Direct
Tax
Supreme Court
Financier
of vehicles engaged in leasing business is entitled for higher rate of
depreciation on the vehicles
The
taxpayer, a non-banking finance company, was
engaged in the business of leasing of vehicles. It bought vehicles and leased
out the same to various customers; such
vehicles were registered
in the name of the
customers under
the Motor Vehicles Act, 1988
(“MV Act”). The
taxpayer claimed depreciation in respect of such vehicles at a higher rate
of 30
percent on Written Down Value basis as per New Appendix I to the Income-tax
Rules,1962 (“the Rules”) on the
ground that the vehicles were used in the business of running them on hire.
Further, the customers (lessees) did not claim depreciation on such vehicles.
During
the course of the assessment proceedings, the assessing officer (“AO”)
disallowed the claim of depreciation in totality by holding that the taxpayer
was neither the owner of the leased vehicles as these were registered in the
name of the lessees nor had it ‘used’ the vehicles for purposes of business of
running them on hire.
On
appeal, the Commissioner of Income tax (Appeals) [“CIT(A)”] held that the
taxpayer was allowed to claim the depreciation on the vehicles. However, the
taxpayer’s claim for depreciation at higher rate was rejected by the CIT(A).
Aggrieved by the order of the CIT(A), both, the Revenue Authorities and the
taxpayer filed an appeal before the Income tax Appellate Tribunal (“ITAT”). The
ITAT by relying on the decision of the Supreme Court (“SC”) in the case of CIT
Bangalore v Shaan Finance Private Limited (3 SCC 605), held that the taxpayer
has rightly claimed the depreciation at a higher rate.
On
appeal to the High Court (“HC”) at the instance of the Revenue
Authorities, the HC
reversed the decision of the ITAT on the ground that the taxpayer was only a
‘financier’ and not the ‘owner’ of the vehicles and thus, was not eligible to
claim depreciation. The taxpayer preferred an appeal before the SC. The SC
ruled in favor of the taxpayer and held that since the taxpayer was the owner
and user of the vehicles, he would be entitled to claim depreciation on such
vehicles. The key observations of the SC were as follows:
·
The
taxpayer was the exclusive and legal owner of the vehicles as per the lease
deed. The registration of the vehicles in the name of the lessees was to meet
the requirements of the MV Act and would not affect the status of the taxpayer
as the owner of the vehicles under eyes of the law.
·
The use
of the vehicles in the hiring business would be treated as 'use of the assets
for the purpose of business' under section 32 of the Income tax Act, 1961 (“the
Act”) and it is not necessary for the taxpayer to be the physical user of the
assets to claim depreciation on the same.
ICDS
Limited v CIT Mysore and ANR (Civil appeal No 3282 of
2008)
(SC)
High Court
Rent from composite
letting of property and plant and machinery held to be taxable as income from
other sources
The taxpayer, an
individual, earned rental income which consisted of rent for building,
furniture, fittings and fixtures, and charges for maintenance of the same. The
rental income was offered to tax by the taxpayer under the head ‘Income from
house property’. During the assessment proceedings, the AO held that the
composite rent should be taxed under the head ‘Income from Other Sources’
(“IFOS”) under the provisions of section 56 of the Act. While passing the
assessment order, the AO observed that letting out of machinery, plant and
furniture were inseparable from the letting of the building and therefore, the
rental income was chargeable to tax under the residual head (ie, IFOS). The
view of the AO was upheld by the CIT(A).
On further appeal, the
ITAT observed that in case of the lessee where the taxpayer had leased a part of
the building along with a right to use the common facilities such as lift,
lobby, staircase, etc, there was mere exploitation of the premises without
letting out of machinery, plant or furniture and accordingly, it held the income
from such letting out to be taxable as income from house property. However, the rental income from other
lessees was held to be taxable as IFOS by the ITAT on the basis that there was a
composite lease wherein the lease of building and facilities (such as fittings,
fixtures, air conditioning plant etc) were inseparable. The taxpayer, aggrieved
by the decision of the ITAT on the latter part, filed an appeal before the HC.
The HC affirmed the
ruling of the ITAT. The HC held that the real test to be applied is whether or
not letting is composite and inseparable and if so, the rental income would be
taxed under the residual head of income. It further held that the finding of
the ITAT treating the letting out of facilities and premises to be composite
and inseparable is correct and accordingly, the income from such letting should
be taxed as IFOS.
Garg Dyeing &
Processing Industries v ACIT (ITA No 319 of 2012) (Delhi
HC)
Reopening of
assessment not valid on the basis of a change in opinion and after the expiry of
4 years in absence of any failure to disclose material facts by the taxpayer
The taxpayer had three
Export Oriented Units (“EOUs”) eligible for deduction under section 10A and 10B
of the Act. It filed its return of income and claimed the deduction in respect
of its two units. As the taxpayer had incurred a loss in the third unit, the
deduction under section 10A / 10B was not claimed with respect to this unit.
Subsequently, the taxpayer revised its return of income for claiming deduction
on some previously incurred expenses and along with it the taxpayer attached a
note stating the reasons for revising the return as well as for not claiming
deduction under section 10A / 10B in respect of the third unit. The assessment
under section 143(3) of the Act was completed by the AO after making certain
additions on the basis of detailed investigation. Post completion of the
assessment, a notice for reassessment proceedings in the case of the taxpayer
was issued after 5 years from the end the relevant assessment year (“AY”). The
reasons recorded by the AO, inter alia, included not setting off of loss
of the third unit before allowing deduction under section 10A / 10B of the Act
which resulted in excess deduction under said section(s) and under -statement of
book profit under section 115JB of the Act.
The taxpayer
challenged the action of the AO in initiating the reassessment proceedings by
filing a writ petition before the HC. The taxpayer argued that the reassessment
proceedings initiated after 4 years from the expiry of the relevant AY were time
barred and invalid in absence of any failure on the part of the taxpayer to
disclose truly and fully all material facts necessary for assessment. In the
case of the taxpayer, the AO was fully aware of all the facts at the time of
original assessment and no new facts came to AO’s record to invoke section 147
of the Act. Further, the AO after examining the return of income and all other
documents accompanying the return (including the note stating reasons for not
claiming the deduction for the third unit) had completed the assessment of the
taxpayer. In view of these facts, the reassessment proceedings, being initiated
on the basis of change in opinion, is not justifiable and time barred.
The HC ruled in favour
of the taxpayer and quashed the reassessment proceedings. The observations of
the HC were as under:
·
Though the AO had
recorded ‘reasons to believe’ for initiating reassessment proceedings such
reasons did not specify the tangible material which persuaded the AO to exercise
the extraordinary powers under section 147 of the Act.
·
In the instant case,
there was intensive examination during original assessment in respect of the
issue, which was the basis for reopening of assessment and accordingly, the AO
was duty bound to indicate the material which compelled him to re-initiate the
proceedings.
·
The absence of any
tangible material having a live link for validation of the formation of opinion
of the AO amounts to change of opinion, which cannot be a legitimate ground for
initiating the reassessment proceedings.
Moser Baer India
Limited v DCIT (WP(C) 7677 of 2011) (Delhi HC)
Shortfall in
withholding of tax not to attract disallowance under section 40(a)(ia) of the
Act
The taxpayer made
payments to sub-contractors and withheld taxes at the rate of 1 percent as
contractual fee. During the course of the assessment proceedings, the AO
contended that the tax should have been withheld at the rate of 10 percent under
section 194I of the Act as the payments were in the nature of machinery hire
charges. The AO disallowed proportionate payments by holding the same to be a
case of shortfall in withholding of tax as per the provisions of section
40(a)(ia) of the Act. On first appeal, the CIT(A) ruled in favour of the
taxpayer.
On further appeal at
the instance of the Revenue Authorities, the ITAT observed that for invoking
section 40(a)(ia) two conditions need to be satisfied, viz, payment
should be liable to tax withholding and such tax has not been withheld. If both
these conditions are satisfied then such payment can be disallowed under section
40(a)(ia) of the Act. However, where tax is withheld by the taxpayer under bona
fide wrong impression under a specific section, then provisions of section
40(a)(ia) cannot be invoked. The provisions of section 40(a)(ia) requires the
payer to withhold tax and to deposit the same with the Government treasury; and
does not govern a case of shortfall in withholding of tax. In case of shortfall
of tax due to any difference of opinion, the taxpayer cannot be treated as an
‘assessee in default’ under section 201 of the Act and no disallowance can be
made under section 40(a)(ia) of the Act. This view was confirmed by the HC by
dismissing the appeal of the Revenue Authorities.
CIT v S K Tekriwal
(ITA No 183 of 2012) (Calcutta HC)
Diagnostic centre is
not an industrial undertaking within the meaning of section 80IA of the
Act
The taxpayer was
engaged in providing services such as X-ray, CT scan etc through an advanced
radiological clinic since 1948. The taxpayer established a new Magnetic
Resonance Imaging (“MRI”) unit and started claiming deduction under section 80IA
of the Act on the MRI and CT scan machines installed by it. During the
assessment proceedings for the AY 1999-00, the AO disallowed the claim of
deduction of the taxpayer. The AO held that the deduction under section 80IA is
allowable to a new industrial undertaking while the taxpayer has claimed
deduction on the installation of machines which, being a mere expansion of
existing facility of the taxpayer, were not entitled to said deduction. On
appeal, the CIT(A) confirmed the order of the AO. However, on further appeal,
the ITAT allowed the claim of the taxpayer by relying on its own orders for
earlier years.
The Revenue
Authorities challenged the orders of the ITAT before the HC and contended that
the deduction under section 80IA is available to a new industrial undertaking
engaged in ‘manufacture or production of any article or thing’, which is not the
case of the taxpayer. Further, the machines installed by the taxpayer cannot be
considered to be engaged in ‘manufacture of new articles or things’ as no
manufacturing process was undertaken by such machines. The Revenue Authorities
relied on the decisions of other HCs on the similar issue. On the other hand,
the taxpayer resisted the submissions of the Revenue Authorities on the basis of
decisions of the HCs which had held the hospitals and diagnostic centres to be
manufacturing goods and therefore, industrial undertakings. Further, the
taxpayer contended that in a diagnostic centre, unexposed films are processed by
a specialised activity and the resultant production of exposed films with
imprints of the patient certainly amounts to processing of goods and thus,
should be eligible for deduction under section 80IA of the Act.
Ruling in favour of
the Revenue Authorities, the HC observed that ‘manufacture or production of an
article or thing or their processing’ is an important condition for claiming
deduction under section 80IA of the Act. In the case of a diagnostic centre, it
is a service which is provided and no processing is involved as there is no
change in the article – the film is the medium in which what is recorded is made
available to a doctor for interpretation and the same can easily be given on
other media like pen drive, email etc. On the basis of these observations, it
held that the facilities provided by a diagnostic centre do not result in
‘manufacture or production of articles or things or their processing’ and
accordingly, the deduction under section 80IA of the Act would not be allowable
on the diagnostic centres.
CIT v Dewan Chand Satyapal (ITA No
87 of 2003, 1411 and 1541 of 2006) (Delhi
HC)
ITAT
Section 14A
disallowance not applicable on exempt income which is incidental
The
taxpayer was engaged in the business of exporting goods and dealing in shares
and securities. Since one of the main businesses of the taxpayer was
dealing in shares and securities, holding a certain number of shares was a
precondition for the taxpayer to trade in large volumes in Futures and Options
(“F&O”). For the AY 2008-09, the taxpayer had claimed
exemption for dividend income and made a suo moto disallowance of
expenses relatable to dividend income at the rate of 1 percent of the dividend
received.
During the course of
the assessment proceedings, the AO made a disallowance of interest and other
expenditure under section 14A of the Act read with Rule 8D of the Rules. On
appeal, the CIT(A) relied on the decision of Special Bench of the ITAT in the
case of Daga Capital Management Services Private Limited, wherein it was held
that section 14A of the Act does not make any distinction between incidental and
main income and is attracted even in case of income not forming part of total
income, like dividend income in respect of shares held as stock-in-trade is
incidental to the main income from trading in shares, and upheld the
disallowance made by the AO.
Aggrieved by the
CIT(A)’s order, the taxpayer filed an appeal with the ITAT. Before the ITAT,
the taxpayer inter alia contended that shares were held as stock-in-trade
and dividend was only an incidental income and it had sufficient interest free
funds for investment in shares. It claimed that borrowings were for its F&O
business and hence, interest could not be apportioned to dividend income under
Rule 8D of the Rules.
The ITAT, deleting the
disallowance, held that since earning of dividend income is incidental to the
main business of the taxpayer, ie business of sale of shares and trading in
F&O, no notional expenditure could be disallowed under section 14A of the
Act by the AO.
Ethio Plastics Private
Limited v DCIT (ITA No 848 of 2012) (Ahmedabad
ITAT)
Appropriate
tax rate for grossing up payments in absence of Permanent Account Number
The
taxpayer, a manufacturing company, entered into annual maintenance contracts with foreign
suppliers of machinery and equipment for preventive maintenance and repairs.
Pursuant to such contracts, the taxpayer had made payments for repairs of
machinery to a German entity during the year under consideration. Such repairs
were carried out outside India. According to the taxpayer, the payments
represented business receipts of the German entity and in absence of a Permanent
Establishment (“PE”) in India of such entity, the payments were not chargeable
to tax in India. The taxpayer also believed that such payments did not
constitute Fees for Technical Services (“FTS”) under Article 12(4) of the
India-Germany tax treaty or section 9(1)(vii) of the Act. However, out of
abundant caution, the taxpayer withheld tax before making the payments to the
foreign entities as per the provisions of section 195 of the Act read with
section 206AA of the Act and paid it to the Government treasury. The taxpayer
also filed an appeal with the CIT(A) denying its liability to withhold tax at
source.
On first appeal, the
CIT(A) held that the payments were in nature of FTS and were chargeable to tax
in India irrespective of whether the services were rendered in India or not and
whether the non-residents had any business connection in India or not.
Rejecting the taxpayer’s contentions, the CIT(A) also held that in the absence
of a Permanent Account Number(“PAN”) of the non-resident, a higher rate of 20
percent in accordance with section 206AA of the Act would be applicable.
Further, the CIT(A) held that as the taxpayer was liable to withhold tax at 20
percent, the grossing up also was to be done with reference to the same rate of
tax and not at the ‘rates in force’ or ‘rate prescribed under the tax treaty’.
Aggrieved
by the order of the CIT(A), the taxpayer filed an appeal with the ITAT. On the
basis of the review of the purchase order and the invoices, the ITAT observed
that the machinery had to be repaired and not to be modified or improved and by
placing reliance on the ITAT decisions on the similar issue, it held that the
payments for repair of machinery cannot be treated as FTS, rather it is business
income which was not taxable in India
in the absence of a PE in India. Since there was no liability to withhold tax
on the taxpayer in the first place, the ITAT held that the issue of grossing up
would not be relevant.
In a different set of
appeals pertaining to another payment, the ITAT observed that the services of
repairs rendered by the non-residents include its assistance in analyzing and
solving technical problems, locating and mending the cause of the dysfunction,
analysis and assistance to the operator and preventive maintenance. The ITAT
held that such services clearly fall within the purview of definition of FTS as
such services involved rendering of technical assistance and services to the
taxpayer in India. Thus, the taxpayer was held to be liable to withhold taxes
on such payments.
With respect to the
taxpayer’s contention that a non-resident is not required to obtain PAN in
India, the ITAT held that the provisions of section 206AA of the Act clearly
override the other provisions of the Act. Therefore, a non-resident whose
income is chargeable to tax in India has to obtain PAN. Section 206AA of the
Act is brought in the statue to ensure that there is no evasion of tax by the
foreign entities. Thus, the ITAT held that in view of failure to furnish PAN,
the CIT(A) had rightly applied the higher rate of 20 percent for withholding
purposes (as per the provisions of section 206AA).
However, with respect
to the grossing up issue, the ITAT ruled in favour of the taxpayer. The ITAT
observed that a literal reading of section 195A of the Act implies that the
income should be increased at the rates in force for the relevant AY and not the
rate at which the tax is to be withheld by the taxpayer. Accordingly, the
grossing up should be done at the rates in force for the AY in which such income
is payable and not at 20 percent as specified under section 206AA of the
Act.
M/s Bosch Limited v
ITO (ITA No 552-558 of 2011) (Bangalore
ITAT)
Payment for acquiring
satellite rights of films is taxable as ‘royalty’ and liable for tax withholding
in India
The taxpayer was
engaged in the business of purchase and sale of rights in satellite and movies.
During the year under consideration, the taxpayer had debited a sum of INR 25.71
crores for purchasing satellite rights of films and programs. Such rights were
brought from various parties at varying cost. The taxpayer did not withhold tax
on such payments on the belief that it being engaged in the business of
purchasing and selling broadcasting rights was not obliged to withhold taxes.
During the course of
the assessment proceedings, the AO held that the assignor only assigned his
rights to the taxpayer through the agreements. Further, the rights were only
for 20 to 25 years and were not of permanent nature. Accordingly, there was
only assignment of rights and no sale of rights to the taxpayer and therefore,
the payments were in the nature of royalty and subject to tax withholding under
section 194J of the Act. In absence of tax withholding at source, the AO
disallowed the payments by applying the provisions of section 40(a)(ia) of the
Act.
On appeal to the
CIT(A), the taxpayer contended that the transaction in question was that of
purchase of rights and not assignment. Further, the taxpayer contended that the
scope of ‘royalty’ specifically excludes from its ambit ‘any consideration
received for sale or distribution or exhibition of cinematographic film’ (as per
explanation 5 to section 9(1)(vi) of the Act) and accordingly, no tax
withholding was required on such payments. The CIT(A) appreciated the
contentions of the taxpayer and deleted the disallowance made under section
40(a)(ia) of the Act. The CIT(A) held that though the agreements were named as
‘assignments’ these were only purchase agreements granting the taxpayer complete
ownership of satellite copyrights and accordingly, the taxpayer was not liable
to withhold taxes on the payments for such purchase. Aggrieved by the order of
the CIT(A), the Revenue Authorities filed an appeal before the ITAT. The ITAT
held that the payments made for acquiring satellite rights of films would be
taxable as royalty and thus, would be subject to tax withholding. Further, the
ITAT for determination of applicability of section 40(a)(ia) of the Act remitted
the matter back to the AO. The key observations of the ITAT were as
follows:
·
On a reference to the
agreements, it was observed that the consideration was not paid for the purchase
of the cinematographic films but only for obtaining the rights for satellite
broadcasting and therefore, cannot be excluded from the scope of royalty.
·
It observed that as
long as the transfer is of a right relatable to a copyright of a film or video
tape, whether perpetual or for a part of the rights, which are to be used in
connection with television or tapes, the consideration paid for such transfer
would qualify as ‘royalty’. Thus, the payments in the case of the taxpayer
would continue to be treated as royalty.
·
Relying on the
decision of Merilyn Shipping and Transport v ACIT [16 ITR (Trib)1(SB)], it held
that disallowances under section 40(a)(ia) of the Act are attracted only on
amounts standing payable at the end of the relevant financial year and not on
the amounts paid in the said year.
Shri Balaji
Communications v ACIT (ITA No 1744 of 2011) (Chennai
ITAT)
AO is duty bound to
follow directions of the ITAT in case matter is restored back to his file
The taxpayer entered
into an agreement with a Russian company for provision of supervisory services
in relation to erection of a steel plant. On application to the AO for
determining the rate of tax withholding on the payments under the said
agreement, the AO held the payments to be in the nature of FTS. According to
the AO, since the Russian company had a PE in India the payments were held to be
taxable as business profits and the rate of withholding tax was determined at
30 percent (as against 20 percent requested by the taxpayer) in terms of the
provisions of section 44D read with section 115A of the Act. On appeal, the
CIT(A) upheld the order of the AO. On further appeal, the ITAT directed the AO
to decide the matter after considering the CIT(A)’s decision in taxpayer’s own
case for the earlier years and the appeal effect order of the AO for those
years.
The AO, however,
determined the rate of withholding at 30 percent by following its original order
and completely ignoring the directions of ITAT. On first appeal, the CIT(A)
upheld the decision of the AO. On further appeal, the taxpayer relying on the
decision of Bhopal Sugar Industries Limited v ITO (40 ITR 618) (SC) contended
that the AO has decided the issue afresh and not followed the directions of the
ITAT and accordingly, the order of the AO should be quashed.
The ITAT ruled in
favour of the taxpayer and observed that the AO is bound by the directions of
the ITAT and if the AO is aggrieved by order of ITAT, the only available remedy
is to prefer an appeal. On this basis, it held that the action of the AO in not
complying with the directions of the ITAT is failure on his part which is
against the principle of justice and is highly condemnable. Accordingly, the
action of the AO was held to be not sustainable.
Steel Authority of
India Limited v ITO (ITA No 2872 of 2011) (Delhi
ITAT)
Depreciation
admissible on acquired client list; despite its nomenclature in the books of
accounts
The taxpayer, engaged
in the business of share broking, purchased the entire clientele business of
another stock broker for a certain consideration. The purchase price of the
clientele business was booked by the taxpayer as purchase of goodwill in its
books of accounts. While filing its return of income, the taxpayer claimed
depreciation on the goodwill at the rate of 25 percent by treating the same to
be a ‘commercial right’ covered under the definition of intangible asset.
During the assessment
proceedings, the AO denied depreciation on the goodwill as claimed by the
taxpayer. The AO observed that acquisition of business of another entity is not
acquisition of goodwill. The AO was of the opinion that depreciation is
allowable only on assets which keep depreciating over a period of time due to
damage, wear and tear and obsolescence and in this case, the asset, ie the
clientele, was tangible, does not depreciate and accordingly, does not fulfil
the conditions of intangibility. Further, the AO also held that the tangible
asset has to be put to use for claiming depreciation and this condition was not
satisfied in taxpayer’s case. On first appeal, the CIT(A) upheld the order of
the AO observing that the payment under question was neither goodwill nor any
commercial right.
Aggrieved by the order
of the CIT(A), the taxpayer filed an appeal before the ITAT and contended that
it had acquired a right to directly deal with clients of the vendor company
which shall substantially increase the business of the taxpayer and thus,
facilitate the taxpayer to carry on its business smoothly. Ruling in favour of
the taxpayer, the ITAT observed that phrase ‘any other business or commercial
rights of similar nature' would include all kinds of commercial rights and the
right acquired by the taxpayer, being a tool to carry its business would be
covered within this phrase so as to be eligible for depreciation. It further
held that even if the payment is treated as for acquisition of goodwill,
considering the taxpayer’s business, the goodwill is paramount and by applying
the decision of Supreme Court in the case of Smifs Securities would be entitled
for depreciation.
India Capital Markets
Private Ltd v DCIT (ITA No 2948 of 2010) (Mumbai ITAT)
Payment to non -
residents for rendering logistics services outside India in relation to
production of films would not liable to tax withholding in India
The taxpayer, engaged
in the business of production of films, made payments to service providers from
UK, Brazil, Canada, Australia and Poland. The payments were made for the
services provided outside India which included arrangement of shooting
locations, obtaining necessary permissions from authorities, arrangement for
shipping and custom clearance, arranging for meals, shooting equipment, etc.
While making the payments, no tax was withheld by the taxpayer treating the same
to be business profits and not taxable in the absence of a PE of the payees in
India.
During the course of
the assessment proceedings, the AO held the payments to be in the nature of FTS
and thus, the taxpayer was liable to withhold taxes on the same under section
195 of the Act. The AO further observed that it was not open to the taxpayer to
make payments by unilaterally taking a no tax position and the taxpayer should
have obtained the concurrence of the AO by applying for a withholding tax order
under section 195(2) of the Act.
On appeal, the CIT(A)
ruled in favour of the taxpayer. On the basis of the perusal of the agreements
relevant to each of the service provider, the CIT(A) held that the services in
question were purely commercial in nature and therefore, the payments for such
services would qualify as business profits; not taxable in the absence of PE in
India. It further held that the logistic services could not be termed as FTS as
such services do not result in rendering of any technical, managerial or
consultancy services and thus, would not be taxable in India as FTS.
Accordingly, the taxpayer was not required to apply for a withholding tax order
under the provisions of section 195(2) of the Act.
Aggrieved by the order
of the CIT(A), the Revenue Authorities filed an appeal before the ITAT. The
ITAT upheld the order of the CIT(A) and allowed the claim of the taxpayer by
making the following observations:
·
The logistic services
were commercial in nature and could not be termed as technical, managerial or
consultancy services; the services were neither technical in nature nor could be
treated as managerial services merely because some managerial skill was
required to render the services;
·
The requirement of
knowledge of local laws on the part of the service providers to render specified
services to the taxpayer to aid in shooting overseas would not change the basic
commercial nature of the services;
·
If the relevant
payment does not contain the element of income taxable in India, the payer is
not required to obtain a withholding tax order before making the payment to a
non-resident.
Yashraj Films Private
Ltd v ITO (ITA No 4856 of 2008) (Mumbai
ITAT)
FTS credited but not
paid in absence of approval from Reserve Bank of India not liable to income
tax
The taxpayer, a
foreign partnership firm established in Germany, was engaged in rendering
management and technical consulting services through its Branch Office (“BO”) in
India. During the relevant year under consideration, the taxpayer availed
services from its group companies in relation to its projects in India. The
taxpayer debited the payment for such services in its books of accounts and
claimed a deduction for the same in its return of income while the payments were
not actually made due to non-receipt of necessary approval from the Reserve Bank
of India (“RBI”). During the course of the assessment proceedings, the AO held
the payments to be in the nature of FTS and thus, taxable in India. Further,
the taxpayer was treated as an agent of the group companies.
Before the CIT(A), the
taxpayer contended that the amount payable did not partake the character of
income in the hands of its group companies as the necessary approval from the
RBI under the Exchange Control regulations was not received. Rejecting the
submissions of the taxpayer, the CIT(A) held that once the taxpayer had
accounted for the invoices in its books and the effect of liability had been
acknowledged by way of claiming a deduction, the income would be accrued during
the year under consideration. As an alternate, the taxpayer also contended that
even as per the specific language used in the relevant tax treaties, FTS could
be taxed only when it was paid to the foreign entities and since the amounts of
FTS had not been paid by the taxpayer in the year under consideration, the same
could not be taxed in that year. The CIT(A), however, held the word ‘paid’ used
in the relevant Article of the treaties dealing with FTS to denote ‘incurring of
a liability’. On the said basis, the CIT(A) upheld the AO’s action.
Aggrieved by the order
of the CIT(A), the taxpayer filed an appeal with the ITAT. Ruling in favour of
the taxpayer, the ITAT observed that the amount in question cannot be taxed in
absence of necessary RBI approval. The ITAT further observed that as per the
FTS Article under the relevant treaties (specifically with reference to German,
Singapore and UK tax treaty), the amounts could be taxed only on payment basis
and since the impugned amounts were never ‘paid’ to the foreign entities, the
same could not be brought to tax.
Booz Allen &
Hamilton (India) Ltd v ADIT (ITA Nos
4503,4504,4506,4507 and 4508 of 2003) (Mumbai
ITAT)
Interest under section
234C of the Act is not applicable when income is earned at fag end of the
year
The taxpayer, engaged
in the business of real estate development, filed its return of income declaring
income under the head ’profits and gains of business or profession’. The AO
accepted the same after charging interest under section 234C of the Act.
The taxpayer filed an
application under section 154 of the Act stating that since income returned by
it was earned at the end of the relevant financial year, the interest under
section 234C of the Act for deferment in payment of advance tax cannot be
charged and therefore, the same constitutes a mistake apparent from record. The
application was disposed off by the AO without dealing with this issue.
On appeal, the CIT(A)
affirmed the order of the AO by observing that the exemption from the
applicability of interest under section 234C of the Act was available only on
capital gains and winning from lotteries etc; and not on income returned under
the head ’profits and gains of business and profession’ under which the income
of the taxpayer was offered to tax.
Aggrieved by the order
of the CIT(A), the taxpayer filed an appeal before the ITAT. Before the ITAT,
the taxpayer reiterated the submissions made before the lower authorities.
Ruling in favour of the taxpayer, the ITAT observed that where the taxpayer has
earned income at fag end of the year he is not expected to estimate / imagine
that he will earn that income and pay advance tax thereon. Accordingly, no
interest could be charged in the case of the taxpayer.
Lalitha Developers v
DCIT (ITA No 770 of 2011) (Bangalore ITAT)
Circular / Notifications
Time limit for filing ITR – V extended
Central Board of Direct taxes (“CBDT”) has extended the time limit to
file form ITR-V for AY 2010-11 and AY 2011-12 to February 28, 2013. The time
limit for filing ITR-V for AY 2012-13 has also been extended to March 31, 2013
or 120 days from the date of uploading the electronic return, whichever is
later.
Source: Notification No 1/2013, issued by
CBDT
CBDT addresses issues faced by software export
industry
The CBDT has issued Circular providing clarifications on various
issues relating to the export of computer software and allowance of deduction
under sections 10A, 10AA and 10B of the Act. For details of the circular,
please refer to the BMR
Buzz dated January 22, 2013.
Source: Circular No 1/2013, issued by CBDT
Link: www.itatonline.org
External Commercial Borrowings limit for Infrastructure Finance
Companies revised
RBI has made an upward revision of the limit for External Commercial
Borrowings (“ECB”) for non banking finance companies categorized as
Infrastructure Finance Companies (“IFC”). IFC can now raise ECB to the extent
of 75 percent of net owned funds including the outstanding ECB. IFC desirous of
availing ECB beyond 75 percent of their owned funds would require the approval
of RBI under the approval route.
Hedging requirement for currency risk has been reduced from 100
percent of exposure to 75 percent of exposure.
Source: Circular No 69 dated January 7, 2013, issued by
RBI
Link: http://www.rbi.org.in
External commercial borrowings for micro finance institutions and non
– government organisations to be fully hedged
RBI has mandated all authorised dealer banks to ensure that ECB
raised by micro finance institutions and non – government organisations to be
fully hedged.
Source: Circular No 63/RBI dated December 20, 2012, issued by
RBI
Link: http://www.rbi.org.in
Sin Maarten has been notified as specified territory under section
90(2) of the Act
Central Government has notified Sin Maarten, a part of Kingdom of
Netherlands as specified territory under section 90(2) of the Act.
Source: Notification No 54/2012 dated December 17, 2012, issued by
CBDT
Certification requirement introduced in Rule 112F of the Rules
Rule 112F of the Rules, outlining the cases wherein investigating
officer (“IO”) is not required to issue notice for assessing income for 6 years
immediately preceding the year of search, has been amended to provide certain
certification requirement to be complied with by the IO. Such certification shall also be sent to the AO and Commissioner of Income
Tax having jurisdiction over the assessee.
Source: Circular No 10/2012 dated December 31, 2012, issued by
CBDT
Low cost affordable housing projects notified as eligible end use for
ECB
RBI has notified low cost affordable housing projects (“LCAHP”) as
eligible end use for ECB under approval route. Salient features of the scheme
are as under:
· Along with developers of LCAHP, Housing Finance Companies (“HFC”) and
National Housing Bank (“NHB”) can also avail the ECB
facility
· Projects should have minimum 60 percent floor space index (“FSI”)
reserved for units with maximum carpet area of 60 square
meters
· Slum rehabilitation projects are also eligible subject to necessary
approvals of necessary authorities
· ECB proceeds cannot be used for acquisition of
land
· NHB shall be the nodal agency for deciding the eligibility of project
for ECB
· Upper cap of USD 1 billion is fixed for the financial year 2012-13,
subject to annual review
· All other conditions applicable to ECB need to be complied
with
Source: Circular No 61 dated December 17, 2012, issued by
RBI
Step by step instructions for grant of refunds issued by income tax
department
With a view to reduce the problems raised due to mismatch of tax and
tax withholding credits, the Income tax department has issued Instruction No 1
dated November 27, 2012 which contains a step by step procedure for adjustment
of refunds to be followed by the AOs and the centralized processing
centre.
Source: Instruction No 1 dated November 27, 2012, issued by Director
of Income tax (Systems)
Link: www.itatonline.org
Ministry of Corporate Affairs notifies change in form DIN
4
Ministry of Corporate Affairs (“MCA”) has added a paragraph in the
certification requirement part of Form DIN 4 which is required to be filed to
intimate change in the details of directors. Director Identification Number
(“DIN”) is a unique identity number which is assigned to an individual who
wishes to become a director of any Indian company.
Source: Notification (F NO 5/80/2012 – CLV) dated December 24, 2012,
issued by MCA
Link: www.taxmann.com
New form 18 and DIN 1 notified by MCA
MCA has notified new Form 18 and DIN 1 which is required to be filed
to intimate any change in registered office of the company and to obtain new DIN
respectively.
Source: Notification (F NO 5/80/2012 – CLV) dated December 24, 2012,
issued by MCA
Source: www.taxmann.com
Indirect
tax
Value Added Tax
(“VAT”) / Central Sales Tax (“CST”)
Kora
maal (brass ware) after polishing and engraving continues to be same commodity
and there is no change in the identity of goods
The
taxpayer was engaged in purchase of kora maal (brass ware) from manufacturer and
after engraving and polishing, selling the same to a dealer outside state who is
stated to have exported the same. The
Revenue Authorities raised demand of purchase tax under section 3AAAA of the
Uttar Pradesh Trade Tax Act, 1948
(“UP
Trade Tax Act, 1948”) against the taxpayer on the basis that engraving and
polishing changes the identity of goods after its purchase. Aggrieved by it,
the taxpayer filed an appeal before the first appellate authority.
The
matter finally reached the HC where the Revenue Authorities contended that the
inextricable link of purchase with the exports required for claiming the
exemption has not been demonstrated in the present case and hence the matter
should be remanded back to the sales tax tribunal for examination of this
aspect.
The HC
held that even if the sale was not inextricably linked to export and the sale of
polished kora maal was an independent sale of goods to a dealer outside state,
the same would qualify as a sale in the course of inter- state trade or commerce
and would be exempt from payment of purchase tax (proviso (iii) to section 3AAAA
of the UP Trade Tax Act, 1948 inter alia exempts the levy of
purchase tax on goods which the purchasing dealer resells in the same form and
condition in the course of inter-state trade). Accordingly, the HC dismissed
the revision petition.
Commissioner
trade tax, UP, Lucknow v Pioneer India [2012-56-VST-323
(All)]
‘Harpic’ and ‘Lizol’ classified under Drugs and Cosmetics
Act, 1940 but having the primary quality of disinfectant fall under the
definition of pesticides liable to be taxed at 4 percent and Mortein mosquito
repellents are liable to be taxed at 12.5 per cent (rates applicable during the
disputed period) in Andhra Pradesh
The taxpayer was
engaged in manufacture and sale of Lizol (floor cleaner), Harpic (toilet
cleaner) and Mortein mosquito repellents. The Revenue Authorities contended that these
goods were liable to be taxed at 12.5 percent by virtue of being covered under
the exclusion of entry 88 of Schedule IV to the Andhra Pradesh Value Added Tax,
2005 (“AP VAT Act”) which covers drugs and medicines excluding products capable
of being used as cosmetics and toilet preparations and mosquito repellents in
any form.
The taxpayer contended
that though Lizol and Harpic are manufactured under drugs license but are
disinfectants capable of destroying germs fall within the category of pesticides
covered by entry 20 of Schedule IV to the AP VAT Act (which levies tax at 4
percent on pesticides, insecticides etc excluding mosquito repellents in any
form).
The Andhra Pradesh HC
with respect to Lizol and Harpic affirmed the view of the taxpayer while placing
reliance on decision of the SC in the case of Bombay Chemical Pvt Ltd[1995 (99)
STC 339 (SC)] wherein it was held that the disinfectants having the capability
to kill bacteria would be considered pesticides, thereby giving a broader
understanding to the term ‘pesticides’.
Further, the HC held
that such goods would not be covered by the exclusion under entry 88 of the
Schedule IV to the AP Vat Act since the entry seems to exclude products capable
of being used as cosmetics and toilet preparations and does not deal with
disinfectants used to kill bacteria and germs.
With respect to
Mortein mosquito repellents, the HC held that since mosquito repellents were
covered by exclusions both under entry 20 and entry 88, its taxability at 12.5
percent need not be challenged.
Reckitt Benckiser
(India) Ltd v State of Andhra Pradesh
[2012-194-ECR-0154(AP)]
‘Inkjet cartridges’
and ‘Tonor cartridges’ are covered by entry 4 of Part B of the Second Schedule
to the Assam Value Added Tax Act, 2003 as parts and accessories of computer
system and peripherals
The taxpayers was
engaged in sale of Information Technology products including ‘inkjet and tonor
cartridges’. The taxpayers had claimed that
these items are covered by entry 4 of Part B of the Second Schedule (‘parts and
accessories of computer system and peripherals’) to the Assam Value Added Tax
Act, 2003 (the “Assam VAT Act”) which lists items taxable at the concessional
rate of 4 percent (during the disputed period).
However, the plea of
the taxpayers was rejected by the Revenue Authorities contending that such goods
are consumables and not parts or accessories of computer systems and are thus,
taxable at the higher rate under the residual entry.
The taxpayers’ plea
was accepted by the Gauhati HC holding that such goods form an integral part of
printers which is undisputedly covered under the entry ‘computer system and
peripherals’. Reliance was placed on the decision of Delhi HC in the case of
Commissioner of Trade and Taxes v HP India Sales Private Limited
(2007-VIL-18-HC-Del) wherein it was held that tonors and cartridges were parts
and accessories of computer systems.
Hewlett Packard India
Sales Pvt Ltd v State of Assam and Others [2012-56-VST-472
(Gau])
‘Dettol’ falls under
the category of drug and medicine and not a toilet preparation; ‘Lizol and
Harpic’ having the primary quality of disinfectant to be treated as
pesticides
The taxpayers were
engaged in manufacturing, selling and marketing of household products including
disinfectants like ‘Harpic’ and ‘Lizol’ and antiseptic liquid, ‘Dettol’. The taxpayers had been paying tax at the rate of
4 percent on sale of these goods in Assam based on the following
grounds:
·
‘Lizol’ and ‘Harpic’,
containing active ingredients like hydrochloric acid are disinfectants. Hence, they are covered under the specific entry
no 19 of Part A of the Second Schedule to the Assam VAT Act including
pesticides, insecticides etc taxable at 4 percent during the disputed
period;
·
Dettol, having
therapeutic and prophylactic properties, is a drug/ medicine, covered under the
specific entry no 21 of the Fourth Schedule of the Assam VAT Act including drugs
and medicines, also taxable at 4 percent during the disputed period.
Contrary to the claims
of the taxpayers, the Revenue Authorities contended that the above products,
‘Lizol’, ‘Harpic’ and ‘Dettol’ being floor cleaner, toilet cleaner and a toilet
preparation are not covered by any of the specific entries, and should be
classified under residuary entry no 1 of the
Fifth Schedule of the Assam VAT Act, leviable to tax at the higher rate of 12.5
percent during the disputed period.
The Gauhati HC while
examining the issue placed reliance on the decision of SC in the case of Bombay
Chemical Pvt Ltd [1995 99 STC 339 (SC)] which held that the disinfectants having
the capability to kill bacteria would be considered as ‘pesticides’.
Accordingly, the Gauhati HC held that ‘Lizol’ and ‘Harpic’ being disinfectants
having the capability to kill germs can be considered as ‘pesticides’, covered
under the specific entry taxable at 4 percent during the disputed
period.
Further, analyzing the
definition of ‘drug’ as defined under the Drugs and Cosmetics Act, 1940 as well
as Medicinal and Toilet Preparations (Excise Duty) Act, 1955 the Court held that
if the purpose of a substance is to prevent disease, unless otherwise provided,
it can be considered a drug. The main purpose for the use of ‘Dettol’ is to
prevent infections. Thus, by applying the
‘users test’, it would squarely fall under the definition of ‘drug’. Further,
from the users’ point of view, it cannot be considered to be ‘cosmetic’ or a
‘toilet preparation’ (requiring the main characteristics of cleansing,
beautifying, promoting attractiveness etc) which are not present in ‘Dettol’.
Accordingly, ‘Dettol’ being a drug would get covered under the specific entry no
21 of the Fourth Schedule of the Assam VAT Act taxable at 4 percent during the
disputed period.
Reckitt Benckiser v
State of Assam [2012-56-VST-452 (Gau)]
Excise
Section 11AC of the
Central Excise Act, 1944 allows a taxpayer the option to pay only 25 percent of
the demand as penalty if the entire demand along with interest and reduced
penalty is paid within 30 days from the date of communication of Central Excise
Officer’s order. The said time limit cannot be modified by any authority
whatsoever
The taxpayer, a
manufacturer of excisable goods, had availed excess input credit which was
subsequently reversed after it was pointed out by the Revenue Authorities.
Penalty under section 11AC of the Central Excise Act, 1944 was confirmed against
which an appeal was filed before the Customs Excise and Service tax Appellate
Tribunal (“Tribunal”). The Tribunal observed that the adjudication order did
not provide the taxpayer the option to pay reduced penalty of 25 percent under
section 11AC and held that the benefit of reduced penalty would be available if
25 percent penalty is paid within 30 days of communication of its order. The
Revenue Authorities seeking to recover 100 percent penalty preferred an appeal
before the Bombay HC against the decision of the Tribunal.
The Revenue
Authorities contended that once demand was confirmed by invoking larger period
of limitation, penalty under section 11AC was to be compulsorily levied and the
benefit of 25 percent penalty would be available only if the demand along with
interest and reduced penalty is paid within 30 days of the communication of
Central Excise Officer’s order as provided under the Central Excise Act, 1944.
The taxpayer argued
that the Tribunal’s order is perfectly valid as the operative part of the
adjudication order did not explicitly clarify the option of reduced penalty
available with the taxpayer.
The Bombay HC
disregarded the taxpayer’s arguments by stating that it was not obligatory to
include the above explained option in the adjudication order’s operating part.
The taxpayers’ plea that section 11AC should be read liberally was rejected as
the section imposed punishment on those who evaded taxes. The appeal was allowed
and it was held that when the legislature specifically fixed a time limit to
avail an incentive, it was not open for any authority to modify the time limit
so fixed.
CCE v Castrol India
Ltd [2012 (286) ELT 194 (Bom)]
Benefits provided
under Exemption Notification No 56/2002 – CE will be available even though the
Khasra numbers of the industrial areas where the units are located are different
from those given under the relevant Notification
The taxpayer, located
in Jammu & Kashmir, was in the business of manufacture of goods which were
exempt from excise duty as provided under Exemption Notification No 56/2002 – CE
subject to the condition that the goods were manufactured and cleared by units
located in industrial growth centres, industrial estates, export promotion
industrial parks, etc as given under Annexure II to the said
Notification.
In the present case,
appeals were filed before the Tribunal by the Revenue Authorities against the
decision given by the Commissioner of Central Excise (Appeals) in favour of the
taxpayer on the ground that the units of taxpayers were located in Khasra
numbers other than those specified in the Notification No 56/2002 –
CE.
The Revenue
Authorities agreed to the fact that the goods and the industrial areas where the
units were located were specified in the Notification but argued that duty was
still payable because the units were not located in Khasra numbers specified
against the corresponding industrial area in the said Annexure. It was further
argued that the provisions of the Notification be construed strictly and
interpreted only on their wordings.
The Tribunal observed
that in some cases there were some typo-graphical mistakes and in other cases
the relevant Khasra numbers were included in the Notification albeit they were
wrongly specified against other industrial areas. After noting that the
Notification did not stipulate that the unit must also be located in the Khasra
numbers mentioned against the each industrial area, the Tribunal held that just
because of some typo-graphical mistakes or just because a Khasra number is
mentioned against a wrong industrial area, the benefits of the Notification
could not be denied to the taxpayer. Consequently, all the appeals of the Revenue
Authorities were dismissed.
CCE v BR Agrotech Ltd
[2012 (286) ELT 127 (Tri – Del)]
The liability to pay
excise duty in case of job work arrangements falls on the person who gets the
goods manufactured on job work basis
Diwan Saheb Fashions,
the taxpayer, was engaged in stitching garments out of fabric bought by
customers from their shop (stitching to take place after sale of fabric) or from
outside. For purchases made by the customers from the taxpayers, it was not
compulsory for customers to also get their fabric stitched. No excise duty was
being paid by the taxpayers in respect of the stitching activity.
The Revenue
Authorities contended that the taxpayers, being the job workers, should be
liable to pay excise duty. The taxpayers defended by placing reliance on Rule
7AA of the Central Excise Rules, 1944 and the corresponding successor rules,
Rule 4(1) and Rule 4(3) of the Central Excise Rules, 2001 and 2002. It was
pointed out that the liability to pay excise duty was that of those who supply
the materials as these rules specified that in cases of job work, excise duty
was to be paid by the person for whom goods were being manufactured on job work
basis as if such person was the manufacturer of the goods. Further, exemption
from excise duty was available on garments got stitched from one’s own fabric
and based on measurements in terms of Notification No 7/2003 – CE dated March 1,
2003.
The Delhi HC agreed
with the taxpayer’s submissions and held that the liability to pay excise duty
would fall on the respective customers but at the same time they should be
eligible for exemption given to Small Scale Industries (“SSI”)
units.
CCE v Diwan Saheb
Fashions Pvt Ltd & Ors
(2012-TIOL-942-HC-Del-CX)
Subsequent investments
in the plant and machinery and increase in commercial production after the
cut-off date to start commercial production cannot be a ground to deny the
excise exemption under Notification No 39/2001 – CE where company has already
obtained a certificate from the concern authority confirming fulfillment of
prescribed investment criteria
The
taxpayer set up the unit in the Kutch area of Gujarat and availed exemption from
excise duty on clearance of its final product. This exemption was claimed by
taxpayer under the Notification No 39/2001 – CE dated July 31, 2001 which
provides for excise duty exemption on final product cleared by a unit meeting
the criteria envisaged under the said Notification subject to a certification
condition.
The taxpayer obtained
the above certificate confirming that unit was set up after the date of
publication of the said Notification and required plant and machinery has been
installed. The taxpayer commenced the commercial production, cleared the final
products and availed the exemption under the said Notification. During the
period April 2005 to December 2005, the taxpayer also filed the monthly excise
returns and disclosed the average per month clearance of 5,000 tons of final
product (ie MS Billets).
The Revenue
Authorities denied the excise duty exemption on clearance of final product on
the ground that taxpayer has done backward integration and installed various
other plants in the project which became functional after December 31, 2005 and
that the substantial investment made by them in the backward integrated plant
was, in fact to be done for setting up of the plant as envisaged in the said
Notification. The Revenue Authorities further alleged that factually the
project commenced its commercial production only after completion of
aforementioned backward integration ie only after December 31, 2005. As per Revenue Authorities average clearance of
5,000 tons of final product per month was not a substantial clearance so as to
conclude that taxpayer has commenced commercial production. Given this, the
Revenue Authorities alleged that the taxpayer has not complied with the
prescribed conditions of investment in plant and machinery by prescribed cut-off
date and hence it was not eligible for excise duty exemption under the said
Notification.
The Tribunal held that
there was no dispute that the taxpayer’s unit at Kutch was a new industrial unit
set up after the date of publication of the said Notification and also it was
undisputed that a certificate was given which categorically indicated that the
taxpayer had installed the machinery and had complied with the said condition as
envisage in the said Notification. Also, in view of Tribunal, average clearance
of 5,000 tons of final product per month (as disclosed in monthly excise
returns) cannot be considered as small production as was sought to be propagated
by the Revenue Authorities.
It was held that the
taxpayer has strong prima facie case for waiver of pre-deposit as it was
undisputed that the taxpayer’s unit was set up after the publication of the said
Notification and subsequent investment made by the taxpayer in the plant in the
form of backward integration cannot be held against the taxpayer to deny the
benefit of the said Notification.
Electrotherm India Ltd
v CCE Rajkot [2012 (194) ECR 257 (Tri-Ahd)]
'Soft Serve' served at
McDonalds is classifiable as 'Ice Cream' under Tariff Heading 2105 of the
Central Excise Tariff Act, 1985 and will attract applicable excise duty. The SC
also observed that in the absence of definition of the term 'Ice Cream' or 'Soft
Serve', classification is to be determined on the touchstone of common parlance
test
The taxpayer was
engaged in the business of selling burgers, nuggets shakes, soft-serve etc
through its fast food chain of restaurants, ‘McDonalds’. The taxpayer was of
the view that ‘soft-serve’ was classifiable either under heading 04.04 or
2108.91 of the Central Excise Tariff Act, 1985 (‘Tariff Act’) for which
applicable excise duty is ‘Nil’.
Show cause notices
were issued to taxpayer alleging that the ‘soft serve’ ice-cream was
classifiable as ‘Miscellaneous Edible Preparations’ under Tariff Act, attracting
16 percent duty under heading 2105.00 –‘Ice-cream and other edible ice, whether
or not containing cocoa’.
The matter reached the
SC in due course. The SC held that in the
absence of a technical or scientific meaning or definition of the term
‘ice-cream’ or ‘soft serve’, the issue would have to be examined on the
touchstone of the common parlance test. SC observed that headings 04.04 and
21.05 have been couched in non-technical terms. Heading 04.04 reads ‘other
dairy produce; edible products of animal origin, not elsewhere specified or
included’ whereas heading 21.05 reads ‘ice-cream and other edible ice’. Neither
the headings nor the chapter notes/section notes explicitly define the entries
in a scientific or technical sense. Further, there was no mention of any
specifications in respect of either of the entries. On that basis, the argument
that since ‘soft serve’ is distinct from ice-cream’ due to a difference in its
milk fat content, was rejected.
Further, rejecting the
taxpayer’s argument that ‘soft serve’ cannot be regarded as ‘ice-cream’ since
the former is marketed and sold around the world as ‘soft serve’, the SC held
that the manner in which a product may be marketed by a manufacturer, does not
necessarily play a decisive role in affecting the commercial understanding of
such a product. What matters is the way in which the consumer perceives the
product at the end of the day notwithstanding marketing strategies.
It was also held that
it is a settled principle in excise classification that the definition of one
statute having a different object, purpose and scheme cannot be applied
mechanically to another statute. Accordingly the taxpayer’s submission that the
common parlance understanding of ‘ice-cream’ can be inferred by its definition
as appearing under the Prevention of Food Adulteration Act, 1955 (“PFA”) cannot
be adopted.
In view of above, the
SC held that ‘soft serve’ marketed by the taxpayer, during the relevant period,
is to be classified under tariff sub-heading 2105.00 as ‘ice-cream’ and was
liable to excise duty.
CCE New Delhi v
Connaught Plaza Restaurant Pvt Ltd New Delhi (2012 TIOL 114 SC –
CX)
One time technical
assistance fee charged for providing services such as putting up a restaurant in
running condition, designing of food facilities and monthly fees for other
services, right to use technical knowhow and brand name of franchisor cannot be
said to be additional consideration for sale of confectionary, cakes etc by
franchisor to franchisee
The taxpayer operated
a chain of restaurants and also manufactured confectionary items like cakes,
pastries, cookies etc chargeable to central excise duty. The goods manufactured
are cleared to their own restaurants and also to their franchisees. The
taxpayer, in terms of the agreement with the franchisees, charged lump sum
amount in the beginning as technical assistance fee, and thereafter a monthly
amount as fixed percentage of the gross sales during the
month.
According to the
Revenue Authorities, such lump sum amount and the monthly amount should also be
added to the assessable value of the goods for payment of excise duty. The
taxpayer submitted that there is no link between the price at which cookies,
cakes and pastries etc manufactured are sold to their franchisees and the
collection of one time technical assistance fee and monthly
fee.
Further, the taxpayer
submitted that the technical fees and monthly fees is for providing certain
technical assistance to the franchisees and for permitting them to operate by
using the taxpayer’s brand name and business model, and the price charged is
equal to the price adopted for clearance of same goods to the taxpayer’s own
restaurants. Further, service tax has been discharged on said amounts under
franchise services.
The Tribunal took note
of Rule 6 of Central Excise Valuation Rules, 2000 and held that the same applies
when there is some supply of goods or services either free or at reduced cost
from the buyer (franchisees in this case) to the manufacturer (the taxpayer in
this case) for use in the manufacture of the goods which are to be sold to the
buyer – thus, it was held to be inapplicable in this case.
The amounts in
question were being received for certain services rendered by the taxpayer to
the franchisees. Further, as service tax had been paid on the said amounts,
they could not qualify as additional consideration for sale.
Therefore, there is no
question for rejecting the normal price/ transaction value on which the duty has
been paid.
Nirulas Corner House
Pvt Ltd v CCE Delhi [2012 (286) ELT 46 (Tri - Del)]
Service
tax
Supplementary services
provided by tour operator such as organizing local events/ trips are includible
in the taxable value of the tour operator’s service and abatement allowed on
such value
The taxpayer was a
public sector undertaking engaged in providing tour operator’s service and
deposited service tax after availing the benefits under abatement Notification
No 39/97 –ST dated August 22, 1997 and Notification No 1/2006-ST dated March 1,
2006. The issues that arose
were:
·
Whether any amount
collected for local events/ trips such as amount collected towards train
charges, darshan ticket charges, entry fees, hill transportation charges and
water fleet charges (supplementary charges) would form part of the taxable value
of tour operator’s service; and
·
Whether abatement
could be claimed on such amount
The taxpayer contended
that only the amount charged for the journey can be included in the taxable
value and not for the amounts charged for supplementary services. Supplementary
charges paid by the taxpayer and reimbursed by their customers are not his
expenditure and therefore are not to be included. Also, abatement should be allowed without including
such charges/ fees in the taxable value.
Revenue Authorities contended that local small trips undertaken by a
tourist in a particular place are covered by the definition of ‘tour’ and the
distance of such ‘tour’ is immaterial. Also the abatement could only be claimed
on the gross taxable value.
The Tribunal held that
the term ‘journey’ in the definition of ‘tour’ is neither defined in the Finance
Act, 1994 (“Finance Act”) nor in the Service Tax Rules, 1994. Accordingly, it
has to be understood in common parlance to include local sight-seeing / trips
organized by tour operator for the tourists. Further, from September 10, 2004,
the business of a tour operator includes arrangements for accommodating,
sight-seeing or other similar services and thus, local events or trips can
reasonably be brought within the ambit of the expression 'other similar
services' by applying principle of ejusdem generis.
With respect to the
taxpayer’s claim for 60 percent abatement, it was held that the benefit is
available only to a 'package tour' and on the gross amount charged. This gross amount is the taxable value and
includes the amounts collected towards the cost of supplementary services. In view of finding that supplementary services
are rendered in relation to package tour, the collections for the same from
tourists cannot be classified as 'reimbursements'.
Hence, the amount
collected from customers for these supplementary services would form part of
taxable value and taxpayer was entitled to abatement to extent of 60 percent on
gross taxable value under the aforementioned
Notifications.
Andhra Pradesh Tourism
Development Corporation Ltd v CCE ]2012 (28) STR 595
(Tri-Bang)]
Service tax is not
payable on the sale proceeds realised from auction of abandoned / uncleared
cargo by the custodian of goods
The taxpayer was
running a container freight station and was functioning as a custodian of the
bonded warehouses under the provisions of the Customs Act, 1962 (“the Customs
Act”). In the course of undertaking the business operations, the taxpayer sold
some uncleared cargo by way of auction. The Revenue Authorities demanded
service tax from the taxpayers on income earned from such sale contending that
the sale proceeds attract service tax under the taxable category of ‘cargo
handling services’ and ‘storage and warehousing services’.
The taxpayer relied
upon Central Board of Excise and Customs (“CBEC”)
Circular No 11/1/2002- TRU, dated August 1, 2002 wherein it has been
clarified that service tax is not leviable on the activities of the custodian
when he auctions abandoned cargo and VAT / Sales Tax is paid. The taxpayer
further relied on earlier judgments wherein the Tribunal has taken a view that
no service tax is leviable on auction of uncleared cargo.
Based on the above
submissions, the Mumbai Tribunal held that no service tax was payable by the
taxpayer on the sale consideration received from auction of uncleared
cargo.
Maersk India Pvt Ltd v
CCE&C Raigad [2012-37-STT-685 (Bom- Tri)]
Rule 5(1) of the
Service Tax (Determination of Value) Rules, 2006 is ultra vires the Finance Act
to the extent it provides for inclusion in the taxable value, expenditure or
costs incurred by the service provider in the course of provision of output
services
The taxpayer was a
company engaged in rendering consultancy services to the National Highway
Authority of India (“NHAI”) in respect of highway projects. The taxpayers
received payments for their consultancy service as well as reimbursements for
the expenses incurred such as air travel, hotel stay, etc in relation to
providing such services. However, service tax was paid only on the fee received
for providing consultancy services (excluding the value of reimbursements).
A show cause notice
was issued on basis of Rule 5(1) of the Service Tax (Determination of Value
Rules), 2006 (‘Valuation Rules’). The taxpayers submitted that Rule 5(1) of the
Valuation Rules, in as much as it provides for including all expenditure or
costs incurred by the service provider in the course of providing the taxable
service in the taxable value of services, travels beyond the mandate of Section
67 of the Finance Act. Accordingly, the taxpayers submitted that it is only the
value of service that is to say; the value of the consulting engineering service
rendered by the taxpayer to NHAI that can be brought to charge and nothing more
and thus, Rule 5(1) of the Valuation Rules is ultra vires Section 67 of the
Finance Act.
On analysing relevant
provisions of service tax laws and after going through the above submissions,
the HC held that:
·
On a combined reading
of section 66 and section 67 of the Finance Act it is clear that in determining
the taxable value only consideration actually paid as quid pro quo for the
service can be brought to charge. The expenditure or costs incurred by the
service provider in the course of providing the taxable service cannot be
considered as the gross amount charged by the service provider ‘for such
service’ provided by him;
·
Therefore,
the provisions of Rule 5(1) to the extent it seeks to include expenses incurred
for providing a taxable service in the value of taxable service, exceeds the
mandate of section 67 of the Finance Act.
·
While
the Central Government has powers under section 94 of the Finance Act to make
rules, such power to make rules cannot exceed the scope of levy envisaged under
the Finance Act/ charging section.
·
Therefore, Rule 5(1)
of the Valuation Rules, to the extent it provides for inclusion of expenditure
incurred in the course of provision of taxable service, in the value of taxable
service, is ultra vires the provisions of section 66 and 67 of the Finance
Act.
Intercontinental
Consultants and Technocrats Pvt Ltd v UOI (2012-TIOL-966-HC-Del-ST)
Whether premium
received by the insurance company is inclusive of service tax or not
would depend on the terms of contract pursuant to which insurance policy is
executed and the conduct of the company. Non-disclosure of real prices at which
the service is provided along with prevailing statutory taxes and levies amounts
to unfair trade practices pursuant to which taxes cannot be recovered from the
customers at a later stage
The taxpayer was a
public limited company engaged in providing life insurance and other similar
services. With respect to a 20 year life insurance policy sold to their
customers, the taxpayer, till the fourth instalment, collected premium without
any charge of service tax. However, in the fourth instalment, the taxpayer
charged service tax in addition to the premium. The same was objected by one of
the customers. Not satisfied with the explanation of the taxpayers, the
customer moved to ‘Insurance Ombudsman’ with the complaint. The Insurance
Ombudsman accepted the case of the customer that the premium receivable should
be inclusive of tax.
Aggrieved by the same,
the taxpayers preferred an appeal with the Kerala HC wherein the taxpayer
contended that it is the duty of the service recipient to pay tax. The customer
did not dispute the liability of service tax. However, he contended that the
premium stated to him by the taxpayer at the time of canvassing the policy was
inclusive of service tax and other levies.
The appeal was
dismissed on the grounds that it depends on the terms of the contract pursuant
to which insurance policy is executed whether premium is inclusive of service
tax or not. Policy document and the premium receipts issued for first three
annual premiums did not contain statement that it did not include statutory
taxes and levies. Further, the taxpayers did not claim service tax till fourth
instalment, which communicated through their conduct that the premiums were
inclusive of service tax. It was more so since policy was issued when service
tax was in force and premium was fixed by the taxpayer taking into account the
nature of business, viability and profit. In the event the premium offered
didn’t include the service tax, the taxpayers, in the normal course, should have
disclosed the same.
Further, the HC held
that non- disclosure of real price at which the service is provided along with
prevailing statutory taxes and levies amounts to misleading vis a vis price,
which is an unfair trade practice under Section 2(r)(l)(ix) of Consumer
Protection Act, 1986. Without such disclosure of the duties and levies at the
time of transaction, the taxpayers are not entitled to claim them from customer
at a later stage during course of continuing service.
Max New York Life
Insurance Co Ltd v Insurance Ombudsman [2012-28-STR-453
(Ker)]
Back office activities
like preparation of tax returns, co-sourcing services, analyzing client data and
calculating estimates of tax amount would not qualify as Information Technology
services even though they are performed by using computer
programs
The taxpayer was a
private limited company registered with the Software Technology Park of India
(“STPI”) providing various back office services to their overseas group entity
such as lead tax services, international assignment services, etc. The
taxpayers got registered under the categories of ‘business auxiliary service’
and ‘management consultancy service’.
On March 31, 2006,
they applied for a refund under Rule 5 of the Cenvat Credit Rules, 2004 of
various input services such as equipment hiring charges, professional
consultation service, recruitment service, security service, etc used in
relation to export of their output services.
According to the
Revenue Authorities, the taxpayers were infact engaged in ‘export of software’
which is a non-taxable service against which no CENVAT credit shall be
available. Also, as per the Revenue Authorities, the input services declared by
the taxpayers did not appear to have any nexus with the output services provided
by them and therefore the taxpayers are ineligible to avail input service
credit. Accordingly, the claim of the taxpayers for refund was rejected.
The matter finally
reached the Andhra Pradesh HC. Besides the above contentions, the Revenue
Authorities relied upon the decision of Bangalore Tribunal in the case of Gandhi
and Gandhi Chartered Accountants v Commissioner [2010-17-STR-25 (Tri-Bang)]
which was confirmed by the SC wherein it was held that the activity of
computerized data processing for filing and accounts management qualifies as
‘Information Technology Service’ and is excluded from ‘Business Auxiliary
Service’.
The Andhra Pradesh HC
held that activities performed by the taxpayers are not in relation to computer
systems, which is also supported by the ‘SOFTEX’ forms submitted by them to STPI
wherein they have mentioned that they export ‘services’ only and not ‘software’
and they have declared their exports as ‘others-Back Office Services’. The HC further held that reliance may not be
placed on the decision in Gandhi and Gandhi's case, wherein it appears that the
Tribunal did not consider the words ‘primarily in relation to computer
systems/programming’ while giving its decision. The fact that the said decision
was confirmed by a non-speaking order by the SC does not mean that the reasoning
in the order of the Tribunal was approved by the SC. Accordingly, the position
of the taxpayers was upheld.
CC&E v Deloitte
Tax Service India Pvt Ltd (2012-TIOL-954-HC-AP-ST)
Customs
Once the end use
condition stipulated under the Project Import Scheme with respect to the goods
imported has been fulfilled, the benefit under the said scheme cannot be denied
in case of non-compliance with the procedural requirements under the said scheme
in time
The taxpayer had
imported Heat Recovery Steam Generators under Chapter 98.01 of the Customs
Tariff Act, 1975 (“Custom Tariff Act"). The
taxpayer had furnished a certificate from a Chartered Engineer certifying that
the said goods have been installed as per the provisions of the Project Import
Regulations, 1986 (‘Import Regulations’). Additionally, the Assistant
Commissioner of Central Excise, Kakinada had furnished a letter certifying that
the goods imported had been installed as per the contract. The taxpayer had
submitted the reconciliation statement in terms of Regulation 7 of the Import
Regulations after nearly two years of the last consignment
The Assistant
Commissioner of Customs, Kakinada finalized the assessments for the bills of
entries after denying the benefit of concessional rate of customs duty under the
Import Regulation on the ground that the taxpayer had violated Regulation 7 of
the Import Regulations. Subsequently, the said order was affirmed by the
Commissioner (Appeals) and held that the taxpayer had failed to satisfy a
substantial condition of submitting the reconciliation statement within 3 months
of import or extended time provided by the authority.
The taxpayer in the
appeal to the Tribunal, amongst other decisions, relied on the decision of SC in
the case of Mangalore Chemicals and Fertilizers Ltd v Deputy Commissioner [1991
(55) ELT 437 SC], and pressed on the fact that it was a settled law that a
substantial benefit could not be denied for violation of procedure.
The Tribunal held that
since the Assistant Commissioner of Central Excise, Kakinada had already
certified that the goods under question have been installed in the factory
premises, the demand of differential duty could not have been raised validly on
the ground of non-compliance of a procedural requirement specified under the
Import Regulations.
Alstom Projects India
Ltd v CC Visakhapatnam [2012 (286) ELT 235 (Tri– Bang)]
Circulars /
Notifications
Customs
Notification No
61/2012-Customs further deepens the tariff concessions in respect of goods
imported from Singapore under Comprehensive Economic Cooperation Agreement
between India and Singapore
Source: Notification
No 61/2012-Customs dated December 18,
2012
Export
incentives
Notification and
Public Notice from DGFT has introduced the Incremental Exports Incentivization
Scheme’. The objective of the scheme is to
incentivize incremental exports achieved by an Importer Exporter Code (“IEC”)
holder by providing an additional duty credit scrip at 2 percent of the Free on
board (“FOB”) value of incremental exports done during the period January to
March 2013 as compared to period January 2012 to March
2012.
Source:
Notification No 27
(RE-2012) / 2009-2014 and Public Notice No 41/2009-2014 (RE-2012) both dated
December 28, 2012
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