

Nerolac Paint launched a sales promotion scheme where the winner would get Honda City car. The assessee-company agreed to bear the cost of the car.

The Revenue disallowed the above advertisement expenditure in the books of the assessee as they were of the opinion that Nerolac Paint stood to benefit from the campaign and not the assessee.

Held: I


In order to ascertain whether payment made for acquiring technical know-how is capital or revenue expenditure, test that is to be applied in such case is whether the assessee got any proprietary/ownership rights or he merely got right to use the same for his business, irrespective of whether expenditure was incurred at the time of initiation of business or at any point of time subsequent thereto.

After noticing all the terms of technical know-how agreement, the ITAT held that on payment for technical know-how the assessee did not become owner of the same. HMCL continued to retain ownership rights in the technical know-how. HMCL merely granted licence to the assessee for manufacture of cars. The manufacture of the cars was the business for which the company was established. Payment made to HMCL was not in connection with setting up of plant but to enable the assessee to manufacture Honda cars in India which formed part of its stock in trade.

Therefore the payment of lump-sum fees for technical know-how and the royalty were treated as part of revenue expenditure.

Held: II

The function of TPO under the provisions of section 92 to 92C is to determine arm’s-length price and he is not concerned with deciding whether it is capital or revenue, nor is he competent in law to decide such question.

The ITAT held that it is first necessary to determine nature of payment and if it is held to be capital then it is not allowable as deduction and determination of arm’s-length price by TPO may not be necessary. However if it held to be revenue, then while giving effect to the order, the AO may, if so advised, refer the question of determination of arm’s-length price to TPO. But decision of tribunal regarding nature of payment cannot be deferred till determination of arm’s-length price by TPO. Such path was not contemplated by law.

Therefore, the request made by the Revenue was rejected.

Held: III


Any expenditure which is not capital or personal nature is allowable as deduction provided it is incurred wholly and exclusively for the purpose of the business according to section 37(1). Expenditure incurred wholly and exclusively for the purpose of the business does not cease to be so merely because it also benefits some other person.

As long as the expenditure benefits the assessee it should be allowed as deduction. Assurance of giving away Honda car at its own cost to the winner of Nerolac Paint promotion scheme may be beneficial to the assessee’s business in long run and is business expenditure. Hence, the expenditure incurred on advertisement should be allowed.

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(2011) 62 DTR (Mum.) (Trib.) 349 Free India Assurance Services Ltd. v. DCIT A.Ys.: 2001-02 to 2004-05. Dated: 30-3-2011

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Bogus purchases — Assessee made payments by cheques to two parties, received cash against the cheque payments and utilised such cash to purchase cloth from the grey market and the same has been recorded in the closing stock — Such purchases are allowed as deduction and cannot be treated as bogus.

Facts:

At the time of search and seizure, it was found that the assessee had made purchases amounting to Rs.30,80,730 for which the assessee had issued cheque and in lieu thereof he received cash. The assessee admitted the fact that such cash received was actually used to purchase fabric from the grey market. Thus the purchase bills were taken from parties to cover up the purchase actually made in the grey market. The fabric was purchased in the previous year and was lying in stock as on the last day of the previous year. The AO treated the same as bogus purchases and disallowed the same. The CIT(A) stated that as long as the stock is reflected in the books of account to that extent the credit for fabrics purchased ought to be given. But the CIT(A) disallowed 20% of total purchase u/s.40A(3) on the ground that the assessee had admitted that the purchases were from grey market.

Held:
In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than the purchases or the entry recorded in the closing stock is found to be fictitious or false, the assessee has made cash purchases of Rs.30,80,730 and the same needs to be allowed since they were undisputedly found recorded in the inventory of the assessee.

Regarding the application of provisions of section 40A(3), no such material was found to show that the assessee had made cash payments in the violation of section 40A(3). Disallowance cannot be merely based on a presumption basis.

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2013-TIOL-720-ITAT-MUMBAI ITO vs. Wadhwa and Associates Realtors Pvt. Ltd. ITA No. 695/Mum/2012 Assessment Year: 2008-09. Dated: 03-07-2013

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S/s. 194I, 201(1) – Lease premium paid to acquire leasehold land is not rent and tax on such payment, made by the assessee to MMRDA, is not deductible u/s. 194I.

Facts:
The assessee, a private limited company dealing in real estate, during the previous year under consideration paid a sum of Rs. 949.92 crore for allotment of a plot of land namely C-59 in ‘G’ Block of Bandra Kurla Complex, Bandra (E), Mumbai as per lease deed dated 22-11-2004 and also for additional FSI in respect of the said plot. The lease premium was paid without deduction of tax at source u/s. 194I. The Assessing Officer (AO) held that this payment attracted provisions of section 194I and since the assessee failed to deduct tax at source it has committed default within the meaning of section 201(1) of the Act and therefore, he treated the assessee to be an assessee in default and directed the assessee to make payment of interest along with TDS totaling to Rs. 314.26 crore.

Aggrieved, the assessee filed an appeal to CIT(A) where it contended that the payment under consideration was not covered by the term `rent’ u/s. 194I but was made to MMRDA (a) for additional built-up area and (b) for granting free-of-FSI area of Rs. 4 crore. The CIT(A) observed that the amount charged by MMRDA as lease premium was equal to the rate prevalent as per stamp duty recovery for acquisition of the commercial premises. These rates are prescribed for transfer of property and not for use as let-out tenanted property. He also observed that even the additional FSI was given for additional charges as per Ready Reckoner rates only. He found that the whole transaction towards grant of leasehold transaction rights to the assessee is nothing but a transaction of transfer of property and the lease premium is the consideration for the purchase of the said leasehold rights. Relying on the ratio of the decision of Mumbai Tribunal in the case of M/s. National Stock Exchange of India Ltd. (ITA Nos. 1955/M/99, 2181/M/99, 4853/M/04, 4485/M/04, 4854/M/04, 356/M/01and 5850/M/00) he decided the appeal in favour of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal observed that a careful reading of the lease deed shows that the premium is not paid under a lease but is paid as a price for obtaining the lease, hence it precedes the grant of lease. Therefore, by any stretch of imagination, it cannot be equated with the rent which is paid periodically. It also noted that the payment to MMRDA is also for additional built-up area and also for granting free-of-FSI area, such payment cannot be equated to rent. It held that the assessee has made payment to MMRDA under Development Control for acquiring leasehold land and additional builtup area. Considering the precedents relied upon by the CIT(A) and the definition of the term `rent’ as provided in section 194I, the Tribunal confirmed the order of the CIT(A) and decided the issue in favour of the assessee.

The appeal filed by the Revenue was dismissed.

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2013-TIOL-764-ITAT-INDORE DCIT vs. Roop Singh Bagga ITA No. 44/Ind/2013 Assessment Year: 2009-10. Dated: 31-05-2013

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S/s. 40(a)(ia), 271(1)(c)–Disallowance u/s. 40(a) (ia) does not attract penalty u/s. 271(1)(c). Making an incorrect claim in law does not tantamount to furnishing of inaccurate particulars of income. Levy of penalty is not justified merely because the assessee has claimed certain expenditure that expenditure is not eligible in view of the provisions of section 40 (a)(ia) of the Act and for that reason, expenditure is disallowed.

Facts: The Assessing Officer (AO) while assessing the total income of the assessee, a transport contractor, found that payment of freight was made without deducting tax at source. Accordingly, he disallowed the freight u/s. 40(a)(ia). The assessee did not challenge the addition and paid tax thereon. The AO also levied penalty u/s. 271(1)(c) with reference to the disallowance so made by him. Aggrieved, the assessee preferred an appeal to the CIT(A) who following the decisions of the Hyderabad `A’ Bench of the Tribunal in the case of ACIT vs. Seaway Shipping Ltd. (ITA No. 80H/2011, order dated 11th June, 2010) and Ahmedabad `D’ Bench of the Tribunal in the case of L.G. Chaudhary (2012-TIOL-205-ITAT-AHM) deleted the penalty.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held: The Tribunal noted that—

(a) the default for non-deduction of tax in respect of payment for freight charges was accepted by the assessee himself by filing letter dated 21-12- 2009 before the Assessing Officer;

(b) the Supreme Court has in the case of Suresh Chand Mittal (supra) observed that additional income offered by the assessee to buy peace and to come out of vexed litigation would be treated as bona fides;

(c) the issue with regard to levy of penalty u/s. 271(1)(c) on the plea of non-deduction of tax u/s. 40a(ia) has been considered by the coordinate Bench in the case of Seaway Shipping Ltd and L.G. Choudhary (supra) wherein exactly on the similar issue, levy of penalty was held to be not justified;

(d) Supreme Court in the case of Reliance Petro Products (P) Ltd. (322 ITR 158)(SC) has categorically observed that “By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars”.

The Tribunal confirmed the order passed by CIT(A) and decided the issue in favour of the assessee.

The appeal filed by the revenue was dismissed.

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2013-TIOL-746-ITAT-DEL ACIT vs. Delhi Public School ITA No. 4878 & 4879/Del/2012 Assessment Year: 2008-09 & 2009-10. Dated: 24-05-2013

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 S/s. 194C, 194I–Payments made by school to bus
owners/contractors for transportation of students from their home to
school and back qualify for deduction of tax at source u/s. 194C and not
u/s. 194I.

Facts:
The assessee, a school, had
taken on hire vehicles which were used for carrying students from their
homes to school and back. In view of the contracts entered into by the
assessee with the bus owners, the assessee deducted tax u/s. 194C.
Before the Assessing Officer (AO) the assessee submitted that
considering the fact that the contract provided for transportation of
children, drivers and conductors were appointed by the contractor, after
school trips were over the contractor was free to utilise the vehicle
for any manner and purpose, tax was deductible u/s. 194C. However, the
AO held that since the name of the school was written on the buses and
also that the buses were in exclusive possession of the school, the
transporter cannot ply buses for any purpose other than for the school.
He, accordingly, held that the payments made qualify for deduction of
tax u/s. 194I and not u/s. 194C. The AO calculated the difference in
amount deductible u/s. 194I and the amount deducted u/s. 194C.

Aggrieved,
the assessee preferred an appeal to CIT(A). The CIT(A) noted that the
contract was on a per trip basis for specified route. The rates per trip
were frozen for a period of one year. The vehicle i.e., the school bus
remains in possession of the transporter and the staff required to
operate the vehicle was also engaged by the transporter. All costs
incurred for running and maintenance of buses including the salaries of
driver and conductor were to be incurred by the transporter. Once the
trips made by these buses for carrying and dropping children from/to
school are complete, the transporter is at liberty to use the vehicle in
any manner. Following the ratio of the following decisions he held that
the contract was a works contract and provisions of section 194I were
not applicable.

a) Lotus Valley Education Society vs. ACIT (TDS) Noida 46 SOT 77 (Delhi) (URO)

b) Ahmedabad Urban Development Authority vs. ACIT 46 SOT 75 (Ahd) (URO)

c) ACIT (TDS) vs. Accenture Services Pvt. Ltd. 44 SOT 290 (Mumbai)

d) ITO vs. Indian Oil Corporation (15 Taxmann. com 210)(Delhi ITAT)

He decided the appeal in favour of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the issue is covered by various cases decided by
the Tribunal. It also noted that the facts are similar to the facts in
the case of Lotus Valley Education Society vs. ACIT (TDS), which was
decided by Delhi Bench in ITA No. 3254 & 3255 /Del/2010. Relying
upon the observations in para 6 of the said order the Tribunal decided
the issue in favour of the assessee.

The appeal filed by the revenue was dismissed.

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S. 69C—If there is a dispute of the source of the expenditure, then addition can be made u/s.69C — Merely because labour charges are shown as outstanding cannot be a ground to make addition u/s.69C.

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14 Muscovite Construction v. ACIT
ITAT ‘I’ Bench, Mumbai
Before R. S. Padvekar (JM) and Rajendra Singh (AM)
ITA No. 2856/Mum./2009
A.Y. : 2005-06. Decided on : 21-5-2010
Counsel for assessee/revenue : C. N. Vaze/Rajnesh Dev Buvman.

S. 69C—If there is a dispute of the source of the
expenditure, then addition can be made u/s.69C — Merely because labour charges
are shown as outstanding cannot be a ground to make addition u/s.69C.

Per R. S. Padvekar :

Facts :

The assessee was carrying on business of civil construction
contract work and labour contract. It filed its return of income declaring an
income of Rs.14,29,579. In the course of assessment proceedings the Assessing
Officer (AO) noticed that the assessee had debited labour charges of Rs.1.10
crores in the P & L Account and in the balance sheet out of the said expenditure
a sum of Rs.54,56,235 was shown as outstanding. The outstanding labour charges
were for the months of Jan, Feb and March 2005. In response to the show cause
notice issued by the AO asking the assessee to explain why outstanding labour
charges/ wages should not be treated as unexplained, the assessee submitted that
it was facing a financial crunch in the business and the break-up of monthly
wages in respect of each type of labour like carpenter, mason, etc. was
furnished. The AO, not being satisfied with the explanation furnished, added the
amount of Rs.54,56,235 as unexplained expenditure u/s.69C.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that nothing has been brought on record by
the AO to show that the assessee has used the money which was not reflected in
the books of account. It also noted that in the immediate next year the assessee
has paid the outstanding wages/labour charges and also that in the assessment
order for A.Y. 2006-07 the AO has discussed the issue. The Tribunal held that as
per the language used by the Legislature in S. 69C, if there is a dispute of the
source of the expenditure, then the addition can be made. Since the payment of
outstanding wages has been accepted by the AO in the next year, hence no
addition can be made u/s.69C of the Act. It also noted that it was not that the
expenditure was bogus or non-genuine and the AO has also not examined any of the
labourers to support his case. It held that merely because labour charges are
shown as outstanding that cannot be a ground to make the addition u/s.69C.

The Tribunal deleted the addition and decided the ground in
favour of the assessee.

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S. 73—Any speculation loss computed for A.Y. 2006-07 and later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006 by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent assessment years applies only to such loss.

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13 Virendra Kumar Jain v. ACIT
ITAT ‘B’ Bench, Mumbai
Before R. V. Easwar (Sr. VP) and
A. L. Gehlot (AM)
ITA No. 1009/Mum./2010
A.Y. : 2006-07. Decided on : 31-5-2010

Counsel for assessee/revenue : Vijay Mehta/ K. K. Das

 

S. 73—Any speculation loss computed for A.Y. 2006-07 and
later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006
by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent
assessment years applies only to such loss.

Per R. V. Easwar :

Facts :

In A.Y. 2001-02 the assessee suffered a speculation loss of
Rs.4,55,30,494 which loss was allowed to be carried forward to subsequent years
u/s.73(2) of the Act. In the return filed for A.Y. 2006-07 the assessee claimed
that speculation loss brought forward from A.Y. 2001-02 should be set off
against speculation profits for the A.Y. 2006-07. The Assessing Officer (AO)
denied the claim of the assessee on the ground that u/s.73(4) no loss shall be
carried forward for more than four assessment years immediately succeeding the
assessment year for which it was first computed. He held that speculation loss
for A.Y. 2001-02 cannot be carried forward beyond A.Y. 2005-06.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

It is a settled rule of interpretation that a vested right
can be taken away only by express language or by necessary implication. This is
settled by the decision of the Privy Council in Delhi Cloth & General Mills
Company Ltd. v. CIT, AIR 1927 (PC) 242 and the same has been cited with approval
by the Supreme Court in the case of Jose Dacosta v. Bascora Sadashiv Sinai
Narcomin, AIR (1975) SC 1843. The assessee had a vested right to carry forward
the speculation loss for a period of eight assessment years as per S. 73(4) as
it stood before the amendment made by the Finance Act, 2005. That such a right
is a vested right cannot be doubted after the judgment of the Supreme Court in
the case of CIT v. Shah Sadiq & Sons, 166 ITR 102 (SC). In S. 73(4) or in any
other provision there is no express language or any implication to the effect
that the right of the assessee to carry forward the speculation loss for a
period of eight subsequent assessment years has been taken away.

Any speculation loss computed for the A.Y. 2006-07 and later
assessment years alone would be hit by the amendment and such loss can be
carried forward only for four subsequent assessment years. The vested right of
the assessee has not been taken away.

The amendment made by The Finance Act, 2005 w.e.f. 1-4-2006
is merely to substitute the words ‘four assessment years’ for the words ‘eight
assessment years’ in Ss.(4) of S. 73. Ss.(4) of S. 73 refers only to the loss to
be carried forward to the subsequent years. It does not say anything about the
set-off of the speculation loss brought forward from the earlier years. There is
a distinction between a loss brought forward from the earlier years and a loss
to be carried forward to the subsequent years. The sub-section deals only with
the speculation loss to be carried forward to the subsequent years and in the
very nature of the things, it cannot apply to speculation loss quantified in any
assessment year before the A.Y. 2006-07.

The Tribunal made a reference to the Income-tax Rules
prescribing form of return of income and noted that the form in ITR 4 makes a
distinction between loss brought forward and loss to be carried forward. It held
that since in the present case it was concerned with the assessee’s right to set
off the brought forward speculation losses against speculation profits for A.Y.
2006-07, Ss.(4) of S. 73 has no application.

The Tribunal allowed the appeal filed by the assessee.

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Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether reduction in the liability availed by the assessee on the basis of One Time Settlement Scheme in respect of its outstanding term loans is to be treated as taxable u/s.28(iv) or u/s.41(1) — Held, No.

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17. Accelerated Freez & Drying Co. Ltd. v. Dy.
CIT



ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 971/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

C. Karthikeyan Nair

Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether
reduction in the liability availed by the assessee on the basis of One Time
Settlement Scheme in respect of its outstanding term loans is to be treated as
taxable u/s.28(iv) or u/s.41(1) — Held, No.

 

Per Dr. O. K. Narayanan :

Facts :

The assessee company, engaged in the business of sea food
exports, had availed term loans from three banks, viz. ICICI Bank Ltd.,
Standard Chartered Bank Ltd., and Sumitomo Mitsui Banking Corporation,
Hongkong. These term loans were availed by the assessee for the purpose of
acquiring capital assets to be deployed in the manufacturing system of the
assessee company. Due to bad financial position the assessee defaulted on
payment of installments and interest. The total amount of loans that remained
payable to the banks amounted to Rs.3486.03 lakhs.

 

During the previous year relevant to the assessment year
under appeal, the assessee reached an agreement with the three bankers for One
Time Settlement (OTS) of its loan liability whereby the loan liability of
Rs.3486.03 lakhs was settled on payment of Rs.2450 lakhs resulting in a waiver
of loan amount of Rs.1036.03 lakhs. This principal amount of loan waived by
the banks was credited by the assessee to General Reserve Account and was not
offered for tax.

 

The AO held that waiver resulted in earning gain for the
assessee company in the course of carrying on of its business. He further held
that u/s.2(24)(i) both ‘profits’ and also ‘gains’ are income; it is a mandate
of S. 28 to levy income-tax not only on the profits of the business but even
on the gains of a business. He, therefore, held that In the light of the
definitions attributed to the expressions ‘income’ and ‘gains’, the waiver
benefit enjoyed by the assessee company should be treated as income of the
assessee from business. The AO relied on a decision of the Supreme Court (SC)
in the case of T. V. Sundaram Iyengar & Sons. He, accordingly, included the
amount of Rs.1036.03 lakhs in computation of assessable income under the head
‘Income from Business’.

 

The CIT(A) held that waiver amount was rightly charged
u/s.28(iv) of the Act. She also observed that the decision of the SC in the
case of T. V. Sundaram Iyengar & Sons is analogous in facts and the ratio of
the said decision was applicable to the assessee’s case. She dismissed the
appeal.

 

Aggrieved, the assessee preferred an appeal to the
Tribunal.

 

Held :

The Tribunal stated that the facts of the assessee’s case
are quite different from the facts considered by the SC in the case of T. V.
Sundaram Iyengar and Sons Ltd. and therefore the said decision does not become
applicable to the present case of the assessee.

 

The Tribunal noted that the Bombay High Court while
delivering its judgment in the case of Solid Containers Ltd. has not dissented
in any way from the earlier decision in the case of Mahindra and Mahindra Ltd.
It observed that in the case of Solid Containers Ltd. the Court has reiterated
the ratio laid down in the judgment of the High Court of Bombay in the case of
Mahindra and Mahindra Ltd., that the loan availed for acquiring capital
assets, when waived, cannot be treated as assessable income. Therefore, it
held that it is not possible to hold that as far as the loan waiver of capital
account is concerned, the decision of the Bombay High Court in the case of
Solid Containers Ltd. clashes with the judgment of the same court in the case
of Mahindra and Mahindra Ltd.

 

The Tribunal held that since the loan waiver amount
credited by the assessee in its general reserve account is covered by the
judgment of the Bombay High Court in the case of Mahindra and Mahindra Ltd.,
the said waiver amount cannot be held as taxable.

 

The Tribunal noted that the SC has in the case of Polyflex
(India) Pvt. Ltd. examined the constitution of S. 41(1) and categorically
ruled that the words ‘remission or cessation thereof’ apply only to a trading
liability. Since the term loans availed by the assessee from the three banks
were not in the nature of trading liability but were in the nature of capital
liability, it held that the waiver thereof would not become income u/s.41(1)
on the ground of remission or cessation thereof. It also noted that the
assessee never had the benefit of deduction of the term loan availed by it
from the banks on capital account. Also, the term loans availed were not in
the nature of any loss or expenditure. Therefore, it held that S. 41(1) had no
application to the present case.

 

The Tribunal found the issue raised to be squarely covered
by the judgment of SC in the case of Polyflex (India) Pvt. Ltd., the decision
of the Bombay High Court in the case of Mahindra and Mahindra Ltd., decision
of the Delhi High Court in the case of Phool Chand Jiwan Ram and the decision
of the jurisdictional High Court in the case of Cochin Co. Ltd.

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether trade discount allowed to a customer constitutes commission liable for deduction of tax u/s.194H — Held, No

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16. S. D. Pharmacy Pvt. Ltd.

v. Dy. CIT



ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 948/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

V. M. Thyagarajan

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether
trade discount allowed to a customer constitutes commission liable for
deduction of tax u/s.194H — Held, No.

 

Per Dr. O. K. Narayanan :

Facts :

The assessee company was engaged in the business of
manufacture and sale of ayurvedic products. In the course of assessment
proceedings the AO noticed that the total sales of the assessee were
Rs.4,82,12,960 and corresponding trade discount amounted to Rs.1,42,43,565.
This trade discount was given to four concerns of which one was a sister
concern of the assessee. The amount of trade discount to the sister concern
was Rs.1,34,24,839 since the major sales of the assessee were to its sister
concern.

 

The AO disallowed the amount of trade discount of
Rs.1,42,43,565 u/s.40(a)(ia) since he held that the discount fell within the
ambit of S. 194H of the Act and since the assessee had not deducted tax at
source the same was not allowable.

 

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

 

On an appeal by the assessee to the Tribunal it was pointed
out to the Tribunal that the products sold were billed at gross amount and
trade discount was given at the rate of 50% or 30% or 17.20%, as the case may
be. Trade discount allowed was reduced from the gross invoice value and net
amount was shown as net price payable by the parties. Sales tax was collected
on the net amount so payable by the parties. In the accounts, the customer’s
account was debited with the net amount and the amount of trade discount was
debited to Trade Discount A/c which was transferred to the debit of Trading
Account. Sales turnover was a gross amount. The property in the goods passed
to the customer on delivery of the goods. It is only the net amount which was
receivable from the customer for the goods sold. Reliance, on behalf of the
assessee, was placed on the decision of Delhi Bench of the Tribunal in the
case of Mother Dairy India Ltd.

 

Held :

The Tribunal found this to be a case of outright sale on a
principal to principal basis at the net amount. The trade discount was held to
be margin that the dealers could enjoy in retail trade. The Tribunal noted
that there was nothing on record to show that dealers and buyers were not
acting on their own behalf and since the sales were made on principal to
principal basis there was no question of assessee paying any commission or
brokerage or similar amounts to parties for the services rendered by them. The
Tribunal also took note of the fact that the assessee was not crediting the
discount to the account of the customer/dealer but was directly debiting it to
Trade Discount A/c.

 

The Tribunal following the ratio of the decision of the
Kerala High Court in the case of M. S. Hameed and Ors. held that since the
assessee was not making any payment of commission or brokerage to the parties
nor was it crediting the accounts of the parties for similar amounts there was
no occasion to deduct the tax as contemplated u/s.194H.

 

The Tribunal also noted that the Kerala High Court has in
the case of Kerala Stamp Vendors Association held that discount given on price
by the seller to the purchaser cannot be termed as ‘commission’ or ‘brokerage’
for services rendered in the course of buying and selling of goods as the act
of buying does not constitute rendering of any service.

 

Considering the facts and following the ratio of the two
decisions of Kerala High Court the Tribunal held that trade discount debited
by the assessee in its accounts is not covered by the provisions of S. 194H of
the Act. Since there was no liability on the part of the assessee to deduct
any tax on the amount of trade discount given to its dealers the disallowance
of Rs.1,42,43,565 was deleted.

 

Cases referred :



(1) Mother Dairy India Ltd. v. ITO, ITA No.
2975/Del./2008 dated 12-12-2008

(2) M. S. Hameed and Ors. v. Director of State
Lotteries and Ors., 249 ITR 186 (Ker.)

(3) Kerala Stamp Vendors Association v. Office of the
Accountant-General and Ors., (282 ITR 7) (Ker.)

 

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S. 2(22)(e) : Balance in share premium account cannot be considered as part of accumulated profit.

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New Page 1

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




17 DCIT v. MAIPO India Limited


ITAT ‘A’ Bench, New Delhi

Before R. V. Easwar (VP) and

K. D. Ranjan (AM)

ITA No. 2266/Del./2005.

A.Y. : 1996-97. Decided on : 7-3-2008

Counsels for revenue/assessee : A. K. Singh/

Rano Jain

S. 2(22)(e) of the Income-tax Act, 1961 — Deemed dividend —
Whether balance in share premium account can be considered as part of
accumulated profit — Held, No.

 

Per R. V. Easwar :

Facts :

The assessee had received an advance of Rs.25.43 lacs from
another company ‘G’, wherein it held 40% of the shares. Before the year end, the
assessee had repaid the sum of Rs.14.31 lacs. The AO assessed the balanced sum
of Rs.11.12 lacs u/s.2(22)(e) of the Act. In the books of G, the aggregate sum
of reserves and surplus of Rs.1.95 crore included the sum of Rs. 1.9 crore of
share premium. The issue was whether the balance in share premium account could
be considered as accumulated profit.

 

According to the Revenue, Explanation 2 to S. 2(22)(e) did
not provide for exclusion of capital profit expressly, and secondly, unlike
other clauses of S. 2(22) which contained the expression ‘whether capitalised or
not’, clause (e) did not contain the said expression. Therefore, it was
contended by it that the balance in share premium account was part of
accumulated profit.

 

Held :

The Tribunal noted that as per the provision in the Companies
Act, 1956, application of the proceeds of the share premium account, for
purposes other than those given in S. 78 of the Companies Act, was treated as a
reduction of the company’s share capital. The said purposes were :



  • To pay up fully paid-up bonus shares;



  • To write off preliminary expenses;



  •  To write off share issue expenses;



  • To pay premium on redemption of redeemable shares/debentures;



  • To purchase its own shares/securities.


 


The above position was also confirmed by the Apex Court in
the case of Allahabad Bank Ltd. Thus, according to the Tribunal, not only was
there a prohibition on the distribution of the share premium account as dividend
under the Companies Act, but the same was treated as part of the share capital
of the company. Further, relying on another decision of the Apex Court in the
case of Urmila Ramesh, it observed that the expression ‘whether capitalised or
not’ (as referred to by the Revenue in its submission), could have an
application only where the profits are capable of being capitalised. The same
were not applicable where the receipts in question formed part of the share
capital.

 

Based on the above and also relying on the ratio of the
decision of the Apex Court in the case of P. K. Badiani, the Tribunal upheld the
decision of the CIT(A) and dismissed the appeal filed by the Revenue.

 

Cases referred to :



(1) CIT v. Allahabad Bank Ltd., AIR 1969 SC 1058
(SC)

(2) CIT v. Urmila Ramesh, (1998) 230 ITR 422 (SC)

(3) P. K. Badiani v. CIT, (1976) 105 ITR 642 (SC)


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What constitutes ‘teaching in or by educational institutions’ under Article 12(5)(c) of India-USA DTAA ?

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New Page 2


Part C — Tribunal & International Tax Decisions



  1. Sri Ramachandra Educational and Health Trust

(2009 TIOL 13 ARA IT) (AAR)

Article 12(5)(c) read with MOU, India-USA DTAA; S. 9, S.
195, Income-tax Act

Dated : 29-5-2009

Issue :

What constitutes ‘teaching in or by educational
institutions’ under Article 12(5)(c) of India-USA DTAA ?

 

Facts :

The applicant was registered u/s.12AA of Income-tax Act. It
had two institutions — a medical college (which was a deemed university) and a
hospital (which was a university hospital). The applicant had executed an
agreement with an American medical institution (‘US Med’) for transfer of
knowledge and experience in the field of medical sciences. US Med was a
tax-exempt entity in USA. The applicant applied to AAR for determination of
the issue whether, having regard to Article 12(5) of India-USA DTAA, the
applicant would be required to deduct tax at source u/s.195 on the annual fee
payable to US Med, especially when both the payer and the payee are not liable
to tax in their respective countries.

 

The applicant stated that :



  •  US Med
    would be rendering the services from USA. Being non-resident, it was not
    liable to tax u/s.9 of the Act in respect of services rendered in USA.



  •  As the
    payments were for teaching in or by educational institution, they would be
    excluded from Article 12(5)(c) of India-USA DTAA. The applicant supported
    this proposition with examples 10 & 11 in the MOU appended to India-USA DTAA
    in respect of fees for included services in Article 12 (‘the MOU’).



  •  As US Med
    was not liable to tax in India, the applicant had no obligation to deduct
    tax at source.


The tax authorities stated that :



  •  Though
    the applicant was exempt u/s.12AA, US Med was not so exempt under the Act.



  •  Fees
    payable by the applicant to US Med fall within the purview of S. 9(1)(vii)
    of the Act, read with the explanation below S. 9(2).



  •  The fee
    paid was described as ‘annual alliance development
    administrative/maintenance fee’, which showed that it was not wholly for
    teaching in or by educational institution. Hence, the payment was outside
    the purview of Article 12(5)(c) of India-USA DTAA.



  •  Correspondence from US Med showed that tuition fee paid was to be covered
    under ‘program deliverables’, which showed that the consideration was paid
    for making available technical knowledge, experience, skill, know-how or
    processes. As such, it was covered under Article 12(4) and example 10 of the
    MOU explaining the scope of exemption for teaching in educational
    institutions.


 


The AAR noted that, US revenue authorities had granted
exemption to US Med under US Revenue Code. It was also noted that US Med was
an incorporated entity which was exempt from tax in USA and as such, it could
invoke provisions of DTAA. The tax authorities did not dispute this position1.

 

The AAR observed that, as the question of tax deduction
would arise only if income is chargeable to tax, it was necessary to ascertain
the taxability of the fees paid. For this purpose, the AAR reviewed the
agreement. It observed that :



  •  US Med
    was to provide educational and teaching services.



  •  Specific
    services were to be agreed and decided in annual plan. These services were
    termed ‘deliverables’ for which fixed annual fee was to be paid.



  •  Additional services were termed ‘additional deliverables’ for which
    additional payment was to be made.



  •  US Med
    had granted non-exclusive, non-transferable licence to the applicant for use
    of copyright, trade mark, trade secrets, patent, etc. (‘intellectual
    property’) owned by it. The AAR observed that though the agreement clarified
    that no royalty was to be paid for use of Intellectual Property, the
    substances of the arrangement was to the contrary.



  •  Based on
    information provided by the applicant, the AAR noted that following actual
    activities were conducted during the years 2004 to 2006.



  •  Various
    programmes and workshops called ‘CME Programmes (comprising medical
    education).



  •  Faculty
    student exchanges where the applicant’s representatives were deputed to US
    Med for doing clerkship.



  •  Tele-medicine, which was a continuing program of monthly tele-medical
    education, e-learning and providing help in applicant’s institution-building
    through programmes in education, clinical care and research.


The AAR then referred to Article 12 of DTAA and examples 10
and 11 of the MOU appended to DTAA. It also referred to the legal definitions
of the terms ‘technical’ and ‘teaching’. It observed that the terms were
defined in their widest sense. The AAR then discussed examples 10 and 11 of
the MOU as also the connotations of the terms ‘technical’ and ‘teaching’.

Held :

The AAR stated that as clear picture of the activity and
payments did not emerge from the facts, it would lay down broad guidelines. In
respect of each of the activities, the AAR held that :



  • Workshops and seminars are conducted from time to time. Generally, the speakers are from US Med. Medical teachers and professional from different places participated in these events. However, it was not known whether the workshops and seminars had any connection to a particular course conducted by the medical college of the applicant and whether it was meant for the benefit of students. These activities could be covered in Article 12(S)(c) : only if faculty from US Med participated in them; some of the participants benefiting from the activities were pursuing medical courses in the applicant’s institution; and seminar/workshop has substantial connection with the course of studies in the college.

  • Tuition fees paid in respect of scholars deputed to complete course in USA were covered by example 10 of the MOU and consequently, were covered under Article 12(S)(c). Accordingly, they were excluded from the purview of fees for included services.

  • Tele-conferencing and e-Iearning were part of teaching methodology. Hence, payments made for them would qualify for exclusion under Article 12(S)(c).

  •  Payment to faculty for teaching through tele-conferencing and e-learning would be covered under Article 12(S)(c).

  • Consideration for use of intellectual property would not be covered under Article 12(5)(c)2.

The AAR held that as the applicant made lump sum payment for various services, it was not possible for AAR to relate the payment to individual services which are exempt and those which relate to consideration for use of IPR. In the light of the above observations, AAR declined to give a ruling to the effect that the applicant was not at all liable to deduct tax at source in respect of payments to US Med and hence directed applicant to make an application before the tax authorities for determination of appropriate portion chargeable to tax in India.

On facts, the assessee is an employer responsible for tax deduction u/s.192.

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New Page 2


Part C — Tribunal & International Tax Decisions






  1. Dolphin Drilling Ltd. v.
    ACIT



[2009] 121 TTJ (Del.) 433

S. 10(6)(viii), S. 40(a)(i), S. 40(a)(iii), S. 192, S. 195,
Income-tax Act

A.Y. : 2004-2005. Dated : 30-1-2009

Issue :

  • On facts,
    the assessee is an employer responsible for tax deduction u/s.192.

  • Amount paid to non-resident
    towards reimbursement of employees’ salaries disbursed as an agent is not
    subject to tax withholding u/s.195.




 


Facts :

The assessee was a UK company (‘UKCo’). UKCo had entered
into a contract with ONGC to charter duly manned deep water drilling rig
together. UKCo entered into contract with another group company in Norway for
procuring crew to operate the drillship. As per the agreement with the
Norwegian company, the Norwegian company was to procure/supply crew. Norwegian
company was to disburse the salary of the crew. UKCo was to, reimburse the
salary of the crew and also pay 5% of the reimbursed amount as handling fee to
the Norwegian company.

 

Additionally, UKCo also paid fixed fees to Norway Company
towards meeting personnel, office, administration and other costs. The crew
were employees of UKCo. UKCo had issued appointment letters to the crew and
UKCo was responsible to secure work permits and security passes for crew as
well as to provide housing and transportation to crew. UKCo also deducted tax
at source u/s.192 of the Act from the income of the crew after considering
exemption u/s.10(6)(viii) of the Act and deposited the same with the
Government.

 

UKCo deducted tax u/s.195 on the fixed fee and the handling
fee paid to Norwegian company.

 

The AO held that the amount reimbursed by UKCo to Norwegian
company for disbursement of crew salaries was ‘fees for technical services’
and hence, tax should have been deducted u/s.195 on the entire amount. Since
the tax was not deducted, the AO disallowed the payment u/s.40(a)(i) of the
Act.

On appeal, CIT(A) confirmed the order of the AO.

 

Held :

The Tribunal held that the obligation for payment of
salaries to the crew was of UKCo and Norwegian company disbursed the salaries
only for the convenience of the parties.

 

The reimbursement of crew salaries was chargeable under the
head ‘Salaries’ and hence, the payments would not be covered u/s.40(a)(i) but
would be covered by S. 40(a)(iii). Since S. 10(6)(viii) exempts remuneration
for employment on a foreign ship if total stay in India does not exceed 90
days, tax would not be deductible in case of employees whose stay did not
exceed 90 days.


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Sections 32 read with section 72 – Brought forward unabsorbed depreciation is allowed to be set off against long term capital gains

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1. (2012) 54 SOT 450 (Mumbai)
Suresh Industries (P.) Ltd. vs. Asst.CIT
ITA No.5374 (Mum.) of 2011
A.Y.: 2007-08. Dated: 10.10.2012

Sections 32 read with section 72 of the Income Tax Act, 1961 – Brought forward unabsorbed depreciation is allowed to be set off against long term capital gains.

For the relevant assessment year, the assessee’s claim for setting off current year’s unabsorbed depreciation and brought forward unabsorbed depreciation against current year’s long term capital gains was rejected by the Assessing Officer and by the CIT(A). The Tribunal allowed the assessee’s claim.

The Tribunal held as under: The law regarding set off of unabsorbed depreciation up to 01-04-1996 was very liberal and set off was allowable against any income. This was also upheld by the Supreme Court in the case of CIT vs. Virmani Industries (P.) Ltd. [1995] 216 ITR 607/83 Taxman 343. However, the law regarding such set off was changed by the Finance Act (No. 2) of 1996 and from assessment years 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses u/s. 72.

 However, the status quo has been restored from assessment year 2003-04 and, therefore, the ratio laid down by the Supreme Court in the case of Virmani Industries (P.) Ltd. (supra) once again holds good and, therefore, now unabsorbed depreciation can be set off against any income. Because of the legal fiction created by the provisions of section 32(2), brought forward unabsorbed depreciation merges with current year’s depreciation.

The treatment given to current year’s depreciation is equally applicable to brought forward unabsorbed depreciation. Therefore, brought forward unabsorbed depreciation is also allowed to be set off against long term capital gains.

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S. 271(1)(c) : Denial of claim for deduction resulting into higher assessed income cannot be ground for imposition of penalty

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New Page 1

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



16 Nasu Properties Pvt. Ltd. v. ITO


ITAT ‘I’ Bench, Mumbai

Before K. C. Singhal (JM) and

D. K. Srivastava (AM)

ITA Nos. 1160 and 1161/Mum./2006

A.Ys. : 2000-01 and 2001-02. Decided on : 21-1-2008

Counsels for assessee/revenue : Jayesh Dadia/Ashima Gupta

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for
concealment of income — Claim for deduction denied resulting into higher
assessed income — Whether AO justified in imposing penalty — Held, No.

 

Per D. K. Srivastava :

Facts :

The assessee’s claim for deduction of Rs.5 lacs towards
diminution in the value of investment was disallowed by the AO and confirmed in
appeal by the CIT(A) as well as the Tribunal.

 

In response to the show-cause notice with reference to the
penalty u/s.271(1)(c), the assessee contended that full facts necessary for the
assessment were disclosed in the return of income filed. Therefore, it did not
amount to concealment of income. However, the AO levied the penalty which was
confirmed by the CIT(A).

 

Held :

The Tribunal noted that the assessee had furnished all the
relevant particulars in its return of income. Thus, the charge of furnishing of
inaccurate particulars of income by the assessee was not established. According
to it, simply because the Departmental authorities had not accepted the claim of
the assessee or the assessee had lost appeals filed against the orders of the
Departmental authorities, dismissing the claim of the assessee, cannot ipso
facto lead to the establishment of charge of furnishing of any inaccurate
particulars of income. Accordingly, the penalty levied was cancelled by the
Tribunal.

 

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S. 9(1)(vii), 40(a)(i), 195 — Payments made for purchase of Internet bandwidth and TDS — Not FTS, not subject to TDS

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New Page 19 DCIT
v. M/s. Estel
Communications Pvt. Ltd. (Delhi ITAT) (Unreported)


S. 9(1)(vii), S. 40(a)(i), S. 195
of the Act


A.Y. : 2003-04. Dated : 10-3-2008

 

Issue :

Disallowance u/s.40(a)(i) of the Act for
non-deduction of tax u/s.195 of the Act from payments made for purchase of
internet bandwidth and TDS.

 

Facts :

The assessee-company had entered into a reseller
agreement with a non-resident company. In terms of the agreement, the
non-resident company was to provide various internet services on non-exclusive
basis to the assessee-company for resale of these services to the end-user
customers in the territory. The Internet services pertained to provisions of
bandwidth with certain minimum performance speed. The privity of contract was
between the assessee-company and the non-resident company and there was no
privity of contract between the non-resident company and the end-user customers.
In terms of the agreement, the assessee-company had made certain payments to the
non-resident company. While making the payments, the assessee-company had not
deducted any tax at source. According to the AO, the assessee-company was
required to deduct tax u/s.195 of the Act, but since it had not deducted the
tax, he disallowed such payments u/s.40(a)(i) of the Act.

 

In the assessee-company’s appeal before him, the
CIT(A) observed that the issue was identical to the decision in Wipro Ltd. v.
ITO, (2003) 80 TTJ 191 (Bang). In that case, the Bangalore Tribunal had held
that the agreement was for use of standard facility and standard services; the
payments were for utilisation of customer-based circuits; the payments were not
fees for technical services u/s.9(1)(vii) of the Act and were not subject to
deduction u/s.195 of the Act. The CIT(A) therefore held that the payments were
not subject to TDS u/s.195 of the Act and that the disallowance u/s.40(a)(i) of
the Act was not warranted.

 

The Department preferred an appal to the Tribunal
against the order of the CIT(A). The Tribunal referred to several clauses of the
reseller agreement and observed that the assessee-company was not paying any
fees for technical services but making payment for the purchase of internet
bandwidth. Even though sophisticated equipment was being used and though the
Internet connectivity was through satellite link, the assessee-company cannot be
said to be availing technical services. Further, the Tribunal also noted that in
the assessee-company’s case for A.Y. 2001-02, the Tribunal had considered
similar issue of disallowance and held in favour of the assessee.

 

Held

Following the order of
the Bangalore Tribunal in the aforementioned case, the Tribunal upheld the Order
of the CIT(A) and held that :

(i) The payment made
by the assessee-company was not towards rendering of any managerial, technical
or consultancy services, but was merely for use of Internet access facility
and accordingly, the payment was not subject to tax u/s.9(1)(vii) of the Act.

(ii) As such the
assessee-company was not required to deduct tax at source u/s.195 of the Act.

(iii) Since there was
no liability to deduct tax u/s.195 of the Act, the amount could not be
disallowed u/s.40(a)(i) of the Act.

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S. 195 — Reimbursement of expenses incurred by non-resident promoters outside India — Not subject to TDS.

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New Page 18 Bangalore
International Airport Ltd. v.
ITO (2008) 6 DTR (Bang.) (Trib.) 15


S. 195 of the Act


A.Y. : 2006-07. Dated :
17-12-2007

 

Issue :

Whether reimbursement of expenses incurred by
non-resident promoters prior to their participation in joint venture company is
subject to tax deduction u/s.195 of the Act ?

 

Facts :

The assessee-company was a joint venture company
established for development of international airport at Bangalore, having equity
participation from certain non-resident companies, which were also the promoters
of the assessee. The non-resident promoters had incurred various expenses
towards technical and other consultations. These consultations were undertaken
outside India prior to the award of the contract to the non-resident promoters
and payments were also made by the non-resident promoters outside India. The
shareholders’ agreement pertaining to the assessee-company provided for
reimbursement of development cost to the promoters. In pursuance thereof, the
Board of Directors of the assessee-company passed a resolution to the effect
that “The offshore expenses shall be advanced by private promoters. All
expenses will be reimbursed and capitalised after financial close“. The
reimbursement of the expenses was to be limited to 50%. Accordingly, the
assessee-company reimbursed 50% of the expenses to the non-resident promoters.

 

In his order u/s.195 of
the Act, the AO had accepted the fact that the amount was being paid much after
the incurring of the expenses by the promoters. However, since the expenses
included element of technical services and since they were incurred after the
execution of shareholders agreement, he was of the opinion that tax should have
been deducted or should be deducted. In this context, the assessee-company
brought to the attention of the AO the decision in Hyder Consulting Ltd., In
re (1999) 236 ITR 640 (AAR) and also contending that reimbursement of
expenses in no way involves any element of profit and further since the expenses
were incurred by the non-resident in respect of services rendered by another
non-resident outside India, TDS provisions were not attracted. The AO, however,
did not accept this contention and concluded as follows and proceeded to compute
the tax to be withheld by the assessee-company.

(a) The foreign
shareholders of the applicant company had provided certain services to the
applicant company.

(b) The contention
that part of these services were obtained from other parties is of no
consequence.

(c) All these services
which are proposed to be paid for by the applicant company now, have been
utilised by the applicant company in India.

(d) All these services
called by the applicant as ‘consultancy services’ fall squarely within the
meaning of fees for technical services, as provided for in Article 12 of both
the relevant DTAAs as also the IT Act.

(e) Thus, the
consideration payable for such services is chargeable to tax, even if its
nomenclature is ‘reimbursement’, as the income is deemed to accrue or arise in
India.

(f) Hence, withholding
provisions of S. 195 are clearly invoked.

(g) The rate of
withholding tax is 10% as per the respective DTAAs, in view of the fact that
it is the rate beneficial to the payees.

(h) The above
conclusions, based on the facts and information as provided by the applicant,
are to be seen in the context of S. 195 of the IT Act. The provisions of S.
195 are necessarily summary and are only for the purpose of determining the
issue and quantum of withholding tax. It follows that the said tentative
conclusion is subject to the test of final determination at the stage of
assessment.

 

In appeal by the assessee-company, the CIT(A) noted
the agreement and arrangement between the share-holders and also the arguments
of the assessee-company. CIT(A) did not dispute assessee-company’s claim of it
being a case of reimbursement of expenses and also that the reimbursement was
only to the extent of 50% of the actual expenses. However, observing as follows,
he held that the AO was justified in his conclusions :

(i) The nature of
services are such as would be prima facie covered by the definition of
FTS in IT Act as well as respective DTAAs.

(ii) Adequate support
in respect of quantification of costs reimbursed has not been furnished by the
appellant.

 


In appeal before the Tribunal, the Tribunal noted that the expenses were incurred by the non-residents out of India in their capacity as promoters and at the relevant time, S. 5 or S. 9 was not applicable, since it was not a payment by a resident to a non-resident. The payment by the assessee-company to the non-resident promoters was a case of reimbursement of expenses incurred and such reimbursement was limited to 50%, which could not be equated to amount paid for technical services. As such it would not involve any profit element. The expenses were incurred to ascertain the feasibility and viability of the project for the promoters to decide whether to participate in the project. One of the bidders whose bid was not accepted had also incurred certain expenses, 50% of which were reimbursed and the Department had permitted such reimbursement without any TDS. The Tribunal noted that there was no difference between the bidder whose bid was not accepted and the bidder whose bid was accepted.

Held:

The Tribunal held that on facts and circumstances, the reimbursement of 50% of the expenses incurred by the non-resident promoters outside India did not attract provisions of S. 195(2) of the Act.

India-USA DTAA — Examination fee paid to US Company — Not taxable

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New Page 17 KnoWerX Education (India) Private


Limited, In re
(AAR) (unreported)


Articles 1, 4, 5, 7 of India-USA DTAA;


Sections 4, 5, 9, 195 of the Act


Dated : 30-4-2008

Issues :

(i)
Examination fee
collected in India by resident on behalf of American professional
organisations and remitted to them outside India — Taxability thereof :

(a) in terms of
the Act; and

(b) in terms of
India-USA DTAA.

(ii)
Characterisation of the income mentioned in (i) above.


(iii)
TDS obligations of the resident
in respect of the income mentioned in (i) above

 



Facts :

The applicant was an Indian company which had
entered into agreement with an American entity for promotion of professional
certification programmes and examinations conducted by the American entity. It
was also in the process of entering into agreement with another American entity
for the same purpose. Under both the agreements, the applicant was to act as
their agent. The applicant would carry out promotional and marketing activities;
collect registration forms and fees from candidates in India desirous of
enrolling for the programmes/examinations; and remit the fees to the American
entities after deducting certain administration expenses and commission. The
American entities would conduct examinations either through the applicant or
through other entities in India; evaluate answer sheets; award certificates to
the candidates; forward these certificates to the applicant; and the applicant
would in turn distribute them to the candidates.

 

The AAR considered the
following questions :


1. (a) Whether
examination fees collected by the applicant in India on behalf of the
American entities and remitted to them were their ‘income’ liable to tax in
India ?

(b) If answer to (a)
is in affirmative, how should that income be classified — as business
income, royalty or fees for technical services ?

2. Whether the
applicant was required to deduct tax at source in respect of the remittances
and if so, at what rate ?

 



The AAR first examined the questions in light of S.
5 of the Act and observed that in terms of S. 5(2), income of a non-resident
includes income which accrues, arises or is received in India, or which is
deemed to accrue, arise or to be received in India, from any source in India. In
this context, the AAR referred to the Supreme Court’s decisions in CIT v.
Ahmedbhai Umarbhai and Co., (1950) 18 ITR 472 (SC), CIT v. Ashokbhai
Chimanbhai, (1965) 56 ITR 42 (SC) and Seth Pushalal Mansinghka (P) Ltd.
v. CIT, (1967) 66 ITR 159 (SC) and observed that while the income did not
accrue or arise, nor was it deemed to accrue or arise in India, it was received
in India as an agent of the American entities in India. It further observed that
the income was in the nature of business income. The applicant was receiving
income in India on behalf of the American entities as their agent. Hence, in
terms of S. 4 and S. 5 of the Act, the examination fee collected by the
applicant on behalf of the American entities would be taxable in India.

The AAR then considered the questions in light of
India-USA DTAA. The applicant had stated in his application that the American
entities were non-profit organisations, which were determined by American tax
authorities as ‘tax exempt organisations’. In response, the Department had
contended that since these were ‘tax exempt organisations’, they could not be
regarded as tax residents of the USA and consequently, provisions of India-USA
DTAA could not apply. For this purpose, the Department relied on the provisions
of Articles 1 and 4 of India-USA DTAA. The Department also contended that
partnerships, trusts, etc. were regarded as ‘transparent entities’ in the USA
and were not liable to pay tax there. In response, the applicant filed
additional documents and submissions to prove that the American entities were
corporations incorporated in the USA; were not ‘transparent entities’; were
liable to pay tax in the USA; but being in certain specified category, were
exempted from payment of tax. The AAR, therefore, held that they were tax
residents of the USA and provisions of India-USA DTAA would apply.

 

The Department also put forth the argument that the
applicant should be treated as PE in India of the American entities. After
examining the provisions of Articles 7 and 5 of India-USA DTAA, the AAR found
that the applicant did not conclude any contract on behalf of the American
entities and the admission of candidates for programme/examination was solely
done by them. Further, the applicant did not carry on any of the other
activities mentioned in Article 5 (such as storage of goods, etc.); on facts, it
could not be considered as dependent agent; it had liberty to have similar
relationship with others; it was not wholly or substantially dependent on the
American companies; it appeared to carry on promotion in the ordinary course of
its business; and it was not subject to any control of the American entities
with regard to the manner of carrying on it.

Indian company engaged Chinese company for testing of bauxite and providing test reports— Testing done entirely in China—Issue of taxability of payment by Indian company for services—Held : (i) After amendment to S. 9, irrespective of the place of utilisa

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16 Ashapura
Minechem Ltd. v.
ADIT
(2010) 5 Taxman.com 57 (Mum-ITAT)
Article 7, 12(4) of India-China DTAA
S. 9, S. 195 of Income-tax Act
Dated : 21-5-2010


 

Indian company
engaged Chinese company for testing of bauxite and providing test reports—
Testing done entirely in China—Issue of taxability of payment by Indian company
for services—Held : (i) After amendment to S. 9, irrespective of the place of
utilisation or rendition and territorial nexus, payment was chargeable as FTS
under Income-tax Act; and (ii) As per source rule under India-China DTAA, place
of rendition is not material and FTS is deemed to accrue in country where payer
is resident.

Facts :

The taxpayer
was an Indian company (‘IndCo’), in the process of building an alumina refinery.
It engaged a Chinese company (‘ChinaCo’) for testing of bauxite to be mined by
IndCo in India. ChinaCo was to test bauxite in its laboratories in China and
prepare test reports so that IndCo could define the process parameters for
processing of bauxite. The test reports were to provide complete chemical
composition of bauxite, performance tests, etc. IndCo agreed to pay certain
payment to ChinaCo for these services.

According to
IndCo : testing charges were in the nature of business profits subject to
Article 7 of India-China DTAA; ChinaCo did not have any PE in India; and hence,
no taxes were required to be withheld u/s.195. Accordingly, it applied for
certificate for no withholding of tax.

According to
the tax authorities, the payments were for services and were taxable as ‘Fees
for Technical Services’ (FTS).

The CIT(A)
upheld the order of the tax authority.

The Tribunal
referred to and relied on its earlier order in case of Hindalco Industries Ltd
v. ACIT, (2005) 94 ITD 242 (Mum.) which laid down certain principles of
interpretation of tax treaties, stating that the language used in a tax treaty
need not be examined in literal sense and a departure from plain meaning is
permissible where the context so requires.

Held :

The Tribunal held that :

  • As regards taxability
    under the Income-tax Act :

  • Payments received by
    ChinaCo were covered within the definition of FTS under the Income-tax Act.

  • In light of the amendment
    to S. 9 by the Finance Act, 2010, the legal proposition regarding utilisation,
    rendition and territorial nexus is no longer good in law. Income of ChinaCo
    for services rendered to IndCo is taxable as FTS under the Income-tax Act.

  • As
    regards taxability under India-China DTAA :

  • The definition of FTS
    covers payments for provision of managerial, technical or consultancy
    services by a resident of one country in the other country. The expression
    ‘provision of services’ is not defined or elaborated anywhere in the tax
    treaty.

  • As per the source rule,
    FTS will be deemed to have accrued in the country where the payer is a
    resident and place of rendition of technical services is not material.

  • Literal interpretation
    of definition of FTS to mean rendition of service would render the source
    rule meaningless.

  • Literal interpretation
    to a tax treaty, which renders treaty provisions unworkable and which is
    contrary to the clear and unambiguous scheme of the treaty, has to be
    avoided.

  • he payments made to
    ChinaCo were taxable as FTS under India-China DTAA as well as under the
    Income-tax Act and hence, IndiaCo was liable to deduct tax from these
    payments.

levitra

UK company had contractual obligation to provide repair and overhaul support and components to an Indian aircraft operator—maintained stock of components with Indian operator—consideration from Indian company for repair and overhaul and use, or right to u

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15 Airlines Rotables Ltd v. Jt. DIT (Unreported)
ITA No. 3254/Mum./2006
Article 5, 7, 13 of India-UK DTAA
A.Y. : 1998-99. Dated : 21-5-2010

 

UK company had contractual obligation to provide repair and
overhaul support and components to an Indian aircraft operator—maintained stock
of components with Indian operator—consideration from Indian company for repair
and overhaul and use, or right to use, of component—repair and overhaul of
component only outside India. Held : (i) UKCo did not have PE in India; (ii)
even if PE, no profit could be attributed to that PE; (iii) stock maintained
with Indian company was not for delivery on behalf of UK companY—even if Indian
company assumed to be agent, no agency PE constituted.

Facts :

The taxpayer was a company incorporated in the UK (‘UKCo’),
and a tax resident of the UK. Principal business of UKCo was to provide spares
and component support to aircraft operators. UKCo entered into an agreement with
an Indian company (‘IndCo’) for providing certain support services for aircraft
operated by IndCo. Under the agreement, UKCo was required to repair or overhaul
a component when IndCo discovered that such components had become operationally
unserviceable. In such case, UKCo was also required to provide replacement of
the component. UKCo was also required to ensure that airworthiness directives in
respect of such component (whether replaced, repaired or overhauled) were fully
complied with. The consideration received by UKCo comprised two parts. One, for
repair and overhaul of the component. Two, for use or right to use, replacement
component. To ensure timely availability of the component, UKCo maintained stock
of replacement component at the operational bases of IndCo in India and also in
the UK at its depot. IndCo was forbidden from loaning, pledging, selling,
exchanging or encumbering any items from the stock.

Before the AO, UKCo contended that it did not have any PE in
India and hence, its business profits were not taxable in India. However, the AO
inferred that the stores staff of IndCo was acting as agent of UKCo and since
UKCo maintained stock of goods in India, in terms of Article 5.4(b) read with
Article 5.5 of India-UK DTAA, PE of UKCo came into existence. The AO estimated
10% of gross receipts of UKCo as profits attributable to PE.

The CIT(A) concurred with the view of the AO.

The Tribunal observed that in terms of Article 5(1) (i.e.,
the basic rule), a PE is said to exist in the other contracting state when an
enterprise of one of the contracting state has a fixed place of the business in
that contracting state through which the business of the enterprise is wholly or
partly carried out. There are three criteria embedded in this definition (i)
physical criterion (i.e., existence of physical location); (ii) subjective
criterion (i.e., right to use that place); and (iii) functionality criterion
(i.e., carrying out of business through that place). Only when these three
criteria are satisfied, a PE can come into existence.

Thus, it is necessary that for PE to exist not only should
there be a physical location through which the business of the foreign
enterprise is carried out, but also that such place should be at its disposal.

Held :

The Tribunal held that :




  • Even though
    the stock of UKCo was stored at a specified physical location, it was under
    the control of IndCo and UKCo did not have any place at its disposal in the
    sense that it could carry out its business from that place. As the physical
    location was under the control of IndCo, UKCo did not have any place at its
    disposal. Thus, it cannot be said to constitute PE of UKCo in India.

  • Even if there is a PE,
    only profit attributable to that PE can be taxed in India. Hence, as entire
    repair and overhaul work was done outside India, no part of the profit could
    be taxed in India.

  • A dependent agent PE
    (‘DAPE’) under Article 5(4)(b) of India-UK DTAA can come into existence only
    when business of UKCo is carried through that DAPE. It would be absurd to
    contend that IndCo is dependant agent of UKCo, which the tax authorities have
    not established. Even if IndCo is regarded as an agent, the maintenance of
    stock by it was for IndCo’s business. Further, even if it is assumed that
    IndCo is an agent, it would be an independent agent. Also, it maintained the
    stock for stand by use and not for delivery on behalf of UKCo. Therefore, UKCo
    does not have PE in India.

  • As part of the
    consideration pertains to use, or right to use, of components, taxability
    under Article 13(3)(b) (i.e., ‘equipment royalty’) should be examined.
    Non-taxability under Article 7 would still require consideration of
    application of Article 13. As these aspects had not been heard by the lower
    authorities, the matter was remanded to the CIT(A) for limited adjudication
    only on this aspect.



levitra

Indian company purchasing shares of another Indian company from non-resident—Non-resident assessed to tax—AO treated Indian company as agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is not a bar to order u/s.163; (ii) there is

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14 Hindalco Industrial Ltd v.
DCIT
AIT 2010 211 ITAT-Mum.
S. 163 of Income-tax Act
A.Y. : 2001-02. Dated : 14-5-2010


Indian company purchasing shares of another Indian company
from non-resident—Non-resident assessed to tax—AO treated Indian company as
agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is
not a bar to order u/s.163; (ii) there is no time limit u/s.163; and (iii) same
income cannot be assessed simultaneously in hands of non-resident as well as
agent.

Facts :

The taxpayer was an Indian company (‘IndCo’). IndCo purchased
shares of another Indian company from a foreign company. the foreign company was
a non-resident in terms of the Income-tax Act. The non-resident applied to the
AO u/s.197 of the Income-tax Act for lower withholding tax on the sale proceeds
of the shares. The AO issued certificate for lower withholding tax. Based on
this certificate, IndCo withheld and deposited the tax. Pursuant to the transfer
of the shares, the non-resident was chargeable to capital gains tax.

The non-resident furnished the return of its income. In the
course of assessment, the AO while assessing the non-resident, also issued
notice u/s.163 of the Income-tax Act to IndCo as representative assessee of the
non-resident, because the non-resident was in receipt of income from IndCo.
IndCo contended before the AO that as per the scheme and intent of the
Income-tax Act and particularly the provisions of S. 160(1)(i) read with S.
161(1), S. 162 and S. 163, no person could be treated as ‘Agent’, in relation to
a non-resident after the expiry of previous year corresponding to the assessment
year in question. The AO however, treated IndCo as Agent on the basis of plain
reading of S. 163(1), S. 160(1)(i) and S. 149(3).

The CIT(A) dismissed the appeal of IndCo.

Held :

The Tribunal held that :

  • The non-resident received
    income from IndCo. Therefore S. 163(1)(c) was attracted. Liability is not
    fastened on the representative assessee merely on passing of order u/s.163.

  • The fact that the agent
    had withheld tax u/s.195 cannot be a bar to pass order u/s.163.

  • The Income-tax Act does
    not contemplate any time limit for initiating proceeding u/s.163. The purpose
    of S. 163 is to secure payment of taxes by the non-resident. The proceedings
    were also not time-barred under the
    Income-tax Act. Hence order u/s.163 was valid.

  • In a similar issue in
    Saipem UK Ltd v. DDIT, (2008) 298 ITR (AT) 113 (Mum.), the Mumbai Tribunal has
    held that the same income cannot be assessed simultaneously in the hands of
    the non-resident as well as the agent, since such double taxation militates
    against the cardinal principles of taxation. Hence, once the assessment in the
    case of principal becomes final, the assessment of the same income in the
    hands of the agent cannot be made. Therefore the assessment of capital gain of
    the non-resident in the hands of IndCo was not proper.



levitra

Mauritius company performing contract for transportation and installation of platforms to be used in mineral oil exploration—Part of income pertained to activities carried on outside India— Whether entire income taxable in India—Income under presumptive t

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13 JDIT v. J. Ray McDermott Eastern Hemisphere Ltd.
(2010) TII 41 ITAT (Mum.-INTL)
Article 4 of India-Mauritius DTAA;
S. 5, S. 9(1)(i), S. 44BB of Income-tax Act
A.Y. : 2003-04. Dated : 30-4-2010

Mauritius company performing contract for transportation and
installation of platforms to be used in mineral oil exploration—Part of income
pertained to activities carried on outside India— Whether entire income taxable
in India—Income under presumptive tax provision can be taxed only if it is
otherwise chargeable to tax.

Facts :

MCo, a tax resident of Mauritius, undertook and executed a
contract for transportation and installation for certain well platform projects
to be used in mineral oil exploration. The contract was undertaken and performed
with an Indian company. Certain portion of the receipts of MCo pertained to work
carried on outside India.

While furnishing its return of income, MCo did not offer the
receipts pertaining to the work carried on outside India on the ground that in
terms of Explanation (a) to S. 9(1)(i) of the Income-tax Act, they were not
chargeable to tax. MCo also contended that, alternatively, such receipts cannot
be attributed to its PE in India.

While assessing the income, the AO held that : income
pertained to work to be carried out in India; source of income is related to
work to be carried out in India; and hence the entire receipts are taxable in
India. Further, S. 44BB does not distinguish between income for activities
carried on in India and for those carried on outside India.

The CIT(A) reversed the order.

The Tribunal relied on the decision on Saipem SPA v. DCIT,
(2004) 88 ITD 213 (Delhi ITAT) and McDermott ETPM Inc v. DCIT, (2005) 92 ITD 385
(Mumbai ITAT).

Held :

The Tribunal held that :

  • Only the income which is
    reasonably attributable to operations carried on in India is taxable in India.

  • Income computed on
    presumptive basis can be taxed in India only if it is otherwise chargeable
    under the provisions of the Income-tax Act.



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Whether a liaison office in India involved in collecting and transmitting of information for a Korean company would, by virtue of Article 5(4) of India-Korea DTAA, not constitute a PE ?

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Part C — Tribunal & International Tax Decisions



  1. M/s. K. T. Corporation

(2009 TIOL 12 ARA IT) (AAR)

Articles 5(1), 5(2), 5(4), 13,

India-Korea DTAA;

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

Dated : 29-5-2009

Issue :

Whether a liaison office in India involved in collecting
and transmitting of information for a Korean company would, by virtue of
Article 5(4) of India-Korea DTAA, not constitute a PE ?

 

Facts :

The applicant was a Korean company (‘KorCo’). KorCo had
obtained RBI’s permission for opening a liaison office (‘the LO’) in India for
the sole purpose of acting as a communication channel between the head office
and companies in India. While granting its permission, RBI had stipulated
various conditions and parameters subject to which the LO was to function.

 

The issue before the AAR was whether the LO of KorCo would
constitute its PE in India. Together with its application, KorCo had furnished
copy a Reciprocal Carrier Service Agreement (‘RCSA’), which it had executed
with an Indian company (‘IndCo’) after opening of its LO. Both KorCo and IndCo
were telecom carriers/resellers and had agreed to provide inter-connection
services to each other. IndCo was to provide and maintain connecting
facilities in India and KorCo was to do the same outside India. Each party was
to raise invoice on the other party in respect of the traffic terminated on
its side during each calendar month.

 

On the merits of the application, the tax authorities had
commented that the applicant had not sought ruling on the question of
taxability of payment made by IndCo to KorCo but had sought ruling only on the
limited issue whether the LO would constitute a PE. The tax authorities
mentioned that unless the applicant furnishes its reply on the following four
specific questions, it was not possible to conclude the issue :

(i) What was the role of LO in pre-bid survey carried out
before entering into the Agreement ?

(ii) How was the feasibility report prepared, did the LO
play any role in it ?

(iii) Were the employees of the LO involved in the
technical analysis of the project ?

(iv) Is the LO involved in the technical analysis of the
project or the execution of any part of the contract ?

 



Further, the tax authorities contended that independent of
the issue under consideration, the payments received by KorCo from IndCo were
taxable u/s. 9(1)(vi)/(vii) of the Act and Article 13 of India-Korea DTAA3.


 

By a supplementary statement of facts, KorCo furnished
information on the questions raised by the tax authorities. It submitted that
the LO was to act only as a communication channel within the restrictions
imposed by RBI. While it was a fixed place of business, its purpose was only
to collect information and to carry out preparatory and auxiliary activities
such as :

(i) Holding of seminars/conferences.

(ii) Receiving trade inquires from customers.

(iii) Advertising about the technology used by the
applicant in its wired/wireless services and replying to queries of
customers.

(iv) Collecting feedback from perspective customers.

 


The LO had not played any role in the pre-bid survey nor
had it involved itself in the technical analysis of any project before KorCo
executed agreement with IndCo. The applicant also furnished affidavit of the
general manager of the LO to this effect. The affidavit also stated that the
LO did not have permission/authority to conclude, nor had it executed, any
trade contract. Similarly, LO did not procure any order nor did it conclude
any negotiation. The counsel for the applicant emphasised that the LO was only
a representative office acting within the restrictions imposed by RBI and had
not undertaken any trading activity, nor had it executed any business
contract, nor had it rendered consultancy or any other services. Thus, the LO
was not a fixed place of business through which the business of KorCo was
wholly or partly carried on but it was a fixed place which had undertaken only
preparatory or auxiliary work. Hence, it could not be regarded as a PE under
Article 5(1), 5(2) read with clauses (d), (e) and (f) of Article 5(4) of
India-Korea DTAA.

 

Held :

The AAR referred to : paragraphs 1, 2 and 4 of Article 5 of
India-Korea DTAA; definition of ‘liaison office’ as per FEMA; the permitted
activities for a liaison office as per FEMA; and legal definition of the term
‘auxiliary’.

 

The AAR expressed its view that collecting information for
an enterprise by a liaison office can be considered to be an auxiliary
activity unless collection of information is primary purpose of the
enterprise. In case of KorCo, collection of information was not its primary
purpose and hence, collecting and transmitting of information by the LO to the
Head office was auxiliary activity particularly when the LO had no connection
with telecom services and network and the contracts related thereto. Hence, LO
could not be considered as PE in terms of Article 5(4)(d), (e) of India-Korea
DTAA. The AAR supported its view with certain extracts from the commentary on
OECD Model Convention, which inter alia, stated that the decisive criterion is
whether the activity of fixed place of business in itself was an essential and
significant part of the activity of the enterprise as a whole.

 

The AAR held that, as per the facts available, the LO had not performed ‘core business activity’ but had confined itself only to preparatory and auxiliary activity and as such the LO was covered within the exclusion in Clauses (e) and (f) of Article 5(4) of India-Korea DTAA. Hence, it could not be regarded as a PE in terms of Article 5(1). Reliance in this regard was made by the AAR on the Supreme Court’s decision in DIT (International Taxation) v. Morgan Stanley and Co Inc, (2007) 292 ITR 416 (SC) and Delhi High Court’s decision in UAE Exchange Centre v. UOI, (2009) 223 CTR 250 (Del.).

S. 36(1)(vii) : Unrealisable amount due to a share broker from client allowable as bad debts

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7 ACIT v. Olympia
Securities Ltd.

ITAT ‘G’ Bench, Mumbai

Before K. P. T. Thangal (VP) and

V. K. Gupta (AM)

ITA No. 4053/Mum./2002

A.Y. : 1997-1998. Decided on : 21-12-2006

Counsel for revenue/assessee: T. Shivkumar/

Rajiv Khandelwal

S. 36(1)(vii) of the Income-tax Act, 1961 — Bad
debts — Assessee, a share broker — Payments made towards purchase price of
shares on behalf of client turned bad — Whether allowable as bad debts — Held,
Yes.

 

Per V. K. Gupta :

Facts :

The assessee was a share broker. It had made
certain payments to the stock exchange on the day of settlement in respect of
purchases and sale of shares made through it by its clients. However, the client
failed to make payment and the assessee wrote off Rs.27.04 lacs as bad debts.
According to the AO, the assessee had failed to prove that the debt had become
bad. Accordingly, he disallowed the claim of the assessee, both as bad debts and
as trading loss u/s.28. On appeal, the CIT(A) deleted the addition and held that
the claim of the assessee was allowable both, u/s.36(1)(vii) as bad debts and as
trading loss u/s.28.

 

Before the Tribunal, the Revenue contended that the
assessee had not fulfilled the conditions of S. 36(2) viz., that the
amount claimed as bad debts had not been taken into account in computing the
income of the assessee for the previous year or any other earlier years.
Secondly, unlike banking company or money lender, the brokerage income earned by
the assessee was not of the category of interest on loan, hence, the loss
arising out of non-payment of amount by the clients was a capital loss. Further,
it relied on the decisions of the Mumbai Tribunal in the case of Harshad J.
Choksi and B. N. Khandelwal.

 

Held :

The Tribunal noted that as per the provisions of S.
36(2), the deduction of bad debt or part thereof can be allowed only when such
debt or part thereof has been taken into account in computing the income of
the assessee.

 

According to the Tribunal, the income of any
assessee was not the gross receipts, but it was the excess of gross receipts
over the expenditure. Thus, in the case of share brokers or agents, gross income
by way of brokerage or commission was credited in the profit and loss account
against which the expenses were claimed. To further explain, it gave an
hypothetical example wherein the assessee credits Rs.105 in profit and loss
account and debits the same in the client’s account. Simultaneously, the
assessee debits profit and loss account with Rs.100 being the value of shares,
treating the purchases of shares on behalf of the client as on its own account
and the sale thereof, by including the brokerage amount in the sale price, as
its gross margin. In that situation, according to the Tribunal, all the
conditions of S. 36(2) would stand satisfied as per the Revenue. However,
according to the Tribunal, even the crediting of only gross brokerage amount of
Rs.5 in profit and loss account would reflect the transaction from which it
emerged and the transaction of creating a debt which was taken into account
impliedly or notionally in computing the income of the assessee. Thus, the
Tribunal opined that the conditions of S. 36(2) stand satisfied even in cases
where only income had been credited in the profit and loss account. According to
the Tribunal, the provisions of allowing the claim in case of money-lending or
finance business as provided in S. 36(2) further support the view expressed
above. Since the claim of the assessee was allowed u/s.36(1)(vii), no finding
was given about the allowability of the claim u/s.28 of the Act.

 

Cases referred to:



1. Harshad J. Choksi v. ACIT, (1995) 52
ITD 511

2. ACIT v. B. N. Khandelwal, (2006) 101
TTJ (Mum.) 717



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S. 148 : When time limit for issuance of notice u/s.143(2) not expired, notice u/s.148 invalid.

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




15 B. R. Industries v. ITO


ITAT ‘A’ Bench, Jaipur

Before I. C. Sudhir (JM) and B. P. Jain (AM)

ITA No. 988/J.P./2006

A.Y. : 2003-04. Decided on : 31-12-2007

Counsels for assessee/revenue : Mahendra Gargieya/L. R. Meena

S. 148 of the Income-tax Act, 1961 — Validity of issuance of
Notice — When time limit for issuance of notice u/s.143(2) had not expired,
whether Assessing Officer was justified in issuing notice u/s. 148 — Held, No.

 

Per B. P. Jain :

Facts :

The assessee had filed return of income on 2-12-2003, which
was processed u/s.143(1)(a) on 10-3-2004. Thereafter a notice u/s.148 was issued
on 8-4-2004 and served on 9-4-2004. The assessee was also served a notice
u/s.143(2) on 29-7-2005. The assessee challenged the validity of the notice
u/s.148 of the Act which was rejected by the AO and the CIT(A) as well.

 

The assessee contended that once the AO was having the
statutory time available with it for the issuance and service of a notice
u/s.143(2), during the pendency and availability of such time, he could not have
issued the notice u/s.148. The original return of income was filed on 2-12-2003
and as per the proviso below S. 143(2) of the Act, such a notice could have been
issued validly on or before 31-12-2004. The AO however, without waiting until
the expiry of the said period i.e., up to 31-12-2004, issued a notice
u/s.148 on 8-4-2004.

 

Held :

The Tribunal agreed with the assessee that when the statutory
time limit was a available with the AO for issuance of notice u/s.143(2) of the
Act, then the notice u/s.148 cannot be issued during the pendency of the
proceedings. Further, it observed that the notice u/s.143(2) could be served
within 12 months from the end of the month in which the return was furnished as
per proviso to S. 143(2) of the Act and since in the present case, the notice
u/s.143(2) was served on 29-7-2005 i.e., after the expiry of 12 months
from the end of the month in which the return was furnished, the same was also
not valid. Further, relying on the decisions listed below, the Tribunal allowed
the appeal of the assessee.

 

Cases referred to :



(1) DCIT v. Krishan Lal Leela, 34 TW 40 (Jp)

(2) R. B. Securities Ltd. v. JCIT, 141 Taxman 49
(Digest) (Del.)

(3) Bapa Lal Exports Co. v. JCIT, (2007) 289 ITR 371
(Mad.)

(4) KLM Royal Dutch Airlines v. ADI, (2007) 159
Taxman 191 (Del.)

 


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S. 23(1)(b) : Stamp duty and brokerage paid by the landlord allowable as deduction from rent received.

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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.)


14 Govind S. Singhania v. ITO

ITAT ‘K’ Bench, Mumbai

Before R. K. Gupta (JM) and

V. K. Gupta (AM)

ITA No. 4581/Mum./2006

A.Y. : 2002-03. Decided : on 3-4-2008

Counsels for assessee/revenue : Vijay Mehta/

L. K. Agarwal

 

S. 23(1)(b) of the Income-tax Act, 1961 — Income from house
property — Annual letting value — Whether Stamp Duty and brokerage paid by the
landlord-assessee allowable as deduction from the rent received — Held, Yes.

 

Per V. K. Gupta :

Facts :

The assessee gave his premises at Mittal Towers on lease and
incurred expenses of Rs.30,000 for Stamp Duty and Rs.85,000 for payment of
brokerage on account of renewal of Lease Agreement. The Assessing Officer,
however, held that the expenses were not allowable against the income from house
property, because the expenses allowable therefrom had been specified by the
Legislature and these expenses did not fall in that category. On appeal, the
CIT(A) also, confirmed the action of the Assessing Officer.

 

The assessee contended before the Tribunal that without
incurring these expenses, he could not have earned the rental income, because
Stamp Duty had to be paid as per the provisions of the Stamp Duty Act, which was
a mandatory requirement and since the premises was let out through the broker,
there was also an obligation on the part of the assessee to pay the brokerage.
The assessee further contended that he could have asked the tenant to pay the
same and adjust the same from the rent and in that event the assessee would have
got only net rent.

Held :

The Tribunal agreed with the assessee that without incurring
these expenses, the assessee would not have earned the rental income. It further
noted that the assessee had computed the annual letting value u/s.23(1)(b) of
the Act. Hence, according to it, such rent had to be net of these expenses. The
Tribunal also found substance in the alternative argument of the assessee that
had these expenses been borne by the tenant, then only the net amount would have
been the annual letting value within the meaning of S. 23(1)(b) of the Act.
Further, the case laws relied on by the assessee (listed below) also support
this view. In this view of the matter, the Tribunal held that the annual letting
value should be taken net of Stamp Duty and brokerage paid by the assessee.

Cases referred to :



(1) Varma Family Trust v. Sixth ITO, 7 ITD 392
(Mum.)

(2) Sharmila Tagore v. JCIT, 93 TTJ 483 (Mum.)

(3) Realty Finance & Leaseing (P) Ltd. v. ITO, 5 SOT
348 (Mum.)

(4) Nandita Banerjee v. ITO, (ITA. No.
1360/Mum./2000) dated 8-4-2004.

 


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Explanation (aa) to S. 80HHC — Date of export out of India — Held that the relevant date was the date when the goods were dispatched and cleared by the customs and not the date as per the bill of lading.

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22. Dy. CIT v. Vallabh Metal Inc..


ITAT ‘H’ Bench, Delhi

Before I. P. Bansal (JM) and

Shamim Yahya (AM)

ITA No. 2564/Del./2009

A.Y. : 2004-05. Decided on : 27-11-2009

Counsel for revenue/assessee : Piyuash Kaushik/

N. K. Chand

Explanation (aa) to S. 80HHC — Date of export out of India
— Held that the relevant date was the date when the goods were dispatched and
cleared by the customs and not the date as per the bill of lading.

Per Shamim Yahya :

Facts :

One of the issues before the tribunal was regarding the
year in which the exports made by the assessee under certain invoices fall.
The AO noted that exports under Invoice Nos. 435 to 444, though dated March,
the corresponding bills of lading were dated April. The assessee contended
that during the financial year itself the goods were dispatched and the custom
clearance was obtained. However, the AO held that these goods cannot be
considered as export of the current year. On appeal the CIT(A) held that the
AO’s view that the bill of lading was the date of sale was absolutely contrary
to the provisions of explanation (aa) of S. 80HHC.


Before the Tribunal the Revenue submitted that the bill of
lading was the authoritative document for dealing with the period of export
sales. It was further submitted that those goods had been exported on FOB
(Free on Board) wherein risk passes to buyer, once goods were delivered on
board of the ship by the seller.


Held :


The Tribunal noted the following facts :


(a) it had been regular system of accounting wherein
exports were accounted according to the date of export invoices;

(b) the goods had been dispatched from the factory
premises of the assessee and had been duly cleared by the customs during the
financial year;


Further, referring to Explanation (aa) to S. 80HHC defining
‘export out of India’ and relying on the decision of the Apex Court in the
case of Silver and Arts Place which explains what is ‘export out of India’,
the Tribunal upheld the order of the CIT(A).


Case referred to :



CIT v. Silver and Arts Place, 259 ITR 684 (SC).



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S. 37(1) — Capital or revenue expenditure — Cost of tools and dies — Allowed as expenditure on its issue for production.

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21. Central Electronics Ltd. v. AO


ITAT ‘B’ Bench, New Delhi

Before R. P. Tolani (JM) and

R. C. Sharma (AM)

ITA. Nos. 233 & 1821/Del. of 2009

A.Ys. : 2004-05 & 2005-06. Decided on : 27-11-2009

Counsel for assessee/revenue : R. S. Singhvi/Ashima Nab &
Manish Gupta

S. 37(1) — Capital or revenue expenditure — Cost of tools
and dies — Allowed as expenditure on its issue for production.

S. 145A — Valuation of inventory in accordance with the
method of accounting regularly followed — Assessee justified in valuing three
years old inventory at nil value.

Per R. P. Tolani :

Facts :

The assessee was engaged in the business of developing and
producing various electronic components, sophisticated systems, solar
photovoltaic cells and other allied items for defence and other government
departments. In its accounts it used to treat items of loose tools and small
dies used in production as consumables. At the time of purchase of tools/dies
the same were entered in the stock as consumable tools and were charged to
consumption as and when issued for production activities. However, the AO
treated the same as of capital nature subject to depreciation @ 25%, the rate
applicable to plant and machinery.

Out of the other issues before the Tribunal — the one was
regarding allowability of Rs.50.2 lakhs claimed by the assessee towards
provision for slow moving inventory. As per the method of accounting regularly
followed, the assessee used to write off all inventories which were more than
three years old. According to the AO — the writing off was premature and was
not allowable under the Act. The assessee justified its method of accounting
on the ground of obsolescence resulting from change and/or upgradation in
technology with the passage of time. It was submitted that the inventory so
written off had no market value and for all practical purposes had only scrap
value. The same was shown as income in the year of sale.

Held :

The Tribunal noted that the assessee was a Government
undertaking and the accounting policy was being followed consistently. Its
accounts were audited by CAG. Further, relying on the judgment of Rajasthan
High Court in the case of Wolkem India Ltd., it allowed the claim of the
assessee.

Case referred to :


CIT v. Wolkem India Ltd., 221 CTR 767 (Raj.)

 

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Explanation to S. 73 — Speculation business — Assessee company earning income from the sale of shares — AO holding that income earned was from speculation — On the facts held that income earned was in the nature of capital gains.

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20. Axis Capital Markets (India) Ltd. v. ITO


ITAT ‘A’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

R. K. Panda (AM)

ITA No. 4098/Mum./2007

A.Y. : 2004-05. Decided on : 30-11-2009

Counsel for assessee/revenue : Rajan R. Vora and Sheetal
Shah/Vikram Gaur

Explanation to S. 73 — Speculation business — Assessee
company earning income from the sale of shares — AO holding that income earned
was from speculation — On the facts held that income earned was in the nature
of capital gains.

Per R. K. Panda :

Facts :

The assessee was a public limited company engaged in the
business of investment, dealing in shares/ securities/bonds, etc. The assessee
during the impugned assessment year had shown income under the head capital
gain at Rs.22,98,229 the break-up of which was as under :

 

Rs.

Long-term capital
gains

41,85,744

Less :

 

Adjusted b/f
long-term capital loss

18,80,681

Less :

 

Short-term capital
loss

6,834

 

22,98,229

On being questioned the assessee explained that in the
current year no shares were purchased or sold as stock in trade. It was only
the shares held as investment that were sold during the year. However, the
Assessing Officer did not accept the contention of the assessee on account of
the reasons, amongst followings :

(a) The assessee had claimed deduction of entire expenses
on share dealings as business expenses though the transactions shown were
for sale of investments;

(b) In earlier years also the assessee had not shown any
stock in trade, even though, shares were acquired for resale;

(c) Memorandum of Association of the assessee company
showed that it was formed with the main objective of carrying on the
business of share trading along with other activities mentioned therein.

(d) As per Note in Part I of Schedule VI of the Companies
Act — for an investment company, shares take the character of stock in trade
and as such, shares shown as investment in the balance sheet could be
stock-in-trade also. The Companies Law does not differentiate between the
capital or revenue nature of transactions of investments and stock-in-trade.

Further, relying on a couple of decisions, the Assessing
Officer concluded that Explanation to S. 73 of the Act was applicable to the
transactions in question. He accordingly treated the net result of the profit
and loss of such transactions as arising out of speculation business. He
further did not allow any set-off of the brought forward long-term capital
loss of the preceding year against the income of the current year.

Before the CIT(A) the assessee submitted that the original
intention of the assessee at the time of entering into share transactions was
to earn dividend and hold them for appreciation in value. The shares were held
as investment and not as stock-in-trade. However, the CIT(A) held that the
claim of the assessee cannot be sustained on the following reasons :

(a) Although the appellant admitted that in the earlier
years as well as in the subsequent year, transactions in share trading were
carried out but not during the current year, in earlier years also no
stock-in-trade of shares was shown in the balance sheet. Shares were always
shown as investments only;

(b) All the expenses incurred on transactions in share
investments were claimed as business expenses in the Profit and Loss A/c.;

(c) The appellant had shown short-term capital loss of Rs.6,834. It means that it was engaged in frequent purchase and sale of shares during the year under consideration, which fact clearly proves the intention of the appellant for dealing in shares as stock-in-trade.

Held :

The Tribunal found merit in the submission of the assessee that the provisions of Explanation to S. 73 were not applicable to the facts of the present case for the reasons that :

    a) In the assessment order passed u/s.143(3) of the Act for the A.Ys. 2005-06 and 2006-07, the Assessing Officer in the orders had considered the income from sale of shares as income from long-term capital gain/short-term capital gain and not as speculation business.

    b) There is no purchase or sale of shares during the year and the assessee has sold the shares/units of mutual funds which were shown under the head investment.

    c) The shares were held for a long period and no borrowed fund had been utilised by the assessee for purchase of shares/units.

As regards the Assessing Officer disallowing the expenses of Rs.4 lakhs out of the total expenses of Rs.6.16 lacs on the ground that the same could have been incurred for earning of speculation income, the Tribunal agreed with the assessee’s contention that the entire expenditure relates to maintaining the corporate entity of the assessee. Accordingly it held that no part of expenditure was disallowable.

S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation O


    19. Abbas T. Reshamwala v. ITO

        ITAT ‘A’ Bench, Mumbai

        Before N. V. Vasudevan (JM) &

        R. K. Panda (AM)

        ITA No. 3093/Mum./2009

        A.Y. 2006-07. Decided on 30-11-2009

        Counsel for assessee/revenue : Ajay R. Singh/

        Vikram Gaur

        S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation Officer to determine fair value.

        Per R. K. Panda :

        Facts :

        During the year the assessee had sold an industrial gala for a consideration of Rs.20 lakhs. Based thereon the assessee had offered to tax the sum of Rs.18.73 lacs by way of capital gains. The Assessing Officer noted that the stamp duty authorities had valued the said property at Rs.44.62 lakhs. The assessee brought to the notice of the AO the various negative factors. He also filed a valuation report of the registered valuer, according to which, the value of the said premises was Rs.18.66 lakhs. He also requested the Assessing Officer if the valuation report was not accepted, then the same may be referred to the DVO u/s.50C of the Act.

        However, the Assessing Officer did not accept the contention of the assessee. He was of the opinion that since the assessee had not taken objection before the Registrar in the initial stages when the property was sold and it was only during the stage when objection was raised, the assessee filed a valuation report of registered valuer after giving second thought. Therefore, he was not under obligation to refer the matter to the DVO. He accordingly adopted the value determined by the stamp duty authorities at Rs.44.62 lakhs u/s.50C and made the addition of Rs.25.88 lakhs as short-term capital gain being the difference between the amount declared by the assessee and the amount finally determined by him. In appeal the learned CIT(A) upheld the action of the Assessing Officer.

        Before the Tribunal the Revenue submitted that the Assessing Officer can refer the matter to the DVO only if the assessee claims that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property on the date of transfer and the value adopted or assessed by the stamp valuation authority had not been disputed in any appeal or revision or no reference had been made before any authority. According to it, in the absence of the word ‘or’ between sub clause (a) and (b) of S. 50C(2), both the conditions, as per clauses (a) and (b) of S. 50C(2), are to be fulfilled before referring the matter to the DVO.

        Held :

        According to the Tribunal, the word ‘may’ used in Ss.(2) of S. 50C had to be read as ‘should’ and the Assessing Officer had no discretion but to refer the matter to the DVO for the valuation of the property when the assessee had raised an objection that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property. Accordingly, the matter was referred back to the file of the Assessing Officer with a direction to refer the matter to the DVO and decide the issue afresh as per law.

S. 43(6)(c) — When an asset is sold, the block of assets stands reduced only by moneys payable on account of sale of the asset and not by the fair market value of the asset sold.

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18. DCIT v. Cable Corporation of India Ltd.


ITAT ‘E’ Bench, Mumbai

Before Pramodkumar (AM) and

V. D. Rao (JM)

ITA No. 5592/Mum./2002

A.Y. : 1995-96. Decided on : 29-10-2009

Counsel for revenue/assessee : Vandana Sagar/

Arvind Sonde

S. 43(6)(c) — When an asset is sold, the block of assets
stands reduced only by moneys payable on account of sale of the asset and not
by the fair market value of the asset sold.

Per Pramodkumar :

Facts :

During the previous year relevant to the assessment year
under consideration, the assessee sold a flat which formed part of block of
assets and on which depreciation was claimed and was allowed @ 5%, for a
consideration of Rs.9,00,000. The District Valuation Officer (DVO), on a
reference by the Assessing Officer (AO), valued the flat at Rs.66,44,902. For
the purposes of computing the amount of depreciation allowable, the AO
computed the written down value of the block by reducing the value determined
by the DVO instead of reducing the consideration for which the flat was sold.
He, therefore, disallowed depreciation of Rs.2,96,551.

Aggrieved, the assessee preferred an appeal to the CIT(A)
who allowed the appeal and held that for computing written down value it is
only the sale consideration of the asset sold, which needs to be deducted and
not the fair market value of the asset sold.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

In view of the provisions of S. 43(6)(c) read with
Explanation 4 to S. 43(6) and also Explanation below S. 41(4), when an asset
is sold, the block of assets shall stand reduced by ‘moneys payable’ in
respect of the asset sold. The expression moneys payable refers to ‘the price
at which it is sold’. What really matters is the price at which the asset is
sold and not its fair market value. The AO does not have any power to tinker
with the sale price of the asset sold. The AO ought to take the sale price for
computing the WDV of the block.

The Tribunal dismissed the appeal filed by the Revenue.

S. 45 and S. 48 — Amount received by the society from the builder for permitting him to construct additional floors on existing building of the society by utilising TDR FSI belonging to him is not chargeable to tax since there is no cost of acquisition.

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17. Om Shanti Co-op Hsg. Society Ltd. v. ITO


ITAT ‘C’ Bench, Mumbai

Before D. Manmohan (VP) and

R. K. Panda (AM)

ITA No. 2550/Mum./2008

A.Y. : 1999-2000. Decided on : 28-8-2009

Counsel for assessee/revenue : Subhash Shetty/

Virendra Ojha

S. 45 and S. 48 — Amount received by the society from the
builder for permitting him to construct additional floors on existing building
of the society by utilising TDR FSI belonging to him is not chargeable to tax
since there is no cost of acquisition.

Per D. Manmohan :

Facts :

The assessee, a co-operative society, on request of the
developer granted him permission to construct 2 floors having 8 flats, on the
existing building of the assessee by utilising TDR FSI available to the
developer. As consideration, the developer paid Rs.26 lakhs to the assessee
and Rs.5.50 lakhs to each of the 12 members of the assessee.

According to the assessee, the members owned a piece of
land on which 12 flats were constructed by utilising maximum FSI available to
them. These persons formed a society. Since the assessee had no right to
construct further structure, there was no question of exploiting any of its
available right so as to earn income out of it. The assessee had regarded the
amounts received by it as not being chargeable to tax.

The Assessing Officer held that the permission granted by
the assessee-society resulted into transfer by way of relinquishment of the
right i.e., ‘to load TDR and construct additional floors’ and since
there was no cost of acquisition, in absence of details, he taxed the entire
consideration of Rs.26 lakhs as long-term capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A)
who enhanced the assessment and charged even Rs.66 lakhs, being the amount
paid by the developer to individual members of the society, as long-term
capital gains in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The assessee and its members had exhausted the right
available while constructing the flats and therefore the assessee and its
members had no right to construct additional floors on the existing building.
The Tribunal noted that TDR was not obtained by the assessee and sold to the
developer. The Tribunal held that the assessee had not transferred any
existing right to the developer, nor any cost was incurred/suffered prior
to permitting the developer to construct the additional floors. Since there
was no cost of acquisition, following the ratio of the decision of the Apex
Court in B. C. Srinivasa Shetty 128 ITR 294 (SC), the consideration was held
to be not assessable as capital gains.


The Tribunal dismissed the appeal filed by the Revenue.


Cases referred to :

1. CIT v. B. C. Srinivasa Setty, (1981) 128 ITR
294 (SC)

2. Deepak S. Shah v. ITO, (2009) 29 SOT 26 (Mum.)

3. M/s. New Shailaja CHS Ltd. v. ITO, ITA
512/M/2007 dated 2-12-2008

4. Maheshwar Prakash-2 Co-op Hsg. Soc. Ltd v. ITO,
(2009) 118 ITD 223 (Mum.)




 

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S. 28 — Contractual payment made by the assessee firm to its retiring partners, in terms of the partnership deed, is not includible in the total income of the assessee since to that extent income has never reached the hands of the assessee.

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16. RSM & Co.
v. ACIT


ITAT ‘D’ Bench, Mumbai

Before P. M. Jagtap (AM) and

R. S. Padvekar (JM)

ITA No. 3269/Mum./2007

A.Y. : 2004-05. Decided on : 12-10-2009

Counsel for assessee/revenue : Sunil M. Lala & Dhanesh
Bafna/Sanjay Agarwal

S. 28 — Contractual payment made by the assessee firm to
its retiring partners, in terms of the partnership deed, is not includible in
the total income of the assessee since to that extent income has never reached
the hands of the assessee.

Per R. S. Padvekar :

Facts :

The assessee, a partnership firm, claimed a sum of Rs.10
lakhs towards payment made by it to its retiring partner, as per the terms of
the partnership deed. The partnership deed provided that a partner retiring
after a specified age would be entitled to receive from the firm an amount,
computed in the manner stated in the deed, for a period of 5 years from the
date of retirement. Before the Assessing Officer (AO) the claim was made
u/s.37 of the Act. The AO held that the amount was not allowable as a
deduction.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where this sum was contended to be not taxable on the principles of diversion
of income by overriding title. The CIT(A) held that the amount paid was
application of income. He, accordingly, dismissed the assessee’s appeal.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The Tribunal noted the relevant clause of the partnership deed and
also the judicial precedents relied upon by the assessee.

Held :

Payment of retirement benefits for a period of five years
from retirement was a contractual obligation of the assessee. The retired
partner had nothing to do with the profit earned or losses suffered by the
assessee firm, but the quantum of retirement benefits had been fixed. On
facts, there was a charge on the profits of assessee firm. The Tribunal upon
considering the facts and the legal principles laid down in the precedents
relied upon by the assessee held that there was diversion of income to the
extent of the retirement benefits paid by the assessee firm to the retired
partner. The Tribunal held that the retirement benefit paid in accordance with
the terms of the partnership deed was not to be included in the total income
of the assessee firm as to that extent the income never reached the hands of
the assessee.

The assessee’s appeal was allowed.


Cases referred to :

1. CIT v. Sitaldas Tirathdas, 41 ITR 367 (SC)

2. CIT v. Crawford Bayley & Co., 106 ITR 884 (Bom.)

3. CIT v. Nariman B. Bharucha & Sons, 130 ITR 863
(Bom.)

4. CIT v. C. N. Patuk, 71 ITR 713 (Bom.)

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S. 275 read with S. 271B — Bar of limitation for imposition of penalty also applies to penalty imposed u/s.271B

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Part B — Unreported Decisions

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


21 Motilal Vishwakarma HUF v.
ITO


ITAT ‘B’ Bench, Mumbai

Before M. A. Bakshi (VP) and

R. K. Panda (AM)

ITA No. 7055/Mum./2007

A.Y. : 2003-04. Decided on : 27-8-2007

Counsel for assessee/revenue : Ajay C. Gosalia/

Garima Jain

 

S. 275 read with S. 271B of the Income-tax Act, 1961 — Bar of
limitation for imposition of penalty — Whether limitation period applicable to
penalty imposed u/s.271B — Held, Yes.

 

Per M. A. Bakshi :

Facts :

The issue before the Tribunal was whether the penalty of
Rs.23,520 imposed on the assessee u/s.271B was barred by limitation. The
show-cause notice was issued and served in June 05 and the order imposing
penalty was passed on 27-2-2006. The contention of the assessee was that the
order has to be passed within six months from the date of initiation of the
proceeding.

 

Held :

The Tribunal agreed with the assessee that since the penalty
order has been passed after the expiry of six months from the end of June 2005,
it was barred by the period of limitation. Relying on the Special Bench decision
of the Chandigarh Tribunal in the case of Dewan Chand Amrit Lal & Ors., the
Tribunal allowed the appeal of the assessee.

 

Case referred to :


Dewan Chand Amrit Lal & Ors. v. DCIT, 283 ITR (AT) 203 (Chandigarh) (SB)

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The total amount of adjustment, along with the arm’s length price already reported by an assessee, cannot exceed the total amount of revenues earned by the assessee and its associated enterprises from third party customers.

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Tribunal News

Part C — Tribunal & AAR International Tax Decisions

Geeta Jani
Dhishat B. Mehta
Chartered Accountants


 


21 DCIT vs Global Vantedge Pvt. Ltd.

2010-TIOL-24-ITAT-DEL

Section 92

Dated: 17.12.2009

 

Issues:

 

  • The total amount of adjustment, along with
    the arm’s length price already reported by an assessee, cannot exceed the
    total amount of revenues earned by the assessee and its associated enterprises
    from third party customers.

  • In undertaking a transfer pricing analysis,
    the least complex entity should be selected as the tested party. However,
    selecting an overseas entity as the tested party may not be appropriate;
    because it is difficult to obtain all relevant facts and data required for
    undertaking a proper analysis of functions, assets and risks (FAR) and making
    the requisite adjustments    .

 

Facts:

 

  • Global Vantedge Pvt. Ltd.
    (GV), is an Indian company engaged in providing IT enabled services. RCS
    Centre Corp (RCS), a company incorporated in USA, is a customer of GV. GV and
    RCS are held by a common parent company and, hence, are associated enterprises
    (AE).

  • RCS is engaged in the
    business of providing debt collection and telemarketing services to clients in
    USA. RCS contracts with third party customers in USA. In turn, RCS enters into
    contracts with GV which has the requisite infrastructure and capacity for
    providing the services which RCS has contracted to render to its customers.

  • RCS retains 9.4% of the
    revenues earned from third party customers in USA and remits the balance 90.6%
    to GV. GV is also engaged in rendering services to other independent clients
    which constitute approximately 18% of its total revenue.

  • GV selected RCS as the
    tested party for the purpose of TP analysis. The TPO rejected selection of RCS
    as the tested party by contending that it is difficult to benchmark an entity
    in overseas jurisdiction.

  • The TPO selected GV as the
    tested party and by making a comparative analysis, he arrived at an average
    operating margin of 11.88%, as against the loss of 53.5% incurred by GV. As a
    result, GV was virtually assessed on revenue of Rs 101.1 as against the
    transaction value with RCS of Rs 90.8, and as against the billing of Rs 100
    raised by RCS on third party customers.

  • Aggrieved, the assessee
    preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].
    Before the CIT(A), the assessee, inter-alia, contended that:

(a) The least complex entity (RCS in the present
case) needs to be selected as a tested party for the purpose of carrying out
transfer pricing analysis because a simpler party requires fewer and more
reliable adjustments to be made to its operating margins.

(b) Without prejudice, the adjustment to the transfer price
between the AE and the taxpayer cannot be more than the revenue earned by the
group from independent third parties. Also, the transfer price needs to be
determined after excluding a fair remuneration payable to the AE, from the
revenue earned from third parties.

  • Based
    on the contentions of the assessee, the CIT(A) held as follows:

(a) The least complex entity should be selected as a tested
party.

(b) However, selection of RCS as a tested party and
consequent use of international comparables would be inappropriate, as it is
difficult to benchmark ALP in different jurisdictions on account of the
differences in facts and circumstances in each geographical area.

(c) The total amount of adjustment along with the arm’s
length price already reported by the assessee cannot exceed the total revenue
earned by the assessee and its associated enterprise from dealing with third
party clients.

(d) Also, the ALP of the assessee in the present case
cannot be 100% of revenues earned from third party customers. RCS was
admittedly rendering market support for which it was entitled to a fair
consideration.

(e) ALP remuneration of RCS was determined @1.4% by
adopting a report issued by the Information and Credit Rating Agency of India
Limited (ICRA report) on marketing expenses in the BPO industry.

(f) The balance 98.6% (100 – 1.4) of the revenues was held
to represent an arm’s length price between GV and RCS.

 

Held:



 


The ITAT upheld the order of the CIT(A) as neither GV nor the
tax authority was able to controvert the its findings.


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(2012) 150 TTJ 265 (Ahd.)(TM) ITO vs. Sardar Vallabhbhai Education Society ITA No.2984 (Ahd.) of 2008 A.Y.2000-01 Dated 18-09-2012

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Section 11(1)(d) of the Income-tax Act 1961 – Since assessee had produced books of account, original receipt books of corpus fund and confirmation letters from the donors, the donations received constituted corpus fund of the Society.

Facts

For the relevant assessment year, the Assessing Officer taxed the entire amount of Rs. 154.67 lakh of donations received by the Trust on the grounds that:

a. None of the donation receipts were signed by the donors.

b. The donation receipts were self made evidence furnished in support of the corpus fund collected and

c. As per section 11(1) of the Income Tax Act, there must be a specific direction from the donors in respect of their donations that it should be for the purpose of the corpus.

The CIT(A) deleted the addition made by the Assessing Officer. Since there was a difference of opinion between the members of the Tribunal, the matter was referred to the Third Member u/s. 255(4).

Held

The Third Member, agreeing with the Judicial Member, held in favour of the assessee-trust. The Third Member noted as under :

The assessee has produced complete books of account along with original receipt book of corpus fund wherein complete names and addresses of the donors were recorded and the column “corpus fund” has been duly “ticked” and signed by the employees of the trust.

It was for the Assessing Officer to make or not to make further inquiry in the facts and circumstances of the case, with regard to the genuineness of the donation claimed by the assess-trust to have been received by it towards its “corpus fund”.

The Tribunal, as a second appellate authority, could not direct the Assessing Officer to make detailed inquiry for the reason that the issue of “inquiry” is not before the Tribunal.

The Assessing Officer has not made any detailed inquiry further and added the amount of corpus fund as income in the hands of the assessee on the plea that such receipts were prepared by the employees of the trust and in none of the receipts, signatures of the donors was available. This approach of the Assessing Officer in finalising the assessment of the assessee is not in accordance with law.

In view of the fact that the CIT(A) has accepted declarations from all the 60 donors of the corpus fund certifying that they have donated towards corpus fund of the assessee-society and the Revenue has not raised any ground of appeal against the admission of these declarations produced by the assessee before the CIT(A), the amount in question has to be held as constituting corpus fund of the assessee-society.

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[2012] 137 ITD 318 (Chennai) Shri Rengalatchumi Education Trust vs. ITO (OSD) Exemptions A.Y. 2004-05 to 2007-08 Dated 25th March, 2011

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Sections 32 and 11 – Assessee entitled to depreciation on capital asset even if cost of acquisition of such asset was earlier allowed as application of income while computing income u/s. 11

Facts:
Assessee trust claimed depreciation while computing its income for the respective assessment years. The Ld. AO held that as the cost of addition to asset was claimed by the assessee as application of income for the respective assessment years, assessee could not further claim depreciation on the very same assets and hence disallowed the claim of depreciation.

Held:
For the purpose of determining the income of trust eligible for exemption u/s. 11, income should be construed strictly in commercial sense (i.e., normal accounting principles), without reference to the heads of income specified in section 14. The income to be considered is the book income and not the total income as defined in section 2(45). The concept of commercial income necessarily envisages deduction of depreciation on the assets of the trust. This position is as confirmed by the CBDT vide its circular No.5-P (LXX-6), dated 19-6-1968. Normal accounting principles clearly provide for deducting depreciation to arrive at income. Income so arrived at (after deducting depreciation) is to be applied for charitable purpose. Capital expense is application of income so determined. Hence, there is no double deduction or double claim of the same amount as application. Thus, depreciation is to be deducted to arrive at income and it is not application of income.

Note:
1. Supreme Court decision in case of Escorts Ltd. vs. Union of India [1993]199 ITR 43 was distinguished
2. Readers may also refer two decisions of Hon’ble Bombay High Court viz.
• DIT (Exemption) vs. Framjee Cawasjee Institute [1993] 109 CTR 463 and
• CIT vs. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110

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Salary income of an expatriate who partly rendered services in India and partly outside India not chargeable to tax in India in respect of proportionate period for which services performed outside India

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New Page 2

13 DCIT v.
Mr. Erick Moroux C/o. Air France and Others

(2008) (TIOL 145 ITAT Del.)

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

A.Y. : 2001-02. Dated : 15-2-2008

Issues :



l
Salary income of an expatriate who partly rendered services in India and
partly outside India would not be chargeable to tax in India in respect of
proportionate period for which services are performed outside India.


l
Contribution towards social securities and other funds in terms of labour law
regulations in France represents diversion of salary at source and is not
taxable in India.


 


Facts :

The assessee, an employee of Air France, was posted in India
since August 2000. For the year under reference, he was R but NOR. In terms of
his employment agreement, apart from rendering services in India, the assessee
was also required to supervise operations in France as well as in South Asia.
The employment agreement itself contemplated that about 20% of the time of the
assessee would be for operations outside India.

 

For the year under reference, the assessee was outside India
for a period of 19 days. The assessee claimed that the salary attributable to
the period for which he rendered services outside India was not taxable in
India.

The Department rejected the claim primarily on the ground
that the assessee provided no evidence of the service that he rendered while
being outside India. The Department also relied on the Explanation to S.
9(1)(ii) inserted with effect from A.Y. 2000-01 to contend that the salary for
period outside India was salary for leave/rest period and hence taxable in terms
of amended S. 9(1)(ii).

The second controversy was about deduction/exclusion in
respect of contributions made towards various schemes in France. The assessee
had made mandatory contributions towards various social security schemes for
health insurance, for retirement scheme, for pension scheme, insurance coverage
for long illness and for widowhood, etc. in France. These amounts were claimed
to be non-chargeable on the ground that the same represented diversion of income
at source.

The Department rejected the contention by holding that the
payments were in the nature of application akin to the payment of provident fund
or some such investment schemes applicable in India.

Held :



l
The ITAT accepted the assessee’s contention that salary attributable to
service outside India was not taxable in India. The ITAT relied on Special
Bench decision in the case Air France viz. J. Calle and Others, (ITA
5921 to 5929/Del). In the view of ITAT, the fact that the employment contract
mandated the assessee to oversee operations outside India coupled with the
assessee’s actual presence outside India did amply support the claim of the
assessee.


 


The Tribunal also held that the amended explanation to S.
9(1)(ii) was not applicable, as the period of absence from India was neither
rest period, nor leave period.

 

The ITAT relied on earlier decision of the Mumbai Tribunal in
the case of Gallotti Raoul v. ACIT, (1997) (61 ITD 453) to hold that
since there was no discretion available to the assessee with regard to statutory
deduction, such contribution was a diversion of income by overriding title and
cannot be brought to tax.

 

The Tribunal noted the following observations from the
decision of Galloti Raoul (supra) and concurred with them.

“The concept of such compulsory contribution to social
security is not prevalent in India. Unlike the schemes in India which are saving
schemes, the scheme of social security is not a saving scheme, but a scheme to
protect the French nationals from various calamities. From this point of view,
the amount that was contributed to the social security organisation was a
diversion of income by overriding title at the stage of earning point itself.
The affiliation being compulsory, making the social security organisation an
earning partner alongside of the assessee i.e., assessee earned not only
for himself, but also for the social security organisation. The assessee had no
right over it at all and thereby no domain on it. Hence the social security
charges were to be deducted from the salary income as a prior charge by
overriding title and it would be only the net salary after such deduction that
should be treated as gross salary within the meaning of S. 16.”

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(2013) 88 DTR 288 (Ahd) Harshadbhai Dahyalal Vaidhya (HUF) vs. ITO A.Y.: 2005-06 Dated: 26.04.2013

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Section 56(2)(v) – Gift received from relative of karta is not taxable in the hands of HUF.

Facts:
The assessee in the capacity of HUF received a gift of Rs. 7 lakh from a person who was uncle of the karta of the HUF. The Assessing Officer brought said amount to tax under head ‘income from other sources’ by invoking provisions of section 56(2)(v). The objection of the Assessing Officer was that as per the Explanation to section 56(2)(v) the definition of relative does not include relationship vis-a-vis HUF, therefore the amount received from the donor by the HUF does not fall within the relationships as prescribed in the said Explanation.

Held:
For the year under consideration, i.e. asst. yr. 2005- 06, the definition of “relative” was in respect of the relationship by an individual donee with close relatives as defined therein. However, it is very pertinent to note that the operative section i.e., s. 56(2)(v) was in respect of (i) individual and (ii) HUF. Meaning thereby the legislature had clear intention to include both the categories i.e., individual as well as HUF within its scope as well as within its operation. Thus, the section is applicable in respect of money exceeding Rs. 25,000 received without consideration either by an “individual” or by an “HUF”. The proviso annexed to s/s. (v) states that the charging clause shall not apply to any sum of money received from any relative. Meaning thereby the proviso is applicable to both of them i.e. “individual” as well as “HUF”. The donor relative can be either relative of “individual” or “HUF”, as the case may be. In other words, if an amount exceeding Rs. 25,000 is received as a gift either by “individual” or by “HUF”, then such an amount is chargeable to income under the head “Income from other sources” but an exception is provided in the first proviso that the said clause of charging the amount to tax should not apply to an amount received from any relative. Thus, the proviso prescribes that the charging of the gifted amount shall not apply to any sum of money received as a gift from a “relative” either by an “individual” or by “HUF”. Naturally, the proviso to cl. (v) of section 56(2) is not restricted to an “individual” but it governs an “individual” as well as an “HUF”. The position is absolutely clear that even in case of HUF if a sum of money is received from any relative and that relative is as defined in Explanation, then also it falls within the exception as prescribed in this section.

Therefore, since the assessee-HUF has undisputedly received a gift of Rs. 7 lakh from a relative who is an uncle of the Karta of this HUF, i.e., as per Explanation, sub-cl. (iv) “brother or sister of either of the parents of the individual”, and thus falls within the category of the “relative” prescribed in the Act, therefore, not chargeable to tax in the hands of the assessee.

Editor’s Note: The section amended by Finance Act 2012 w.e.f. 01-10-2009, defining the term relative in respect of an HUF. Therefore the decision may not apply from 01-10-2009

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Subscription fees for database access which contains repository of information otherwise available in public domain is not royalty within the means of S. 9(1)(vi) or Article 12 of India-USA DTAA.

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New Page 3

Part C — Tribunal & International Tax Decisions




  1. FactSet Research System Inc

Authority for Advance Ruling

Before Justice P. V. Reddi (Chairman),

Mr. A. Sinha (Member) and

Mr. Rao Ranvijay Singh (Member)

A.A.R. No. 787 of 2008, Dated : 30-6-2009

S. 9(1)(vi) of the Income-tax Act and Article 12 of
India-USA DTAA

Counsel for assessee/revenue : A. V. Sonde/

Sanjeev Sharma

Facts of the case :


  • FactSet
    Research System Inc, (herein applicant) is a company incorporated in the
    USA. It maintains databases outside India, which contains the financial and
    economic information (like shareholding by global holders of global
    equities, takeover defence strategies adopted by various US public
    companies, etc.) of a large number of companies worldwide.



  • The
    information contained in the database is available in the public domain.
    However, the applicant collates, stores and displays this information in an
    organised manner which enables the customers to retrieve the required
    information within a short span of time in a focussed manner. The customers
    are required to download client interface software (similar to an internet
    browser) to access and view the database. The customers of the applicant are
    mostly financial intermediaries and investment banks. The databases,
    software and tools are hosted on the applicant’s main frames/data libraries
    maintained at its data centres in the US.



  • The
    applicant enters into a Master Client Licence Agreement (MCLA), with its
    customers, which inter alia provides that :




  • The
    applicant grants limited, non-exclusive, non-transferable rights to use
    its database, software tools, etc. and receive subscription fees from its
    customers.



  • All
    proprietary rights including intellectual property rights in the software,
    databases and related documentations remain the property of the applicant.



  • The
    customer agrees that it will not copy, transfer, distribute, reproduce,
    etc. any works from or make any part of the data available to others.



  • The
    customer will cease to use all licensed material and software and destroy
    all documentation except such copies as are required to be maintained by
    law.





  • The
    applicant does not carry out any business operations in India and there is
    no agent in India acting on behalf of the applicant with the authority to
    conclude contracts.



  • In the
    above background, the applicant raised following issues before AAR :



    •

  • Whether
    the subscription fees received from customers in India shall be taxable in
    India under the domestic law and under the treaty ?



  • If the
    applicant is not liable to be taxed in India, whether its subscribers will
    be required to withhold taxes u/s.195 of the Act ?



  • Assuming the applicant has no other taxable income in India, whether the
    applicant will be absolved from filing a tax return in India u/s.139 ?





Ruling of AAR :


  • Based on
    features of the Licence Agreement noted by AAR, it was held that the
    subscription fess received by the applicant do not amount to ‘royalty’ in
    terms of S. 9(1)(vi) of the Act and Article 12 of the treaty. AAR held :



    •

  • The
    subscription fees are paid by customers for facilitating the customer’s
    access to the database and not for any rights in the copyright of the
    database. No proprietary right or exclusive rights possessed by the
    applicant in the database are transferred to the customers. The customers
    merely get a right to view and use the data for internal business purpose.



  • The
    subscription fee is not fees for use of “information concerning
    industrial, commercial or scientific knowledge, experience or skill” as
    the information which the subscriber gets through the database is already
    available in public domain and it does not relate to the underlying
    experience or skills. The applicant does not share its experiences,
    techniques or methodology employed in evolving the database with the
    subscribers. The OECD Commentary and Commentary by Prof. Klaus Vogel was referred to conclude that royalty taxation covers transfer of know-how which may cover unprotected, non-secret knowledge derived from experience.

    The subscription fee cannot be considered as payment towards the use of ‘scientific equipment’ as the fees paid are for availing of the facility of accessing the data/information collected and collated by the applicant in the database.

    There is no use of or right to use any copy-right of a literary or scientific work involved in the event of subscriber getting access to the database for his own internal purpose. It is like offering a facility of viewing and taking copies of books for its own use without conferring any other rights available to a copyright holder.

Tribunal News: PART A

1. (2009) 119 ITD 1 (Pune) Bhagwandas Associates v. ITO, Ward 5(4), Pune A.Y.: 1988-89. Dated:  28-9-2007

The mistake which is otherwise rectifiable u/s.154 cannot be adjusted at the time of giving effect to appellate order u/s.250/254 particularly when that mistake is absolutely out of context and purview of appellate order.

Facts:

The assessee claimed deduction u/s.32AB in his return for A.Y. 1988-89 based on audit report. The AO wrongly allowed deduction of higher amount and also made addition on account of sales tax refund. The Tribunal deleted the addition of sales tax refund. While giving effect to Tribunal’s order AO rectified deduction u/s.32AB to the correct figure. The CIT(A) also held that ‘rectification was consequential of giving effect to the Tribunal’s order’ and upheld the addition in favour of AO. On an appeal to Tribunal, it was held that:

    There are 2 types of orders of appellate authority. One is specific relief pertaining to specific ad-dition and the other is de novo assessment i.e. setting aside assessment and making a fresh assessment. In second case, AO has same powers as at the time of making fresh assessment.

    ‘When Tribunal sets aside the assessment and remands the case for making fresh assessment, the power of AO is confined to the subject matter of the appeal before Tribunal. He can not take up the questions which were not subject matter of appeal before the Tribunal even though no specific direction has been given by the Tribunal.’

    The contention of CIT(A) is not correct because thetquaritum of deduction u/s.32AB is not linked with the assessed income. Rather it is based on the quantum of investment. Giving effect to the Tribunal’s order can not be equated with the regular assessment order.

    Even though AO can make rectification of order u/s.154, he has exceeded his limits while giving effect to the order of the Tribunal.

    Hence, it was held that even though a mistake is rectifiable u/ s.154, it can not be adjusted while giving effect to the order of Tribunal particularly when that mistake is absolutely out of context and purview of appellate order.

2. (2009) 119 ITD 13 (Mumbai) Smarttalk (P.) Ltd. v. ITO, Ward 8(3)(2), Mumbai A.Y. : 2001-02. Dated: 31-3-2008

Assessee co., a joint venture, took bank loan guaranteed by co-venturers – Payment by one of the venturers to discharge his obligation credited by company to capital reserve. Repayment taxed u/s. 10(3) – CIT(A) upheld addition u/s.28(iv)/41(1) – Since assessee has not claimed deduction of the amount originally, repayment of loan not taxable u/s.28(iv)/41(1). Also can not be taxed u/s.10(3) as S. 10 deals with income which does not form part of total income – Additions, therefore to be deleted.

Facts:

The assessee company was a joint venture between ‘M’ (holding 49%) and ‘B’ (holding 51% of shareholding). The company took a loan of Rs.7 crores from Bank of America which was guaranteed by eo-venturers in proportion to their shareholding. The agreement also restricted the right of the asses-see to enter into any merger, acquisition or sale without prior permission of bank. In A.y. 2002-03~ ‘ASC’ took over 51% shareholding of ‘B’ and’ AW’ took over 49% shareholding of ‘M’. The company had repaid the loan to the extent of Rs.2 crores. 49% of the balance loan was repaid by ‘M’ (i.e. Rs.2.45 crores) along with outstanding interest which was credited by assessee to capital reserve. The AO taxed the same u/s.l0(3). On appeal to CIT (A), it upheld the addition u/s.28(iv)/41(1). On appeal to Tribu-nal, it applied the ratio laid down by the Bombay High Court in Mahindra & Mahindra Ltd. v. CIT, and followed by the Third Member Bench in ITO v. Ahuja Graphic Machinery Ltd., holding that waiver of loan is neither covered u/s.28(iv) nor u/s.4l(l). As the assessee has not claimed deduction of loan taken, repayment of the same by eo-venturer cannot be taxed as cessation of liability u/s.4l(l). Further, the said sum can also not be taxed u/s.lO(3) as S. 10 deals with only such incomes, which are not to be included in the total incomes of the assessee. Hence, the appeal filed by the assessee is allowed.

3. (2009) 199 ITD 15 (Agra) (Third  Member) ITO,  Range  3(1), Gwalior  v. Laxmi Narain Ramswaroop Shivhare A.Y.: 2001-02. Dated: 26-12-2008

S. 145 – A.Y. 2001-02 was the first year of business of the assessee – Aa rejected books of accounts on the ground that there were no support-ing vouchers for sales and all sales made in cash
– Applied different G.P. ratio on comparative basis – Since due to the nature of business of the assessee it is not possible to maintain proper sales bills, it cannot be said that books of accounts were defective – Therefore, books cannot be rejected and actual G.P. ratio to be considered.

Facts:

The assessee firm was engaged in the business of trading in country liquor and IMFL. The supplies of country liquor to the assessee were made through the Government warehouse on payment of duty and purchase of IMFL was made from other private parties in accordance with the permit given by the Government. The assessee got his accounts audited and furnished audit report in Form 3CD. However, he could not produce supporting vouchers in respect of sale of country liquor as the sales were recorded on the basis of daily sales records given by employees of the shops. AO rejected books of accounts on the ground that the sales were not subject to any independent evidence and applied G.P. ratio of 5% against actual G.P. ratio of 3.11%. On an appeal to CIT(A), he reduced G.P. ratio to 4%. On appeal before Tribunal, the Third Member held that:

    The AO rejected books of accounts for want of sales bills and accepted sales value declared by the assessee. Hence, he has no reason to reject books of accounts.

    The CIT(A) has reduced  G.P. ratio and has given a finding  that there was no significant defect in the books.    

    The nature of business of the assessee is such that it is not possible to maintain proper bills.

    Hence, the books of accounts can not be rejected and actual results declared by the assessee be accepted.

4. (2009) 119 ITD 49 (Ahd.) ITO, Ward-4(2),  Ahmedabad v. Krishnonics Ltd. A.Y. : 1996-97. Dated: 19-12-2007

Held  1:

Provisions of S. 2(22)(e) are not applicable when loan is advanced in the course of normal money lending business – Further, in determining ‘sub-stantial part of business’, income criteria is not relevant but objects and deployment of funds are relevant factors.

Held  2:

Foreign travelling expenses incurred for the purpose of business are allowable expenditure especially when they are proved to be incurred for the purposes of business.

Facts 1 :

The assessee company took loan of Rs.37,77,475 from ‘I’ Ltd. which was claimed to be engaged in the business of money lending. ‘I’ Ltd. also advanced the loan of Rs.1,08,099 to G Ltd. a third party not connected with any of the above parties. It was found that one of the directors of assessee was holding more than 10% of share-capital in ‘I’ Ltd. and more than 20% capital in assessee company. The AO invoked the provisions of S. 2(22)(e) on the ground that ‘I’ Ltd. derived more income from dividend than from interest income. On appeal to CIT(A), it deleted the addition. However, Revenue preferred an appeal to Tribunal. The Tribunal held that as per S. 2(22)(e)(ii) ‘substantial income’ is not the relevant criteria for determining substantial part of business but objects and deployment of funds are relevant. As money lending business was one of the six objects of assessee company and it carried on that object in preference to others it was engaged in the business of money lending and hence provisions of S. 2(22)(e) are not attracted.

Facts 2:

The assessee company claimed expenses on account of travelling of managing director to Taiwan. It was claimed that the expenditure was incurred to find out the possibility of expanding export sales and to acquaint company regarding latest automation machinery concept. The AO disallowed the expenditure on the ground that assessee did not prove it to have been incurred for the purposes of business.

The CIT(A) allowed the claim of assessee. However, department preferred an appeal to Tribunal. It was shown that as a result of the visit to Taiwan, assessee was able to make exports to Taiwan which was not contested by AO. Hence, Tribunal allowed the appeal in favour of assessee and upheld the decision of CIT(A).

5. (2009) 119 ITD 62 (Kolkata) (TM) Shanti Ram Mehta v. ACIT, Circle-3, Asansol A.Ys.: 2000-01 and 2003-04 Dated: 11-11-2008

Additions u/s.69C for unexplained expenditure cannot be made on ad hoc basis or on presumptions.

Facts:

The assessee mainly dealt in two products namely Kerosene Oil and Fertilizers. During A.Ys. 2000-01 and 2003-04, assessee made purchases from different parties. He was to bear some expenses relating to transportation charges. However, he submitted to AO that the purchases were made in bulk. Regard-ing kerosene oil it was submitted that supplying dealers redirect the Tankers to assessee’s business place hence no charges were incurred towards trans-portation. However, AO accepted the contention of assessee only in respect of Kerosene oil and added transportation charges of Rs.50,OOOon estimated basis in respect of purchase of fertilizers as they were purchased in small quantities in a day which was revealed from books of accounts. On an appeal to C!T(A), he upheld the addition. On appeal before the Tribunal, the Tribunal held that 5. 69C is applied when assessee is unable to explain the source of any expenditure however ‘the AO has to first find the evidence of incurring the expenditure. S. 69C cannot be applied on mere presumption or suspicion’. In the present case, the’ AO didn’t bring on record any evidence of incurring transportation charges. Consequently, the Tribunal deleted the addition of Rs.50,OOOalleged to have been incurred towards transportation charges.

6. 2009 TIOL 526 ITAT Mum. Livingstones Jewellery (P) Ltd. v. DCIT ITA No. 187/Mum./2007 A.Y. : 2003-04. Dated:   12-5-2009

S. 10A –  All the profits  which  have  nexus  with the  business   of  the  undertakingqualify   for deduction u/s.10A – Interest income on FDRs given by the assessee to the Bank for obtaining credit facilities has nexus with the business of the undertaking and qualifies for deduction u/s.10A.

Facts:

The assessee having its business of manufacturing and export of studded and plain jewellery of gold and platinum filed its return of income for A.Y. 2003-04 declaring total income after claiming deduction u/s.10A. Interest of Rs.9,OO,961 received on fixed deposits was netted against the interest payment of Rs.1,04,37,835 and net interest of Rs.95,36,873 was debited to its P&L account. The AO held that interest income on FDs with bank cannot be said to be derived from export of goods and merchandise. He, denied the deduction u/s.10A of this amount of interest on FDs.

The CIT(A) did not allow any relief to the assessee.

Aggrieved, assessee preferred an appeal to the Tribunal.

Held:

The expression ‘profits derived from export of articles or things or computer software’ as employed in 5s.(1) or 5s.(lA) has been given a specific meaning in 5s.(4). 5s.(4) states that the ‘profits derived from export of articles or things or computer software’ shall be the amount which bears to the ‘profits of the business of the undertaking’, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. By providing for considering the ‘profits of the business of the undertaking’, the position has been made clear that the restricted general meaning given to eligible profi ts as derived from the export of articles in 5s.(1) ha; been given a go by in 5s.(4) and the scope of the benefit has been expanded by extending to all the profits of the business carried on by the undertaking. The Tribunal noted that the wording of 5s.(4) as amended w.e.f. 1-4-2000 is on the pattern of 5. 80lA prior to its substitution w.e.f. 1-4-2000. It also noted that in the context of 5. 80IA the Arnritsar Bench of the Tribunal had in the case of Dy. CIT v. Chaman Lal & Sons, 3 50T 333 held that the benefit of deduction was available in respect of purchase and sale which was part and parcel of the business of the industrial undertaking. All the profits which have nexus with the business of the undertaking will qualify for deduction. The Tribunal noted since that the FDRs were given to obtain credit facility, interest income had nexus with the business of the undertaking and falls under the head ‘Income from Business’. It allowed the claim of deduction u/s.lOA in respect of interest income.

The appeal  filed by the assessee  was allowed.

7. 2009 TIOL 559 ITAT Mum. ITO v. P & R Automation Products Pvt. Ltd. ITA No. 2119/Mum./2007 A.Y.: 2003-04. Dated:   25-3-2009

32 – Machinery purchased and given to sister concern for manufacturing goods for the assessee, which in turn exports them, is utilised by the assessee for business – No part of depreciation can be disallowed on such machinery on the ground that spare capacity was utilised by the sister concern for manufacturing its own goods which were sold locally.

Facts:

As per the agreement entered into between the assessee and PAL (its sister concern) a CMG machine was purchased by the assessee and was installed at the factory premises of the sister concern. The sister concern was to use the machine at its premises for manufacturing goods by utilising its power, labour and other facilities and sell the goods so manufactured to the assessee at fair market price to meet the assessee’s export obligation. PAL was authorised to develop indigenous market for said products by using spare capacity. The total sales declared by PAL were Rs.2.28 crores out of which sales to the assessee were Rs.1.50 crores. 93% of the capacity of the machine had been utilised for goods sold to the assessee and spare capacity to the tune of 7% had been utilised for others. The assessee had not charged any rent or hire charges from the sister concern.

The assessee claimed depreciation on the machine on the ground that it was utilised by it for the purposes of its business. While assessing the total income of the assessee the Aa disallowed the claim of depreciation on this machine on the ground that the sister concern had also utilised the machine for manufacturing its own goods which were sold locally.
 
The CIT(A) relying upon the decision of the Madras High Court in the case of Indian Express Pvt. Ltd. 255 ITR 68 held that the assessee was entitled to deduction u/s.32 of the Act.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

The Tribunal observed that u/s.32 an assessee is entitled to deduction by way of depreciation on machinery, if it is owned by the assessee and is used for the purpose of its business. The Tribunal noted the undisputed facts viz. that the assessee had purchased the machinery and the same was provided to the sister concern essentially to manufacture goods for the assessee and supplying the same at fair market price. The Tribunal held the conditions required to be satisfied for deduction u/s.32 as having been satisfied. It stated that its view is supported by the decision of the Madras High Court in the case of Indian Express Pvt. Ltd.

The appeal  filed by the Revenue  was dismissed.

8. 2009 TIOL 550 ITAT Mum. Popatlal Fulchand v. ACIT ITA No. 358/Mum./2008 A.Y. : 2004-05. Dated:  6-5-2009

s. 22. – Property owned by individuals and used by a firm, without paying any rent, whose partners are HUFs of the individuals owning the property can be said to be used for the purposes of business by such individuals and consequently its notional income is not chargeable.

Facts:

The assessee alongwith other individuals were owners of a property which was being used by M/s. F C International, a partnership firm, whose partners were HUFs of the assessee and other individual owning the property. The HUFs were partners through the individuals owning the property. The firm did not pay any rent for the property.

The assessee was of the view that annual value of this property is not chargeable to tax since the same is being used for the purposes of his business. The Assessing Officer (Aa) was of the view that the firm is a distinct entity than its individual partners and since the property has been utilised for the purpose of the business of the firm, the benefit of S. 22 cannot be given to individual partners.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal held that the assessee was not liable to tax in respect of the notional income of the house property used by the firm for its business without paying any rent to the owners of the property. It also observed that the issue under consideration is squarely covered by the decision of the Delhi High Court in the case of Cl’T v. H. S. Singhat & Sons, 253 ITR 653 (Del.). The Tribunal allowed the appeal filed by the assessee.

Section 32(1) — Depreciation is allowable on pre-operative expenses which are revenue in nature, allocated to fixed assets since the expenses were incurred on setting up fixed assets and in pre-operative period the assessee was only engaged in putting up fixed assets on rented land.

(2011) TIOL 434 ITAT-Del.Cosmic Kitchen Pvt. Ltd. v. ACIT ITA No. 5549/Del./2010 A.Y.: 2006-2007. Dated: 13-5-2011

Facts:

In
pre-operative period, the assessee had incurred expenditure of
Rs.16,93,153, which was debited under 8 heads, all of which were revenue
in nature. The assessee was not able to link any expenditure with a
particular item of fixed asset. However, since during the pre-operative
period the assessee was engaged only in putting up fixed assets on
rented land, it had capitalised this sum of Rs.16,93,153 to various
items of fixed assets in the ratio of cost of the asset to total cost.
The Assessing Officer (AO) disallowed Rs.2,70,744 being the amount of
depreciation on this sum of Rs.16,93,153 on the ground that the
expenditure incurred is revenue in nature and there is no link between
item of asset and the expenditure incurred. Aggrieved the assessee
preferred an appeal to the Tribunal.

Held:

In
view of the ratio of the decision of the Delhi High Court in CIT v. Food
Specialities Ltd., 136 ITR 203 (Del.) and also the ratio of the
decision of the Madras High Court in CIT v. Lucas-TVS Ltd., 110 ITR 346
(Mad.), the expenditure was required to be capitalised. Also the
proportionate method of allocating the expenditure to various items of
fixed assets is fair and reasonable. Accordingly, the assessee is
entitled to claim depreciation on the sum of Rs.16,93,153 being
pre-operative expenses capitalised to various items of fixed assets. The
Tribunal decided the appeal in favour of the assessee.

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