March 2013 Tax Update

Direct Tax

High Court

Tax Residency Certificate issued by the Revenue Authorities of the country of residence of the non-resident is a sufficient evidence of its beneficial ownership of royalty income

The taxpayer, a tax resident of Netherlands, was in receipt of royalty income from
Universal Music India Private Limited, an Indian company. The taxpayer claimed the benefit of Article 12 of the Double Taxation Avoidance Agreement (“DTAA”) between India-Netherlands and sought to pay tax, at a beneficial rate of 10 percent on the royalty income. While passing the assessment order, the Assessing Officer (“AO”) held that the taxpayer was not entitled to claim the benefit of the India-Netherlands DTAA in respect of the royalty income as it was not the beneficial owner of the music tracks on which royalty income was earned.

On appeal, the Commissioner of Income tax (Appeals) [“CIT(A)”] held that the taxpayer was eligible to claim the benefit of the India-Netherlands DTAA. Aggrieved by the order of the CIT(A), the Revenue Authorities filed an appeal before the Income tax Appellate Tribunal (“ITAT”). Before the ITAT, the taxpayer submitted its tax residency certificate (“TRC”) which was issued by the Revenue Authorities of Netherlands. The ITAT relied upon the Central Board of Direct Tax (“CBDT”) Circular no 789 dated April 13, 2000 and held that the TRC submitted by the taxpayer was a sufficient evidence of its beneficial ownership over the royalty income. Accordingly, the ITAT allowed the claim of the taxpayer.

On appeal by the Revenue Authorities, the High Court (“HC”) dismissed the appeal on basis that the Revenue Authorities had not been able to show anything contrary to the facts arrived at by CIT(A) or ITAT, which could show that the taxpayer was not the beneficial owner of the royalty. Thus, it ruled that the taxpayer, being beneficial owner of royalty income, could pay tax at a concessional rate of 10 percent as per the India-Netherlands DTAA.

DIT v M/s Universal International Music BV (ITA No 1464 to 1466 of 2011) (Bombay HC)

No capital gains implications on transfer of shares of an Indian listed company by an offshore holding company without any consideration to its wholly owned subsidiary located outside India

The taxpayer, a US company, had approached the Authority for Advance Ruling (“AAR”) on the Indian tax implications in relation to its group restructuring. It had proposed to transfer 74 percent shareholding in an Indian listed company to its Singapore based subsidiary as ‘gift’ and without consideration.

Before the AAR, the Revenue Authorities contended that the transaction was a part of a design of ‘treaty shopping’. The argument of the Revenue Authorities was that the transaction was proposed to be entered to avoid capital gains taxation in India on transfer of the shares of the Indian company in future thereby seeking benefit under the India-Singapore DTAA. Capital gains exemption on transfer of shares of an Indian company is provided under the India-Singapore DTAA subject to certain conditions.

The AAR ruled in favour of the taxpayer and held that no capital gains tax would accrue where shares were transferred 'without consideration' as the computation mechanism would fail to apply. The AAR, inter alia, held that no tax could be sought to be evaded as even if the shares were to be transferred for a consideration, the same, being transfer of shares of a listed company, would have been exempt from income tax under section 10(38) of the Act. Further, the AAR also held that transfer pricing provisions would not be applicable in the absence of any liability to pay tax and the provisions relating to taxing corporate-gift of shares would not apply as transfer is of shares of a listed company.

Aggrieved by the ruling of AAR, the Revenue Authorities filed a writ petition before the HC. Dismissing the writ petition, the HC upheld the AAR ruling and also held that no illegality had been pointed out in the AAR ruling.

DIT v Goodyear Tire and Rubber Company (ITA No 8295 of 2011) (Delhi HC)

Forfeiture of bank guarantee for non-fulfilment of commitment by the taxpayer allowable as business expense

The taxpayer, a manufacturing company, was granted entitlements for export of garments and knit wares by the Apparel Export Promotion Council (“AEPC”). The taxpayer furnished a bank guarantee committing to abide by the terms and conditions of the export entitlements. The bank guarantee was encashed by AEPC as the taxpayer decided not to utilise the export entitlements in view of its losses. The taxpayer claimed the forfeiture of bank guarantee as a deduction under section 37 of the Act by treating it as a penalty which was compensatory in nature.

The AO rejected the claim of the taxpayer. On appeal, the CIT(A) and ITAT allowed the claim of the taxpayer. The view of the CIT (A) and ITAT was further affirmed by the HC. In arriving at the said conclusion, the HC held that since the taxpayer had taken a business decision of not honouring its export commitments, there was no contravention of any provisions of the law and thus, the forfeiture of bank guarantee being compensatory in nature would be allowed as a business deduction.

CIT v M/s Regalia Apparels Private limited (ITA No 88 of 2013) (Bombay HC)

Stay of demand to be granted within a reasonable time and no recovery by the AO during pendency of the stay application

The taxpayer, a charitable trust, was claiming tax exemption under section 11 of the Act and the same was accepted by the AO in assessment proceedings of the taxpayer for various assessment years (“AY”). Thereafter, the AO reopened the assessment proceedings for some completed years and sought to deny the taxpayer exemption under section 11 of the Act. The exemption under section 11 was also denied by the AO for subsequent years. On this basis, a huge tax demand was raised on the taxpayer.

The taxpayer filed an appeal before the CIT(A) for all the years. While the appeal was pending before the CIT(A), the AO issued notices for the recovery of the tax demand. The taxpayer filed an application seeking stay for the payment of tax demand and requested for a hearing. Without disposing off the stay application, the AO issued a notice under section 226(3) of the Act to the bank of the taxpayer (a copy of the notice was not served on the taxpayer) and proceeded to attach the bank accounts of the taxpayer. The notice specifically stated that the bank should not contact the taxpayer till payment was made and therefore, the money was withdrawn by the Revenue Authorities from the taxpayer’s bank account.

The taxpayer filed a writ petition before the HC to challenge the recovery action undertaken by the AO. The HC allowed the writ petition of the taxpayer and held as under:

· The action of attaching taxpayer’s bank account during the pendency of a stay application and without giving a notice to it was arbitrary and high handed. The whole object of serving a notice on the assessee is to enable the assessee to have some recourse. This requirement could be relaxed only in cases where there is an apprehension that the monies would be spirited away by the assessee resulting in loss to the Revenue Authorities. This relaxation was not applicable in case of the taxpayer.

· Since the appeals were pending before the CIT(A) and the taxpayer had sought an opportunity of being heard and filed applications for stay, the action of hastily enforcing the recovery of the demand without disposing of the stay application was not justified.

· Stay applications cannot be treated by the Revenue Authorities as meaningless formalities and have to be disposed off early. The authorities have to apply their mind in an objective and dispassionate manner to the merits of each application for stay. While the interests of the Revenue has to be protected, it is necessary for the Revenue Authorities to realize that fairness to the assessee is an intrinsic element of the quasi judicial function conferred upon them by law.

Society of the Franciscan (Hospitaller) Sisters v DDIT (Writ Petition No 155 of 2013) (Bombay HC)

Mere delay on the part of CBDT in notification of an industrial park pursuant to approval by Ministry for Commerce and Industry would not warrant the taxpayer, being denied the benefit of section 80IA of the Act.

The taxpayer had claimed deduction under section 80IA of the Act in respect of profits earned from developing / operating a notified industrial park. While passing the assessment order, the AO, inter alia, disallowed the aforesaid claim of the taxpayer by holding that for the relevant AY, the industrial park of the taxpayer was not notified by the CBDT under Rule 18C of the Income tax Rules,1962 (“Rules”). The AO held that the deduction under section 80IA of the Act would be available for subsequent AYs post notification of the industrial park by CBDT.

On further appeal, the CIT(A) and the ITAT allowed the claim of the taxpayer. The CIT(A) and ITAT respectively, had held that that there was an approval granted by the Ministry for Commerce and Industry which recognized the taxpayer as an ’industrial park‘ and the deduction was claimed by the taxpayer on basis of such approval. Once the approval is granted, the CBDT has to suo-motto issue the notification. The ITAT, on examination of all facts concluded that all the requisite conditions for claiming benefit under section 80IA of the Act has been complied with, by the taxpayer during the concerned AY and held that there is no reason to hold that the benefit under section 80IA of the Act is available only prospectively from the date of the issue of notification by the CBDT. It was thus, held that mere delay on the part of the CBDT in issuing the notification would not warrant the taxpayer being denied the benefit of section 80IA of the Act.

On appeal to the HC at the instance of the Revenue Authorities, the HC upheld the view of the CIT(A) and ITAT and dismissed the appeal of the Revenue Authorities.

CIT v M/s Ackruti City limited (ITA No 71 of 2012) (Bombay HC)

Punjab and Haryana HC reaffirms that a family settlement does not result in a ‘transfer’; amount received to equalize inequalities in partition of the assets is not income liable to capital gains tax

The taxpayer, an individual, held a share in the family business whose properties were being partitioned. The beneficiaries of the properties were divided into two groups and after prolonged litigation regarding the partition of properties, the two groups agreed to settle the dispute. As per the terms of the settlement, one group received from the other, compensation in cash for forgoing its share in a particular property. This compensation was agreed to be kept in fixed deposit for a specified period, post which it had to be transmitted to the recipient group.

While passing the assessment order, the AO held that the taxpayer, being a part of the group receiving the cash compensation, was liable to pay capital gains tax in respect of his share of the cash compensation.

On appeal, the CIT(A) held that the said share of the compensation did not accrue to the taxpayer during the concerned AY, as the matter was sub-judice and the taxpayer was not allowed to use the money. The ITAT, on further appeal, upheld the decision of the CIT(A).

On appeal to the HC by the Revenue Authorities, the HC observed that the said compensation has been received by the taxpayer to equalize the inequalities in partition of the assets of the business. It was held that such compensation cannot be construed to have been received in respect of a transfer of capital asset; the amount so paid was held to be a share in the immovable property (though paid in cash) which was otherwise indivisible. The HC further held that if such amount was to be treated as income liable to tax, the inequalities would set in as the share of the recipient will diminish to the extent of tax.

Thus, the HC ruling in favour of the taxpayer held that the amount of compensation given to the taxpayer was to equalize the inequalities in partition of assets and represents immovable property, thus, it would not attract capital gains tax.

CIT v Ashwani Chopra (ITA No 353 of 2011) (Punjab and Haryana HC)

Investment in ‘commercial’ property can be made by the Trust provided income from such property is applied for charitable purposes

The taxpayer, a charitable trust, had its main object of spreading education and opening of schools. During the relevant AY, the taxpayer invested a part of its surplus towards purchase of a commercial property. Due to investment in the commercial property, the Director of Income-tax (Exemptions) cancelled the registration of the taxpayer granted under the provisions of section 12A of the Act by holding that the commercial property was not used for charitable purpose or educational activity.

Aggrieved by the same, the taxpayer filed an appeal before the ITAT where it was contended that though the investment was in a commercial property, the income generated from it was applied for charitable purposes. The ITAT ruled in favour of the taxpayer and observed that the trust was allowed to make investment in immovable property. Further, it observed that charitable purpose will include educational activities and acquisition of income yielding assets to promote the educational objects. Accordingly, it held that the investment even in commercial property would continue to be for charitable purposes so long as the income generated by it, is applied for charitable objects. In this case, in absence of Revenue Authorities demonstrating the application of income from these properties to any non-charitable purposes, it was held that the registration of the taxpayer under section 12A of the Act cannot be cancelled. On appeal to the HC at the instance of the Revenue Authorities, the HC upheld the decision of the ITAT.

DIT (Exemptions) v Abul Kalam Azadi Islamic Awakening (ITA No 80 of 2013) (Delhi HC)

Profits arising on sale of unlisted shares, being not marketable, to be treated as capital gains and not business profits

The taxpayer, a company, during the relevant AY sold shares of a private company, held by it, to its holding company and treated the income earned from such sale as long term capital gains. Further, the taxpayer claimed tax exemption on such gains, being capital gains arising from transfer of capital assets by a 100 percent subsidiary to its holding company as per the provisions of section 47(v) of the Act.

The contention of the taxpayer was rejected by the AO during the assessment proceedings. Further, the AO observed that the shares were held for only 8 months by the taxpayer and held that the profit on sale of shares would be taxable as business income. On first appeal, the CIT(A) upheld the decision of the AO to the extent of characterisation of profits on sale of shares as business income. However, the CIT(A) observed that the shares were held for 4 years.

On second appeal, the ITAT ruled in favour of the taxpayer by accepting that the profits earned on sale of shares would be in nature of capital gains and observed as under:

· The shares of the private company are not tradable in the market and therefore, such shares cannot be held as stock in trade.

· The investment by the taxpayer in the shares of the private company was not for purposes of trading. This is evidenced from the fact that the shares were purchased by the taxpayer from funds borrowed by it from the holding company at a nominal interest rate. The borrowing at nominal cost was not in the nature of a commercial borrowing but more in the nature of the capital being infused in the subsidiary by the holding company.

Thus the HC, on appeal at the instance of the Revenue Authorities, confirmed the ruling of the ITAT. The HC observed that the Supreme Court (“SC”) in case of Sutlej Cotton Mills had held that the classification of income as business income or capital gains has to be decided based on the facts and circumstances of the case and not on the application of any single principle or test. Further, it observed that the ITAT had considered all the facts of the case and had concluded that the transaction was not an adventure in the nature of trade and hence, the income derived from the transaction was in the nature of capital gains (not business income). In confirming the ITAT’s ruling, the HC specifically considered ITAT's conclusion that the shares being transferred were not tradable in the market like any other normal trading asset.

CIT v Renato Finance & Investment Limited (ITA No 1672 of 2011) (Bombay HC)

Setting up an entity with new employees, plant and machinery and new source of capital cannot be treated as a ‘restructured entity'

The taxpayer, was engaged in the business of manufacturing and export of gems and silver jewelleries. The taxpayer claimed deduction under section 10A of the Act on its profits from the said business. The deduction was disallowed by AO in the assessment proceedings on the ground that the taxpayer was a restructured company (of an existing concern). On appeal, the CIT(A) allowed deduction under section 10A of the Act to the taxpayer and held that it was not formed by ‘reconstruction of any old business’ on the basis of the following:

· The investment in the share capital of the taxpayer was made by the directors from their own funds and not by way of transfer from the existing concern.

· The taxpayer had employed 70 employees out of only 8 were employees of the existing concern.

· New plant and machinery for the business was purchased by the taxpayers as evidenced from the bills submitted by it.

On further appeal by the Revenue Authorities, the ITAT affirmed the order of the CIT(A) and observed that on the basis of facts of the case, it could be inferred that the taxpayer was a independent unit doing its own activity of manufacturing and thereafter the material was been sold on the basis of market price. Accordingly, it was held that the taxpayer cannot be treated as a restructured company so as to deny the deduction under section 10A of the Act. The HC dismissed the appeal filed by the Revenue Authorities against the order of the ITAT.

CIT v Sagun Gems (P) Ltd (2013 31 taxmann 120) (Rajasthan HC)

ITAT

Disallowances made under section 40(a)(ia) of the Act to be restricted to the amount payable at the end of the year and not on the amount already paid during the year

The taxpayer, a transport company, had paid dumper hire charges to various parties and claimed deduction of the same during the relevant year under consideration. The AO disallowed the claim under section 40(a)(ia) of the Act on the ground that the taxpayer had not withheld tax on the payments which were contractual / sub – contractual in nature and liable to tax withholding under section 194C of the Act.

On appeal, the CIT(A) held in favour of the taxpayer by holding that no tax was to be withheld as there was no contractual agreement between the taxpayer and the dumper owner.

On further appeal, the ITAT rejected the contention of the taxpayer that the tax withholding provision would not apply in absence of a written contractual agreement; it held that rather an oral agreement would suffice. The taxpayer before the ITAT alternatively argued that the disallowance under section 40(a)(ia) of the Act shall be restricted to the amount payable at the end of the year and shall not be made on the amount already paid during the relevant year. Reliance in this regard was placed on the decision of Vishakhapatnam Special Bench in case of Merilyn Shipping 136 ITD 23 (SB), the operation of which had been stayed by the Andhra Pradesh HC.

The ITAT accepted the alternate argument of the taxpayer and directed the AO to re-compute the disallowance under section 40(a)(ia) only on the amounts payable at the end of the relevant year. The ITAT held that the Special Bench decision would still hold ground on account of the following:

· The stay would only apply to the parties to that proceeding and would not destroy the binding effect of the decision.

· There is a difference between ‘stay of operation’ of an order and ‘quashing of an order. In case of a ‘quashing’, the order of the lower court ceases to exist, while in the case of a ‘stay’, the order of the lower court continues to operate and have binding effect.

ITO v M/s MGB Transport (ITA No 2280 of 2010) (Kolkata ITAT)

Pollution control equipment even if part of plant and machinery shall be eligible for 100 percent depreciation

The taxpayer was engaged in the business of manufacture and sale of asbestos corrugated sheets. It claimed 100 percent depreciation on fly ash handling system treating it as ‘pollution control equipment’ for various AYs.

The claim of the taxpayer of higher rate of depreciation was disallowed by the AO on the ground that the same was a part of the plant and machinery as a whole and eligible for depreciation at the rate of 15 percent only. The CIT(A) ruled in favour of the taxpayer by observing that the equipment was used for converting dry fly ash to wet fly ash which by controlling the emission of fugitive dust contributed to air pollution control. Accordingly, it held that even if the equipment was installed as a part of plant and machinery, it would constitute ‘air pollution control equipment’ entitled to higher rate of depreciation.

The Revenue Authorities filed an appeal before ITAT against the order of the CIT(A). At the ITAT level, there was difference in opinion of the Judicial and the Accounting member and therefore, the matter was referred to a Third Member. The Third member upheld the Accounting member’s view and also upheld taxpayer's entitlement to higher rate of depreciation.

The Third Member held that even when air pollution equipments are entitled to depreciation at special rate of 100 percent, they remain as a part of plant and machinery. Further, it relied on the legal maxim “generalia specialibus non derogant” which means ‘a special provision normally excludes the operation of a general provision’. Accordingly, it held that the fly ash handling system though a part of plant and machinery under the general category would still be qualified under the special category of ‘air pollution equipments’ entitled for higher rate of depreciation.

DCIT v M/s UAL Industries Limited (ITA Nos 2004 of 2009 and 1668 and 1669 of 2011) (Third Member) (Kolkata ITAT)

Provision of information technology ("IT”) support services to group companies not to qualify as Fees for Technical Services (“FTS”) under the India-Australia DTAA

The taxpayer, an Australian company, rendered certain IT support services to customers in India including its group companies. The services provided by the taxpayer were in the nature of Help Desk, administrative and maintenance IT support.

While passing the assessment order, the AO held that consideration for providing such services were taxable as FTS under the provisions of the Act. The AO observed that the taxpayer had created global basic infrastructure to provide global functional services and thus, held such services to be technical in nature. The AO also disregarded the claim of the taxpayer that such services do not ‘make available’ any technical knowledge, skill, etc to the recipient of the service and thus, denied the benefit of the restricted scope of FTS defined under India-Australia DTAA. Aggrieved by the same, the taxpayer filed objections before the Dispute Resolution Panel (“DRP”). The DRP, in its directions, confirmed the draft order of the AO.

The taxpayer filed an appeal before the ITAT against the assessment order. Before the ITAT, the taxpayer reiterated that the services rendered by it were not only limited to its affiliates or group companies in India but were for the entire Asia region. The nature of the services as elaborated were giving advice to the receiving parties, help desk Support, providing IT operations & support service in IT infrastructure, and disseminating related IT information. The taxpayer, thus, contended that it was not imparting any technical knowhow or knowledge to its Indian group companies and accordingly, as per the India-Australia DTAA, such services were not taxable in India. The Revenue Authorities, on the other hand, laid emphasis on the recitals of the agreement between the taxpayer and the Indian group companies wherein it was mentioned that the taxpayer was prepared to transfer technical knowledge etc to the recipient.

The ITAT after considering the facts of the case ruled in favour of the taxpayer and observed as follows:

· The taxpayer has not imparted any technical knowledge, skill, process, etc and thus, does not get covered under the definition of FTS as per the India-Australia DTAA.

· The agreement, between the taxpayer and the Indian group companies, has to be read as a whole and cannot be read on a piece-meal basis. The agreement, when read in totality, does not suggest that the taxpayer made available the required technical knowledge, etc to the service recipient.

· The technology would be considered as made available only when the person receiving the service is able to apply the technology on its own.

Accordingly, it was held that since the services did not ‘make available’ the technical knowledge etc to the recipients in India, it cannot be held taxable as FTS under the India-Australia DTAA. Thus, the taxpayer was held not liable to tax in India.

Sandvik Australia Pty Limited v DDIT (ITA No 93 of 2011) (Pune ITAT)

Mumbai ITAT reignites the debate on the characterisation of income earned from sale and purchase of securities through a Portfolio Manager

The taxpayer, a private family trust, earned profits from sale and purchase of securities and reported the income earned thereon under the head ‘capital gains’. While passing the assessment order, the AO observed enormous volume, periodicity, frequency and multiplicity of transaction of sale / purchase of securities and held that the income earned by the taxpayer would be taxable as business income. On first appeal, the taxpayer, inter alia, contended that it had appointed Portfolio Management Service (“PMS”) providers for investing into securities and the sole objective of the investment was to preserve capital and to achieve growth. Further, the taxpayer contended, as per the tacit agreement with the PMS providers, they were not allowed to trade or indulge in any speculation activities for the taxpayer. Accordingly, the income earned by it should be taxable under the head ‘capital gains’. The CIT(A), relying on the decision of the Delhi ITAT in the case of Radials International, rejected the appeal of the taxpayer.

Aggrieved by the order of the CIT(A), the taxpayer filed an appeal before the ITAT and relied on various decisions wherein it was held that income earned from the investments made through PMS could not, ipso-facto, result into business income. The ITAT ruled in favour of the taxpayer and observed that:

· The investment in securities were made out of corpus funds of the taxpayer and no funds were borrowed for investing in the securities.

· The taxpayer had agreements with the PMS which provided that the PMS will on a discretionary basis, manage and invest the funds of the taxpayer and it shall not deal on a speculative basis.

· The taxpayer reflected the investments in its balance sheet at cost price and had not adopted the method prevalent for valuing stock in trade ie cost or market value, whichever is less.

Accordingly, the ITAT by placing reliance on the decision of the Mumbai ITAT in the case of Manan Nalin Shah (ITA Nos 6166, 2125 and 4125 of 2008) (Mumbai ITAT), held that income earned by the taxpayer from sale and purchase of securities through PMS was liable to be taxed under the head ‘capital gains’.

Salil Shah Family Private Trust v ACIT (ITA No 2446 of 2012) (Mumbai ITAT)

Income from testing activities carried out purely by machines without human intervention not to qualify as fee for technical services

The taxpayer, an Indian company, was required to make payment to a German company for carrying out certain quality tests of the circuit breakers manufactured by the taxpayer and to certify that the said circuit breakers met with international standards. For the purposes of making remittance, the taxpayer made an application under section 195(2) of the Act. The taxpayer contended that the payment would not be taxable in India due to the following reasons:

· No income accrues or arises in India as all services are rendered outside India and the payment is made outside India.

· The payments were purely for standard facility provided by the Laboratory which was done automatically by the machines without any human intervention and thus, would not qualify as FTS.

· The payment was in the nature of business income of the German company and in the absence of the German company constituting a Permanent Establishment (“PE”) in India, the business income could not be taxed in India.

The AO rejected the taxpayer’s contention and held that the services provided by the German company were highly technical in nature and accordingly, would be covered within the definition of FTS under the India-Germany DTAA as well as the Act. On this basis, the AO directed the taxpayer to withhold tax at the rate of 10 percent on the gross amount of payment to the German company.

On appeal, the CIT(A) affirmed the view of the AO by observing that even assuming human intervention was not necessary, the same was present in the form of humans observing the process, preparing the report, issuance of certificate and monitoring the machines. Thus, the payments for such services would qualify as FTS.

Before the ITAT, the taxpayer reiterated that the circuit breakers manufactured by the taxpayer undergo destructive tests in the laboratory and sophisticated equipments are used in such process. The taxpayer added that these standard procedures are carried out by the German company without any human interference, with the use of machinery and thus, clearly no technical service was being provided by the German company.

The ITAT after considering the facts of the case, ruled in favour of the taxpayer by holding the payments to be not in nature of FTS in India by making the following observations:

· The expression ‘FTS’ is defined to mean ‘any consideration for rendering managerial, technical and consultancy services’. The word ‘technical’ is preceded by the word “managerial” and succeeded by the word “consultancy” and therefore, by applying the principle of ‘noscitur a sociis’, as the words ‘managerial and consultancy’ have a definite involvement of a human element, the word ‘technical’ has to be construed in the same sense involving direct human involvement. Accordingly, where the services are provided using an equipment or sophisticated machine or standard facility, as in the case of the German company, it cannot be characterized as FTS.

· The tests for determining whether the testing services would qualify as ‘technical services’ or otherwise would depend on the manner of rendering services ie whether the services are rendered by a human or by a machine. If a human renders the technical services with the aid of a machine or equipment etc, the services would be ‘technical services’. In such a situation there would be constant human endeavour and the involvement of the human interface. But if any technology or machine developed by human is put to operation automatically and it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of ‘technical services’. Further, the mere fact that the certificates have been provided by humans after the test is carried out by the machines does not mean that services have been provided by human skills.

Accordingly, it was held that since a standard facility is provided through usage of machines or technology, it cannot be termed as rendering of technical services. Thus, the German company was held not liable to tax in India.

M/s Siemens Limited v CIT (ITA No 4356 of 2010) (Mumbai ITAT)

Grossing up of tax equalization to be restricted to incremental tax liability paid by the employer

The taxpayer, an individual, was in receipt of salary income from India as well as US. The taxpayer was entitled to receive tax equalization from the employer in US for the excess tax paid in India vis a vis the tax paid in US. The taxpayer calculated its tax liability in India at INR 32.30 lakhs and also worked his hypothetical tax liability on such income in US at INR 22.19 lakhs. Thus, the difference had been worked out by grossing up at INR 16.84 lakhs. This amount was offered to tax in India as tax equalization.

The AO observed the above details and reopened the assessment proceedings of the taxpayer which were earlier completed exparte under section 144 of the Act. While passing the re-assessment order, the AO held that the entire tax amount of INR 32.30 lakhs borne by the employer should be grossed and offered to tax in India. Accordingly, the AO considered the entire tax liability borne by the employer as a perquisite amounting to INR 39.03 lakhs and added the same to the income declared by the taxpayer.

On appeal, the CIT(A) relying on the decision of the Mumbai ITAT in the case of Jaidev H Raja (ITA No 2021 of 1998), ruled in favour of the taxpayer. The CIT(A) directed the AO to consider the perquisite only to the extent of tax paid by the employer as additional income tax liability on account of tax equalization of income earned in India.

Aggrieved by the order of the CIT(A), the Revenue Authorities filed an appeal before the ITAT. After hearing the taxpayer and the Revenue Authorities, the ITAT upheld the decision of the CIT(A). The ITAT held that the taxpayer was only entitled to receive reimbursement of taxes paid in India up to the amount of INR 16.84 lakhs (after grossing up) and the rest of the taxes were borne by the taxpayer from the salary received in India. It was held that the tax paid by the taxpayer out of his salary income and not reimbursed by the employer cannot be treated as the income of the taxpayer.

DCIT v Shri Bikram Sen (ITA No 810 of 2012) (Mumbai ITAT)

Disallowed under section 14A of the Act cannot include the expenses specifically relatable to a taxable income

The taxpayer, a company, had earned tax free dividend income during the relevant AY. During the assessment proceedings, the AO noticed the tax free dividend income and sought to compute disallowance under section 14A of the Act by applying the Rule 8D. In the computing the disallowance, the AO excluded certain expenses including expenses related to house property income, interest expenditure and demat charges from the total general expenditure and the balance expenses were allocated as relating to exempt income in the ratio of tax exempt receipts to total receipts.

The taxpayer filed an appeal before the CIT(A) contending that the computation of the AO was grossly incorrect as the disallowance under section 14A of the Act included an amount which was exclusively incurred for building maintenance and service expenses by the taxpayer. The CIT(A) observed that said expenses were directly related to rental income of the taxpayer, which was specifically offered to tax under the head house property and accepted the contentions of the taxpayer.

On appeal by the Revenue Authorities before the ITAT, the ITAT held dismissing the appeal as under:

· In case of the expenses shown / proved to be specifically relatable to a taxable income, no portion of such an expense can be disallowed under section 14A of the Act.

· The allocation of general expenses vis-à-vis tax exempt income and taxable income can only be made in respect of expenses which cannot either be wholly allocated to taxable income, or to tax exempt income. Further, the allocation on the basis of formula set out in Rule 8D is permitted for the expenses which do not fall under any of the above categories of income.

JCIT v M/s Pilani Investment & Industries Corporation Limited (ITA No 653 of 2012) (Kolkata ITAT)

Circulars/ Notifications

Finance Ministry issues clarification regarding acceptability of TRC

The Finance Ministry has clarified that the amendment proposed to be introduced in section 90 of the Act stating that the TRC is a necessary but not a sufficient condition for availing the benefits of the DTAA, shall not mean that the TRC produced by a resident of a contracting state will not be accepted as an evidence of his residence. He clarified that the Revenue Authorities in India will not go beyond the TRC and question the residential status of the person producing the TRC. Further, since a concern has been expressed about the language of the amendment, this concern will be addressed suitably when the Finance Bill is taken up for consideration. The Finance Minister further clarified that India will not unilaterally revise the India-Mauritius DTAA.

Further, the Mauritius Government has released a press communiqué where they have confirmed that they have noted the measures announced by the Indian Finance Minister during the presentation of the Budget 2013-14. The Mauritius Government has announced that they are satisfied with the clarification given by the Indian Finance Ministry regarding the validity of the TRC as mentioned above. Also, the Mauritius Government released that they are comforted by the declaration of the Indian Finance Minister that India will not unilaterally revise the India-Mauritius DTAA.

Source: Press release dated March 1, 2013

Link: http://law.incometaxindia.gov.in/DIT/Circulars.aspx, http://mof.gov.mu

Digital signatures optional for withholding tax returns

The CBDT has notified certain changes by the Income-tax (Second Amendment) Rules, 2013 in respect of compliances for withholding tax returns. It provides that Forms 24Q, 26Q and 27Q shall be furnished electronically and it may be digitally signed at the option of the deductor. Further, it is notified that the deductor of taxes can file a statement in the new Form 26B to claim refund of the taxes paid to the Central Government (“CG”) under Chapter XVII-B of the Act subject to certain conditions.

Source: Notification No 11 dated February 19, 2013

Link: http://law.incometaxindia.gov.in/DIT/Notifications.aspx

Revised guidelines on Money Transfer Service Scheme issued by the Reserve Bank of India (“RBI”)

The RBI has revised the guidelines on Money Transfer Service Scheme. The Scheme provides guidelines for transferring personal remittances from abroad to the beneficiaries in India. It also provides norms and conditions for becoming agents in India who would disburse the funds to beneficiaries in India.

Source: A P (DIR Series) Circular No 89 dated March 12, 2013, issued by RBI

Link: http://rbi.org.in/scripts/NotificationUser.aspx?Id=7887&Mode=0

Simplification and liberalisation of “write offs” of unrealised export bills by RBI

The RBI has recently issued a Circular for further simplifying and liberalizing the procedure for “write-offs” of unrealized export bills. Such “write offs” would be permitted subject to prescribed limits and conditions.

Source: A P (DIR Series) Circular No 88 dated March 12, 2013, issued by RBI

Link: http://rbi.org.in/scripts/NotificationUser.aspx?Id=7886&Mode=0

Amendment to memorandum of instructions for opening and maintenance of rupee / foreign currency vostro accounts of non-resident exchange houses

Under the extant Rupee Drawing Arrangements (“RDAs”), cross-border inward remittances are received in India by AD Category-I banks through exchange houses situated in Gulf countries, Hong Kong, Singapore and Malaysia (for Malaysia only under Speed Remittance Procedure). To extend the scope of the said arrangement to certain other jurisdictions, the RDAs have been extended only under the Speed Remittance Procedure to exchange houses situated in all countries which are Financial Action Task Force (“FATF”) compliant.

Source: A P (DIR Series) Circular No 85 dated February 28, 2013, issued by RBI

Link: http://rbi.org.in/scripts/NotificationUser.aspx?Id=7873&Mode=0

Foreign Institutional Investors allowed to use investments in Government securities and corporate bonds as collateral

In terms of the extant regulations, Foreign Institutional Investors (“FIIs”) are allowed to offer such securities, as permitted by RBI from time to time, as collateral to the recognized stock exchanges in India for their transactions in exchange traded derivative contracts. The RBI has now allowed FIIs to use, in addition to already permitted collaterals, their investments in corporate bonds as collateral in the cash segment and; Government securities and corporate bonds as collaterals in the Futures & Options segment.

Source: A P (DIR Series) Circular No 90 dated March 14, 2013, issued by RBI

Link: http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7890&Mode=0

DTAA between India – Ethiopia notified

The CG has notified the DTAA between the Government of the Republic of India and the Government of the Federal Democratic Republic of Ethiopia that was entered into force on October 15, 2012. The DTAA shall be effective from April 1, 2013.

Source: Notification No 14 dated February 21, 2013 issued by the Government of India

Link: www.taxindiainternational.com

Income tax offices to remain open on March 30 and March 31, 2013

The CBDT has directed that all the income tax offices shall remain open on March 30, 2013 and March 31, 2013 to facilitate smooth filling of return of income and other related work of taxpayers. Further, special arrangements shall be made by opening special counters to facilitate filing of return of income.

Source: Order [F NO 225/45/2013/ITA II], Dated March 13, 2013

Link: www.Taxmann.com

Directors Identification (Amendment) Rules, 2013 notified by the CG

The CG has notified new rules namely Companies Directors Identification Number (Amendment) Rules, 2013. The said rules gives power to CG or Regional director or any officer authorised by the regional director to cancel or deactivate the Directors Identification Number (“DIN”) of any person subject verification of prescribed particulars in specified cases such as where DIN is found to be duplicate, DIN was obtained in wrongful manner or by fraudulent means or on death of the concerned person, etc.

Source: Notification [F. NO. 5/80/2012-CL.V] DATED March 15, 2013

Link: www.taxmann.com

Indirect tax

Value Added Tax (“VAT”) / Central Sales Tax (“CST”)

Input Tax Credit cannot be denied to a purchasing dealer on the grounds that no output turnover has been declared by selling dealer

The taxpayer is a partnership firm engaged in the business of gold and jewellery (bullion). During the tax period in question, the taxpayer purchased bullion from a local registered dealer, M/s Karat 24 (“selling dealer”) and paid Value Added Tax on such a purchase made by them and claiming Input Tax Credit (“ITC”) of the same.

On verification by the Revenue Authorities, it was found that the selling dealer’s registration was cancelled with effect from February 28, 2010 and no output turnovers were disclosed by him during the period for which the taxpayer was claiming ITC. Consequently, the Revenue Authorities sought to deny the benefit of ITC to the taxpayers.

The HC, relying on earlier judgments in this regard, held that since the provisions of the Andhra Pradesh Value Added Tax Act, 2005 entitle credit to taxpayers for tax charged in respect of purchase of taxable goods, failure on the part of the selling dealer to file returns or remit tax component cannot be a ground to deny ITC.

Harsh Jewellers v Commercial Tax Officer, Panjagutta Circle, Hyderabad [2013-057-VST-0538]

Tax paid on purchase of vehicles for use in providing leasing of cars / motor vehicles is eligible for ITC under the Delhi Value Added Tax Act, 2004 (“DVAT Act”), as the word ‘resale’ should be construed according to the definition of ‘sale’ which includes transfer of right to use goods

The taxpayers were engaged in the business of leasing cars / motor vehicles which included transfer of right to use, control and possession of the vehicles to their customers. The taxpayers’ claim for refund of ITC claimed on purchase of motor vehicles was rejected on the grounds that motor vehicles belong to list of non-creditable goods on which ITC is available only when such goods are meant for ‘resale’ in an unmodified form.

The Tribunal decided in favour of the taxpayer on the ground that the word ‘resale’ should be construed according to the definition of ‘sale’ which includes transfer of right to use goods. Thus, leasing of vehicles would qualify as resale in which case ITC should be available on purchase of motor vehicles.

The Tribunal also referred to section 12(4) of the DVAT Act read with Rule 4(b) of the corresponding Rules (which provided the manner of determining turnover of purchase for specified transactions including transfer of right to use) basis which it held that in case of transfer of right to use, ITC should be availed in proportion to the sale price due during the taxable period.

Finally, the matter reached before the HC which agreed with the Tribunal with respect to availability of ITC. However, the HC disagreed with the Tribunal’s view regarding proportionate availability of ITC. The HC held that when a taxpayer involved in leasing business purchases cars, entire credit can be claimed in the tax period of purchase in which the taxpayer is obliged to declare his total lease rental turnover.

The HC also relied upon the fact that the concept of proportionate availability of credit has been recognized in the DVAT Act only under section 9(9) which specifically relates to capital goods and thus, cannot apply for any other category of goods. Thus, full ITC was allowed to the taxpayers.

Commissioner of Value Added Tax v Carzonrent India Pvt Ltd [2013-VIL-07-DEL]

ITC under section 9(1) of DVAT Act cannot be denied to a purchasing dealer because of the non-payment or less payment of tax by the selling agent in the absence of any mechanism which would enable him to determine whether the tax is fully deposited by the selling agent

The taxpayer traded in electrical goods as a registered dealer under the DVAT Act. Taxpayers purchased goods from registered dealers on payment of VAT at applicable rates. Tax invoices were issued by the selling dealers’ basis which taxpayer claimed the ITC of tax paid.

The issue relates to the period April 1, 2007 to March 31, 2008 wherein the VAT Officer sought to disallow the benefit of ITC to taxpayers on the grounds that certain identified selling dealers had deposited proportionately lesser tax with the Revenue Authorities despite having a high turnover.

The Tribunal also decided against the taxpayer placing its reliance on section 9(1) of the DVAT Act which permitted tax credit to a purchasing dealer only to the extent of the tax actually deposited by the selling dealer. It also took into consideration amendment in section 9(2) of the DVAT Act with effect from April 1, 2010 vide which it was clarified that ITC is admissible to purchasing dealer only when tax is actually deposited by the selling dealer.

The HC decided the matter in favour of the taxpayer on the ground that the words ‘actually paid’ used in section 9(1) of the DVAT Act only signify that a claim for set off cannot be in excess of the tax in respect of which set-off is claimed. Further, the relevant amendment in section 9(2) came into effect only in 2010, whereas the matter related to a prior period. Thus, such amendment shall not be applicable in the present case. The HC was held that in the absence of any mechanism enabling the purchasing dealer to ascertain that a dealer’s registration is cancelled, the benefit of ITC cannot be denied under section 9(1) of the DVAT Act.

Furthermore, it was observed by the HC that the cancellation of registration of selling dealers took place after the transactions with the taxpayer. Thus, the taxpayer was allowed the ITC benefit.

Shanti Kiran India Pvt Ltd v CTT Department [2013-VIL-04-DEL]

Benefit of remission of tax cannot be denied to an expanded unit on the grounds that the original unit has been closed down

The taxpayer started its first production of goods in a new factory at Salt Lake (Unit 1) and obtained eligibility certificate under the Bengal Finance (Sales Tax) Act, 1941 for deferment of tax for a period of seven years. The taxpayer subsequently expanded the factory by setting up a new unit in the self same plot of land (Unit 2) and a second expanded unit in Salt Lake itself (Unit 3). The taxpayer obtained eligibility certificate for its expanded units under the West Bengal Sales Tax Act, 1994 for deferment of tax for a period of 7 years which could be extended over a period of time.

The taxpayer made an application for renewal of eligibility certificate for its Unit 3 which was rejected by the Joint Commissioner and a show cause notice was issued to show cause as to why the exemption certificate should be renewed for Unit 3 when the taxpayer had closed Unit 1 and 2 and shifted usable plant and machinery outside the state of West Bengal. The Joint Commissioner held that if there is no existing industrial unit, there can be no expanded unit. Hence, Unit 3 has lost its status as the ‘expanded unit’ for the purpose of renewal of eligibility certificate.

Aggrieved by the same, the taxpayer filed an application before the Tribunal which set aside the order by the Joint Commissioner and allowed the renewal of eligibility certificate.

In the present writ petition filed before the HC, it was held that the taxpayer satisfied all provisions of the relevant Act and Rules thereof and has also not violated any such condition in relation to expanded unit. Thus, once the benefit of remission has been given to an expanded unit, its continuance depends on the fulfillment of conditions of eligibility and the same cannot be denied on the grounds that the original unit has been closed down.

Accordingly, the order of the assessing authority rejecting the taxpayer’s application was set aside.

State of West Bengal v Supreme Industries Limited [2013-58-VST-0117-HC-CAL]

The competent authority cannot curtail the statutory period of exemption once eligibility certificate has been granted on the grounds that the unit was registered under the Factories Act after grant of eligibility certificate

The taxpayer established a new unit for processing of rice from paddy in the State of Uttar Pradesh (“UP”) and an eligibility certificate under section 4A of UP Trade Tax Act was granted to the taxpayer by the competent authority for a period of six years.

Later, the competent authority found that the unit was registered under the Factories Act three years after the date of application of eligibility certificate. Accordingly, the Revenue Authorities sought to curtail the exemption by a period of three years. The taxpayer, aggrieved by the same approached the Tribunal who also rejected the claim of the taxpayer.

The matter reached before the HC which held that once the eligibility certificate was granted, the Revenue Authorities cannot curtail the benefit of exemption on the grounds that the unit was registered under the Factories Act on a date latter than the date of application under section 4A.

Accordingly, the HC held in favour of the taxpayer and set aside the impugned order for curtailment of the exemption period.

Parmshwar Quality Rice Mill v CTT, [2013- 58- VST- 0090-HC-ALL]

Excise

Section 4A of the Central Excise Act, 1944 is applicable only in respect of those goods for which there is a requirement of declaration of Maximum Retail Price (“MRP”) under the provisions of the Standards of Weights and Measures Act, 1976 and the rules made thereunder

The taxpayers were engaged in the manufacture of motorcycle and parts thereof. The spare parts in loose condition were cleared by the taxpayers from their Daruhera factory in Haryana to a Spare Parts Division (“SPD”) in Gurgaon on payment of duty on 110 percent of the cost of production (ie the value determined as per Rules 8 and 9 of the Central Excise Valuation Rules, 2000). SPD, Gurgaon packaged such loose motor parts for retail sale and cleared them on payment of duty on the value determined under section 4A of the Central Excise Act, 1944.

The Revenue Authorities insisted that the taxpayers should also pay duty on clearances of spare parts from Daruhera unit to SPD, Gurgaon as per the value determined under section 4A. The matter reached the Tribunal where the taxpayers contended that the motorcycle parts were cleared by Daruhera unit in bulk and the same were not packed for retail sale at that stage. Further, packaging for retail sale was done at SPD, Gurgaon where MRP tags are also affixed on packages. It was also argued by the taxpayers that the provisions of the Standards of Weight and Measures Act, 1976 (“SWM Act”) and the Standards of Weight and Measures (Packaged Commodities) Rules, 1977 (“SWM Rules”) were not applicable to the loose parts as such provisions were applicable only on those commodities which have been packed for retail sale.

The Tribunal observed that for section 4A to apply, it was a pre-requisite that there must be a requirement under the SWM Act or the SWM Rules to declare the MRP of the goods on their packages. Such requirement was there only in respect of commodities packaged for retail sale. The Tribunal further observed that the goods cleared in loose condition to SPD, Gurgaon were not packaged commodities, therefore the demand of duty in respect of such clearances was declared to be unsustainable.

Hero Motorcorp Ltd v CCE [2013 (288) ELT 82 (TRI-DEL)]

Comptroller and Auditor General of India has no power to audit records of non-government companies which are not in receipt of any aid or assistance from any government or government entity; since conflicting decision was appeared to have been given in another case, matter was referred by the Single Judge to the Division Bench

The taxpayers were a company incorporated under the Companies Act, 1956 and were inter alia engaged in the business of trading in stocks and securities. No aids in the form of funds or loan were provided to the taxpayers by the Central or State Government or any other Government undertaking or organization. A notice was issued by the Office of the Principal Director of Audit (Central), Kolkata for getting the accounts, service tax records and other documents audited by the Central Excise Audit (“CERA”) authorities. A writ application was filed by the taxpayers against the said notice.

In the present writ application, the question before the Calcutta HC was whether Central Excise Audit authorities [an audit wing of the Principal Director of Audit (Central), Kolkata under the Comptroller and Auditor General of India (“CAG”)] had the powers/ authority/ jurisdiction to audit the accounts, service tax records or other documents of the taxpayers.

During the course of hearing, it was observed by the HC that none of the relevant statutes like the Companies Act, 1956, the Income Tax Act, 1961, the Central Excise Act, 1944 or the Finance Act, 1994 contained any provision which would empower the CAG or any audit team subordinate to the CAG to conduct audit of any company incorporated under the Companies Act 1956, except a government company within the meaning of section 619 of the Companies Act. The HC also observed that under Section 20(1) of the Comptroller and Audit General’s (Duties, Powers and Conditions of Service) Act, 1971, accounts of a non-government company could be audited by the CAG only when the CAG is requested to do so by the President of India/ the Governor of a State/ the Administrator of Union Territory, which was not the situation in the present case.

In this writ petition, the taxpayers also challenged the vires of Rule 5A of the Service Tax Rules 1994 (“Service Tax Rules”) contending inter alia that the said rule is in excess of the rule making power conferred under the Finance Act, 1994.

The HC held that there is no provision in the Finance Act, 1994 or the CAG Act which empowered the CAG to audit the accounts of a non-government company, which was not receiving any aid or assistance from any government or government entity. Further sub-section (2) of section 94 also did not empower the Central Government to frame rules for audit of the accounts of an taxpayer by any audit team under the CAG. With respect to Rule 5A of the Service Tax Rules, it was held that the rule did not oblige an taxpayer to agree to an unauthorized audit of its accounts by an audit team from the CAG’s office. It was further clarified that statutory rules framed in exercise of power conferred by a statute, cannot introduce something not contemplated in the statute, from which the rule making power is derived.

The Single Judge was of the opinion that the impugned notice could not be sustained and the same is liable to be set aside. However, in the light of a conflicting judgment given by a Co-ordinate bench in the case of Berger Paints India Limited and Others v Joint Commissioner (Audit) Central Excise, Calcutta – II Commissionerate, Calcutta & Ors, the Single Judge decided to refer the writ application to a Division Bench for adjudication on the grounds of judicial propriety.

SKP Securities Ltd v Deputy Director (RA-IDT) [2013 (29) STR 337 (CAL)]

Wheeled Tractor Loader Backhoe (WTLB) and Vibrating Compactor (VC) are construction machinery could not be termed as ‘Automobile’ by applying definition provided under Motor Vehicles Act - Parts of WTLB and VC would not be covered by the expression ‘parts, components and assemblies of automobiles’ appearing against Entry No. 100 of Third Schedule, thus, their packing and repacking would not amount to manufacture

The taxpayers are manufacturers of construction equipments namely Wheeled Tractor Loader Backhoe (“WTLB”) and Vibrating Compactor (“VC”) covered under HSN heading No 8429 and 8430. In addition they also trade in spare parts of WTLB and VC which are classifiable under CETH 8431 which covers ‘parts suitable for use solely or principally with machinery of heading no 8425 to 8430’. The taxpayer was paying applicable excise duty on procurement of spare parts and was onward selling the same after re-packing. No excise duty was charged by the taxpayer as in their view no excise duty was applicable.

According to section 2(f)(iii) of Central Excise Act, 1944 (“CEA”) in respect of goods listed in Schedule III to Central Excise Act, 1944 (“Schedule III”) inter-alia packing, repacking of goods to render the same marketable to the consumer amounts to manufacture. Schedule III inter-alia cover ‘parts, components and assemblies of automobiles’ falling under any chapter heading.

The Revenue Authorities contended that the word ‘automobiles’ would cover even the WTLB and VC in terms of definition as given in section 2(28) of the Motor Vehicle Act, 1988 and section 2(e) of the Air (Prevention and Control of Pollution Vehicle) Act, 1981. Therefore spare parts of WTLB and VC would be treated as parts, components and assemblies of automobiles and their packing or repacking for retail sale would amount of manufacture.

The Tribunal observed that in the Central Excise Tariff Act, 1985 (“CETA”), WTLB and VC are covered under Heading No 8429 and 8430 and parts of these goods are covered under Heading No 8431. Tribunal noted that when in the CETA, the WTLB and VC are treated as construction machinery falling under Chapter 84 and not as ‘vehicle other than railways or tram way’ covered by Chapter 87 then for the purpose of interpreting the scope of term ‘Automobiles’ in Schedule III a different criteria based on the definition of the term ‘vehicle’ or ‘automobiles’ in Air (Prevention and Control of Pollution) Act, 1981 or Motor Vehicle Act 1988 cannot be adopted. Tribunal held that these two laws are for totally different purpose. Tribunal held the prima facie the word ‘Automobiles’ in the entry parts, components or assemblies of automobiles under Schedule III has to be understood in the context of CETA in which goods in question are treated as parts of construction machinery not as parts of automobiles.

New Holland Construction v CCE [2013 (287) ELT 447 (TRI- DEL)]

Whether the sale of specified goods that do not physically bear a brand name from a branded sale outlet would amount to sale of banded goods and would disentitle the taxpayer from the benefit of SSI(“Small Scale Industry”) exemption notification

The taxpayer was engaged in the manufacturing and sale of cookies from the branded retails outlets of “Cookie Man”. The Appellant had acquired this brand name from M/s Cookie Man Pvt Ltd, Australia. The taxpayer was selling some of these cookies in plastic pouches / container on which the brand name of Cookie Man was printed. No brand name was affixed or inscribed on the cookies. The taxpayer was paying excise duty on the cookie sold in the said pouches / container. However on the cookies sold loosely from the counter of the same retail outlet with plain plates and tissue paper excise duty was not paid.

Factually, no loose cookies were received in the outlet nor did the taxpayer manufacture the same. The taxpayer received all the cookies in sealed pouches / containers. Cookies which were sold separately were taken out of the container and displayed for sale separately.

The taxpayer argued that only specified goods bearing an affixed brand name of those goods which physically display the brand name would qualify as goods bearing brand name and hence won’t be eligible for SSI exemption. In this case since no brand name was affixed on the cookies loosely sold he is entitled for SSI exemption.

The SC observed that the same cookies when sold in containers do not become unbranded cookies. The invoices carry the name of the company and the cookies were sold from the counter of the store. The SC held that the store’s decision to sell some cookies without the container stamped with its brand or trade name doesn’t change the brand of the cookies. The SC held that cookies once sold even without inscription of the brand name, indicate a clear connection with the brand name in the course of taxpayer’s business of manufacture and sale of cookie under the brand name ‘Cookie Man’. They continue to be the branded cookies of “Cookie Man” and hence SSI exemption is not available.

CCE, Chennai v Australian Foods India Pvt Ltd [2013 (287) ELT 385 (SC)]

Service tax

Services provided and invoices issued before change in effective rate of tax but payment received afterwards– rate of tax would be the one prevailing earlier as provided by Rule 4 (a) (ii) of the Point of Taxation Rules, 2011

The taxpayer is an association of Chartered Accountants, registered as a society in Delhi. They filed a writ petition on the following 2 issues:

a) Taxable event for the purpose of levy of service tax where the Chartered Accountants rendered services and invoices were issued before April 01, 2012, but the payment is received after April 01, 2012

b) Quashing of the Circular No 158/9/2012-ST dated May 08, 2012 and Circular No 154/5/2012-ST dated March 28, 2012

The taxpayer relying on Rule 4(a) (ii) of the Point of Taxation Rules, 2011 (the “POT Rules”), contended that the point of taxation shall be the date of issuing of invoice.

The Revenue Authorities on the contrary relied on the Circular No 158/9/2012-ST dated May 08, 2012 wherein it was clarified that for the 8 specified services mentioned in Rule 7 (including Chartered Accountant services), for invoices issued on or before March 31, 2012, the point of taxation shall be the date on which payment is received or made, as the case may be. Also it relied on

Circular No 154/5/2012-ST dated March 28, 2012 wherein it was clarified that if the payment is received or made, on or after April 01, 2012, the service tax needs to be paid at the rate of 12 percent.

The HC allowed taxpayer’s writ petition relying on Rule 4 (a) (ii) of the POT Rules and held that where the services of Chartered Accountants were actually rendered and the invoice was issued before April 01, 2012, but the payment is received after April 01, 2012, then the date of issuance of invoice shall be deemed to be the date on which the service was rendered. Thus, the rate of tax will be 10 percent and not 12 percent.

HC also held that since Rule 7 was substituted by a new rule wef April 1, 2012 which does not apply to services rendered by Chartered Accountants, the applicability of both the Circulars becomes redundant. Therefore, the Circulars being contrary to the Finance Act, 1994 and the POT Rules were quashed.

Delhi Chartered Accountants Society (Regd) v UOI [2013-TIOL-81-HC-DEL-ST]

Taxable event under the erstwhile service tax regime is the date of providing of taxable service and not the date of receipt of payment

The issue in consideration before the HC was which rate would be applicable for services rendered prior to date of rate change in respect of which payments were received after the rate change.

Tribunal relied on the decision given by the Gujarat HC in the case of Commissioner of Central Excise & Customs v Reliance Industries Ltd [2010 (19) STR 807 (GUJ)] wherein it was held that the effective rate of service tax would be based on the date on which the service is provided and not the date of billing and decided the issue in favour of the taxpayer.

The Revenue Authorities contended that the view taken by the Gujarat HC is not binding on this HC and placed reliance on the Service Tax Rules, the POT Rules along with section 67A of the Finance Act, 1994.

It was held that since the relevant period here is April, 2003 to September, 2003 and none of the provisions relied upon by the Revenue Authorities are in effect during the above period therefore, the taxable event has to be considered in the light of provision of the Finance Act, 1994. Accordingly, the date of providing the taxable services is the taxable event and not the date of receipt of payment.

CST v Consulting Engineering Services India Pvt Ltd [2013-TIOL-60-HC-DEL-ST]

Service tax not applicable on transfer of employees to hotels run by subsidiaries/ associate companies under man-power recruitment or supply agency service

The taxpayers are owners of several hotels. Some hotels are owned and managed by their subsidiaries/associate companies. The manager/employees of the taxpayers are sent on deputation to hotels owned and managed by subsidiaries/associate companies and in turn reimbursement is made for actual expenses incurred in relation to such employees without adding any mark-up.

The Revenue Authorities contention was that taxpayers are providing taxable services under the category of ‘manpower recruitment or supply services’.

Tribunal in the instant case granted stay from recovery of service tax on the ground that taxpayers are not running any manpower recruitment or supply agency. Taxpayers are managing hotels and some employees were sent to other hotels managed by the subsidiaries/associate companies on deputation and cost was recovered on the basis of actual expenses. Therefore, it cannot be said that the taxpayers are engaged in supply of manpower or as an agency and prima facie case exists in favour of taxpayers.

ITC Ltd v CST [2013-29-STR-387-TRI-DEL]

Rate of service tax prevailing at time of providing service is relevant under the erstwhile regime, not on the date of receipt of payment – Tax Research Unit (“TRU”) Instruction dated April 28, 2008 clarifying to the contrary quashed

The taxpayers were engaged in rendering works contract services which were taxable at the rate of 2 percent which was enhanced to 4 percent with effect from March 01, 2008. The issue for consideration before the HC was what will be the effective rate of service tax on the works contract services rendered prior to March 01, 2008 for which the payment was received post March 01, 2008.

The Revenue Authorities relied on TRU Instruction F No 545/6/2007-TRU, dated April 28, 2008 (“TRU Instruction”) to contend that the date of receipt of payment by the taxpayers was relevant in determining the correct rate of service tax applicable on the services rendered by the taxpayers and therefore, service tax would be payable at the rate of 4 percent. The TRU Instruction specifically clarified that the service tax was chargeable on receipt basis and on the amount so received for the service provided or to be provided, whether or not services were preformed.

The HC relied on the SC judgement in the case of Association of Leasing and Financial Service Companies v UOI [2010 (20) STR 417 (SC)] and its own judgment in the case of Commissioner of Service Tax v Consulting Engineering Services India Pvt Ltd in Service tax Application 76/2012 decided on March 14, 2013. The SC held that since there were no provisions under the law to the contrary during the relevant period, date of rendering the service is the taxable event.

The HC quashed the TRU Instruction and held that services in the present case were taxable at the rate applicable on date of rendering such services ie 2 percent.

Vistar Construction Pvt Ltd v UOI [2013-TIOL-73-HC-DEL-ST]

Services of transportation of export cargo is performed substantially outside India and thus, qualify as export of service under the erstwhile provisions – taxpayer cannot be made liable to pay service tax on the ground that export cargo was handed over to the airlines in India

The taxpayers were engaged in the business of transportation of cargo by air. Taxpayers received cargo from their customers in India and transported the same outside India. For providing the aforesaid services, taxpayers charged a fee from its customers and received the same in Indian currency. The Revenue Authorities demanded service tax from the taxpayers on the services provided by them during the period March 15, 2005 to June 23, 2005 on the ground that services were not export.

On March 15, 2005, Export of Service Rules, 2005 (the “Export Rules”) were introduced and all the taxable services were classified under three baskets namely ‘services relating to immovable property’, ‘performance based services’ and ‘recipient based services’.

Transportation of goods by air (“TGA”) services as provided by taxpayers were classified under second basket ie ‘performance based services’ and accordingly such services were considered as export if they were either wholly or partly performed outside India. In light of Export Rules, Tribunal held that since TGA services involved taking of goods outside India which is a service substantially performed outside India, taxpayers were not liable to pay any tax. The Tribunal rejected the argument of the Revenue Authorities that such services cannot qualify as export since the cargo was handed over to the airlines in India.

From June 16, 2005, Exports Rules were amended to include receipt of convertible foreign exchange as a pre condition for a service to qualify as exports. Since the taxpayers were not receiving payment for TGA services in convertible foreign exchange from their clients, they became liable to pay service tax on TGA services provided by them from June 16, 2005. However, exemption to this effect was provided to airlines from July 15, 2005. Thus, for the period June 16, 2005 to July 15, 2005, taxpayers were liable to deposit service tax. The taxpayers started collecting tax from their customers only from June 23, 2005 onwards.

The Tribunal thus held that for a short period from June 16, 2005 to June 23, 2006, there was no provision which waived service tax liability on TGA services provided by the taxpayers and they were liable for payment of service tax on the same. The Tribunal also upheld invocation of extended period of limitation since the taxpayers were aware of the changes in law and knowingly evaded payment of service tax and inability to collect service tax from customers cannot be a ground for pleading bona fide belief. However, the Tribunal waived off the penalty considering the peculiar nature of circumstances.

Sirlankan Airlines v Commissioner of Service Tax, Chennai [2013-29-STR-365-TRI-CHENNAI)]

Consideration received towards goodwill on transfer of running business by taxpayer to another company is not taxable under Business Auxiliary Services

The taxpayers entered into two agreements with their client M/s Dirk India Ltd. (“Dirk India”). One agreement was for transfer of goodwill wherein the consideration was calculated at a rate per ton of output produced by Dirk India. Other agreement was for providing services of collection, delivery and handling of fly ash produced by taxpayers to Dirk India on which taxpayers were paying service tax classifying the same as ‘business auxiliary services’.

The Revenue Authorities sought to levy tax on royalty received by taxpayers for transfer of goodwill by including the same in the value of ‘business auxiliary services’ on the ground that such income was also towards commission only.

The Tribunal held that there were two separate agreements entered by the respondents - one for transfer of business goodwill and other for collection, delivery and handling of fly ash on which service tax liability has been discharged. The Tribunal held that by no stretch of imagination, payment of goodwill on transfer of business can come under the category of ‘business auxiliary services’ thereby rejected the appeal made by the Revenue Authorities.

CCE v S S Engineers & Contractors [2013-38-STT-312]

Collection of toll charges by the concessionaire under an assignment agreement does not amount to Business Auxiliary Services

A Concession Agreement was executed between National Highways Authority of India (“NHAI”) and a Malaysian company CIDBI on Build, Operate and Transfer (“BOT”) basis, wherein NHAI granted to CIDBI (“Primary Concessionaire”) the exclusive right, license and authority to implement the project and the concession in respect of the Project Highways i.e. NH-5 and NH-9 in Andhra Pradesh.

Under a separate Assignment Agreement, NHAI agreed to the assignment of concession by CIDBI in favour of Swarna Tollway Pvt Ltd (“taxpayer”) pursuant to which taxpayers were deemed to be Concessionaire under the Concession Agreement. Under the said Assignment Agreement, the taxpayers were made responsible for completion of the project and later on collection of appropriate fees from the users of the Project Highways at the prescribed rate.

The Revenue Authorities contended that CIDBI was only the authorized Concessionaire as per the Concession Agreement and was not entitled to transfer the concession rights allotted to them under the Concession Agreement. Accordingly, taxpayers were collecting toll from users on behalf of CIDBI and were acting in the capacity of an agent of CIDBI. Consequently, the Revenue Authorities sought to recover service tax on toll charges collected by taxpayers under the taxable category of Business Auxiliary services.

The Tribunal while relying on the various clauses of the aforementioned agreements held that pursuant to the Assignment Agreement (approved by NHAI), taxpayers had stepped into the shoes of CIDBI and were collecting toll in the capacity of 'Concessionaire' and not as an agent of CIDBI. Hence, taxpayers were not liable to deposit service tax on toll charges under Business Auxiliary services and appeal was allowed in the favour of taxpayers.

Swarna Tollway Pvt Ltd v CCE, Guntur [2011-5-TMI-192-CESTAT-BANGALORE]

Activity of providing transportation from one of its establishments to another establishment for facilitating provision of ropeway services does not fall within the ambit of tour operator services

The taxpayer provides ropeway services between its two establishments, both situated in Hardwar, one at Mansa Devi Temple and other at Chandi Devi Temple upon payment of fees which is not chargeable to service tax. For facilitating such service, the taxpayer also provides transportation of passengers between the two establishments upon payment of a separate fee.

The Revenue Authorities contended that such transportation services would fall under the scope of ‘tour operator services’ leviable to service tax.

The Tribunal held that the taxpayer cannot be said to be a ‘tour operator’ because the service of providing transportation is not his main activity and is only ancillary to the main business of providing ropeway service. Hence, the Appeal was dismissed

CCE, Meerut-I v Usha Breco Ltd Hardwar (Uttarkhand) [2013-TIOL-20-HC-UKHAND-ST]

Stay granted in relation to renting of immovable property on the view that meaning of term “renting” will not cover long term leasing. Further, developing a township according to a plan conducive to the society at large has to be prima facie considered as a sovereign function and not a commercial activity

The taxpayer, Greater Noida Industrial Development Authority (“GNIDA”) is a body established under Uttar Pradesh Industrial Development Act, 1976 which empowers GNIDA to allocate and transfer whether by way of lease or sale or otherwise plots of land for industrial, commercial and residential purposes. The taxpayers charge both onetime lease charges at the time of initial handling over of the land and also annual fees charges at different rates for land given for different purposes.

Service tax was sought to be recovered on the lease charges received under the category of ‘renting of immovable property’.

The taxpayers contended that they are undertaking statutory sovereign functions and not a service and that long term lease is like a ‘sale’ not akin to renting taxable under the Finance Act, 1994 (the “Act”) which only includes short term renting.

Opposing the taxpayers, the Revenue Authorities contended that the all the properties leased out by taxpayers continue to belong to them. The property is given on lease basis and not on free hold basis. Further, the fact that taxpayers also collect annual rent in addition to onetime payment shows that property is not sold at all.

The Tribunal held that with new types of ‘transfer of rights’ emerging, the ordinary meaning of ‘renting’ will not cover long term leasing. The term ‘leasing’ used in the inclusive definition of renting under the Act does not cover long term leasing where a property is given to a person with rights to transfer, assign and mortgage the rights. Such transfers are more akin to sale and less to renting of property.

Further, developing a township according to a plan conducive to the society at large has to be prima facie considered as a sovereign function and not a commercial activity of the Government. Accordingly, based on the prima facie view that the taxpayer is not liable for payment of service tax, stay was granted.

Greater Noida Industrial Development Authority v CCE, Noida [2013-TIOL-44-CESTAT-DEL]

Other indirect taxes

Education Cess would not be leviable only on such portion of customs duty as is exempt under the Duty Entitlement Passbook Scheme

The taxpayer is engaged in manufacturing various goods and also exporting such goods to various countries. The taxpayers have been availing of the Duty Entitlement Passbook Scheme (“DEPB scheme”) with respect to which, exemption from payment of import duty is granted at the specified rates for the specified commodities under Notification No 45/2002-Cus dated April 22, 2002 (“Notification No 45/2002”).

The taxpayer adopted a position that when an importer imports any goods and avails the benefits under the DEPB scheme, in essence, he does not pay any customs duty and accordingly, is also not liable to pay education cess at the prescribed rate. This was based mainly on the premise that the goods imported under the DEPB scheme by virtue of Notification No 45/2002, carry 'nil' rate of customs duty and additional duty.

The taxpayers pointed out that the Government of India in the Circular No 5/2005 -Cus dated May 31, 2005 clarified that in case of the imports made under the DEPB scheme, the education cess at the rate of 2 percent would also be debited from the DEPB scrip.

The HC held that education cess is to be collected on the customs duty levied and collected by the Central Government at the rate of 2 percent on such duty. Further, it observed that based on the nature of DEPB scheme and the exemption granted to imports made under such scheme, it can be seen that the very purpose is to neutralise the import duty component on the imported goods used for production of export items. Such object is achieved through the DEPB scheme under which the exporter is given the facility of utilising the credits in the DEPB scrip for the purpose of adjustment against the customs duty liability on the goods imported for the ultimate purpose of export on value addition

If goods are fully exempted from excise duty or customs duty or are chargeable to nil rate of duty or are cleared without payment of duty under specified procedure such as clearance bond, there is no collection of duty and, therefore, no education cess would be leviable on such clearances.

In view of the above, the HC held in favour of the taxpayer.

Gujarat Ambuja Exports Ltd v Gov of India Thr' Under Secretary, [(2012)-TIOL-546-HC-AHM-CUS]

The SC dismissed the Special Leave Petition filed against the above order of HC.

Gujarat Ambuja Exports Ltd & 1 v Gov of India, [(2013)-TIOL-15-SC-CUS]

Levy of entry tax under the Orissa Entry Tax Act, 1999 (“OET Act”) on the value of goods imported from a place outside India held constitutional

M/s Tata Steel Limited, M/s Emami Paper Mills Limited and M/s Maheswari Coal Services Private Limited (“taxpayers”) imported goods from outside India within the State of Odisha for use or consumption within the State. On import of goods within the municipal limits of the State of Odisha, the Revenue Authorities demanded entry tax at the applicable rates in terms of the OET Act. The taxpayers contended that levy of entry tax on the goods that are imported from a place outside India is contravention of Article 286 of the Constitution of India (“Constitution”) which places restriction on the imposition of taxes on the sale of goods where the sale takes place in the course of import of goods into India.

Further, the taxpayers submitted that Entry 83 of List I of the 7^th Schedule to the Constitution provides the power to levy duties of customs including export duty to the Central Government. Whereas Entry 52 of List II of the 7^th Schedule to the Constitution empowers the State governments to levy tax on the entry of goods into local area for consumption, use or sale therein. Thus, in light of Article 246 of the Constitution, the taxpayers urged that the State Legislature cannot infringe upon the legislative power of the Parliament and levy entry tax on the goods that are imported from a place outside India.

In this context, the Revenue Authorities submitted that the restriction placed vide Article 286 of the Constitution is on authorizing imposition of tax on sale or purchase of goods which the State Legislature has a power, which is derived from entry 54 of List II of the 7^th Schedule of the Constitution. However, the power to levy entry tax is derived from entry 52 of the said list. Thus, the two fields are distinct and separate.

Additionally, the Revenue Authorities placed reliance on decision given by the HC of Kerala in the case of FR William Fernandez v State of Kerala [1999 (115) STC 591 (Kerala)], wherein the HC upheld the constitutional validity of tax on the import of goods from outside India. Also, the Revenue Authorities noted the ruling given by the Apex Court in the case of Kiran Spinning Mills v Collector of Customs [1999 (113) ELT 753 (SC)] and JV Gokal & Co Private Limited v Assistant Collector of Sales Tax (Inspection) [1960 (11) STC 186 (SC)], wherein it has been held that the incidence of import ends the moment the goods crosses the custom barriers and does not continue till the time the goods reach their destination within the country.

The HC rejected the contention of the taxpayers and held that entry tax is levied on goods which cross the custom barriers by invoking the powers conferred on the State under Entry 52 of List II of the 7^th Schedule of the Constitution and thus there is no encroachment of the powers of the Parliament.

Tata Steel and others v State of Odisha and others [2013 (57) VST 484 (ORISSA)]

Circulars / Notifications

Service tax

The Service Tax Rules, 1994 has been amended to introduce the revised service tax return form applicable under the new service tax regime.

Source: Service Tax Notification No 01/2013 dated 22/02/2013

Link: http://www.servicetax.gov.in/st-notfns-home.htm

Director General of Foreign Trade (“DGFT”)

The DGFT has issued a clarification regarding deemed export benefits for supply against ARO/Invalidation letter against Advance Authorisation and clearly laid down the specific deemed exports benefits available vis a vis supplies against ARO as well as the specific benefits available vis a vis supplies against invalidation letter against Advance Authorisation.

Source: DGFT Policy Circular No 15/2009-2014(RE 2012) dated 21/02/2013

Link: http://164.100.9.245/Exim/2000/CIR/CIR12/cir1512.htm