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DIRECT TAXES Judicial pronouncements
SN K
Issue 12 December, 2011
Newsletter Website : www.snkca.com Email: [email protected]
� DIRECT TAXES …... 1 - 13
� OTHER LAWS ………... 14 - 15
� IMPORTANT DUE DATES… 15
� INDIRECT TAXES ……. 13 - 14
Smt Alka Agarwal v ADIT [TS-650-ITAT-2011(Del), ITAT
Delhi Bench, dtd. 09.11.2011]
Capital gains on listed shares converted from investment
into stock in trade & later sold by paying STT, not exempt
u/s 10(38)
A Delhi bench of ITAT held that capital gains on conversion of
listed shares, investment, into 'stock in trade' would not enjoy
exemption u/s 10(38) even though STT was paid at the time
of subsequent sale of such shares. ITAT relied that according
to Sec 45(2) capital gains arose at the time of conversion,
which was not a transaction liable to STT. ITAT also held that
capital gain arising on conversion was taxable at 20% as the
assessee was a non-resident.
The assessee was a non-resident individual and held listed
shares in a company. These shares were treated as invest-
ment (& capital asset). The assessee converted these shares
into stock in trade of the business in April 2005. Later, the
assessee sold the shares in FY 2005-06 through stock ex-
change and securities transaction tax (STT) was paid at the
time of sale of shares through stock exchange.
The assessee claimed that profits on sale of shares were ex-
empt u/s 10(38), which was denied by the AO. Sec. 10(38)
provides exemption for long term capital gain arising on sale
of listed shares when sale is subject to STT.
The AO held that the 'transfer' of shares took place at the time
of conversion of investment into stock in trade, even though
tax on capital gains was payable tax at the time of sale of
shares as per the provisions of Sec. 45(2).
The conversion of investment into stock in trade is treated as
‘transfer of capital asset’ in terms of provisions of Sec. 2(47).
Sec. 45(2) provides that capital gains arising on such transfer
are to be taxed in the year in which actual sale of assets
takes place. Further, fair value at the time of conversion is to
be treated as consideration for conversion and capital gains
are required to be computed accordingly.
A Delhi bench of ITAT held that benefit of exemption from
capital gains tax u/s 10(38) was not available to the assessee.
After analyzing relevant provisions, ITAT observed, “A cumu-
lative reading of the aforesaid provisions, in our mind, makes
it clear that as far as the benefit of Section 10(38) is con-
cerned, the assessee shall not be eligible for this benefit at
the first stage of chargeability of capital gains because the
deemed sale is the point of conversion into stock-in-trade
which had not suffered STT.”
Further, ITAT held that second transaction of actual sale of
shares was purely a business transaction and benefit of Sec
10(38) was applicable only to transfer of shares which are
held as 'long term capital asset' and not to the shares trans-
ferred as 'stock in trade'. ITAT also denied the alternative
claim of the assessee that capital gains should be taxed @
10% and not @20% as determined by the AO. ITAT held that
proviso which provides concessional rate of tax of 10%
(without indexation benefit) is applicable only to resident as-
sessee. Since, the assessee was a non-resident, the benefit
was not available to the assessee. Accordingly ITAT upheld
that the AO’s action in charging the capital gains of conver-
sion of shares @ 20%.
2
SNK DIRECT TAXES
Judicial pronouncements
CIT Vs DSL Software Ltd [TS-665-
HC-2011(Kar), Karnataka High court,
dtd. 17.11.2011]
10 year tax holiday u/s 10B under
1999 amendment available to exist-
ing STP units for unexpired period;
Benefit cannot be denied even if
original 5 years tax holiday period
expired pre-amendment; Cost im-
posed on IT department for filing
frivolous appeal
DSL Software Ltd (the assessee)
claimed tax holiday benefit u/s 10B for
5 years from FY 1992-03 to 1996-97
under the old provisions of Sec. 10B.
As per the then existing provision as-
sessee was entitled to tax holiday
benefit for the period of 5 years in the
block of 8 years, beginning with the
year in which eligible unit commenced
software development.
Section 10A and 10B were amended
with effect from 1st April 1999, by which
the tax holiday was extended to 10
years. The amendment also provided
that in case of undertakings, which en-
joyed the benefit under old provisions,
the extended benefit would be available
only for unexpired period. The as-
sessee therefore claimed benefit for FY
1998-99 to FY 2000-01.
The AO disallowed the benefit in FY
2000-01, holding that the assessee ex-
hausted tax holiday benefit prior to
amendment. The AO held that there
was no unexpired period left to claim
the benefit, on the date on which
amendment became effective, as the
assessee exhausted the benefit in FY
1996-97 itself.
The assessee’s appeal was allowed by
CIT(A) and ITAT confirmed the order of
CIT(A). The Revenue was in appeal
before HC against ITAT order.
A divisional bench of Karnataka HC
held that the assessee was entitled to
claim benefit for remaining period under
new provisions. HC observed that ob-
ject of amendment was to extend the
benefit to 10 years, in order to give
added thrust to export. The Court held
that since it was case of extension from
5 years to 10 years, the unit which had
benefit for 5 years, would automatically
get the benefit for 10 years, if other
conditions were fulfilled. The other con-
dition to be fulfilled was with regards to
the period of 10 years beginning with
the year, in which the undertaking be-
gan to manufacture.
HC observed that benefit could not be
denied on the ground that 5 years pe-
riod had expired on the date on which
amended provision came into force.
Such an interpretation would defeat the
intention behind the amendment.
HC noted that Income-tax department
had filed appeal without proper applica-
tion of mind and wasted precious time
of HC.
The Court observed.. “It seems the De-
partment is filing these appeals either
for the purpose of statistics or to save
their skins without application of mind.
In this process, a person eligible for tax
holiday has not only been denied the
benefit, but made to contest the pro-
ceedings in three forums.” Therefore,
HC held , “The only way to bring reason
to the department, is by imposing cost,
so the appropriate action may be taken
against the person who has taken the
decision to prefer an appeal and re-
cover the same after enquiry.’
Accordingly, HC imposed a cost of Rs.
1 lakh on the tax department.
CIT Vs. Yokogawa India Ltd. [ITA No.
78 of 2011, Karnataka High Court,
dtd. 09.08.2011]
Sec. 10A/B continue to “exempt”
profits & so loss of other units
(eligible & non-eligible, including B/f
loss) not liable for set-off against s.
10A/B profits
The High Court had to consider two
issues for AY 2001-02 & onwards:
whether (i) the loss incurred by a non-
eligible unit & (ii) the brought forward
unabsorbed loss & unabsorbed depre-
ciation of the eligible unit has to be set-
off against the profits of the eligible unit
before allowing deduction u/s 10A/ 10B.
Karnataka High Court answering both
questions in favour of the assessee
held that -
(a) On issue (i), sec. 10A was
amended by the FA 2000 w.e.f.
1.4.2001 to convert it from an
“exemption” provision to a
“deduction” provision. S. 10A al-
lows deduction “from the total in-
come“. The phrase “total income” in
sec. 10A means “the total income
of the STP unit” and not “total in-
come of the assessee“. Conse-
quently, sec. 10A deduction has to
be given before computing the
“profits & gains of business” under
Chapter IV. This proposition is in
line with the form of return. Allowing
deduction at the earliest stage of
business income computation will
blur the difference between
“commercial profits” and “tax prof-
its“. Further, though sec. 10A was
amended to make it a “deduction”
provision, it continues to remain in
Chapter III and was not moved to
Chapter VI-A. The result is that
even now sec. 10A is in the nature
of an “exemption” provision and the
profits of the eligible unit have to be
deducted at source level and do not
enter into the computation of in-
come. Consequently, the losses
suffered by non-eligible units can-
not be set-off against the eligible
profits;
3
SNK DIRECT TAXES
Judicial pronouncements
(b) On issue (ii), sec. 10A(6) as
amended by the FA 2003 w.r.e.f.
1.4.2001 provides that depreciation
and business loss of the eligible
unit relating to the AY 2001-02 &
onwards is eligible for set-off &
carry forward for set-off against
income post tax holiday. This
amendment does not militate
against the proposition that the
benefit of relief u/s 10A is in the
nature of exemption with reference
to commercial profits. However, to
give effect to the legislative inten-
tion of allowing the carry forward of
depreciation and loss suffered in
respect of any year during the tax
holiday for being set off against
income post tax holiday, it is neces-
sary that a notional computation of
business income and the deprecia-
tion should be made for each year
of the tax holiday period. Such loss
is eligible to be carried forward.
But, as the income of the 10A unit
has to be excluded at source itself
before arriving at the gross total
income, the question of setting off
the loss of the current year’s or the
brought forward business loss (and
unabsorbed depreciation) against
the sec. 10A profits does not arise.
CIT Vs Tata Elxsi Limited [TS-637-
HC-2011(Kar), Karnataka High court,
dtd. 07.11.2011]
Any exclusion from ‘export turnover’
is also to be excluded from ‘total
turnover’ for Sec 10A relief
A Division bench of Karnataka HC has
ruled that while computing the relief u/s
10A of the Act, the amount of communi-
cation expenses should be excluded
from the total turnover if the same are
excluded from the export turnover.
The assessee, a STP unit, while com-
puting exemption u/s 10A, deducted the
communication expenses incurred in
foreign currency from export turnover
as well as total turnover. The Assessing
officer (AO) disallowed the proportion-
ate exemption claim on the ground that
the assessee ought to have included
those expenses in total turnover in the
absence of any specific provision for
such exclusion. The same was how-
ever overturned by ITAT.
A Division bench of Karnataka HC, up-
holding the ITAT ruling, held that while
computing the relief u/s 10A of the Act,
the amount of communication ex-
penses should be excluded from the
total turnover if the same are excluded
from the export turnover.
Though there is no definition of total
turnover in Sec 10A, HC observed that
If the export turnover in the numerator
is to be arrived at after excluding cer-
tain expenses, the same should also be
excluded in computing the export turn-
over as a component of total turnover in
the denominator. The reason being the
total turnover includes export turnover.
It further held that “If what is excluded
in computing the export turnover is in-
cluded while arriving at the total turn-
over, when export turnover was compo-
nent of total turnover, such an interpre-
tation run counter to the legislative in-
tent and impermissible”.
While relying on Apex Court decision in
Laxmi Machine Works [(2007) 290 ITR
667 (SC)], HC observed that the princi-
ples laid down by courts for interpreting
the term total turnover u/s 80HHC shall
be applicable to compute Sec 10A re-
lief. HC also placed reliance on Bom-
bay HC decision in Gem Plus Jewellery
India Ltd [2010] 233 CTR. 248 and
Chennai ITAT Special Bench ruling in
Sak Soft Ltd [( 2009) 313 ITR 353
(Chennai)(SB)]
Maxopp Investment Ltd Vs. CIT [ITA
No. 687/2009, Delhi High Court, dtd.
18.11.2011]
No S. 14A or Rule 8D Disallowance
without showing how assessee’s
calculation is wrong. Only real ex-
penditure can be disallowed
The High Court had to consider two
issues: (a) whether interest paid on
funds borrowed to acquire “trading
shares” is hit by s. 14A given that the
profits there from are assessable to tax
as “business profits” and the dividend is
incidental and (b) whether Rule 8D has
retrospective operation. Delhi High
Court held that:-
1. The argument that if the dominant
and main objective of the expendi-
ture was not the earning of ‘exempt’
income then, the expenditure can-
not be disallowed u/s 14A is not
acceptable. The expression “in re-
lation to” cannot be given a narrow
meaning and simply means “in con-
nection with” or “pertaining to”. If
the expenditure has a relation or
connection with or pertains to ex-
empt income, it cannot be allowed
as a deduction even if it otherwise
qualifies under the other provisions
of the Act;
2. The expression “expenditure in-
curred” in s. 14A refers to actual
expenditure and not to some imag-
ined expenditure. If no expenditure
is incurred in relation to the exempt
income, no disallowance can be
made u/s 14A (Hero Cycles Ltd 323
ITR 518 referred).
4
SNK DIRECT TAXES
Judicial pronouncements
3. The AO cannot proceed to deter-
mine the amount of expenditure in-
curred in relation to exempt income
without recording a finding that he is
not satisfied with the correctness of
the claim of the assessee. This is a
condition precedent. While rejecting
the claim of the assessee with re-
gard to the expenditure or no expen-
diture in relation to exempt income,
the AO will have to indicate cogent
reasons for the same;
4. Rule 8D comes into play only when
the AO records a finding that he is
not satisfied with the assessee’s
method. Though s. 14A(2) & (3)
were inserted w.e.f. 1.4.1962, Rule
8D was inserted on 24.03.2008. Ac-
cordingly, Rule 8D would operate
prospectively. (Godrej and Boyce
Mfg. Co. Ltd 328 ITR 81 (Bom) fol-
lowed);
5. For periods prior to Rule 8D, the AO
will have to adopt a reasonable
method on the basis of objective
criteria to determine the expenditure.
However, here also, he will have to
show why he is not satisfied with the
correctness of the assessee’s claim.
Aditya Birla Nuvo Ltd. Vs. Assistant
Commissioner of Income tax [(2011)
61 DTR (Mum.)(trib.) 343, ITAT Mum-
bai bench, dtd. 28.02.2011]
Where the new unit being set up by
the assessee was integral part of the
same business, interest on money
borrowed for the same had to be al-
lowed as deduction under Sec. 36(1)
(iii)
The provisions of allowing interest on
capital borrowed are contained in Sec.
36(1)(iii). The only requirement of the
said section is that the capital should
be borrowed for the purpose of busi-
ness and the interest expenditure
should be incurred. Once these condi-
tions are satisfied the interest has to be
allowed as revenue expenditure irre-
spective of the fact whether borrowed
funds are used for the acquisition of
capital asset or for setting up of new
units. Therefore the point to be consid-
ered is whether the new unit was an
independent business or part of the
existing business. In case the new unit
was is found to be part of the existing
business the interest on capital bor-
rowed has to be allowed as deduction.
The tests to be applied are whether
there is interconnection, interlacing,
interdependence and unity of control
between the two businesses. In this
case it is found that all the units are
under the direct control and supervision
of the board of directors and thus have
a common business administration.
Though the employees and funds are
separately allocated for different units
they are dependent upon the head of-
fice for raising of funds and employees
are transferable from one unit to an-
other. There is also inter-transfer of
funds. There is centralized finance cell
for looking after accounts, finance, fund
management, information, secretarial
matters and taxation matters for all the
units. The new unit being set up by the
assessee company was integral part of
the same business and therefore inter-
est on money borrowed has to be al-
lowed as deduction.
CIT Vs. Asahi India Safety Glass Ltd.
[ITA No. 1110/2006 & 1111/2006,
Delhi High Court, dtd. 04.11.2011]
Expenditure on ‘Application Soft-
ware’ is revenue in nature
The assessee, engaged in manufactur-
ing safety glass, entered into an agree-
ment with Arthur Anderson for installa-
tion of the “Oracle” software application
for financial accounting, inventory and
purchase. A Master Software Licence
and Services Agreement was also en-
tered into with Oracle. The assessee
incurred expenditure of Rs. 1.36 crores
& Rs. 1.70 crores in AY 1997-98 &
1998-99. While in the books the expen-
diture for AY 1997-98 was capitalized,
the expenditure for AY 1998-99 was
treated as “deferred revenue expendi-
ture”. The AO rejected the claim for
deduction of the entire expenditure on
the ground that it had resulted in
“enduring benefit” and was “capital” in
nature though the CIT (A) & Tribunal
allowed the claim on the ground that
the expenditure had not resulted in
creation of new asset or a new source
of income. On appeal by the depart-
ment to the High Court, dismissing the
appeal Delhi High Court held that:
(i) The test of enduring benefit is not a
certain or a conclusive test which
the courts can apply almost by rote.
What is required to be seen is the
real intent and purpose of the ex-
penditure and whether the expendi-
ture results in creation of fixed capi-
tal for the assessee. Expenditure
incurred which enables the profit
making structure to work more effi-
ciently leaving the source of the
profit making structure untouched is
expense in the nature of revenue
expenditure. Fine tuning business
operations to enable the manage-
ment to run its business effectively,
efficiently and profitably; leaving the
fixed assets untouched is of reve-
nue expenditure even though the
advantage may last for an indefinite
period. Test of enduring benefit or
advantage collapses in such like
cases especially in cases which
deal with technology and software
application which do not in any
manner supplant the source of in-
come or added to the fixed capital
5
SNK DIRECT TAXES
Judicial pronouncements
of the assessee (Alembic Chemical
Works 177 ITR 377 followed);
(ii) On facts, the expenditure was for
overhauling the accountancy and to
efficiently train the accounting staff.
It was incurred under various sub-
heads such as licence fee, annual
technical support fee, professional
charges, data entry operator
charges, training charges and trav-
elling expenses. None of these re-
sulted in either creation of a new
asset or brought forth a new source
of income for the assessee. The
software was “application software”
which enabled it to execute tasks in
the field of accounting, purchases
and inventory maintenance more
efficiently;
(iii) The fact that the expenditure was
not written off in the books/ treated
as ‘deferred revenue’ is irrelevant
(Kedar Nath Jute vs CIT 82 ITR
363 (SC) followed)
Sood Brij & Associates vs. CIT [ITA
No. 1154 of 2011, Delhi High Court,
dtd. 04.11.2011]
Sec. 40(b)(v): Partnership Deed must
quantify or lay down the manner of
quantifying remuneration to partners
The assessee, a firm of Chartered Ac-
countants, provided by its partnership
deed that the profits would be divided
equally. By a supplementary deed of
1992 it was agreed that the working
partners would be paid such remunera-
tion as may be “mutually agreed upon”
subject to the provisions of the Act. It
was also specified that the total remu-
neration payable to the working part-
ners would be an amount permissible
as remuneration to the working part-
ners under the Act. The AO, CIT (A) &
Tribunal held that the deed did not sat-
isfy the conditions of s. 40(b)(v) and
deduction was not admissible. On ap-
peal to the High Court, dismissing the
appeal Delhi High court held that :-
1. Sec. 40(b) (i) to (v) which prescribe
the conditions for deduction of remu-
neration paid to a partner require
that the payment should be author-
ized by, and be “in accordance with
the terms of the partnership deed“.
This mandates that the quantum of
remuneration or the manner of com-
puting the quantum of remuneration
should be stipulated in the partner-
ship deed and should not be left un-
determined, undecided or to be de-
termined or decided on a future
date;
2. On facts, while the deed authorized
payment of remuneration to the part-
ners, it did not quantify the same or
prescribe any method or manner to
calculate and compute the remu-
neration. Clause 1 of the supple-
mentary deed simply stated that the
remuneration payable would be
“mutually agreed“. Even clause 2
which stated that the total remunera-
tion payable to the working partners
shall be the permissible amount read
with the clause that stated that prof-
its would be divided equally did not
satisfy the requirement of sec. 40(b)
(v) because it also did not quantify or
lay down the manner of quantifying
the total remuneration payable to the
partners (Anil Hardware Store 323
ITR 368 (HP) distinguished).
CIT Vs. Dataware Pvt. Ltd. [ITA No.
263 of 2011, Calcutta High Court,
02.09.2011]
Assessee’s AO cannot question
Creditor’s I. T. Return
The assessee received share applica-
tion money of Rs.1 crore from a com-
pany (‘creditor’) and submitted the
creditor’s confirmation letter, details of
the transaction, PAN etc to the AO. The
AO made enquiries from the creditor
who confirmed the transaction. How-
ever, the AO, instead of making enquiry
from the creditor’s AO as to whether
the creditor’s return had been ac-
cepted, arrived at the finding after look-
ing at the creditor’s P&L A/c that the
procurement of money by the creditor
was not genuine and added the amount
to the assessee’s income. This was
reversed by the CIT (A) and the Tribu-
nal. On appeal by the department, Cal-
cutta High Court dismissing the appeal
held that if the creditor discloses his
PAN and claims to be an assessee, the
AO cannot himself examine the return
and P&L A/c of the creditor and brand
the same as unworthy of credence. In-
stead, he should enquire from the
creditor’s AO as to the genuineness of
the transaction and whether such trans-
action has been accepted by the credi-
tor’s AO. So long it is not established
that the return submitted by the creditor
has been rejected by the creditor’s AO,
the assessee’s AO is bound to accept
the same as genuine when the identity
of the creditor and the genuineness of
transaction through account payee
cheque has been established.
CIT Vs. Jyoti Plastic Works Pvt Ltd
[ITA No. 5045 of 2010, Bombay High
Court, dtd. 15.11.2011]
For sec. 80-IB “workers” need not be
“employees”
The assesee was engaged in the
manufacture of goods by using job
workers; its total number of permanent
employees was less than ten. The de-
partment relied on Venus Auto Pvt Ltd
vs. CIT [321 ITR 504 (All)] and claimed
that the non-employment of at least 10
6
DIRECT TAXES
Judicial pronouncements SNK
workers was in breach of sec. 80IB(2)
(iv) and deduction u/s 80IB was not
admissible. This was reversed by the
Tribunal. On appeal by the department,
dismissing the appeal Bombay High
Court held that Sec. 80IB(2)(iv)(iii) pro-
vides that an industrial undertaking
must “employ” ten or more workers in a
manufacturing process carried on with
the aid of power. The expression
‘worker’ which is not defined in the Act
means any person employed by the
assessee directly or by or through any
agency (including a contractor). What is
relevant is the employment of ten or
more workers and not the mode and
the manner of employment. The fact
that the employer – employee relation-
ship between the workers employed by
the assessee differs cannot be a
ground to deny deduction u/s 80IB
(Sawyer’s Asia Ltd 122 ITR 259 (Bom)
followed).
ACIT Vs. The Total Packaging Ser-
vices [ITA no. 5364/Mum/2009, ITAT
Mumbai Bench, dtd. 04.11.2011]
For s. 80-IB, Modvat credit is
“derived” from industrial undertak-
ing
The assessee availed/set off Modvat
credit of excise duty of earlier years
amounting to Rs. 1.93 crores. The AO
held that s. 80-IB deduction was not
admissible on the said Modvat credit on
the ground that the “source of the in-
come was government policy imposing
excise duty at differential rate” and it
was not “derived” from the industrial
undertaking. This was reversed by the
CIT (A). On appeal by the department,
dismissing the appeal ITAT Mumbai
bench held that the payment of central
excise duty has a direct nexus with the
manufacturing activity and similarly, the
refund of the Central excise duty also
has a direct nexus with the manufactur-
ing activity. The issue of payment of
Central excise duty would not arise in
the absence of any industrial activity.
There is, therefore, an inextricable link
between the manufacturing activity, the
payment of central excise duty and its
refund. Consequently, it is “derived”
from the industrial undertaking and eli-
gible for s. 80-IB deduction (CIT vs.
Meghalaya Steels 332 ITR 91 (Gau)
and J.K. Aluminium vs. ITO (ITAT
Delhi) followed).
Anil H. Lad Vs. DCIT [ITA No. 1262/
Bang./2010, ITAT Bangalore bench,
dtd. 07.01.2011]
Loss & Depreciation of eligible unit
prior to “initial assessment year”, if
set-off against other income, not no-
tionally carried forward.
In AY 2006-07 the assessee installed a
windmill, the profits of which were eligi-
ble for 100% deduction u/s 80-IA. Ow-
ing to depreciation and loss, the as-
sessee did not claim sec. 80-IA deduc-
tion in AY 2006-07 & 2007-08 and set-
off the loss and depreciation against
other income. In AY 2008-09, the as-
sessee earned profits from the windmill
and claimed deduction u/s 80-IA. The
AO & CIT (A) relied on the Special
Bench decision in ACIT vs. Gold Mines
Shares & Finance [116 TTJ (Ahd) (SB)
705] and held that in view of sec. 80IA
(5), the loss and unabsorbed deprecia-
tion of the eligible unit, though set-off
against the other income, had to be
“notionally” carried forward for set-off
against the profits of the eligible under-
taking. On appeal by the assessee,
allowing the appeal ITAT Bangalore
bench held that though in Gold Mines
Shares & Finance [116 TTJ (Ahd) (SB)
705] it was held that in view of sec.
80IA(5), the eligible unit had to be
treated as the only source of income
and the profits had to be computed af-
ter deduction of the notionally brought
forward losses and depreciation of the
eligible business even though they
were in fact set-off against other in-
come in the earlier years, the Madras
High Court held in Velayudhaswamy
Spinning Mills P. Ltd. v. ACIT [38 DTR
57] that such a notional exercise was
not contemplated by sec. 80IA (5). It
was held that the fiction in sec. 80-IA
(5) that the eligible unit is the only
source of income begins from the
“initial assessment year” which is not
the same thing as the year of com-
mencement of activity. The law contem-
plates looking forward to a period of ten
years from the initial assessment and
does not allow the Revenue to look
backward and find out if there is any
loss of earlier years and bring forward
notionally even though the same were
set off against other income of the as-
sessee and the set off against the cur-
rent income of the eligible business.
Once the set off has taken place in an
earlier year against the other income,
the Revenue cannot rework the set off
amount and bring it notionally. The fic-
tion in sec. 80-IA(5) is for a limited pur-
pose and does not contemplate to bring
set off amount notionally. The judgment
of a constitutional court has overriding
effect over the decision of a Special
Bench of the Tribunal and the latter
cannot be followed.
CIT Vs. Bhari Information Tech Sys-
tems [SLP No. 33750/2009, The Su-
preme Court of India, dtd.
20.10.2011]
For sec. 115JA/JB sec. 80HHC de-
duction to be computed as per P&L
Profits & not normal provisions
The assessee had a loss as per the
normal computation though it had a
profit as per the P&L A/c. In computing
the book profits u/s 115JA, the as-
sessee claimed deduction u/s 80HHE.
The AO rejected the claim on the basis
that as the assessee had no income
under the regular provisions of the Act,
it was not eligible for sec. 80HHE de-
duction in computing the sec. 115JA
book profits.
7
SNK DIRECT TAXES
Judicial pronouncements
This was upheld by the CIT (A) though
the Tribunal gave relief by following the
judgment of the Special Bench of the
Tribunal in DCIT vs. Syncome Formula-
tions 106 ITD 193. This was upheld by
the High Court. On appeal by the de-
partment, the Supreme Court dismiss-
ing the appeal held that In DCIT vs.
Syncome Formulations 106 ITD 193
the Special Bench held in the context of
sec. 80HHC that the deduction is to be
worked out not on the basis of regular
income tax profits but it has to be
worked out on the basis of the adjusted
book profits in a case where sec.
115JA is applicable. In the said judg-
ment, the dichotomy between regular
income tax profits and adjusted book
profits u/s 115JA was clearly brought
out and it was rightly held that in sec.
115JA relief has to be computed u/s
80HHC(3)/(3A). It was held that once
the law itself declares that the adjusted
book profit is amenable for further de-
ductions on specified grounds, in a
case where sec. 80HHC (80HHE in the
present case) is operational, it be-
comes clear that computation for the
deduction under those sections needs
to be worked out on the basis of the
adjusted book profit. Accordingly, the
deduction claimed by the assessee u/s
80HHC & 80HHE has to be worked out
on the basis of adjusted book profit u/s
115JA and not on the basis of the prof-
its computed under regular provisions
of law applicable to computation of
profits and gains of business. The Su-
preme Court agreed with the view
taken by the Special Bench of the Tri-
bunal.
Atma Ram Properties Pvt Ltd Vs.
DCIT [ITA No. 52/2010 & 87/2010,
Delhi High Court, dtd. 11.11.2011]
Under Sec. 147, AO must specify
what facts are failed to be disclosed.
Lapse by AO no ground for reopen-
ing if primary facts disclosed
In AY 2001-02, the AO assessed ad-
vances of Rs. 1.56 crores received
from a group concern as “deemed divi-
dend” u/s 2(22)(e). In appeal, the CIT
(A) held that the advances received in
earlier years could not be assessed.
The AO thereafter reopened the as-
sessment for AY 1999-00 (after 4 years
from the end of the AY). Though the
AO alleged that there was a failure on
the part of the assessee to disclose full
and true material facts, he did not spec-
ify what that failure was. The reopening
was upheld by the CIT (A) & the Tribu-
nal. On appeal to the High Court, allow-
ing the appeal Delhi High Court held
that :-
1. In AY 1999-00, the AO inquired into
the details of advances received but
did not make any addition u/s 2(22)
(e). If the AO fails to apply legal pro-
visions, no fault can be attributed to
the assessee. The assessee is
merely required to make a full and
true disclosure of material facts but
is not required to disclose, state or
explain the law. A lapse or error on
the part of the AO cannot be re-
garded as a failure on the part of the
assessee to make a full and true
disclosure of material facts;
2. Though the recorded reasons state
that the assessee had failed to fully
and truly disclose the facts, they do
not indicate why and how there was
this failure. Mere repetition or quot-
ing the language of the proviso is not
sufficient. The basis of the averment
should be either stated or be appar-
ent from the record;
3. Explanation (1) to s. 147 which
states that mere production of books
is not sufficient does not apply a
case where the AO failed to apply
the law to admitted facts on record.
4. The allegation that the assessee did
not disclose the true and correct na-
ture of payment received from the
sister concern nor disclosed the ex-
tent of holding of the sister concern
so as to enable the AO to apply his
mind regarding s. 2(22)(e) is not ac-
ceptable. The assessee had filed
statement of accounts of each credi-
tor and indicated them to be sister
concerns. The primary facts were
furnished. The law does not impose
any further obligation of disclosure
on the assessee (CIT vs. Burlop
Dealers Ltd 79 ITR 609 (SC) fol-
lowed).
ITO Vs. Indian Oil Corporation [ITA
No. 1829 to 1834/Del/2011, ITAT
Delhi Bench, dtd. 16.11.2011]
Tests to distinguish “transportation
contract” from “hire contract”
The assessee entered into contracts
with transporters for transporting petro-
leum products from the plant to various
destinations. The assessee deducted
TDS u/s 194C at 2% on the basis that
the transportation contract was “work”.
The AO held that the contract was a
“hiring” of vehicles on the basis that (i)
the assessee had exclusive possession
and usage, (ii) the use was for a fixed
tenure, (iii) the tankers were custom-
ized to the assessee’s requirements
and that TDS ought to have been u/s
194-I at 10%. The assessee was held
to be in default u/s 201. On appeal, the
CIT (A) reversed the AO.
8
SNK DIRECT TAXES
Judicial pronouncements
On appeal by the department, dismiss-
ing the appeal ITAT Delhi bench held
that to decide whether a contract is one
for “transportation” or for “hiring”, the
crucial thing is to see who is doing the
transportation work. If the assessee
takes the trucks and does the work of
transportation himself, it would amount
to hiring. However, if the services of
the carrier were used and the payment
was for actual transportation work, the
contract is for transportation of goods
and not an arrangement for hiring of
vehicles. On facts, the agreement was
of the nature of transport agreement
and not one for hiring of vehicles be-
cause the tank truck owners did not
simply confine themselves to providing
vehicles at the disposal of the as-
sessee in lieu of rent but also engaged
their drivers in driving such vehicles
and thereby in transporting petroleum
products from one place to the other. In
effect, the truck remained in the pos-
session of the staff of the carrier. Fur-
ther, the assessee was required to pay
for the transportation work on the basis
of distance and no idle charges were
payable. There was no transfer of the
right to use the vehicle involved in the
agreement. The agreement was merely
for carriage of petroleum products and
so s. 194-I was not applicable.
CIT Vs. Kotak Securities Limited
[ITA No. 3111 of 2009, Bombay High
Court, dtd. 21.10.2011]
“Transaction charges” paid to BSE
is “fees for technical services” u/s
194-J
The assessee paid Rs.5.17 crores to
the Bombay Stock Exchange towards
“transaction charges” for getting ac-
cess to the “BOLT” trading system. The
AO held that the payment constituted
‘fees for technical services‘ u/s 194J
and that as there was a failure to de-
duct TDS u/s 194-J, the amount was
disallowable u/s 40(a)(i). This was up-
held by the CIT (A) though reversed by
the Tribunal on the ground that the
stock exchange did not render any
managerial or technical services. On
appeal by the department, reversing
the Tribunal, Bombay High Court held
that the assessee’s argument, based
on Skycell Communications v/s DCIT
251 ITR 53 (Mad), that the stock ex-
change does not render “managerial or
technical services” is not acceptable
because while in that case the sub-
scriber had paid a fixed amount for the
use of air time on the mobile phone
and was not concerned with the tech-
nology or the services rendered by the
managerial staff in keeping the cellular
mobile phone activated, in the case of
a stock exchange, there is direct link-
age between the managerial services
rendered and the transaction charges
levied by the stock exchange. The
BOLT system provided by the BSE is a
complete platform for trading in securi-
ties. A stock exchange manages the
entire trading activity carried on by its
members and accordingly renders
“managerial services”. Consequently,
the transaction charges constituted
“fees for technical services” u/s 194-J
and the assessee ought to have de-
ducted TDS.
Tarika Exports Vs. ACIT [(2011) 129
ITD (Ahd.), ITAT Ahmedabad Bench,
dtd. 30.11.2010]
Taxes paid after the end of the previ-
ous year but before the due date of
filing of the return are to be consid-
ered while calculating interest u/s.
234A
Interest under Sec. 234A is compensa-
tory in nature and not penal. It aims to
compensate the Government for not
getting its dues within the time limit
provided u/s. 139(1).
Therefore, if entire tax amount is paid
before the due date of filing of return,
though the assessee has delayed in
filing the return, no interest is leviable
u/s. 234A. The same was also held by
the Apex Court in the case of CIT Vs.
Pranoy Roy & Anr.
Sushil Kumar Das Vs. ITO [(2011)
TIOL 583 (Kol.), ITAT Kolkata Bench,
dtd. 13.05.2011]
Income assessed can be lower than
the income returned by the as-
sessee. A receipt returned by the
assessee can be reduced at the Ap-
pellate stage if the same is, in law,
not taxable
The assessee retired as a school
teacher on 31.07.1998. He received
an amount of Rs. 10,92,796/- inclusive
of interest of Rs. 3,29,508/-. Interest
was received by virtue of writ petition
filed by the assessee. Since the
amount received by the assessee in-
cluded interest on which tax was de-
ducted at source, the AO issued a no-
tice u/s. 148 of the Act upon noticing
that income has escaped assessment
since the assessee had not filed return
of income. The assessee filed return
of income returning income of Rs.
6,19,392/- and claimed relief u/s. 89(1)
of the Act. The AO restricted the relief
u/s. 89(1) to Rs. 65,817/- and as-
sessed the total income at Rs.
8,86,500/-.
The returned income as well as as-
sessed income included interest re-
ceived as per the order of the High
Court. Upon completion of the assess-
ment the assessee came to know that
interest received pursuant to the order
of the High Court, being non statutory
interest in the form of damages /
9
SNK DIRECT TAXES
Judicial pronouncements
compensation, the same is not charge-
able to tax. He filed an appeal to the
CIT(A) and contended that interest
wrongly returned by him be held to be
not taxable in view of the decision of
the Punjab & Haryana High Court in
the case of CIT Vs. Charanjit Jawa
(142 Taxmann 101). The CIT(A) re-
jected the same by stating the as-
sessee had offered the income in his
return and the same cannot be re-
duced at the Appellate Stage.
When the assessee filed an appeal to
ITAT, ITAT held that the principle for
determining the taxable income of the
assessee under the Act should be
within the purview of the law in force. If
the taxable income determined by the
AO is not in accordance with such prin-
ciple it is open to the assessee raise
the contention before the higher au-
thorities for following the law to deter-
mine the actual taxable income of the
assessee. Tribunal held that the lower
authorities cannot say that merely be-
cause the assessee has returned in-
come which is higher than the income
determined in accordance with the le-
gal principles; such returned income
can be lawfully assessed. An as-
sessee is liable to pay tax only on his
taxable income. The AO cannot as-
sess an amount which is not taxable
merely on the ground that the as-
sessee has returned the same as its
income. It is always open to the as-
sessee to shoe before the higher au-
thorities that income though returned
as income is not taxable under law.
On merits, the Tribunal held that the
case of CIT Vs. Charanjit Jawa sup-
ports the view that interest received as
a result of the order of the High Court
was not a statutory interest and was in
the form of damage/compensation and
the same was not liable to tax. The
tribunal held that the interest of Rs.
2,53,730/- received by the assessee as
per the order of the High Court was not
taxable and the same is a capital re-
ceipt. The Tribunal also found support
from the circular issued by the CBDT
being circular No. 14(XL-35) dated
11.04.1955 which has directed the offi-
cer not to take advantage of the igno-
rance of the assessees. The tribunal
directed the AO to treat the sum of Rs.
2,53,730/- as capital receipt.
CIT Vs. Manish Build Well Pvt Ltd
[ITA No. 928/2011, Delhi High court,
dtd. 15.11.2011]
Powers of CIT (A) to admit Addi-
tional Evidence u/s 250(4) & Rule
46A
The AO asked the assessee to furnish
confirmation letters from customers
who had paid advances by cash (& not
cheque) which the assessee complied
with. In the assessment order, the AO
treated the advances received by
cheque as “unexplained cash credits”
u/s 68. Before the CIT (A), the as-
sessee produced confirmation letters
from customers who paid by cheque.
The CIT (A) admitted the additional
evidence under Rule 46A &, without
giving the AO an opportunity, deleted
the addition. In appeal by the depart-
ment, the Tribunal upheld the CIT (A)’s
action on the ground that as the AO
had not called for the confirmations
before making the addition, the CIT (A)
was justified in admitting the additional
evidence and there was no reason to
set-aside the matter to the AO for a
second innings. On further appeal to
the High Court, allowing the appeal
Delhi High Court held that u/s 250(4),
the CIT (A) has the power to direct en-
quiry and call for evidence from the
assessee. Under Rule 46A, the as-
sessee has the right to ask for the ad-
mission of additional evidence. If the
CIT (A) exercises his powers u/s 250
(4) to call for additional evidence, the
AO need not be given an opportunity to
show-cause. However, if the CIT (A)
acts on an application under Rule 46A,
then the requirement of giving the AO
an opportunity as per Rule 46A(3) is
mandatory. The argument that in all
cases where additional evidence is
admitted, the CIT (A) should be consid-
ered to have exercised his powers u/s
250(4) is not acceptable as it will ren-
der Rule 46A redundant. On facts, as
the assessee had produced the evi-
dence, the CIT (A) ought to have fol-
lowed Rule 46A(3) and remanded the
evidence to the AO for comments and
verification.
CIT vs. M/s K. Mohan & Co.
(Exports) [ITA No. 1263 of 2011,
Bombay High Court, dtd. 01.07.2011]
Retrospective amendment does not
mean failure to disclose material
facts
The assessment was sought to be re-
opened on account of retrospective
amendment to Section 80HHC intro-
duced by the Taxation Laws Amend-
ment Act, 2005 with effect from 1st April
1998. If the legislature amends the pro-
visions of the Act with retrospective
effect, it cannot be said that there was
failure on the part of the assessee to
disclose fully and truly all material facts
relevant for the purpose of assess-
ment.
10
SNK DIRECT TAXES
Judicial pronouncements (International Taxation)
CIT Vs. M/s BKI/HAM v.o.f. (ITA No.
34 of 2007, Uttarakhand High Court,
dtd. 14.10.2011]
Fact of “Office PE” under Article 5(2)
irrelevant if there is no
“Construction Site PE” under Article
5(3)
The assessee, a Netherlands company,
obtained a contract for dredging a
trench for which it opened an office at
Mumbai. The dredging activity was
completed in two months. The as-
sessee claimed that whether it had a
‘permanent establishment‘ (PE) in India
or not had to be decided as per Article
5(3) of the DTAA which provided that a
“building site” or “construction project”
would be a PE only if continued for
more than 6 months. However, the AO
held that as the assessee had an office
in Mumbai, it had an “office” or a “place
of management” which constituted a
PE under Article 5(2) of the DTAA. This
was reversed by the CIT(A) & Tribunal.
On appeal by the department, Uttara-
khand High Court dismissing the ap-
peal held that the assessee had a “site”
or “project” in India. Under Article 5 (3)
of the treaty, such a “site” or “project” is
a PE only if it continues for a period of
more than six months. As the as-
sessee’s contract was completed in two
months, there was no PE under Article
5(3). The argument that the Mumbai
office was a PE under Article 5(2) is not
acceptable because while Article 5(2) is
a general provision, Article 5 (3) is a
specific provision which prevails over
Article 5(2).
Veer Gems Vs ACIT [TS-670-HC-2011
(Guj), Gujarat High Court, dtd.
19.11.2011]
AO not required to grant hearing to
assessee before transfer pricing ref-
erence to TPO; TPO not competent
to decide validity of AO’s reference;
TPO's conclusion on existence of
'international transaction' not bind-
ing on AO while framing assessment
order
In an important ruling, a division bench
of Gujarat High Court, ruling on the ju-
risdiction of TPO, held that TPO was
not authorized to determine the validity
of transfer pricing reference made to
him by the AO u/s 92CA.
HC also ruled that the AO could not
make a reference to the TPO without
having made a final decision as to
whether the transaction before him was
an ‘international transaction,’ subject to
transfer pricing rules. HC however held
that AO was not required to give oppor-
tunity of hearing to the assessee before
making such reference to TPO.
HC further held that even though AO
was bound by the TPO’s order u/s
92CA(4) on determination of arm’s
length price, he was not bound by the
TPO’s ‘opinion’ on whether assessee in
fact carried out an ‘international trans-
action’.
JDIT vs. Harvard Medical Interna-
tional [TS-669-ITAT-2011 (Mum),
ITAT Mumbai Bench, dtd. 18.11.2011]
Payment received by non-resident
for rendering services to Indian com-
panies not taxable as royalty, where
no economic consideration was paid
to use assessee's name and logo
The assessee (Harvard Medical Inter-
national) was incorporated in USA with
the objective of providing charitable and
educational services in the medical
field. For AY 2002-03, the assessee
received income from two Indian com-
panies, Max India Ltd (MIL) and Wock-
hardt Hospital Ltd (WHL), towards ser-
vices rendered in relation to healthcare.
The AO was of the view that 90% of the
payments were in the nature of Royalty,
which were in respect of use of the
name 'Harvard' which carried immense
value, as it was associated with quality.
The AO also argued that assessee duly
protected its intellectual property rights
to its name and its logo in the agree-
ment and had given only limited rights
to MIL and WHL to use them.
Accordingly, AO held that 90% of the
receipts were taxable under Article 12
(3) of the Indo- US DTAA and 10%
were in the nature of Fees for Included
Services (FIS), taxable under Article 12
(4) of the DTAA.
On first appeal, the CIT(A) held that
50% of the sum received from WHL
was not taxable because it was paid to
the assessee for teaching in or by edu-
cational institutions. However in case of
MIL, the CIT(A) held that the entire sum
was taxable as FIS.
Before Mumbai ITAT, the revenue ar-
gued that as regards WHL, it was the
right to use the assessee’s name and
logo that was essence of the agree-
ment between the parties and other
services rendered were only incidental.
Thus, consideration was received by
the assessee primarily for allowing
WHL to use its intellectual property
rights. ITAT rejected this argument
holding that consideration paid in lump-
sum could not be split into ‘royalty’ and
‘FIS.’ For this purpose, ITAT relied on
Delhi ITAT Special bench decision in
Motorola Inc. vs. DCIT 95 ITD 269(Del)
(SB). ITAT further observed that "The
decision of the Delhi Bench of the ITAT
in the case of Sheraton International
Inc. vs. DDIT, 107 ITD 120 (Del) sup-
ports the plea of the assessee that
where the agreement between the par-
ties provides that there was no eco-
nomic consideration for right to use the
name it cannot be said that any pay-
ment can be called royalty.
11
SNK DIRECT TAXES
Judicial pronouncements (International Taxation)
ITAT held that the payment was not
royalty since the terms of the agree-
ment made it clear that consideration
was advanced for rendering services
and the right to use the name and logo
was only incidental. ITAT also held that
the payment was not FIS either, since
the assessee did not ‘make available’
any technical knowledge, experience,
skill knowhow or process.
As regards MIL, ITAT relied on the or-
der passed in the assessee’s own case
for AY 2001-02, wherein ITAT had held
that the services rendered to MIL were
purely advisory in nature and nothing
was ‘made available’ to MIL by the as-
sessee.
Hence, ITAT held that the sums re-
ceived from both companies were busi-
ness profits. In the absence of a PE in
India, the sums were not taxable in
accordance with Article 7(1) of the
DTAA.
ADIT V Neo Sports Broadcast P Ltd
[TS-649-ITAT-2011(Mum), ITAT Mum-
bai Bench, dtd. 10.11.2011]
Payment for live broadcast of
cricket matches played outside India
not taxable as 'royalty' u/s 9(1)(vi);
Copyright in broadcast created only
after live telecast of match
Neo Sports Broadcast P Ltd (the as-
sessee) filed an application u/s 195(2)
for seeking nil or lower deduction of tax
at source, on certain payment made to
Nimbus Sports International Pte Ltd
(Nimbus), based in Singapore (a non
resident). The assessee was required
to make payment, for obtaining license
for live broadcast and recorded broad-
cast of cricket matches to be played in
Bangladesh. Nimbus was acting as a
commercial agent for Bangladesh
Cricket Board, for receiving and broad-
casting cricket matches.
The assessee contended that payment
for recorded broadcast would amount
to royalty. But, payment towards live
broadcast was not covered within the
definition of ‘royalty’ and hence, not
taxable in India. Accordingly, assessee
contended that TDS was not applicable
in respect of payment for license for
live broadcast.
The AO held that both the payments
would be covered within the definition
of royalty and accordingly the as-
sessee was liable to deduct tax at
source. The AO held that payment was
towards transfer of rights in respect of
copyright. The AO also observed that
Nimbus had business connection in
India. The AO held that, without receipt
of signal on account of matches to be
played, income in the form of advertis-
ing revenue and subscription revenue
would not accrue to the assessee.
The CIT(A), on appeal by the as-
sessee, upheld the claim of the as-
sessee that payment for live broadcast
would not amount to royalty. However,
the CIT(A) upheld the contention of the
AO that the Nimbus had a business
connection in India. The CIT(A) finally
concluded that no tax was deductible
at source in respect of payment to-
wards live broadcasting of matches.
The Revenue was in appeal before
ITAT. The assessee filed a an applica-
tion under Rule 27 against the finding
of the CIT(A) regarding business con-
nection.
A Mumbai bench of ITAT upheld the
claim of the assessee and ruled that
payment towards license for live broad-
cast of matches would not amount to
royalty u/s 9(1)(vi). ITAT rejected the
contention of the Revenue that playing
of matches was akin to perform the'
work' in public and hence, the consid-
eration for live broadcasting was for
transfer of a copyright.
ITAT held that live telecast of match or
any other event could not be consid-
ered as transfer of copyright. After re-
ferring to the provisions of Copyright
Act, ITAT noted that the broadcast of
cricket match would be covered as
‘cinematograph film’ under the defini-
tion of the term ‘work’ under Copyright
Act. However, ITAT held that a
`copyright’ could be created only after
the `work’ had been performed for the
first time. Use of such work at a later
point of time would lead to exploiting
the copyright in such work. ITAT ob-
served that live telecast would result
into creation of 'work' which was capa-
ble of copyright under Copyright Act
and second or subsequent telecast
would amount to use of work. Hence,
the assessee was right in treating pay-
ment for recorded broadcast as royalty.
ITAT observed, “It is only when the live
telecast of a match is done that the
question of creation of copyright in
such match arises. The second or later
telecasting of such event shall be con-
sidered as use of the “work” and con-
sideration for the broadcasting of such
recorded matches shall be considered
as payment for the use of copyright in
such event.”
ITAT also drew support from the provi-
sions of Direct Tax Code Bill, 2010
which defines the term royalty to spe-
cifically include transfer of all or any
right in respect of 'live coverage' of any
event. ITAT observed that if 'live cover-
age' had been part of copyright of any
work, there was no need to classify it
as a separate item.
12
SNK DIRECT TAXES
Judicial pronouncements (International Taxation)
ITAT further noted that the CIT(A) had
held that Nimbus had a business con-
nection in India, but final conclusion of
CIT(A) was that no TDS was applicable
in respect of payment towards live tele-
cast. ITAT therefore held that the as-
sessee was justified in not filing appeal
against the above conclusion of CIT(A).
However, ITAT noted that the assessee
was entitled to protect its interest by
filing an application under rule 27 on
the point decided against it. Accord-
ingly, ITAT admitted the application
filed by the assessee under rule 27.
ITAT, accordingly, examined whether
the payment could be taxable u/s 9(1)(i)
as 'income deemed to be accrued' on
account of business connection in In-
dia. ITAT held that mere act of allowing
the assessee to live broadcast the
matches in India would not constitute a
business connection for Nimbus in In-
dia. ITAT held that it was necessary
that some sort of business activity
ought to be done by non-resident in
India to constitute a business connec-
tion.
ITAT observed that, whether the as-
sessee earned any income or suffered
losses on account of exploitation of
broadcasting would not be a relevant
consideration for determining issue of
business connection. ITAT relied on SC
decision in case of R D Agarwal & Co
(56 ITR 20).
ITAT further observed that, even if the
Revenue’s contention that business
connection existed was accepted, still
no income accrued in India in the ab-
sence of any business operations in
India.
Therefore, ITAT held that income from
providing license for live broadcast of
cricket matches was not taxable in India
and hence, TDS u/s 195 was not appli-
cable.
Ardex Investments Mauritius Ltd
[TS-663-AAR-2011, dtd. 16.11.2011]
Attempt to take advantage of Treaty
by itself not ‘objectionable treaty
shopping’, where structure existed
for considerable period of time; Ap-
plicant required to file tax return in
India even though capital gains ex-
emption availed under India-
Mauritius DTAA
AAR held that the gains derived from
transfer of shares of Indian company,
held by the Mauritian shareholder,
would not be taxable in India under Arti-
cle 13(4) of India-Mauritius DTAA. How-
ever, AAR held that the Mauritian appli-
cant was required to file tax return in
India, since the transaction of sale of
shares was otherwise taxable in India.
Ardex Investments Mauritius Ltd (the
applicant), a wholly owned subsidiary of
a UK company and a tax resident of
Mauritius, held 50% of equity share
capital in Ardex Endura India P. Ltd (an
Indian company). The applicant pro-
posed to sell its entire stake in the In-
dian company to a German group com-
pany. The transfer was contemplated at
fair value and not as a gift.
The Revenue took the view that the
applicant (Mauritian company) was sim-
ply created as a facade, so as to facili-
tate the investment of UK holding in
India and this was with the obvious in-
tention of taking advantage of Indo-
Mauritius DTAA. The revenue con-
tended that the decision for the pro-
posed sale was being taken by the UK
holding company and that the funds for
acquisition of shares in the Indian com-
pany were also provided by the holding
company to the Mauritian company. It
was thus submitted that the beneficial
ownership of these shares vested with
the UK company. Hence, the tax de-
partment argued that the corporate veil
had to be pierced and the gains arising
from the transfer ought to be taxable in
Indian in the hands of the UK company
as per India-UK DTAA.
Ruling in favour of the applicant, AAR
held that “it was not clear how far the
theory of beneficial ownership could be
invoked to come to a conclusion that
the holder of the shares in the Indian
company in this case would be the
company in UK”.
AAR observed that the first shares were
purchased almost 10 years before the
application and the shareholding was
steadily increased. AAR further ruled
that, “In a case of this nature, where the
shares were held for a considerable
length of time, before they are sought to
be sold by way of a regular commercial
transaction, it may not be possible to go
into an enquiry on who made the origi-
nal investment for the acquisition of the
shares and the consequences arising
there from.”
AAR also observed that at worst it
could be an attempt to take an advan-
tage of a Treaty, but that by itself could
not be viewed or characterized as
‘objectionable treaty-shopping.’ Relying
on Supreme Court’s decision in Azadi
Bachao Andolan (263 ITR 706) [TS-5-
SC-2003], AAR held that the proposed
sale would not be chargeable to capital
gains tax. On treaty shopping, AAR
made an observation that the decision
in McDowell (154 ITR 148) [TS-1-SC-
1985]did not deal with treaty shopping
and the only guidance therefore is to be
derived from Azadi Bachao ruling. How-
ever, AAR held that the applicant was
bound to file a return of income on the
proposed transaction since the shares
to be transferred are the shares of an
Indian company, which would otherwise
have been taxable under the provisions
of the Income-tax Act. AAR relied upon
its earlier ruling in VNU International
13
SNK DIRECT TAXES / INDIRECT TAXES
Judicial pronouncements (International Taxation)
BV, AAR 871 of 2010 [TS-130-AAR-
2011] and other subsequent rulings.
AAR rejected reliance by the applicant
on AAR ruling in Vanenburg Group BV
(218 ITR 464) [TS-10-AAR-2007]
wherein it was held that tax return filing
was not required by a foreign company
as the income was not taxable under
DTAA.
DCIT Vs Calcutta Test House P Ltd
[TS-621-ITAT-2011 (DEL), Delhi ITAT
Bench, dtd. 01.11.2011]
A non-resident lessor does not have
PE in India on account of leased as-
sets, used in India but delivered out-
side India and since lease agreement
entered on principle to principle ba-
sis
Calcutta Test House P Ltd (the as-
sessee) hired certain machinery from
UK based company and paid lease
rentals charges to UK Company. The
assessee, while making payment of
lease rentals to UK Company, did not
deduct tax at source. The AO disal-
lowed deduction for lease rentals invok-
ing provisions of Sec. 40(a)(i) read with
Sec. 195. The assessee could not pro-
duce copy of lease agreement during
the assessment proceedings.
The AO observed that UK Company
had business connection in India and
the assessee ought to have deducted
TDS u/s 195. The assessee produced
copy of lease agreement before ITAT
which was admitted on record. ITAT
remanded the matter back to the files of
AO for fresh determination. Since the
AO confirmed the disallowance, the
assessee filed an appeal before CIT(A).
Assessee’s appeal was allowed by the
CIT(A) and the Revenue was in appeal
before ITAT against the CIT(A) order.
A Delhi bench of ITAT, on analysis of
terms of the lease agreement, observed
that all the risk and reward of ownership
continued with the lessor. Further, as
per lease agreement, the assets were
to be delivered outside India. The
agreement was on 'principle to principle'
basis and did not create a partnership
or joint venture between parties. ITAT,
therefore, observed that the foreign
vendor did not have a PE or business
connection in India. Further, there was
no material on record to indicate the
presence of foreign vendor in India.
Hence, ITAT held that lease rentals
were not chargeable to tax in India.
ITAT further held that in the absence of
liability to tax in India, provisions of Sec.
195, requiring deduction of tax at
source, were not applicable. Accord-
ingly, ITAT confirmed CIT(A)’s order.
INDIRECT TAXES
Judicial Pronouncements
Ranbaxy Laboratories Ltd. Vs. Union
of India & Ors [Civil Appeal No. 6823
of 2010, The Supreme Court of India,
dtd. 21.10.2011]
Liability of revenue to pay interest u/s.
11BB commences from date of expiry of
three months from date of receipt of
application for refund and not on expiry
of said period from date on which order
of refund is made
Imagination Technologies India Pvt.
Ltd. Vs. CC Ex., Pune – III [(2011) 23
STR 661 (Tri.-Mumbai), CESTAT
Mumbai Bench]
Cenvat credit taken for the input ser-
vices received prior to registration is
allowable
The appellants were provider of soft-
ware development and support services
taxable w.e.f. 16.05.2008. They got reg-
istered from 24.07.2008. The appel-
lants made a claim for refund in respect
of tax on input services paid by them.
The claim was rejected on the ground
that credit cannot be claimed in respect
of input services received prior to regis-
tration.
CESTAT Mumbai Bench held that since
there was no provision in the rules
which stated that credit shall not be al-
lowed for the period prior to the registra-
tion, the appellant was entitled to refund
on such amount paid.
C. C. E. Ahmedabad – I Vs. Ferro-
matik Milacron India Ltd. [2011-TIOL-
18-HC-AHM-ST, Gujarat High Court,
dtd. 01.04.2010]
Canteen services which are indis-
pensable in relation to manufacture
of the final products would fall within
the ambit of input service
Under the provisions of section 46 of
the Factories Act, it is mandatory for the
employer to provide canteen services to
the staff. Thus, provision of canteen
services is a statutory requirement. Pro-
vision of canteen services being indis-
pensable, it is incumbent on a manufac-
turer of goods, to provide the same if he
desires to run his factory. In view of the
definition of Input service which means
any service used by the manufacturer,
whether directly or indirectly, in or in
relation to the manufacture of final prod-
ucts, the input service does not have to
used directly in the manufacture of final
products, it may be a service which is
only indirectly used in relation to the
manufacture of final products. In the
circumstances, canteen services which
are indispensable in relation to manu-
facture of the final products would cer-
tainly fall within the ambit of input ser-
vice as defined under the Rules.
14
SNK
C.C.E. Chandigarh –I Vs. M/s. Cool
Tech Corporation [STA No. 47 of
2010, Punjab & Haryana High court,
dtd. 17.12.2010]
Penalty under Sections 76 & 78 are
mutually exclusive and could not be
imposed simultaneously.
All India Tent Dealers Welfare Or-
ganization versus Union of India and
Ors. [Writ Petition (Civil) No.
12345/2009, Delhi High Court, dtd.
30.09.2011]
Services provided during Hindus’
marriage ceremony not exempt from
service tax
Delhi High Court held that the Hindus’
marriage ceremony is not a religious
but a social function and various kinds
of service providers, including those
erecting tents for it, are not exempted
from paying service tax.
The tent service providers had con-
tended “that no service tax can be lev-
ied on the erection of pandal or sha-
miana for a Hindu marriage is funda-
mentally a sacrosanct and sacred reli-
gious function and can never be treated
as a social function to invite the levy of
service tax.”
But the Delhi High court dismissing the
appeal held that if the entire provision is
properly understood, it is clearly dis-
cernible that Hindu marriage is not
treated or regarded a social function
per se. If the dictionary clause is appo-
sitely appreciated, there can be no
trace of doubt that only when a “pandal
or shamiana” is used for marriage, it
earns the status of “social function” be-
cause the service component is in-
volved. It is worth noting, the statute
itself postulates that marriage is to be
regarded as a social function and full
effect has to be given to the same. That
apart, the pre-requisite is the use of
“pandal or shamiana” and, therefore,
the contention raised by the learned
counsel that Hindu marriage is not a
contract but a sacred institution and
hence, no service tax is imposable
treating it as a social function has to be
repelled and we so do.
Com. of Service tax, Ahmedabad Vs.
M/s. Bacha Finlease [ITA No. 456 of
2010, Gujarat High Court, dtd.
12.01.2011]
Merely because the benefit under the
notification was not claimed before
the original Adjudicating Authority is
no ground for denying benefit under
the notification if the assessee is
otherwise entitled to the same
It was an admitted position that the ag-
gregate value of services in the case of
the assessee which was quantified by
the department was Rs.1,98,543/-. No-
tification No.6/2005-Service Tax dated
1st March, 2005 exempts taxable ser-
vices of aggregate value not exceeding
four lakh rupees in any financial year
from the whole of the service tax le-
viable thereon under section 66 of the
Finance Act. In the present case, ad-
mittedly the aggregate value of taxable
services in the whole of the financial
year is below Rs.4,00,000/-. In the cir-
cumstances, no infirmity can be found
in the impugned order of the Tribunal in
holding that merely because the benefit
under the notification was not claimed
before the original Adjudicating Author-
ity is no ground for denying benefit un-
der the notification if the assessee is
otherwise entitled to the same. On be-
half of the revenue nothing has been
pointed out to indicate that the as-
sessee is otherwise not entitled to the
benefit of the notification.
Commissioner of Central Excise &
Service tax – LTU Vs. M/s. Adecco
Flexione Workforce Solutions Ltd
[CEA No. 101 & 102 of 2008, Karna-
taka High Court, dtd. 08.09.2011]
When service tax with interest is
paid u/s. 73(3), no notice for recov-
ery of penalty under Sec. 76 can be
issued
The assessee has paid both the service
tax and interest for delayed payments
before issue of show cause notice un-
der the Act. Sub-Sec.(3) of Sec. 73 of
the Finance Act, 1994 categorically
states, after the payment of service tax
and interest is made and the said infor-
mation is furnished to the authorities,
then the authorities shall not serve any
notice under Sub-Sec.(1) in respect of
the amount so paid. Therefore, High
court held that the authorities have no
authority to initiate proceedings for re-
covery of penalty under Sec. 76 of the
Act.
OTHERS
Circulars / Notifications / Instruc-
tions
Order No. 52/26/CAB-2010-MCA dtd
02.05.2011 & dtd. 03.05.2011
The Ministry of Corporate Affairs vide
order dated 02.05.2011 has issued
w.e.f. 01.04.2011 mandatory cost audit
of all companies engaged in:-
1. Bulk Drugs
2. Formulations
3. Fertilizers
4. Sugar
5. Industrial Alcohol
6. Electricity
7. Petroleum &
8. Telecommunication
Companies operating in any of the
above Industries and falling in the Crite-
ria specified below shall mandatorily
get their Cost Audits done if during the
immediate previous financial year: -
1. Aggregate value of Net Worth ex-
ceeds 5 Crores or
2. Aggregate value of Turnover ex-
ceeds 20 Crores or
INDIRECT TAXES / OTHERS
Judicial Pronouncements / Circulars / Notifications
15
SNK OTHERS
Circulars / Notifications
3. Company’s Equity or Debt Securities are Listed or are in
the process of Getting Listed whether in India or outside
India
On the same line, the Ministry of Corporate Affairs vide or-
der dated 03.05.2011 has issued w.e.f. 01.04.2011 manda-
tory cost audit of all companies engaged in:
1. Cement
2. Tyres and Tubes
3. Steel Plant
4. Steel Tubes and Pipes
5. Paper or Insecticides
Companies operating in any of the above Industries are re-
quired to get their Cost Audits done only if during the imme-
diate previous financial year: -
1. Aggregate Value of Turnover exceeds 100 Crore
2. Company’s Equity or Debt Securities are Listed or are in
the process of Getting Listed whether in India or outside
India.
Notification No. G.S.R. 429(E)-MCA, dtd. 03.06.2011
Vide G.S.R. 429(E) dated 03.06.2011, the Central Govern-
ment has notified Common Cost Accounting Record Rules
read with section 209(1)(d) of the Companies Act 1956.
These rules shall apply to every company, including a for-
eign company as defined under section 591 of the Compa-
nies Act, 1956 which is engaged in the production, process-
ing, manufacturing, or mining activities and wherein :
1. the aggregate value of net worth as on the last date of
the immediately preceding financial year exceeds five
crores of rupees; or
2. wherein the aggregate value of the turnover made by the
company from sale or supply of all products or activities
during the immediately preceding financial year exceeds
twenty crores of rupees; or
3. wherein the company’s equity or debt securities are
listed or are in the process of listing on any stock ex-
change, whether in India or outside India.
However, these rules shall not apply in the following cases:
1. a company which is a body corporate governed by any
special Act;
2. to the activities or products covered in any of the follow-
ing rules,-
- Cost Accounting Records (Bulk Drugs) Rules, 1974
- Cost Accounting Records (Formulations) Rules, 1988
- Cost Accounting Records (Fertilizers) Rules, 1993
- Cost Accounting Records (Sugar) Rules, 1997
- Cost Accounting Records (Industrial Alcohol) Rules,
1997
- Cost Accounting Records (Electricity Industry) Rules,
2001
- Cost Accounting Records (Petroleum Industry) Rules,
2002
- Cost Accounting Records (Telecommunications) Rules,
2002
Also, every company to which these rules apply, includ-
ing all units and branches thereof are required to keep
cost records in respect of each of its financial year com-
mencing on or after the 1st day of April, 2011. These
Rules also provide for the Compliance Report to be certi-
fied by a Cost Accountant.
Due Dates of key compliances pertaining to
the month of December 2011:
5th December Payment of Service Tax & Excise
duty for the month of November
6th December Payment of Service tax & Excise
duty paid electronically through
internet banking for the month of
November
7th December TDS/ TCS Payment for the month of
November
10th December Excise Return ER1/ER2/ER6
15th December PF Contribution of November
21st December ESIC payment of November
26th December ST-3 for the half year ending on
30.09.2011
15th December Advance Income Tax for Non Corpo-
rate Assesses (Quarter II)
15th December Advance income tax for Companies
(Quarter III)
The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any individual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information presented herein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business decisions. This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.
