Direct
Tax
High
Court
Characterisation
of an account as a Non Performing Asset not sufficient to exclude interest
accrued thereon from total income of the taxpayer
The
taxpayer, a non-banking financial company (“NBFC”), did not include accrued
interest on non-performing assets (“NPA”) while computing its total income for
the relevant assessment year (“AY”). During the course of the assessment
proceedings, the assessing officer (“AO”) added the accrued interest on such
NPAs to the total income of the taxpayer. The AO’s order was set aside by the
Commissioner of Income-tax (Appeals) [“CIT(A)”] on the ground that no interest
could said to have been accrued on the loans doubtful of recovery and classified
as NPA. The Income tax Appellate Tribunal (“ITAT”) confirmed the CIT(A)’s
order.
In an
appeal before the HC, the Revenue Authorities contended that the classification
of assets as NPA was in accordance with Reserve Bank of India (“RBI”) guidelines
and not as per the provisions of the Income-tax Act, 1961 (“Act”). The RBI
guidelines and Act operate in different fields and thus, the income tax
liability would not be governed by the classification of assets as NPA under RBI
guidelines.
The HC
accepted the contentions of the Revenue Authorities and reversed the decision of
the ITAT. It held that characterisation of an account as NPA would not be
sufficient to conclude on uncertainty of accrual of interest on loans. The HC
further held that the accrual of interest was a matter of fact and had to be
decided separately for each case. In the present case, since the AO had not
recorded any finding regarding the uncertainty in collection of income on NPA
accounts, the HC remanded the matter back to the file of the AO for fresh
consideration.
CIT v
Shakti Finance Limited (ITA No 282 and 283 of 2007) (Madras
HC)
Not
possible to change the opening Written Down Value (“WDV”) of fixed assets for
succeeding years without making changes in WDV for prior
years
The
taxpayer, an Indian company, had not claimed depreciation on its fixed assets
for the AYs prior to AY 2003-04. The taxpayer’s claim was accepted by CIT(A) and ITAT for earlier AYs.
However, the taxpayer claimed depreciation on the WDV of assets from AY 2003-04
to AY 2005-06.
The AO
while passing assessment order for the three AYs partly disallowed the claim for
depreciation by holding that in the earlier AYs, the depreciation though not
claimed by the taxpayer was thrust upon him as per the Explanation 5 to section
32 inserted in the Act with retrospective effect from April 1, 2002. The said
explanation stipulated that it was mandatory for a taxpayer to claim
depreciation. This action of the AO had the effect of reducing the opening WDV
of assets as well as resultant decrease in the depreciation claim for relevant
AYs. On appeal, the CIT(A) granted relief to the taxpayer and allowed the
depreciation actually claimed by the taxpayer in the AYs under consideration.
On
further appeal by the Revenue Authorities, the ITAT also held in favour of the
taxpayer. It observed that the assessment orders for earlier years were
accepted by both - the taxpayer as well as the Revenue Authorities and had thus,
attained finality. Further, the insertion of Explanation 5 to section 32 was
not applicable to earlier AYs and accordingly, the said provision cannot disturb
the settled / final position for earlier AYs. Accordingly, the ITAT held that it was not possible to reopen the
assessments for earlier years to allow depreciation and therefore, the
depreciation claim of the taxpayer for the years under consideration should be
allowed without any re-computation. The High Court (“HC”) subsequently affirmed
the decision of the ITAT.
CIT v
M/s Silvassa industries limited (ITA No 2558, 2583 and 2584 of 2011) (Bombay
HC)
Reliance
placed on the decision of non-jurisdictional High Court (even though overruled
by the Supreme Court) constitutes sufficient ground for waiver of interest under
section 234B
The
taxpayer, a company registered in Karnataka, relying on the decision of the
Kerala HC in case of A V Thomas (1997) ITR 29 DD, claimed
deduction under section 80HHC of the Act. On this basis, the taxpayer did not
pay advance tax. During the assessment proceedings, the AO allowed the claim of
the taxpayer.
However,
the Commissioner of Income-tax (“CIT”) thereafter revised the said order of the
AO and disallowed deduction under section 80HHC of the Act claimed by the
taxpayer. On further appeal, the ITAT allowed the claim of deduction under
section 80HHC of the Act to the taxpayer. The Revenue Authorities thereafter
appealed before the Karnataka HC.
During
the pendency of the case before the HC, the Supreme Court (“SC”) decided a
similar issue in favour of the Revenue Authorities by disallowing the claim of
deduction under section 80HHC of the Act. Relying upon the SC decision, the HC
ruled in favour of the Revenue Authorities. In the appeal effect proceedings,
the AO raised tax demand on the taxpayer including interest under section 234B
of the Act for not depositing / delay in deposit of advance tax by the
taxpayer.
The
taxpayer filed an application before the Chief Commissioner of Income-tax
(“CCIT”) for waiver of interest under section 234B. The said application was
rejected by the CCIT which led the taxpayer to file a writ petition before the
HC. The taxpayer relied upon an instruction issued by the Central Board of
Direct Taxes (“CBDT”) which specified cases where the waiver of interest under
section 234B was available. One of the illustrations covered a situation
wherein, the tax liability arose due to SC over-ruling the decision of
jurisdictional HC relied upon by the taxpayer. However, the Revenue Authorities
argued that the said case would only cover a situation where the taxpayer had
relied upon a decision of the jurisdictional HC.
The HC,
while ruling in favour of the taxpayer, held that the order of CBDT provides a
class of cases which are fit to be considered for the waiver of interest and
does not provide an exhaustive list. Thus, the said illustration can be
modified to apply in cases where taxpayer had relied upon the decision of a
non-jurisdictional HC. Finally, the HC allowed the writ of the taxpayer by
directing the CCIT to waive off 75 percent of the interest levied under section
234B of the Act.
M/s UB
Global Corporation limited v CCIT [Writ petition No 16136 of 2011 (T-IT)]
(Karnataka HC)
No
penalty is leviable in case of a bonafide mistake by the
taxpayer
The
taxpayer had filed its return of income committing two mistakes viz claiming
depreciation on an incorrect value due to mistakes in the calculation and
treating a capital loss as a revenue loss. The loss was a capital loss as the
same was incurred by the taxpayer on account of sale of its garment
manufacturing machine. During the course of the assessment proceedings, the
taxpayer suo moto pointed out the mistakes to the AO and corrected the
same. The AO made requisite adjustments for such mistakes and levied penalty
under section 271(1)(c) of the Act on the taxpayer for concealment of income and
furnishing of wrong particulars of income.
On
appeal by the taxpayer, the CIT(A) upheld the order of the AO. On further
appeal, the ITAT held that imposition of penalty in the case of the taxpayer was
not warranted on account of the following:
·
The
excess depreciation originally claimed by the taxpayer was on account of
bonafide and inadvertent mistake on his part and since the taxpayer suo moto
pointed out the same to the AO, the levy of penalty was not justified in this
case.
·
There
was complete disclosure of facts as the taxpayer has clearly described the loss
as the loss on sale of its garment unit asset. Further, the claim of the
taxpayer was based on advice of the Chartered Accountant (“CA”), though
incorrect and the taxpayer pointed out his mistake at the time of assessment
proceedings. Considering the bonafide belief of the taxpayer, the penalty was
not leviable.
·
The
withdrawal of the above claims at the time of assessment proceedings was
sufficient to prove the bonafide belief of the taxpayer since the revised return
could not be filed due to the expiry of the statutory time limit for filing the
same.
On
appeal, the HC affirmed the view of the ITAT and dismissed the appeal of the
Revenue Authorities.
CIT v
M/s Somany Evergreen Knits Limited (ITA No 1332 of 2011) (Bombay
HC)
ITAT
Surcharge
and education cess not applicable on the tax rate prescribed for interest income
under the India-UAE Double Taxation Avoidance Agreement (“DTAA”)
The
taxpayer, a non-resident individual based in UAE, was in receipt of interest
income from an Indian partnership firm in which he was a partner. Interest
income was offered to tax at the rate prescribed under the India-UAE DTAA. The
AO, in addition to taxing the interest income at the prescribed rate, also
further included education cess and surcharge on tax rate.
On
appeal, the CIT(A) upheld the order of the AO. The CIT(A) also held that the
interest income was taxable as business income and therefore, the taxpayer was
not eligible to claim taxation at preferential tax rate applicable to interest
income under India-UAE DTAA.
On
further appeal, the ITAT allowed the claim of the taxpayer and held that the
taxpayer’s income from partnership firm would be taxable as interest income and
not as business income. The ITAT also held that the maximum rate of tax which
can be levied in India would be the rate as per Article 11(2) of the India-UAE
DTAA and such rate cannot be further enhanced by surcharge and education cess.
In arriving at the said conclusion, the ITAT made the following
observations:
·
There
are specific Articles in the DTAA dealing with taxation of income under
different heads. The business profit is governed by Article 7 whereas interest
income is governed by Article 11. In case there is a specific provision for
dealing with a particular type of income, such type of income has to be dealt
with by those provisions. The Article of ‘Interest’ under India-UAE DTAA, being
more specific to the income of the taxpayer would prevail over the general
Article of ‘Business income’.
·
Tax has
been defined in Article 2(2)(b) under India-UAE DTAA, as per which income tax
included surcharge. Therefore, the income tax referred to in Article of
‘Interest’ under India-UAE DTAA would include surcharge. Relying on the ruling
of its Coordinate Bench in the case of DIC Asia Pacific Pte Ltd
[TS-443-ITAT-2012 (Kol)], the ITAT observed that nature of education cess
and surcharge is the same. Based on this, the ITAT held that education cess and
surcharge could not be levied separately and would be included in tax rate
prescribed under the DTAAs.
Sunil V
Motiani v ITO (ITA No 276 of 2012) (ITAT Mumbai)
Reimbursement
of expenses subject to tax withholding even in case payments are made to a third
party through related concern; absence of profit element essential for it to
qualify as reimbursement
The
taxpayer, an Indian company, paid certain amount as reimbursements to its parent
company in Netherlands without subjecting it to tax withholding in India. These
reimbursements were made on account of sharing of overheads incurred for support
services (such as legal, accounting, etc) provided by the parent company and the
payment for training of taxpayer’s employees by outside trainers which was initially paid by
the foreign parent to third parties. The reimbursement for support services
were made at cost without any mark-up.
During
the assessment proceedings, the AO disallowed the above payments made by the
taxpayer under section 40(a)(ia) of the Act due to failure on part of the
taxpayer to undertake tax withholding in India. On appeal, the CIT(A) confirmed
the disallowances made by the AO. In the appeal before ITAT, the taxpayer
argued that both the payments made by it, were actually reimbursements of
expenses incurred by its parent, on an actual basis without any mark-up.
On
appeal, the ITAT granted partial relief to the taxpayer by holding as
under:
·
The
cross charge for support services would not be chargeable to tax in India in the
hands of the recipient company since these were reimbursements towards expenses
(such as accounting, legal and professional, staff and management etc) without
any profit element. This was also evidenced from the terms of agreement between
the taxpayer and its parent company and the CA certificate. Accordingly, in
absence any obligation on the taxpayer for tax withholding under section 195 of
the Act, the provisions of section 40(a)(ia) could not be attracted.
·
The
payment for the training services provided by an outside trainer to the
employees of the taxpayer through its parent company would not qualify as
reimbursements. The ITAT observed that if the Indian subsidiary company incurs
expenses or makes purchases or avails any service from some third party abroad
and the payment to such third party is routed through its holding or related
company abroad, the provisions for tax withholding would apply as if the
taxpayer has made the payment to such independent party de hors the
routing of payment through the holding company. Therefore, if the payments are
of a nature which are chargeable to tax in India and thus, liable for tax
withholding in India, the failure to do so would clearly attract disallowance
under section 40(a)(ia) of the Act. Accordingly, the matter was restored to the
AO for determination of the taxability of such training expenses and thereafter,
the question of application of section 40(a)(ia) of the Act.
M/s C U
Inspections (I) Private Limited v DCIT (ITA No 577 of 2011) (Mumbai
ITAT)
Interest
under section 244A, being in the nature of a statutory right would be available
on refund of interest levied under 201(1A)
The
taxpayer, a Hong Kong based company, deposited interest levied by the AO under
section 201(1A) of the Act for non-compliance with the tax withholding
provisions. On an appeal before the ITAT, it held that the order under section
201(1A) of the Act was time barred and restored the issue to the file of the AO
to pass orders in accordance with its decision. The AO while giving effect to
the decision of the ITAT, held the proceedings under section 201(1A) of the Act
to be barred by limitation and granted refund of the interest levied. The AO,
however, did not grant interest under section 244A of the Act on such
refund.
Appeal
against AO’s order was dismissed by the CIT(A) who held that interest
under section 244A of the Act was only admissible on amount of excess tax or
penalty paid by the taxpayer. It was held that the amount paid by the taxpayer
did not qualify as ‘tax’ since the order imposing the interest on the taxpayer
was held to be time barred and thus, it could not have survived. The CIT(A)
also held an appeal effect order in pursuance of ITAT’s directions cannot be a subject matter of further appeal
and the same being not maintainable would be void ab initio.
On
appeal, the ITAT held that a fresh order giving effect to ITAT’s directions is also an assessment order and could be a
subject of further appeal. Further, the ITAT held that section 244A provides
for interest on refund of ‘any amount due to the taxpayer’ and not only
on ‘tax amount’. The ITAT also observed that for the purposes of granting
interest on refunds, it is immaterial whether the taxpayer has received the
refund on procedural technicalities like bar of limitation or on any other
substantial ground. It was held that it was the duty of the AO while granting
refund of any amount to the taxpayer to grant interest under section 244A which
is a statutory entitlement to the taxpayer. Thus, the ITAT passed an order in
favour of the taxpayer and held that the interest on refunds should be granted
to the taxpayer.
Satellite
Television Asian Region Limited v DDIT (ITA No 8639 to 8641 of 2010) (Mumbai
ITAT)
Expenses
incurred by an Indian company in facilitating global sale of a division by its
parent company not allowable as a business deduction
The
taxpayer, an Indian company, was engaged in the business of establishing its
parent company’s business in India either through wholly owned subsidiary or on
their own by making investments directly or joint ventures with Indian
partners. During the relevant year, the taxpayer claimed business deduction for
certain expenses which were incurred in furtherance of studying business project
in India, taking legal and professional advice for the same, investing in joint
venture (“JV”) companies and subsidiaries. Further, the taxpayer’s parent
company sold one of its business divisions internationally to a third party
which entailed a corresponding exit by the taxpayer from an Indian JV of same
division. In relation to the same, the taxpayer incurred expenses for taking
legal opinion for divestment from JV, for drafting and execution of documents,
travel expenses for entering into agreement, etc. During the assessment
proceedings, the AO disallowed the deduction of the legal and travel expenses to
the taxpayer by observing that they were not incurred wholly and exclusively for
the taxpayer’s business.
The AO
observed that all the invoices indicated that the expenses were with reference
to sale of division by its parent company. This exit resulted in a violation of
the JV agreement entered into between the taxpayer and its Indian partner. The
Indian JV partners wanted to take legal as well as international arbitration
recourse, so as to protect their interest in the JV. It was noticed that such
an injunction of the court or arbitrator could have stalled the international
deal of parent company. In order to avoid any hindrance in the world-wide sale
of the said division, the parent company entered into negotiations with the
Indian JV partners through the taxpayer and paid non-compete fee to the Indian
partner. On this basis, the AO concluded that legal and travel expenses
incurred by the taxpayer were not wholly incurred for the purpose of taxpayer’s
own business. The AO rejected the separate legal entity argument of the
taxpayer and held that such expenses were incurred by the taxpayer on behalf of
its parent company.
On
appeal by the taxpayer, the CIT(A) recorded a finding that the parent company
had directly entered into a non-compete waiver agreement with the Indian JV
partner and also paid the amount directly. Further, the entire sale proceeds of
the division were retained by the parent company. On this basis, the CIT(A)
held that legal and professional expenditure was not incurred by the taxpayer
wholly in connection with its business and thus, upheld the decision of the AO.
On further appeal, the ITAT upheld the findings of the AO and the CIT(A) and
consequently, the disallowance.
M/s
Gillette Group India Private limited v DCIT (ITA No 886 of 2005) (Delhi
ITAT)
Revenue
not empowered to question the taxpayer’s commercial wisdom to incur an
expenditure; inter-company charges paid to the foreign parent company allowable
as deduction
The
taxpayer, an Indian company, was engaged in trading of food grains. During the
relevant AY, the taxpayer availed certain management services like corporate
risk advisory, human resources, legal, trading and marketing, etc from its
foreign parent. The taxpayer benchmarked these transactions using Transactional
Net Margin Method (“TNMM”).
During
the transfer pricing proceedings, the Transfer Pricing Officer (“TPO”) held that
the taxpayer was unable to show that any service was actually rendered to it and
it had received any tangible benefit. The TPO observed that since the taxpayer
had incurred expenditure on procuring similar services locally, the impugned
services were duplicate in nature and an independent entity would not have paid
such management fees in uncontrolled circumstances. Thus, the TPO by applying
Comparable Uncontrolled Price Method (‘CUP”) determined the arms length price
(“ALP”) for inter-company charges as ‘Nil’. Accordingly, the entire management
fee paid by the taxpayer was added back to its income. The order of TPO was
upheld by the Dispute Resolution Panel (‘”DRP”)
In the
appeal filed before ITAT, the ITAT ruling in favour of the taxpayer held that
the ALP for the management fees etc could not be determined at ‘NIL’ on the
following grounds:
·
The
taxpayer had produced evidence (sample copies of emails exchanged) of availing
such services and the contents of which were “amply supportive” of the
taxpayer’s claim and the TPO was not justified in considering the
same as in the nature of routine correspondence.
·
The
adoption of CUP stipulates ‘comparable’ and ‘uncontrolled’ transactions,
however, the TPO applied the same only on the basis of a general observation
that no independent party would have made payment in uncontrolled circumstances,
which was incorrect.
·
The
taxpayer has successfully demonstrated the criticality of information provided
by its associated enterprise (“AE”) to its business. The AE provided analytical
inputs including possible impact of weather on wheat output, impact of global
demand and supply on price of wheat.
·
Though
some of the data obtained by the taxpayer from its AE was available freely on
the internet, for use in specialized businesses it has to be structured,
cross-referenced and made easy to use like in the case of the taxpayer and this
was provided by its AE.
·
The
Revenue Authorities are not empowered to question taxpayer’s commercial wisdom
to incur a specific expenditure and it was entirely for the taxpayer to take
such decisions for the advancement of its business.
AWB
India Private Limited v ACIT (ITA No 4454 of 2011) (Delhi
ITAT)
Conversion
of stock in trade into investment is permissible and income from sale of such
converted stock held to be taxable as ‘capital gains’
The
taxpayer, an Indian company was engaged in the business of borrowing and lending
funds. During the relevant AY, the taxpayer sold certain shares held by it as
capital assets and offered the resulting income to tax as long term capital
gains (“LTCG”). Originally, the said shares were held by the taxpayer as stock
in trade but were subsequently converted into investments in the past few
years. During the course of the assessment proceedings, the AO treated the same
as business income by holding the conversion of stock into investment as a
colourable device formulated with the sole intention of avoiding tax liability
under the head ‘business income’. On appeal, the CIT(A) allowed the claim of
the taxpayer by holding that the conversion of stock in trade into investment as
a valid transaction under the Act.
The ITAT
on an appeal by the Revenue Authorities, relied on the decision of the CIT(A)
and observed that the taxpayer had converted stock in trade into investments in
pursuance of discontinuance of its share trading business. The ITAT held that
there is no specific bar on such conversion of shares under the Act and the
taxpayer could be treated as an investor as well as a speculator in shares
simultaneously. It further held that conversion of shares was not a sham
transaction as such conversion was done in a transparent manner and was duly
disclosed in the audited accounts of the taxpayer along with a clarificatory
note. Thus, the ITAT upheld the order of the CIT(A) and held that the income
from sale of such shares would be taxed as capital gains in the hands of the
taxpayer.
ACIT v
M/s Superior Financial Consultancy Services Private Limited (ITA No 4208 of
2007) (Mumbai ITAT)
Income
from share trading taxable as speculative income for specified companies; no
exclusion from the scope of deeming fiction under Explanation to section 73(2)
for delivery based transactions
The
taxpayer, a private company, was engaged in share brokerage and share trading
business. During the year, the taxpayer earned commission income from trading
in shares as a sub-broker for its customers. The taxpayer was also engaged in
buying and selling of shares for itself on delivery basis through the demat
accounts maintained by the main brokers. The taxpayer did not maintain separate
profit and loss account for its commission income and income from share
trading. Both commission income and the income from share trading were offered
to tax by the taxpayer as ‘normal business income’.
During
the assessment proceedings, the AO relied upon the Explanation to section 73(2)
of the Act and treated the share trading business as speculative business.
Accordingly, the AO, by bifurcating the income and expenses on an assumption
basis worked out the final profit and loss account for determining taxpayers
normal and speculation income / loss. The CIT(A) concurred with the view of the
AO.
Before
the ITAT, the taxpayer contended that all the transactions were delivery based
and hence, the activity should be treated as a business activity and not as a
speculative activity. In this regard, the ITAT relied on the decision of
Lokmat Newspaper (P) Ltd (2010) 189 Taxmann 370 (Bombay HC) and
held that Explanation to section 73(2) is a specific provision applicable to
companies irrespective of the mode of transaction, ie whether delivery based or
otherwise. The purpose of the provision was to curb the device sometimes
resorted to by business houses controlling group of companies to manipulate and
reduce the taxable income of companies under their control. Thus, the ITAT
affirming the decision of the CIT(A) held that even in cases of delivery based
share trading, the said explanation shall get attracted.
Nashik
Capital Financial Services Private limited v DCIT (ITA No 691 to 694 of 2011)
(Pune ITAT)
Gains
arising on sale of shares of an Indian company, engaged in development,
operation and maintenance of IT Park, by a Netherlands company to constitute
income from sale of shares and not income from sale of immovable property;
hence, eligible for capital gains exemption under India-Netherlands
DTAA
The
taxpayer, a company, resident in Netherlands subscribed to 100 percent equity
capital of an Indian company engaged in the development, operation and
maintenance of an IT Park. Such investment was made with the approval of the
Foreign Investment Promotion Board, Government of India. The business undertaking of the
Indian company was notified by the Central Government (“CG”) as being eligible
for deduction under section 80IA(4)(iii) of the Act. The Indian company was
also notified under section 10(23G) of the Act which grants tax exemption on
LTCG arising on transfer of investments in a notified project.
During
the relevant AY, the taxpayer sold its entire shareholding in the Indian company
to a Singapore company which resulted in LTCG to the taxpayer. The Singapore
company withheld taxes on LTCG as well as interest paid on account of delay in
payment of sales consideration before making the payments to the taxpayer. In
the annual return of income, the taxpayer claimed the refund of entire taxes
withheld by the buyer. The taxpayer claimed capital gains exemption under the
India–Netherlands DTAA and treated interest as not deemed to accrue / arise in
India. Alternatively, the taxpayer also claimed that the capital gains were
exempt under section 10(23G) of the Act once such status of the taxpayer was
approved and notified by the CG.
During
the assessment proceedings, the AO denied the capital gains exemption to the
taxpayer under the DTAA as well as under section 10(23G) of the Act. The AO was
of the view that as per section 2(47) and section 269UA(d) of the Act, the
shares of the Indian Company were ‘immovable property’ under the provisions of
the Act and accordingly, the sale consideration should be taxed as income from
sale of immovable property. Therefore, the AO held that the taxpayer should be
taxed under Article 13(1) of the India-Netherlands DTAA which provides for
taxation of gains from an immovable property situated in India. The AO also
rejected the claim of exemption under section 10(23G) on the ground that such
approval was obtained after investment was made in the Indian company. Further,
for the interest income, the AO held that the same to be arising or accruing to
the taxpayer through a transaction involving sale of capital asset situated in
India and hence, would be taxable in India. On appeal by the taxpayer, the
CIT(A) upheld the AO’s order.
On
appeal, the ITAT allowed capital gains exemption to the taxpayer on the income
from sale of shares in the Indian company on both the counts on the following
basis:
·
The
shares in the Indian company did not qualify as immovable property for the
purposes of Act or under India-Netherlands DTAA.
·
Reliance
in this regard was placed on the CBDT Circular No 495 dated September 22, 1987
which clarified that the definition of immovable property under section 269UA(d)
read with 2(47) of the Act was strictly applicable only where the shareholder
gained enjoyment of a property in some manner. Therefore, the definition being
a specific one cannot be taken as a general law. In the present case, the
taxpayer did not enjoy the property of the Indian company ie the Industrial Park
and thus, the same would not be applicable in this case.
·
In view
of the definitions of "immovable property" under the General Clauses Act 1897
and Registration Act, 1908, it was clear that immovable property includes land,
building or any rights pertaining to that but, share in a company cannot be
considered as immovable property. Further, unless the conditions prescribed in
Article
6 apply, the same cannot be considered as immovable
property for the purposes of Article 13(1) of the DTAA. Accordingly, none of
the provisions of Article 13 of the DTAA referring to immovable property would
be applicable.
·
In
absence of sale of any immovable property or any rights directly attached to the
immovable property, the provisions of Article 13(1) cannot be made applicable to
the transaction of sale of shares in the present case.
·
The
exemption under section 10(23G) of the Act would also be available as the
approval under this section is not conditional and would be available to the
investments made prior to the date of such approval. Further, the Indian
company was already approved as an infrastructural company and the conditions as
provided under section 10(23G) of the Act were satisfied at the time of sale.
On the
taxability of the interest income, the ITAT held that the interest for delay in
payment of sale consideration would not be taxable in India by observing the
following:
·
Interest
and sales consideration were two distinct payments. The interest payment was
received outside India and it was neither in relation to any debt incurred or
moneys borrowed nor used for the purpose of business or profession in India.
Therefore, the said income cannot be considered as received or deemed to have
received or accrued or arising or deemed to have accrued or arise as provided by
section 9 of the Act.
·
Further,
even if interest income was to be considered as a part of the sale
consideration, it being liable to exempt from capital gains tax would not be
taxed in India.
Vanenburg
Facilities BV v ADIT (International Taxation) (ITA No 739 and 2118 of 2011)
(Hyderabad ITAT)
Distribution
rights, trademarks and technical know-how qualify as intangible assets and
depreciation can be claimed thereon
The
taxpayer, a private company, claimed depreciation on distribution rights,
trademarks and technical know-how as well as on goodwill. During the assessment
proceedings, the AO disallowed the depreciation claimed by the taxpayer. On
appeal, the CIT(A) allowed the claim of the taxpayer.
On
further appeal to the ITAT at the instance of the Revenue Authorities, the ITAT
upheld the order of the CIT(A) by placing reliance on the following judicial
precedents:
·
The
decision of SC in the case of Smifs Securities Limited (210 Taxman 428)
wherein, it was held that goodwill is an intangible asset covered
under section 32 of the Act and thus, depreciation could be claimed on
goodwill.
·
The
decision of the Mumbai ITAT in case of M/s Jyoti (India) Metal Industries
Private Limited (ITA No 181 of 2008) wherein, it was held that rights to
access marketing network, customer lists, marketing strategies etc were in the
nature of intangible assets and depreciation under section 32 of the Act could
be claimed on such assets.
·
The
decision of the Kerala HC in the case of Shri B Raveendran Pillai (332 ITR
531) wherein, it was held that depreciation can be claimed on trademark
rights.
ITO v
Virbac Animal Health India Private limited (ITA No 6806 & 6807 of 2011)
(Mumbai ITAT)
Payment
of transponder fee by Indian company to its Mauritius subsidiary was chargeable
to tax in India in view of the business connection / permanent establishment of
the Mauritius subsidiary in India
The
taxpayer, an Indian company, had paid transponder fee to its Mauritius
subsidiary for the transponder space taken on a satellite for undertaking
transmission of its uplinked programmes. The transponder fee was paid by the
taxpayer without any tax withholding. During the assessment proceedings, the
taxpayer contended that it had only leased space on the transponder and was not
controlling or operating the transponder itself. The transponder was just
receiving uplinked programmes and broadcasting it to the larger footprint of the
satellite and no processing was done by the satellite. The taxpayer had only
used facility / space and there was no
use of any equipment nor were any technical services provided and thus, the said
payments were not in the nature of royalty or fee for technical services
(“FTS”).
The
taxpayer relied upon the AAR rulings in ISRO Satellite Center (AAR 765 of
2007) and Dell International Services Pvt Ltd (AAR 735 of 2006)
wherein, it was held that payment for using space on transponder was neither
royalty nor FTS. However, the AO held that the payments for transponder
services were in the nature of royalty as well as FTS in view of the decision of
the ITAT in case of Sanskar Info TV Private Limited (24 SOT 87). The AO
thus, disallowed the transponder fee by applying the provisions of section
40(a)(i) of the Act. The CIT(A) also upheld the AO’s order.
In the
appeal filed before the ITAT, the taxpayer relied on the decision of Delhi HC in
the case of Asia Satellite Telecommunications Limited (332 ITR 340) and
Mumbai ITAT’s decision in the case of B4U International Holding
Limited (52 SOT 545) and contended that the earlier rulings of New Skies
Satellite (supra) and Sanskar Info (supra) relied by the Revenue Authorities
have been overruled. The taxpayer also contended that retrospective amendments
to section 9(1)(vi) and 9(1)(vii) of the Act, which had the effect of making
transponder fees taxable under the Act were made subsequent to the payments made
by the taxpayer. Accordingly, it was impossible for the taxpayer to withhold
tax in the years prior to the amendment. Without prejudice to such amendments
under the Act, no amendment was made to the India-Mauritius DTAA and thus, the
beneficial provisions of DTAA would continue to apply to the taxpayer.
Rejecting
the appeal of the taxpayer, the ITAT held that taxpayer’s case was
distinguishable on facts from the case of Asia Satellite (supra). In
Asia Satellite, the parties were all situated in a foreign territory. The
taxpayer had no business connection in India and the payment was held to be
neither royalty / FTS. However, in the present case, the ITAT on the specific
facts, held that unlike in the Asia Satellite’s case, the
Mauritius subsidiary constituted a Permanent Establishment (“PE”) through the
taxpayer. Based on this, the ITAT held that income arising to the Mauritius
subsidiary on account of transponder fee may be taxed in India as business
income and not as royalty or FTS. Since the ITAT has not examined the
taxability of transponder fee as business income, the ITAT restored the matter
to the file of the CIT(A) for passing the necessary order.
Separately,
the ITAT also denied the taxpayer protection under the non-discrimination clause
of India-Mauritius DTAA by holding that in case of residents also, the tax
withholding implications as applicable in case of non-residents would arise in
India on payments under consideration and therefore, no discrimination was done
in this case.
M/s Zee
Telefilms Limited Now Zee Entertainment Enterprises Ltd) v ACIT (ITA No 2308 of
2010) (Mumbai ITAT)
Circular
/ Notifications
CBDT
notifies a Circular on application of Profit Split Method (“PSM”) as the most
appropriate method
The CBDT
has issued Circular clarifying issues regarding the use of PSM for benchmarking
specific transactions. The CBDT, inter alia, discouraged use of TNMM for
valuation of intangibles. The Circular provides that PSM may be applicable in
international transactions involving transfer of unique intangibles or in
multiple transactions which are so interrelated that they cannot be evaluated
separately for the purpose of determining ALP of one single
transaction.
Source: Circular
no 2/2013, dated March 26 2013, issued by CBDT
Link: Please
refer BMR Edge for detailed analysis - http://www.bmradvisors.com/upload/documents/Vol8,BMR%20Edge%20TP1364988916.pdf
CBDT
brings out conditions to identify contract centres providing Research &
Development (R&D) services with insignificant risk
CBDT has
taken note of the conflict in classification of R&D service providers as
assuming significant or insignificant risks by the taxpayers and Transfer
Pricing Officers. For this purpose, CBDT has prescribed certain cumulative
conditions for determining whether the contract R&D service providers bear
insignificant risks. The conditions prescribed by the CBDT inter alia
include as to whether foreign principal performs most of the economically
significant functions vis-Ã -vis Indian development centre, level of control or
supervision exercised by foreign principal over Indian development centre, etc.
Source: Circular
no 3/2013, dated March 26 2013, issued by CBDT
Link: Please
refer BMR Edge for detailed analysis - http://www.bmradvisors.com/upload/documents/Vol8,BMR%20Edge%20TP1364988916.pdf
Department
of Industrial Policy and Promotion (“DIPP”), Ministry of Commerce & Industry
notifies Consolidated Foreign Direct Investment (“FDI”)
policy
The
DIPP, Ministry of Commerce & Industry has issued a Consolidated FDI policy
with a view to attract and promote FDI in order to supplement domestic capital,
technology and skills, for accelerated economic growth. The Consolidated FDI
policy shall be effective from April 5, 2013.
Source: F No
5(1)/ 2013 – FCI Dated April 5, 2013
Rationalisation
of limits for investment in Government securities and corporate debt by Foreign
Institutional Investors (“FIIs”) registered with the Securities Exchange Board
of India (“SEBI”)
The RBI
has rationalized the existing limits for foreign investment in India by SEBI
registered FIIs in Government securities and corporate debts. As per the
revised framework, various sub-limits for investment in debt in India have now
been broadly merged into two categories – Government debt and Corporate debt,
vide two Circulars issued by RBI. Further, the current system of auction of
debt limits for corporate bonds will be replaced by ‘on tap
system’.
Source:
Press
Release, Ministry of Finance, Department of Economic
Affairs
Ministry
of Corporate Affairs (“MCA”) amends the Companies (Acceptance of Deposits)
Rules, 1975
The MCA
has made amendment to the Companies (Acceptance of Deposits) Rules, 1975 and has
amended the definition of the terms ‘deposits’ in the said rules. The
definition of deposit includes any amount borrowed by the company excluding any
amount raised by issue of bonds or debentures secured by mortgage of fixed
assets excluding intangible assets of the company. Earlier, there was no rule
regarding the exclusion of intangible asset from the same.
Source:
Notification
[F No 11/2/2012- CL- V- (A)] dated March 21, 2013, issued by
MCA
Link:
www.taxindiaonline.com
The
Export-Import Bank of India (“EXIM Bank”) makes available a line of credit of
USD 15 Million to the Government of Republic of Benin
EXIM
Bank has concluded an agreement with the Government of Republic of Benin for
providing a line of credit (“LOC”) of USD 15 Million to finance eligible goods,
services, plant and equipment, etc from India in relation to tractor assembly
plant and farm equipment manufacturing unit in Benin. Under the LOC, the last
date for opening of letters of credit and disbursement will be 48 months from
the scheduled completion date(s) of contract(s) in the case of project exports
and 72 months (August 22, 2018) from the execution date of the Credit Agreement
in the case of supply contract.
Source:
A P (DIR
Series) Circular No 93 dated April 1, 2013, issued by RBI
EXIM
Bank makes available a line of credit of USD 42 Million to the Government of
Republic of Cameroon
The EXIM
Bank has concluded an agreement with the Government of Republic of Cameroon to
provide to the latter a LOC of USD 42 Million for financing eligible goods,
services, plant and equipment, etc from India for the purpose of financing
Casava Plantation Project in Cameroon. Under the LOC, the last date for opening
of letters of credit and disbursement will be 48 months from the scheduled
completion date(s) of contract(s) in the case of project exports and 72 months
(September 13, 2018) from the execution date of the Credit Agreement in the case
of supply contracts.
Source: A P (DIR
Series) Circular No 91 dated April 1, 2013, issued by RBI
The
Institute of Chartered Accountants of India (“ICAI”) has issued a guidance note
on report under section 92E of the Act (Transfer
Pricing)
ICAI has
recently released a Guidance Note on Report under section 92E of the Act
(Transfer Pricing). The Guidance Note incorporates amendments made by the
Finance Act, 2012 such as the definition of International Transaction, Advance
Pricing Agreement (APA), amendments relating to penalties, etc.
Source:
ICAI
Agreement
for exchange of information with respect to taxes between India –
Gibraltar
notified
The CG
has notified an agreement for exchange of information with respect to taxes
between the Government of the Republic of India and the Government of
Gibraltar with effect from March 11, 2013.
Source: Notification
No 28 dated April 1, 2013
Mandatory
issuance of Form 16 by generating and downloading it from Government portal/
website
The CBDT
has issued a Circular giving instructions regarding issuance of tax withholding
certificate in Form 16 for the purposes of section 192 of the Act by a
deductor. In line with the procedure notified earlier for issue of Form 16A,
the CBDT has, inter alia, instructed all deductors to issue Form 16 by
generating and subsequently downloading it from TRACES portal. Such procedure
will be applicable in respect of all sums deducted on or after April 1, 2012.
The deductors are further required to authenticate the correctness of the
contents mentioned in the form by using manual signatures or by using digital
signatures.
Source: Circular
no 4/2013 dated April 17, 2013, issued by CBDT
Tolerance
limit of 3 percent/ 1 percent variation between ALP and actual price of
transaction notified by the CBDT
The CBDT
has issued a notification prescribing tolerance limits of variation between the
ALP determined under section 92C of the Act and the actual price of the
international transaction or specified domestic transaction with respect to AY
2013-14. The notification prescribed a tolerance limit of 1 percent of the
actual price in case of wholesale traders and 3 percent of actual price in all
other cases for this purpose.
Source: Notification
No 30 dated April 15, 2013
Indirect
tax
Value
Added Tax (“VAT”) / Central Sales Tax (“CST”)
The
general principle that different commodities would attract different tax is not
applicable when the entry is wide enough to cover all forms / variants of a
product even where such variants are distinct commercial
commodities
Taxpayer
was a registered dealer under the Central Sales Tax Act, 1956 (“CST Act”) and
the Assam General Sales Tax Act, 1993 (“AGST Act”). The taxpayer was engaged in
the conversion of raw petroleum coke (“RPC”) to calcined petroleum coke
(“CPC”). The finished goods ie CPC were sold in different states. Section 30
of the AGST Act provided for refund of tax in case of sale and purchase of
declared goods which are subsequently sold in the course of interstate sales.
Accordingly, the taxpayer applied for the refund of the local sales tax as his
goods were falling in the category of declared goods under the entry ‘coke in
all its forms’.
However,
the State tax authorities were of the view that RPC loses its original identity
in manufacture of CPC as it undergoes an irreversible chemical change and they
are two different products. Further, under the Central Excise Act, 1944, RPC
and CPC are treated as different products being subjected to different rate of
excise duty.
The
taxpayer filed a writ petition before the HC of Guwahati. The HC while deciding
the issue placed reliance on the judgment of the SC in the case of State of
Tamil Nadu v Mahi Traders [(1989) 73 STC 228 (SC)] wherein it was held that
it was not of any importance to ascertain that coloured leather is a form of
leather or a different commercial commodity as the entry under the Tamil Nadu
General Sales Tax Act was comprehensive enough to include the products emerging
from ‘hides and skins until the process of dressing or finishing is done’.
Applying the same principle in the taxpayer’s case, it was held that RPC and CPC
are well covered under the entry “coke in all its forms” and thus, the principle
that different commodities attract different tax was distinguishable.
Accordingly, the order against the taxpayer was set aside and the matter was
remanded back for fresh adjudication.
Guwahati
Carbon Ltd v State of Assam [2013-058-VST-0412
(Guw)]
Transaction
of surrender of the Replenishment Licences (“REP licences”) to the CG for a
premium cannot be treated as an activity of ‘sale’ as the REP licenses
immediately lost their value on transfer as they were cancelled. Such transfer
for surrender was in fact pursuant to the Circular issued by the government
The REP
licence scheme was introduced by Government of India (“CG”) to provide
registered exporters the facility of importing essential inputs required for the
manufacture of the product being exported. These REP licenses were freely
transferable and allowed to be sold in the open market as there was no
requirement of endorsement or permission from the licensing authority. Such
transfer was considered to be sale as it could be used by the transferee for
import of inputs and accordingly, was subject to the levy of sales tax
[Vikas Sales Corporation v CCT (1996) 102 STC 106 (SC)]. However, the CG
introduced a policy for surrendering the unused licences vide Circular
No.11/1993 dated May 5, 1993 (“Circular”) and provided a premium of 20 percent
on such surrender of REP licenses. The Circular also mentioned that if the REP
licenses are not surrendered during the relevant period, they would cease to
remain useful in the hands of the holder and would not be eligible for further
sale.
Taxpayer
surrendered unutilized REP licences on which they received the said premium.
The assessing authorities took a view that the act of surrender of license was
sale under section 2(1)(n) of the APGST Act and the premium received was
equivalent to the turnover received for the same. The same was challenged by
the taxpayer before the Tribunal and subsequently, it filed a tax revision case
before the Andhra Pradesh HC.
The
taxpayer’s submission in this regard was that the activity of
surrender would not amount to sale in course of business as the basic
requirement of sale ie transfer of title of the right to import against the REP
licences, had not taken place but they were in fact cancelled. It was also
contended that there was no mutual consent in the transaction but it was owing
to operation of law and compensation is a payment gratis which cannot be equated
to sale consideration.
The
Andhra Pradesh HC held that the surrender of REP licenses did not amount to
‘sale’ as it was not in course of the business but by the virtue of the
sovereign power of the CG. It was also held that the premium paid by CG was
nothing but a compensation being paid to an exporter for the inability of the
exporter to avail the benefit of incentives. Therefore, such premium would not
qualify as ‘turnover’ within the meaning of section 2(1)(s) of the APGST Act.
Accordingly, the taxpayer’s tax revision case was
allowed.
National
Mineral Development Corporation Limited v State of Andhra Pradesh
[2013-58-VST-136 (AP)]
The tax
exemption granted to fresh milk, recombined milk and milk drink (with or without
any addition thereto) sold as beverage would include flavoured milk within its
ambit since milk with any addition thereto is included in the
entry
The
taxpayer was a registered dealer under the Tamil Nadu General Sales Tax Act,
1959 (“TNST Act”) and dealt in flavored milk. It sought the benefit of the tax
exemption granted to “fresh milk, recombined milk and milk drink with or without
any addition thereto for being sold as a beverage” vide Notification No II (1)/
CTRE/69/81 dated January 3, 1981 under the TNST Act.
The
Revenue Authorities rejected the claim of the taxpayer in an assessment under
section 16(2) of TNST Act on the basis that the beverage sold by the taxpayer
contains additives and hence would not fall within exemption notification. The
dispute reached before the Tribunal. The Tribunal allowed the appeal of the
taxpayer by relying on the decision of the SC in the case of Deputy Commissioner
of Sales Tax v. Pio Food Packers [1980] 46 STC 63 (SC) wherein it was
held that flavoured milk sold as beverage is entitled to the benefit of tax
exemption. Aggrieved by the said order, the Revenue Authorities filed an appeal
before the Madras HC.
The
Madras HC relied on the dictionary meaning of the term ‘beverage’ in the absence
of any definition in the TNST Act. It also relied on the aforesaid judgment of
Pio Food Packers (supra) and decided in favour of the taxpayer and
accordingly, dismissed the Revenue Authorities appeal.
State of
Tamil Nadu v Ganesh Corporation [2013-058-VST-0368
(Mad)]
Where no
sales tax is payable under section 10 of the Assam Value Added Tax Act, 2003
(“Assam VAT Act”) on branch transfer of oil-cakes outside the State of Assam,
the dealer is liable to pay purchase tax under section 12 on that part of
mustard seeds locally procured from unregistered dealers which was used as a raw
material in the manufacturing of oil-cakes
The
taxpayers were engaged in oil manufacturing in the State of Assam and the oil so
manufactured was sold by them locally. Oil-cakes, the by-products of the
manufacturing process, were disposed of by way of stock transfer on consignment
basis outside the State of Assam. The Revenue Authorities sought to levy
purchase tax on the proportionate purchase value of the mustard seeds referable
to the production of oil-cakes under section 12 of the Assam VAT Act which were
purchased locally from unregistered dealers without payment of VAT. The
taxpayers filed a writ petition against this proposed levy of purchase
tax.
The
taxpayers contended that they were already paying tax on the sale of oil which
is manufactured from the mustard seeds and oil-cake was merely by-product. It
was argued that the proportionate value of purchase turnover of mustard seeds
referable to value of oil-cakes, produced therefrom, could not be subjected to
purchase tax as manufacture of oil-cakes is automatic.
The
Revenue Authorities contended that the levy of purchase tax was completely
justified as the value of mustard oil-cake was significant part of the
taxpayers’ total turnover and the same cannot be claimed as wastage. Although
mustard oil-cake was not the main product of the process of manufacture, but it
was also a product of manufacture.
The HC
observed the decisions given in the case of Hotel Balaji v. State of Andhra
Pradesh [1993 (88) STC 98 (SC)] and Shri Krishna Oil and General Mills v
State of Punjab [2010 (35) VST 226 (P&H)] where it was held that where
the manufactured goods are not sold within the State but are disposed of or
where the manufactured goods are sent outside the State (otherwise than by way
of inter-State sale or export sale) the tax has to be paid on the purchase value
of the raw material. Relying on the abovementioned case laws and other relevant
judicial precedents, the Court ruled the matter in favour of the Revenue
Authorities.
Pawan
Industries v State of Assam [(2013) 58 VST 281
(Guw)]
Movement
of goods from one state to another pursuant to a contract of sale and the fact
that insurance charges were not borne by the buyer does not alter the character
of inter-state sale due to which the same cannot be taxed as a local
sale
The
taxpayers were based out of Calcutta and their head office at Mumbai entered
into a contract with Neyveli Lignite Corporation (“Neyveli”) based out of Tamil
Nadu for design and manufacture of machineries, which were to be transferred on
inter-state sale basis. The contract detailed out the conditions for supply by
way of interstate movement along with the separate conditions for commissioning,
test running, erection and subsequent handing over to the customer. The
contract also provided cost break-up of different activities like design,
engineering, manufacture, erection, testing and commissioning, etc. The
contract also contemplated movement of machinery as well as manufacture and
movement of goods from Head Office at Mumbai and branch office at
Calcutta.
The
Tamil Nadu Revenue Authorities sought to tax the sale value of the materials
under the TNST Act by applying the theory of accretion. The matter reached
before the Madras HC where the taxpayers contended that the contract was a
divisible one and Neyveli were not bound to award the erection portion of the
contract to the taxpayers. Further, when the goods moved from Mumbai and
Calcutta the delivery of the same was taken by Neyveli and the ownership in
goods got transferred at that very instant. It was further argued that when the
contract itself was with the Mumbai Head Office, the taxpayers being a branch
office had nothing to do with the contract and as a result the State of Tamil
Nadu had no authority to tax the inter-state transaction emanating from Mumbai
and Calcutta.
The
Revenue Authorities argued that since the payment was made by Neyveli part by
part and full payment was made only after the successful completion of the
performance; there was no outright purchase of materials by Neyveli and thus the
turnover was assessable to the provisions of the TNST Act. Further, the
responsibility to pay the insurance on the goods remained with the taxpayers and
the goods ever remained the property of the taxpayers alone till they were
assembled and installed before handing over to the
contractee.
The HC
held that the contract contemplated divisibility and rightly specified the
price, both in respect of goods which were to be moved from outside the State
and for the erection portion. Moreover, the movement of goods from Mumbai to
Tamil Nadu was pursuant to the contract of sale. The fact that the insurance
coverage was borne by the taxpayers could not dilute the fact that sale is an
inter-state sale. On the basis of the foregoing, the matter was decided in favour of the
taxpayers.
State of
Tamil Nadu v Mahindra & Mahindra Ltd [(2013) 58 VST 483 (Mad)]
Excise
Activity
involving fabrication of steel angles, channels, etc in relation to a structure
embedded in earth cannot be regarded as “manufacture” and therefore, no excise
duty can be demanded on such fabrication activity
The
taxpayer, a CG undertaking registered under the Companies Act, 1956, was awarded
a fabrication and erection work by Punjab State Electricity Board for which
tenders were invited by the taxpayer. The steel structures fabrication job was
transferred to an independent contractor who was provided with steel trusses,
angles, channels and other raw material by the taxpayer. The entire fabrication
task was executed at site by the contractor under the taxpayers supervision.
A Show
Cause Notice (“SCN”) was issued demanding excise duty on the allegation that the
fabrication activity undertaken by the taxpayer amounted to manufacture and
excise duty was leviable thereon. The taxpayer filed a writ petition against
the SCN.
The HC
observed that the fabrication work was being done by the independent contractor
under the supervision of the taxpayer on job-charge basis. It was further
observed that the job work undertaken by the contractor did not fit in the term
“manufacture” as the word “manufacture” was normally associated with movables
(ie articles and goods) and was never connected with the fabrication of a
structure embedded in earth. After noting the conditional exemption granted to
goods fabricated at the site of construction for use in construction work from
the payment of excise duty, the HC decided the matter in favour of the
taxpayer.
Bharat
Heavy Electricals Ltd v Collector of Central Excise [2013 (289) ELT 293 (P &
H)]
'Bagasse'
generated from crushing of sugarcanes is not a manufactured good but a
residue/waste which cannot be regarded as a final product exempt from levy of
excise duty, therefore credit reversal envisaged under Rule 6 of the CENVAT
Credit Rules,2004 (“CENVAT Credit Rules”) don’t get triggered
The
taxpayers were engaged in the manufacture of sugar from sugarcane and during
this manufacturing process, molasses, industrial alcohol and ‘bagasse’ also got
generated. Excise duty was being paid on clearances of sugar, molasses and
industrial alcohol. 'Bagasse' emerged as a waste/ residue of sugarcane during
this entire process and it was mainly used as fuel in the factory for
manufacture of final products and the surplus, if any, was transferred by the
taxpayers to their sister concern.
The tax
authorities demanded that proportionate input credits be reversed in terms of
Rule 6 of the CENVAT Credit Rules on the ground that ‘bagasse’ was a
manufactured final product and not a refuge, dirt or porridge as it possessed
the characteristics of durability, exchangeability and economic value.
The
taxpayers countered that the aforementioned proceedings are baseless as
‘bagasse’ was not a manufactured final product as held by the SC and credit
reversal provisions apply only when both dutiable and exempted final products
were manufactured, which was not a case in the present
situation.
The
matter reached the Tribunal who took note of the decision given in the case of
CCE v Shakumbhari Sugar and Allied Industries Limited wherein it was held
that 'bagasse' may find an entry in Schedule to the Central Excise
Tariff 1985, but it did not become a final product merely on the basis of
such entry. The Tribunal further held that such 'bagasse' was nothing but a
waste obtained during the manufacture of sugar and such waste cannot be
regarded as a final product exempt from excise duty. Based on the above
observations, the Tribunal ruled that provisions of Rule 6 did not get trigger
in the present case and the matter was decided in the favour of the
taxpayers.
Balrampur
Chini Millls Ltd v UOI [2013 (38) STT 635]
CENVAT
credit of excise duty paid is not available where seller has actually not
paid/credited any excise duty to government and buyer has not exercised
‘reasonable steps’ under erstwhile Rule 7(2) of CENVAT Credit Rules, 2002
(“Credit Rules, 2002”) to
ensure payment of excise duty by the seller
The
taxpayers were the merchant exporters who have been purchasing unprocessed
fabrics from the open market which were processed through independent textile
processing units for exports. During the period June 2004 to April 2005 the
taxpayer purchased unprocessed fabrics from various weavers who were registered
as weavers/manufacturers with the Central Excise Department. Payment against
these purchases was made by account payee cheque by the taxpayer. The credit of
the excise duty paid by such weavers as shown on the Excise Invoice was passed
on by the taxpayer to the independent textiles processors. The independent
textile processors processed such fabrics, paid excise duties on the processed
fabrics by utilizing CENVAT Credit of excise duty on the basis of invoice of
weavers and returned the processed fabrics to the taxpayer under their Excise
Invoice. The taxpayer exported all such processed fabric to the foreign
countries under the claim of rebate of duties paid thereon (“Rebate Claims”).
The
above Rebate Claims were rejected by the Assistant Commissioner of the Central
Excise (“AC”) on the ground that weavers from whom unprocessed fabrics were
procured were fake and non-existent as declared by the Alert Circulars issued by
the Surat Central Excise Commissioner. Payment of excise duties on the
processed and finished goods out of such CENVAT Credit was not actual payment of
duties for allowing rebate thereof. Being dissatisfied with the above findings,
the taxpayer preferred an appeal before the Commissioner (Appeal) which upheld
the findings of the AC. Being dissatisfied, the taxpayer preferred a Revision
before the Joint Secretary, CG who affirmed the above order. Again being
dissatisfied the taxpayer went to HC.
HC
accepted the contention of the Revenue Authorities that in order to get the
CENVAT credit, Rule 7(2) of Credit Rules, 2002 cast a further duty upon the
taxpayer to take all reasonable steps to ensure that excise duty has been
actually paid by the seller. In view of HC, the taxpayer has not taken those
‘reasonable steps’ to ensure that duty has been actually paid. HC relied upon
the case of Sheela Dyeing and Printing Mills Pvt Ltd v CCE, Surat-1 [2008
(232) ELT 408] and held that credit is not available and dismissed the
applications.
Multiple
Exports Private Limited and Ors v Union of India – Through Joint Secretary and
Ors [2013 (38) STT 522 (Guj)]
The
manufacturer was not required to reverse the credit on inputs used in the
manufacturing of final product on which duty has been remitted for the period
prior to the insertion of Rule 3(5C)
The
taxpayers were engaged in the manufacture of drugs. They procured necessary
‘input’ required to manufacture drugs and claim CENVAT Credit of the excise
duty. During the period prior to September 7, 2007 certain drugs manufactured by
the taxpayer were found unfit for human consumption and the same were destructed
by the taxpayer. On such drugs the remission of excise duty (ie waiver of duty)
was granted by the excise authorities.
With
effect from September 7, 2007 a new Rule 3(5C) was introduced in CENVAT Credit
Rules which lays down that the CENVAT credit taken on the inputs used in the
manufacture of finished goods shall be reversed where on such manufactured
goods, the payment of duty is ordered to be remitted under Rule 21 of the
Central Excise Rules, 2002.
A
dispute arose and reached the HC on the issue whether the introduction of Rule
3(5C) is clarificatory in nature and would have a retrospective effect or the
same is prospective in nature.
The HC
observed that prior to introduction of sub-rule (5C) to Rule 3 there was no
provision, which provided for reversal of the credit by the excise authorities
where it has been lawfully taken by a manufacturer. Therefore, the credit
accrued at the moment the input was used in manufacturing of a final product
which was neither exempt from duty nor carried nil rate of duty. The moment
sub-rule (5C) was introduced in Rule 3, the Legislature made its intention clear
that from the date of coming into force of the said amended rule, there will be
reversal of the credit in future if excise duty on the manufactured goods is
remitted.
The HC
also relied on the judgment of the SC in case of Delta Engineers v State of
Goa [2009 (12) SCC 110] laying down the principles to be followed in
determining whether the statutory amendment is retrospective or clarificatory in
nature. The HC observed that amendment has been effected from a particular date
and at the same time, prior to such amendment, there was no provision of
reversal in the Rules dealing with the circumstances stated therein. Thus, the
amendment has created a new right in favour of the Revenue Authorities and in
such circumstances, the amendment must be held to be prospective.
Commissioner
of Central Excise & Customs v Intas Pharmaceuticals Ltd [2013 (289) ELT 256
(Guj])
Service
tax
Services
provided in relation to execution of a work contract in respect of Railways are
not liable to service tax
Taxpayer
had filed the writ petition to seek a clarification on the legal position that
services provided in relation to the execution of works contract in respect of
Railways are not liable to service tax.
The HC
disposed of the writ petition with the clarification that any service provided
in relation to the execution of a works contract in respect of Railways is
specifically excluded from the definition of “works contract” services under
clause (zzzza) of section 65(105) of the Finance Act , 1994 (“Finance Act”).
Consequently, no service tax would be liable under section 66 of the Finance Act
on the value of such services.
BMR
Corporation Ltd v Ministry of Finance, Govt of India, [2013 (29) STR 469
(Kar)]
Consideration
received for giving the right to other party to construct and own the
advertisement board for limited period is not taxable under the category of sale
of space and time for advertisement services (“SOSTA Services”) when the
consideration is collected in the form of advertisement
tax
Taxpayer
entered into a contract with M/s Shri Durga Publicity Service (“SDPS”) wherein
SDPS agreed to invest money in instalments for the construction of a rail over
bridge on Build Own Operate Transfer (“BOOT”) basis. In turn, SDPS was given
the right to construct and own for a period of 11 years a specified number of
advertising boards (sky-signs, uni-poles, kiosks, lollipops etc.) on the bridge
where advertisement could be displayed. While collecting the instalments,
taxpayer issued bills showing the amount received as advance tax for permitting
display of the advertisement. SDPS in turn was renting out the spaces to other
persons who wanted to advertise using the space and SDPS was paying service tax
on such activity.
The
dispute was whether the money collected by the taxpayer can be considered to be
value for sale of advertisement or is it to be considered as tax for putting up
the advertisement.
Revenue
Authorities were of the view that the taxpayer by permitting the use of various
spots by various parties for putting up the advertisement boards are providing
services taxable under the category of SOSTA Services. The tax liability of the
taxpayer was confirmed by the adjudicating authority.
The
taxpayer filed an appeal before the Tribunal against the findings of the
adjudicating authority. The taxpayer contended that the amount collected by the
taxpayer in lieu of giving the above rights was in the nature of advertisement
tax which is collected in exercise of sovereign and statutory function and
cannot be treated as amount received for provision of SOSTA Services. The
taxpayer further contended that the advertising space is not owned by them and
hence there is no question of having sold such advertisement space to SDPS
whereas SDPS was discharging service tax liability on the activity of renting of
such advertisement space to third parties.
Revenue
Authorities on the other hand contended that the taxpayer’s contract with SDPS
was nothing but the agreement for sale of advertising space and the amount
charged by the taxpayer is the consideration for provision of SOSTA Service.
There
was difference in opinion between the judicial and technical member of the
Tribunal and the matter was referred to the third member.
The
third member held that the contract is not a conventional BOOT scheme because
SDPS does not own or operate the bridge but is given the right to build and own
the advertisement boards and hence had limited ownership of the bridge to the
extent of right to construct the advertising board. The third member of the
Tribunal referred to the provisions of the Punjab Municipal Corporation Act,
1976 and notifications issued there under and held that the amount collected by
the taxpayer was being received as advertisement tax and there is no
notification exempting this tax. The Revenue Authorities have not made out a
case that the money received is in excess of the advertisement tax and hence it
is not reasonable to conclude that the money paid by SDPS to taxpayer is for
sale of space. Accordingly, the requirement of pre-deposit was waived of this
case.
Municipal
Corporation, Jalandhar v Commissioner of Central Excise, Ludhiana, [2013 (29)
STR 481 (Tri-Del)]
Underwriting
and lead manager services relating to issue of Foreign Currency Convertible bond
(“FCCB”) in foreign country – it cannot be said that the dominant nature of
services is the lead managers’ service and the contract cannot be classified as
a bundle of service treating it as Banking and Financial services
In the
present case, taxpayer issued FCCB’s in foreign countries to raise funds in
foreign exchange. The taxpayer appointed M/s J P Morgan Securities Ltd (“JPMS”)
as a lead manager as well as underwriters to the issue of such bonds. The
taxpayer did not pay service tax under reverse charge on the payments made to
JPMS for the aforesaid services. Relevant to note here that under the erstwhile
service tax regime, the services provided by JPMS as a lead manger were
classifiable under the taxable category of ‘banking and financial services’
(“BFS Services”) and services provided by JPMS as an underwriter were
classifiable under the taxable category of ‘underwriting services’. Further, as
per the provisions of Taxation of Service (Provided from Outside India and
Received in India) Rules, 2006 (“Import Rules”), BFS services received from
outside India become taxable in India if the service recipient is located in
India and ‘underwriting services’ become liable to service tax in India only if
such services are either partly or fully performed in India. An audit was
conducted by the department and pursuant to discussions between the taxpayer and
the departmental authorities, taxpayer paid service tax only on the charges paid
for the services rendered by JPMS as a lead manager under the category of BFS
Services.
Later on
an investigation was conducted by Director General of Anti Evasion who was of
the view that the entire payment made by the taxpayer to JPMS would be liable to
service tax in India under the category of BFS Services on a reverse charge
basis.
The
matter reached before the Tribunal and after hearing both the sides, the
Tribunal held that services provided by JPMS as a lead manger are separate and
distinct from the services provided by JPMS as an underwriter. The Tribunal
rejected the contention of the Revenue Authorities that the Agreement has to be
considered as a whole and classified considering it as a single service and
subjected it to tax because the aforesaid services are distinct in nature and
the Agreement also lays down such services as distinct services and provides for
separate remuneration fixed for the two services. Further, if the services are
to be considered as bundled, as per the rules of classification of services
provided under section 65A of Finance Act, ‘underwriting services’ are specified
under a sub-clause which occurs before the sub-clause under which BFS Services
are specified. Therefore, going by the criterion laid down in section 65A(c)
of the Finance Act it is more appropriate to classify the services provided by
JPMS as ‘underwriting services’.
Basis
the above reasoning, the Tribunal decided the issue in favour of the
taxpayer.
Jubilant Life Sciences Ltd v CCE [2013 (29) STR 529 (Tri-Del)]
Jubilant Life Sciences Ltd v CCE [2013 (29) STR 529 (Tri-Del)]
No
service tax is payable on commercial training and coaching services under
reverse charge in case where a company receives training services from its
offshore parent entity and no training fee is charged for the provision of these
services and the expenditure incurred was only towards travel, accommodation
etc
The
taxpayer was engaged in procuring orders for its offshore parent entity for
installation and maintenance of printing machinery. The taxpayer was availing
the services of its offshore parent entity for training of its employees both
outside India and in India. The Revenue Authorities contended that the taxpayer
was liable to pay service tax under reverse charge under the category of
“commercial coaching and training services” on the receipt of these training
services since their employees were trained both outside India and in India.
The taxpayer contended that its employees had gone to the offshore parent entity
located outside India and got training there. The offshore parent entity did
not charge any consideration for providing the training services and the
expenses incurred for training are only towards travel, accommodation and other
expenses in relation to training. Further, relevant certificates were also
furnished by the taxpayer certifying that its offshore entity did not charge any
training fee.
The
matter reached the Tribunal which observed that the taxpayer’s contention that
no training fee was charged by its offshore parent entity was not countered by
the Revenue Authorities. On that basis it was held that the taxpayer is not
liable to pay any service tax under reverse charge mechanism on the services
availed by them from their parent company as they have not paid any remuneration
for the training charges.
CST,
Chennai v Heidelberg India Pvt Ltd
[2012-TIOL-1739-CESTAT-MAD]
Customs
Date of
payment of tax to be excluded for computing the period of
limitation
The
taxpayer had filed a refund claim in respect of the duty paid on July 2, 2009
under Notification No 102/2007 – Customs dated September 14, 2007. The refund
was rejected by the Revenue Authorities on the ground that the refund claim was
time barred. The taxpayer filed an appeal against the order rejecting the
refund claim with the Commissioner of Customs. The Commissioner allowed the
claim of the taxpayer in view of section 9 of the General Clauses Act, 1897 (“GC
Act”). The Revenue Authorities in the appeal to the Tribunal contended that the
Commissioner could not rely on the provisions of the GC Act for the refund under
Notification No 102/2007- Customs dated September 14,
2007.
The
Tribunal in the present case relying on section 9 of the GC Act, the day on
which the event takes place has to be excluded. Thus, in the present situation
the date on which the duty was paid by the taxpayer has to be excluded and thus
the refund claim is not time barred.
Commissioner
of Customs v S S Steels [2013 (289) ELT 350 (Tribunal –
Ahmedabad)]
The
recovery process contemplated under section 142(1) of the Customs Act, 1962
(“Customs Act”) can only be pursued against the person from whom government dues
are recoverable under the Customs Act
A SCN
was issued under section 124 of the Customs Act to several entities and persons
viz. Nisum Exports and Finance Private Limited; Nisum Global Limited; Mehul
Exports; Nirmal Agarwal and Mayur Vakharia. The underlying issue for issuance
of SCN was fraudulent claim of duty drawback. The petitioner and her spouse
were directors of Nisum Global Limited and Nisum Exports and Finance Private
Limited whereas Mehul Exports was a proprietary concern of the petitioner’s
spouse. Adjudicating authority confirmed demand against Nisum Exports and
Finance Private Limited, Nisum Global Limited and against Mehul Exports and also
imposed fine in lieu of confiscation and penalty. No order of adjudication was
passed against the petitioner since no SCN was issued against the petitioner.
Subsequently,
a notice of demand was issued to the petitioner and her husband for recovery of
the confirmed demand as petitioner and her husband were directors of two
companies and her husband was proprietor of Mehul Exports. The petitioner
challenged the notice in the present writ petition as demand without
jurisdiction.
The
property which was attached was a joint ownership property in the joint names of
the petitioner/ her spouse and one third person. The property comprising of one
flat was stated to have been divided into three portions each of which was
registered individually and separately in the names of the aforesaid three
persons. The Revenue Authorities attached the property which was registered in
the name of the petitioner and her spouse.
The
petitioner contended that section 142(1)(c)(ii) of the Customs Act provided the
mode of recovery of sums due to Government where any sum payable by any person
under the Customs Act is not paid. It was submitted that the expression “such
person” used in section 142(1)(c)(i) must refer to and mean the person by whom
any sum is payable.
The
Bombay HC observed that section 142 of the Customs Act read along with the
Customs (Attachment of Property of Defaulters for Recovery of Government Dues)
Rules 1995 purported to initiate the recovery process against the defaulter viz.
the person from whom government dues are recoverable under the Customs Act. The
HC observed that there is no provision under the Customs Act akin to section 179
of the Income Tax Act, 1961 or section 18 of the CST Act where dues of a private
limited company can be recovered from the directors. Thus, HC held that dues of
private limited companies cannot be recovered from its directors until and
unless corporate veil is lifted and in the present case no such exercise was
carried out because neither was the SCN issued to the petitioner nor was
adjudication order passed against her. Hence, the action of initiating recovery
proceedings against the petitioner and consequential attachment is wholly
without the authority of law.
Suman N
Agarwal v UOI [(2013) 38 STT 598 (Bom)]
Circulars
/ Notifications
Customs
The
Customs authorities have issued a detailed clarificatory circular clarifying the
scope and ambit of the recent amendments carried out in various customs
notifications to implement the Post Export EPCG duty credit scrip(s) Scheme
under the Foreign Trade Policy.
Source:
Customs
Circular No 10/2013 dated 06/03/2013
Director
General Foreign Trade (“DGFT”)
The DGFT
has issued a Notification and a Public Notice vide which it has clarified the
import policy vis a vis import of second hand goods.
Source:
DGFT
Notification No 35(RE-2012)/2009-2014 dated February 28,2013 read with DGFT
Public Notice No 50(RE 2012)/2009-2014 dated 28/02/2013
Link: http://164.100.9.245/Exim/2000/NOT/NOT12/not3512.htm
and http://164.100.9.245/Exim/2000/PN/PN12/pn5012.htm
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