Case Laws Update - June 2013

Direct Tax

High Court

Remuneration paid to non-resident employees for services rendered in India not taxable under India-Denmark Double Taxation Avoidance Agreement (“DTAA”)

The taxpayer, a non-resident company was engaged in certain business activities in India. For this purpose, it employed 13 Danish nationals in India. Each of the employees were in India for a period of less than 183 days and were paid salary income for their services.

The salary income was not paid directly to the Danish employees but was paid to another non-resident company. Further, the salary was not borne by any Permanent Establishment (“PE”) or fixed base of the taxpayer in India.

The Assessing Officer (“AO”) contended that the salary paid to the Danish employees was taxable in India under the provisions of the Income tax Act, 1961 (“the Act”). The Commissioner of Income-tax (Appeals) [“CIT(A)”] upheld the order of the AO. On further appeal, the Income Tax Appellate Tribunal (“ITAT”) observed as under:

· As per the India-Denmark DTAA, the salary income earned by a Denmark resident from employment exercised in India would be taxed only in Denmark if the duration of stay of such employee in India does not exceed 183 days in a fiscal year and the salary is paid by an employer who is not resident in India.

· The non-resident employees were residents of Denmark and duration of their stay in India was less than 183 days in a given fiscal year. These facts were not challenged by the Revenue Authorities.

· The salary to non-resident employees for Indian employment was paid by or on behalf of an employer, who was not a resident of India. Further, the salary was also not borne by any PE of the employer in India.

In view of the above, the ITAT held that the salary earned by non-resident employees was not taxable in India under the provisions of the India-Denmark DTAA. In an appeal before the High Court (“HC”), the Revenue Authorities contented that the employer was not a resident of Denmark, but a resident of UK and accordingly, there was a dispute as to the residency of the employer. The HC observed that exemption under the
India-Denmark DTAA is available if the employer qualifies as a non-resident in India and it is not sine qua non for the employer to qualify as a resident of Denmark. Accordingly, the HC affirmed the decision of the ITAT.

DIT v M/s Maersk Company Limited (ITA No 28 of 2011) (Uttarakhand HC)

ITAT

Adoption of Valuation Rules, prescribed for Employee Stock Option Plans, for valuation of shares issued pursuant to conversion of Global Depository Receipts (“GDRs”) held to be valid

The taxpayer, a non-resident Japanese trust, was registered with the Securities Exchange Board of India (“SEBI”) as a sub-account of a SEBI registered Foreign Institutional Investor (“FII”). The taxpayer was the holder of GDRs of Cipla Ltd (“Issuing Company”) issued under the ‘Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993’ (“the Scheme”). The GDRs were converted into equity shares of the Issuing Company, which were subsequently, sold by the taxpayer. The taxpayer earned short term capital gains from the sale of shares.

For the purpose of computing capital gains, the taxpayer considered the closing price per share prevailing on the Bombay Stock Exchange (“BSE”), on the date of conversion (ie INR 214 per share) as the cost of acquisition of shares. However, the AO considered the weighted average price per share prevailing at BSE as the cost of acquisition of shares (ie INR 212.62 per share) and accordingly, enhanced the amount of capital gains income. In an appeal before the CIT(A), it held that:

· The dictionary meaning of the term ‘prevailing price’ was ‘market price’ or ‘fair market value’ (“FMV”). The term ‘FMV’ was not defined in the Act or under the Scheme, except in section 17(2)(vi)(d) of the Act, which deals with the determination of FMV in the context of shares granted under Employee Stock Option Plans.

· The CIT(A) placed reliance on Rule 40C of the Income Tax Rules, 1962 read with Circular No 9 of 2007 that provides the method for computation of cost of acquisition of a share based on its FMV. Applying the provisions of Rule 40C, the CIT(A) determined the FMV of shares at INR 212 (ie based on the prevailing price on the date of conversion) and further enhanced the capital gains income of the taxpayer.

On further appeal before the ITAT, the taxpayer placed reliance on the CBDT Circular No 3 of 1957 dated September 28, 1957 for determining the FMV of shares for Wealth tax purposes. This Circular provided that closing price in the stock exchange as on the date of valuation was to be adopted for valuation of shares. However, the ITAT held that Rule 40C, being a specific valuation rule under the Act, would be applicable to section 17(2)(vi)(d) as well as section 48(ii) of the Act. Accordingly, it upheld the order of the CIT(A) in computing the FMV of the shares by applying the Rule 40C read with Circular 9 of 2007.

The Master Trust Bank of Japan Ltd v ACIT (ITA No 7793/M/2011) (Mumbai ITAT)

Consideration received for exercising voting rights in a specified manner would be a windfall receipt not chargeable to income tax

The taxpayer was a Non Banking Finance Company (“NBFC”) having income by way of dividends and sale of shares as its principal source of income. The taxpayer held
50 percent equity in RPG Raychem Ltd (“RRL”) and the balance 50 percent was held by Raychem Radiation Technologies Inc, USA (“Raychem USA”). The parent company of Raychem USA ie Tyco Electronics Corporation, USA (“Tyco USA”) was engaged in manufacturing, marketing and promotion of industrial products across various countries. Tyco USA proposed to designate its subsidiary – Tyco Electronics Middle East FZE, Dubai (“Tyco Dubai”) to conduct the business of marketing and promotion of specific products in Asia Pacific region. RRL was also engaged in manufacturing and marketing of similar products in India and could, thus, have been a potential competitor of Tyco USA. Accordingly, Tyco Dubai negotiated an agreement with the taxpayer to exercise its voting rights in a manner to ensure that RRL does not directly or indirectly engage in business similar to that of Tyco Dubai, for a consideration payable to the taxpayer, in three equal tranches.

Pursuant to the agreement, the taxpayer received the first tranche of consideration and claimed it to be a capital receipt not chargeable to tax. The AO did not accept the claim of the taxpayer and taxed the consideration received for exercise of voting rights as a revenue receipt. In the appeal before the CIT(A), the taxpayer contended as under:

· By agreeing to exercise its voting rights in a specified manner, it had not undertaken any business activity for earning profit and hence, the consideration was not in nature of business income;

· The amount received from Tyco Dubai was not in the nature of non-compete fee for the taxpayer and thus, could not be taxed as such; and

· Neither the shares held by the taxpayer were transferred nor any rights were extinguished; thus the consideration could not be taxed as capital gains.

The CIT(A) by rejecting the contentions of the taxpayer held the consideration to be taxable as ‘income from other sources’ under the Act. On an appeal before the ITAT, the taxpayer relied on the decision of Bombay HC in the case of CIT v David Lopes Menezes (195 Taxman 131) and contended that the receipt was in the nature of a mere wind fall gain, which did not bear the character of income under
section 2(24) of the Act. The ITAT observed that the consideration received by the taxpayer was not recurring in nature and also it was not its business to exercise voting power. The ITAT held that the facts in taxpayer’s case were similar to the facts in the matter of David Lopes Menezes (supra) and by applying the ratio of Bombay HC’s decision, the ITAT held that the consideration received by taxpayer for exercise of voting rights would not be taxable under the Act.

Carnival Investments Ltd v ITO (ITA No 568 of 2011) (Kolkata ITAT)

Denial of lower rate of tax on interest income under India-Singapore DTAA, in absence of proof of actual receipt in Singapore

The taxpayer, a company incorporated in Singapore, was engaged in the business of providing Computer Reservation System (“CRS”) to various airline companies. During the relevant assessment year (“AY”), the taxpayer received income tax refund along with interest.

The taxpayer offered such interest income to tax @ 15 percent under Article 11 of the India-Singapore DTAA. The AO denied the benefit of lower withholding tax rate under India-Singapore DTAA by invoking Article 24, which stipulated that income should be mandatorily ‘remitted to or received in’ Singapore. The AO held that since the taxpayer had not furnished proof of remittance of interest income to Singapore in accordance with Article 24 of India-Singapore DTAA, the interest income would continue to be taxed @ 20 percent under the Act. The CIT(A) confirmed the order of the AO.

On appeal to the ITAT, the taxpayer contended that the fact that income tax refund voucher was encashed by the taxpayer should be taken as a direct inference of the amount having been received by the taxpayer in Singapore. After considering the facts of the case and the provisions of India-Singapore DTAA, the ITAT affirmed the order of the AO / CIT(A) and held that the taxpayer would be taxed @ 20 percent under the Act on the following basis:

· The basic condition for availing the benefit extended by Article 11 of the
India-Singapore DTAA was that the income must have been remitted to or received in Singapore. Unless it is positively shown that the income was received in Singapore, the benefit of lower tax withholding rate cannot be made available.

· The burden was on the taxpayer to demonstrate that it had positively received income in Singapore. A bald submission not backed by any supporting evidence to prove the fulfillment of the requisite condition, cannot be a good reason for drawing an inference in favour of the taxpayer. The taxpayer could have submitted a copy of pay-in-slip showing deposit of refund voucher in a bank account in Singapore which was eventually credited to the bank account or even a certificate from a bank in Singapore.

· In absence of the taxpayer discharging its burden, the taxpayer would not be entitled to benefit of lower rate of tax withholding under Article 11 of the
India-Singapore DTAA.

Abacus International Pvt Ltd v Deputy Director of Income Tax (ITA No 1045 of 2008) (Mumbai ITAT)

Consideration for sale of intellectual property rights in software is taxable on an accrual basis

The taxpayer, a software development company developed Enterprise Resource Planning software. The taxpayer, pursuant to an agreement with 3i Infotech (“the Buyer”) in the relevant AY transferred the intellectual property rights (“IPR”) in the software to the buyer for a specified consideration. The consideration was payable in two instalments with the second instalment falling due for payment in the beginning of the next AY. In addition, a sum was also payable as royalty based on certain performance conditions by the end of the next AY.

In the return of income for the relevant AY, the taxpayer only offered for tax, a part of the first instalment as the sale consideration received during the subject year. The remaining part of first instalment was treated as deferred income by the taxpayer and not offered to tax (even though it was received during the said year). The taxpayer was of the view that royalty income and the consideration payable as second instalment did not accrue during the relevant AY and therefore, would not be taxable.

The AO, during the assessment proceedings, held that the entire sale consideration accrued to the taxpayer on the date of entering into sale agreement and therefore, the entire consideration including the royalty income would be liable to tax for the relevant AY.

On appeal, the CIT(A) accepted the view of the taxpayer in relation to the royalty income and consideration payable as second instalment. However, with regard to the amount of first instalment received in the subject year (whether deferred or otherwise), the CIT(A) held that the entire amount, being accrued income, should be taxed in the hands of the taxpayer as ‘sale consideration for transfer of IPRs’.

On an appeal before the ITAT, the ITAT relied extensively on the terms of the agreement and characterized it to be in the nature of an agreement for sale of IPR in software simpliciter. The ITAT held that since the taxpayer followed mercantile system of accounting, the entire consideration mentioned in the agreement (in absence of any break up) should be taxed in the year under consideration. However, due to the fact that the CIT(A) had allowed relief for the second instalment, the ITAT confirmed the addition only to the extent of part of the first instalment not offered to tax by the taxpayer and upheld the order of the CIT(A).

Fruition Morgensoft (India) Pvt Ltd v DCIT (ITA No 281 of 2012) (Chennai ITAT)

Reimbursement of salaries of deputed employees not taxable in India, hence, no requirement to withhold tax on such reimbursement

The taxpayer, a subsidiary of a US company, was engaged in the operation and maintenance of power plant in India. In this regard, CMS Resource Management Company (“CMS”), a US company, had deputed some of its employees to India in relation to taxpayer’s business operations. As per the commercial arrangement, CMS credited salary to the account of deputed employees which was subsequently reimbursed by the taxpayer to CMS on a no profit basis.

During earlier years, the taxpayer paid the reimbursements without withholding any taxes and claimed deduction for such payments as ‘reimbursements of manpower cost’. For such years, the AO had disallowed the deduction for such reimbursements by applying provisions of section 40(a)(ia) of the Act. The CIT(A) deleted the disallowance made by the AO, which was also upheld by the ITAT. In the relevant AY, the taxpayer, as a matter of abundant caution withheld taxes on such reimbursements and subsequently, obtained an order from the CIT(A) under section 248 of the Act regarding non-withholding of tax on such payments. The CIT(A) gave a declaration to the taxpayer confirming that no tax was required to be withheld on such reimbursements. The AO challenged the CIT(A)’s order before the ITAT.

The ITAT rejected the appeal of the Revenue Authorities and relied on the following facts and findings, as articulated in the decision of the ITAT in the case of taxpayer for earlier years:

· There was no employee-employer relation between the taxpayer and the deputed employees, thus, such payments were not in the nature of salary. Accordingly, the taxpayer was not under an obligation to withhold taxes under section 192 of the Act;

· The deputed employees were on the payroll of CMS and CMS had already withheld taxes on salary payments made to its employees deputed in India;

· Further, the deputed employees were not making available technical
know-how, skill etc to the taxpayer and hence, payment to CMS could also not be classified as fee for technical services under the provisions of India-US DTAA to attract taxation in India.

ITO v CMS (India) Operations and Maintenance Company Private Limited
(ITA No 1264 of 2012) (Chennai ITAT)

Deduction for salaries paid to non-residents allowed in the year of deposit of taxes

The taxpayer, an Indian company, had employed certain expatriate employees in India. The taxpayer withheld taxes on the salary payments to the employees; however, such taxes were deposited by the taxpayer in the subsequent AY. Due to delay in the deposit of taxes withheld, the AO disallowed the deduction for salaries paid in computing the total income of the taxpayer under section 40(a)(iii) of the Act.

Before the Dispute Resolution Panel (“DRP”), the taxpayer submitted that section 40(a)(iii) requires that taxes applicable on salary payments must be withheld and paid but it does not prescribe any due date for payment of such taxes to claim deduction of salary payments. Further, the provisions of section 40(a)(iii) are different from provisions of section 40(a)(ia), which stipulate a specified date for deposit of taxes withheld at source to escape disallowance. The taxpayer further, contended that Chapter XVII of the Act (‘Collection and recovery of tax’) merely ascertains the obligation to withhold taxes and cannot be invoked for the purposes of section 40 of the Act.

The DRP affirmed the disallowance made by the AO. It acknowledged that though section 40(a)(iii) does not lay down the time limit for payment of taxes, it cannot be open for the taxpayer to deposit the taxes at any time as per his will. The DRP held that, on the basis of harmonious construction of section 40(a)(ia) and section 40(a)(iii) of the Act, it can be inferred that due date of payment of taxes envisaged under section 40(a)(ia) should also be applicable for section 40(a)(iii) of the Act.

On further appeal, the ITAT held that the salary payments should be allowed as a deduction in computing the income of taxpayer for the AY in which such tax has been paid. The ITAT observed that the provisions of section 40(a)(ia) of the Act would also apply to section 40(a)(iii). Section 40(a)(ia) provides that the taxes withheld should be paid on or before the due date for filing the return of income under section 139(1) of the Act, and if the amount is paid after the said due date, such sum should be allowed as deduction in computing the income of the AY in which such tax has been paid. On this basis, the ITAT remitted the matter back to the AO to determine the amount of taxes which were paid on or before the due date for filing the return of income and allow deduction for the same in the year under consideration.

Tianjin Tianshi India Private Limited v Income Tax Officer (ITA No 2299 of 2011) (Delhi ITAT)

Opening written down value of membership card of BSE cannot be considered as a business loss on conversion of membership card into equity shares

The taxpayer, an Indian company, had purchased membership card of BSE for a consideration in the year 1999 and depreciation was claimed on the purchase price of the same. Subsequently, the membership card was converted into equity shares under the scheme of demutualization or corporatization of the BSE and taxpayer was allotted 10,000 shares in BSE. During the relevant AY, the taxpayer sold part of such shares under buyback scheme of BSE and offered resultant gains to tax as business profits. The AO recomputed the cost of shares and worked out the long term capital gain, as against business profits claimed by the taxpayer. Subsequently, the CIT(A) upheld the order of the AO, however, it allowed the cost of acquisition of the original card as a deduction from the sale consideration.

On an appeal filed before the ITAT, the taxpayer raised an additional ground of appeal for allowing Written Down Value (“WDV”) of membership card as business loss. The ITAT upheld the decision of the CIT(A) and rejected the additional ground raised by the taxpayer on the following basis:

· The loss incurred by the taxpayer was not a business loss;

· Any loss incurred by the taxpayer on conversion of membership card into equity shares, would be considered as business loss only in the year of conversion (not in the year of sale);

· The taxpayer had sold only part of shares during the relevant AY, therefore, the entire loss could not be allowed as the taxpayer still held part of the shares;

· As per the relevant provisions of the Act, the cost of acquisition of the shares would be the original cost of membership. The Act does not contain provisions for adjusting depreciation claimed by the taxpayer.

Bakliwal Financial Services (I) Pvt Ltd v DCIT (ITA 2991 of 2012) (Mumbai ITAT)

FMV cannot be substituted for full value of consideration for the purpose of computing capital gains

The taxpayer, an Indian company, during the relevant AY, sold shares of its subsidiary company, PMP Components Private Limited at a loss of INR 0.11 per share. In the computation of income, the taxpayer showed a long term capital loss by taking the indexed cost of acquisition. This loss was carried forward as it was not set off during the year.

During the course of assessment proceedings, the AO alleged that such sale of shares was not a genuine transaction and disallowed the loss on the ground that sale was made to related parties to evade tax. The AO enhanced the sale consideration by taking the average of prices by using book value, price mentioned in the D-Mat account statement and yield method. Accordingly, the AO computed long term capital gains from such sale transaction as against long term capital loss claimed by the taxpayer.

The CIT(A) considered the sale transaction undertaken by the taxpayer as a colourable transaction and by relying on the decision in the case of McDowell & Co Ltd (154 ITR 148), it upheld the action of the AO in substituting the FMV. However, the CIT(A) directed the AO to recompute the gains by using only the book value of shares.

On appeal to the ITAT, the taxpayer contended that the AO was not empowered to substitute FMV as against the ‘full value of consideration’ received by the taxpayer.

The ITAT ruled in favour of the taxpayer. The ITAT observed that the two words,
‘full value of consideration’ and ‘FMV’ were differently used in the Act and FMV cannot be substituted for full value of consideration, except in cases specifically empowered by the Act such as under the specific provisions of computation under section 50C and 50D of the Act. The ITAT held that since these specific provisions were not applicable in the case of the taxpayer, the AO was not empowered to substitute ‘FMV’ for ‘full value of consideration’. Accordingly, the ITAT accepted the long term capital loss returned by the taxpayer.

Morarjee Textiles Limited v ACIT (ITA No 1979 of 2009) (Mumbai ITAT)

Fees paid to non-resident contract research organizations do not satisfy ‘make available test’; characterized as business profits under DTAA

The taxpayer, an Indian company, was inter alia engaged in the business of research and development of bulk drugs and pharmaceuticals. For the purpose of marketing its products in USA and Canada, the taxpayer was required to obtain approvals from regulatory authorities of respective countries. The taxpayer got its products tested through ‘bio-equivalence study’ which were undertaken by specialized Contract Research Organisations (“CRO”) in USA and Canada. During the bio-equivalence study, the CROs undertook clinical research to analyse the impact of the drug on human beings. After conducting bio-equivalence studies, the CROs had to submit a report to the taxpayer, which was then submitted to the regulatory authorities for the patent registration.

The taxpayer paid fees to CROs without withholding taxes on the basis that the fees was neither in the nature of fee for included services (“FIS”) nor business income (in the absence of PE of CROs in India). The AO held that fees paid to CROs was taxable as FIS under India-USA DTAA and India-Canada DTAA, and disallowed such expenses on account of non-withholding of taxes.

On an appeal before the CIT(A), the taxpayer submitted that CROs were only conducting clinical trials and submitting reports to the taxpayer. The CROs were not making available any technical know-how or expertise to the taxpayer and hence, the fees paid to CROs did not qualify as FIS under the India-USA DTAA as well as India-Canada DTAA. The CIT(A) accepted the taxpayer’s contention and held that the amounts remitted by the taxpayer were only business profits and not ‘FIS’ and hence, there was no liability of the taxpayer to withhold taxes on such payments.

On Revenue Authorities’ appeal to the ITAT, it upheld the order of the CIT(A) on the following basis:

· As per the decision of the Authority for Advance Ruling (“AAR”) in the case of Anapharm v DIT Inc (305 ITR 394), the AAR had held that fees paid for clinical trial report was not taxable as FIS under India-Canada DTAA, but was taxable as business profits only;

· The CROs were not parting with their experience, technical knowledge / skill / processes but were parting only with their findings, as documented in their study;

· The protocols to the study, developed by the CROs and mutually agreed with the taxpayer do not qualify as technical plan / design. Thus, the CROs cannot be said to be engaged in development and transfer of technical plans or designs, making available of technical knowledge, experience or know-how to the taxpayer under both the DTAAs;

· The taxpayer did not get any benefit out of the said services in USA or Canada and it was only getting reports in respect of field study on its behalf, which helped it, in getting registration with the regulatory authorities.

DCIT v Dr Reddy’s Laboratories Ltd (ITA No 886 and 887 of 2003)
(Hyderabad ITAT)

Section 14A read with Rule 8D not to be invoked on mechanical basis without considering the claim of taxpayer and giving cogent reasons

The taxpayer, an individual, earned dividend income during the relevant AY which was claimed as exempt under section 10(34) of the Act. Further, the taxpayer claimed that as no expenditure was been incurred to earn the dividend income, no disallowance under section 14A should be made. During the course of the assessment proceedings, the AO rejected the taxpayer’s claim and proceeded to make a disallowance for expenditure incurred on earning the tax free dividend income by applying the provisions of section 14A of the Act read with 8D of the Income tax Rules,1962.

The CIT(A) deleted the disallowance under section 14A of the Act on the ground that the AO had mechanically applied Rule 8D to compute the disallowance. The CIT(A), observed that since the AO has already disallowed the expenses claimed by the taxpayer under the head ‘income from other sources’ no further disallowance was warranted in this case.

On further appeal, the ITAT dismissed the appeal filed by the Revenue Authorities. The ITAT held that the condition precedent for the AO to apply the computation mechanism for determination of the expenditure incurred in relation to exempt income was that the AO must record his satisfaction or otherwise regarding the correctness of the claim of the taxpayer in respect of such expenditure. It observed that this condition was not satisfied in the taxpayer’s case and also the AO failed to bring anything on record to prove incurrence of any expenditure for earning dividend income by the taxpayer. Accordingly, the action of the AO in directly computing disallowance under Rule 8D without cogent reasons by presuming 0.5 percent of investment value deserves to be deleted.

DCIT v Ashish Jhunjhunwala (ITA No 1809 of 2012) (Kolkata ITAT)

Assessment proceedings not in conformity with CBDT instructions are illegal and unsustainable

The taxpayer, an Indian company, was subject to assessment proceedings under section 143(3) of the Act in accordance with clause 2(v)(b) of Scrutiny Guidelines issued by the Central Board of Direct Taxes (“CBDT”) for the relevant AY. The Scrutiny Guidelines provided that a case had to be selected for compulsory assessment if an addition / disallowance of INR 5 lakh or more was pending in appeal before the CIT(A) and such identical issue also originated in the year under consideration. During the course of assessment proceedings, the taxpayer contended that in its own case, the above condition stipulated in the Scrutiny Guidelines was not satisfied, and accordingly, the AO had no jurisdiction to select the case for assessment. Further, the threshold limit of INR 5 lakh was breached only if the addition / disallowance for all the issues pending in appeal for earlier years were aggregated. The AO and CIT(A) rejected the taxpayer’s claim.

On further appeal, the ITAT allowed the appeal of the taxpayer and held as under:

· The instructions issued by the CBDT for selection of cases of corporate taxpayers for assessment were issued under section 119 of the Act and were binding on the Revenue Authorities including the AO. The onus was on the AO to establish that his jurisdiction was in accordance with instructions of CBDT;

· In the facts of the case, since there was no addition / disallowance of INR 5 lakhs or more in the earlier years and as no identical issue had arisen in the present year, the notice issued under section 143(2) of the Act was not in terms of the CBDT’s Scrutiny Guidelines and consequently, the assumption of jurisdiction was illegal and the entire assessment proceedings were treated as invalid.

Crystal Phosphates Limited v ACIT (ITA No 3630 and 4002 of 2009) (Delhi ITAT)

Sub-arrangers fees for mobilizing deposits not taxable as fee for technical services; tax deduction available for the entire loss notwithstanding amortization approach followed for accounting purposes

The taxpayer, a bank was appointed as an arranger by State Bank of India (“SBI”) for mobilizing deposits from non-resident customers under India Millennium Deposits (“IMD”) programme. For this purpose, the taxpayer appointed sub-arrangers for mobilizing deposits in and outside India. The taxpayer received arrangers fee and commission from SBI for its services and it also incurred expenses for payments to
sub-arrangers for their services. The payments to non-resident sub-arrangers were made by the taxpayer without withholding any taxes. The taxpayer claimed the net loss (income from SBI less sub-arrangers fee) as a tax deduction in computing its total income under the Act. However, for the accounting purposes, such loss was amortized over a period of 60 months and a proportionate amount was charged to the Profit and Loss account for the relevant AY.

The AO alleged that the payments made to sub-arrangers by the taxpayer were in the nature of fee for technical services (“FTS”) under the Act and were to be disallowed in the absence of tax withholding thereon by the taxpayer. Further, the AO held that the taxpayer was not eligible to claim deduction under the Act for the entire loss and only the proportionate amount actually amortized in the books of accounts should be allowed [reliance was placed on the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Limited v CIT ( 225 ITR 802)]. On appeal by the taxpayer, the CIT(A) held that sub-arrangers fees paid by the taxpayer was in the nature of brokerage / commission and not FTS. Accordingly, the taxpayer was not obliged to withhold taxes on such fees. However, the CIT(A) upheld the order of the AO regarding the deductibility of un-amortized balance and held that during the relevant AY, the taxpayer was eligible to claim deduction only for the amount actually amortized in the books of accounts.

Both, the taxpayer and the Revenue Authorities filed appeals with the ITAT. The ITAT ruling in favour of the taxpayer held as under:

· The services rendered by sub-arrangers were only a small part of the management of IMD issue and the taxpayer was only one of the several banks soliciting NRI customers to SBI’s IMD. SBI even reserved the right to reject any application forwarded by the taxpayer without assigning any reason and thus, by doing small parts of overall project, the sub-arrangers could not be said to be rendering ‘managerial services’;

· From the nature / scope of services rendered by the sub-arrangers, it was clear that such services did not require any technical knowledge, qualification or experience. The act of convincing the potential customers and helping them in filling requisite forms and sending the amount to the designated branches, cannot by any stretch of imagination be considered as a `technical service’;

· In view of the above, since the sub-arrangers were simply acting as commission agents or brokers, the payment of sub-arranger fees would not qualify as FTS under the Act. Accordingly, the taxpayer was not obliged to withhold taxes on such fees;

· The entire loss was in the nature of expenses incurred for bringing out the debenture issue, legal formalities etc and thus, was revenue in nature. The ITAT allowed deduction for entire loss by relying on the decision of Supreme Court in the case of India Cement Limited v CIT (60 ITR 52) and held that reliance placed by Revenue Authorities on the decision of Madras Industrial Investment Corporation Limited (supra) was misplaced.

Credit Lyonnais v ADIT (ITA No 305 of 2006) (Mumbai ITAT)

Warranty reimbursed to the seller in pursuance of a business acquisition is not deductible as revenue expenditure

The taxpayer, an Indian company, had purchased two business divisions of Hindustan Motors Ltd (“the Seller”). As per the business transfer agreement, the taxpayer reimbursed the warranty claims to the Seller. The payment made by the taxpayer towards warranty claims to the Seller was in excess of the provision for outstanding warranty claims and such differential payment was claimed as revenue expenditure by the taxpayer.

The AO disallowed the claim of the taxpayer on the following basis:

· Business transfer agreement specifically stipulated that ‘warranty shall mean the warranties of the seller” and thus, discharge of warranty claims was the liability of the Seller and not of the taxpayer;

· Even, if it is assumed that the warranties were taken over by the taxpayer, such payment would be in relation to the purchase of business from the Seller and would, thus be capital in nature;

· The Seller had already fulfilled the obligation of warranty and customers were already satisfied and accordingly, there was no business expediency for such payment.

The CIT(A) confirmed the order of the AO. On further appeal before the ITAT, the taxpayer, contended that payment for warranty claims should be allowed to be deducted as the liability for such payment had arisen pursuant to take over of all the assets and liabilities of the Seller. The taxpayer also contended that such payment was essential for business expediency as non-discharge of warranty claims would have impacted its goodwill and consequentially, have an adverse impact on its business.

The ITAT rejected the appeal of the taxpayer and held that warranty was given by the Seller while selling the goods and no commercial expediency existed for subsequent reimbursement of warranty claims by the taxpayer, since the Seller had already fulfilled its obligations under such warranty. Accordingly, the ITAT upheld the order of the AO and CIT(A).

Avtec Ltd v ACIT (ITA No 1606 of 2010) (Delhi ITAT)

Circular / Notifications

CBDT notifies provisions dealing with withholding tax at source on immovable property transactions

The CBDT has notified the rules providing the operational framework for withholding of taxes on immovable property transactions exceeding INR 50 lakh under section 194-IA of the Act. The CBDT has notified that the deductor would be required to deposit the tax along with a challan cum statement in Form No 26QB within 7 days from end of month in which the tax is required to be withheld. The format for Form 26QB has also been notified. The notification stipulates that the certificate of tax withheld should be issued to the payee in Form 16B within 15 days from the due date for furnishing the challan-cum statement in Form No 26QB.

Source: Notification No 39/2013, dated May 31, 2013

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

Cost inflation index for AY 2014-15 notified

The CBDT has notified Cost Inflation Index (“CLI”) applicable for AY 2014-15 as 939. The CLI is to be used while computing long term capital gains on specified assets. The CLI has been increased by 10.2 percent from previous year's CLI of 852.

Source: Notification No 40/ 2013, dated June 6, 2013

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

CBDT notifies amendment to transfer pricing rules and new Form 3CEB

The CBDT has amended Income tax Rules pertaining to transfer pricing provisions to incorporate a specific reference to ‘specified domestic transactions’. The CBDT has also prescribed a new format of Form 3CEB ie the report to be issued by a Chartered Accountant. The revised Form 3CEB envisages reporting of specified domestic transactions under Part C. Further, the revised form seeks additional disclosure requirements for international transactions such as issue and buy-back of equity shares, business structuring and reorganization transactions etc.

Source: Notification No 41/ 2013, dated June 10, 2013

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

CBDT notifies revised forms of filing CTR for AY 2013-14

The CBDT has notified new forms (ie ITR 5, ITR 6 and ITR 7) for filing CTR for AY 2013-14.

Key changes to the CTR forms are in context of additional information and disclosure requirements. Some of the additional reporting requirements prescribed in ITR 6 required to be filed by corporate taxpayers have been illustrated below:

· Money received against share warrants as well as share application money pending allotment for more than 1 year and less than 1 year to be disclosed separately;

· Various items of ‘Long Term Borrowings’ as well as for ‘Short Term Borrowings’, such as deposits or loans and advances from related parties, etc to be disclosed;

· Separate disclosure is required for income chargeable to tax at special rate under section 111A (short term capital gains), section 112 (long term capital gains) etc;

· A bifurcation is required for income chargeable to tax at special rates (viz relief claimed under DTAA etc) and at normal rates.

Source: Notification No 42/2013, dated June 11, 2013

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

India-Monaco enter into agreement for exchange on information for taxes

India has notified the agreement entered into with Monaco for the exchange of information relating to tax matters. The agreement was signed on July 31, 2012 and has now been notified to come into force with effect from March 27, 2013.

Source: Notification No 43/2013, dated June 12, 2013

Link: http://www.taxmann.com/topstories/104010000000040306/india-monaco-tiea-is-effective-from-27-03-2013.aspx

DIPP issues clarification on queries pertaining to Foreign Direct Investment Policy for Multi-Brand Retail Trading

The Department of Industrial Promotion and Planning (“DIPP”), Ministry of Commerce & Industry has issued clarifications on conditions governing Foreign Direct Investment (“FDI”) in Multi-Brand Retail Trading (“MBRT”). The DIPP has inter alia clarified that MBRT operations under the FDI Policy must remain confined to multi-brand retail stores and the foreign investor cannot engage in any wholesale trading or B2B activities or any other form of e-commerce activities. With respect to the condition of mandatory investment in back-end infrastructure, the DIPP has clarified that such investment should only be in the form of a fresh investment in greenfield assets and any acquisition of supply chain / backend assets from an existing entity will not be counted.

Source: F No 5(1)/ 2013 – FC I, dated April 5, 2013

Link: For detailed BMR analysis please click here

DIPP defines ‘Group Company’ under the Consolidated FDI Policy

The DIPP has incorporated the definition of ‘Group company’ in the Consolidated FDI policy vide Press Note 2 of 2013. Group company has now been defined to mean ‘two or more enterprises which directly or indirectly are in a position to exercise 26 percent or more of voting rights in other enterprise or appoint more than 50 percent of members of Board of Directors in the other enterprise’.

Source: Press Note 2 of 2013, dated June 3, 2013

Link: http://dipp.nic.in/English/acts_rules/Press_Notes/pn2_2013.pdf

Time limit for realisation of exports proceeds reduced from 12 months to 9 months with effect from April 1, 2013

The Reserve Bank of India (“RBI”) has issued a Circular to reduce the period for realization and repatriation of the full export value of goods or software to India from a period of 12 months to 9 months. Such period of 9 months will be available from the date of export and will be valid till September 30, 2013.

Source: A P (DIR Series) Circular No 105, dated May 20, 2013

Link: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR105200513.pdf

Time limit specified for units operating in Special Economic Zones to realize and repatriate export proceeds

RBI has issued a Circular making it compulsory for units operating in Special Economic Zones (“SEZ”) to realize and repatriate full value of goods / software / services to India within a period of twelve months from the date of export. Any extension of time beyond the stipulated period may be granted by RBI, on a case to case basis.

Source: A P (DIR Series) Circular No 108, dated June 11, 2013

Link: http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=8027

RBI amends the condition for issue of equity shares under the FDI Policy against pre-operative / pre-incorporation expenses

RBI has amended the condition for issue of equity shares under the FDI Policy under the approval route against pre-operative / pre-incorporation expenses. Earlier, the payments were required to be made by the foreign investor directly to the Indian company and not indirectly through third parties. The revised condition now envisages that the payment can be made by the foreign investor directly or through an Indian bank account opened by such investor in compliance with FEMA Regulations.

Source: A P (DIR Series) Circular No 104, dated May 17, 2013

Link: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/CIRAPDI17052013.pdf

Indirect tax

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

Dispensing of medicines by doctors in the course of medical treatment is not liable to sales tax by applying dominant nature test as well as the transaction nature

The taxpayer was engaged in rendering medical services through its clinics all over India. The services rendered by the taxpayer were in the nature of consultancy, advise, diagnosis and treatment. For rendering the services, the taxpayer had hired doctors / consultants who in course of medical treatment had dispensed homeopathic medicines to the patients. The taxpayer had not obtained registration either under Karnataka Value Added Tax, 2003 (“KVAT Act”) or under Central Sales Tax Act, 1956.

The Revenue Authorities wanted to treat the dispensation of medicines by the taxpayer as ‘sale of goods’ against which the taxpayer argued that the taxpayer did not sell any medicines to the patients. The matter reached before the Karnataka VAT Appellate Tribunal (“CESTAT”) which held that the transaction effected by the taxpayer so far as dispensation of medicine of transaction was concerned was not a transaction of sale of goods and was a pure service contract.

In arriving at the above decision, The CESTAT relied on the principles of law laid in the decision rendered by SC in case of Bharat Sanchar Nigam Limited v UOI (2006 SC 1383) and observed that under the Constitution of India, only three types of contracts can be artificially disintegrated – hire purchase, catering contracts and works contract. Since the taxpayer is not undertaking any of the aforementioned three transactions, the same cannot be artificially bifurcated. Further, by applying the dominant nature test and transaction nature test, it could be said that dispensing of medicine by the taxpayer during the course of providing an integrated package treatment was a transaction of sale of goods.

Dr Batra’s Positive Health Clinic Pvt Ltd Bangalore v State of Karnataka
(2013 TIOL 01 TRI – BANG) (Bangalore CESTAT)

Purchasing dealer is entitled for credit where the tax was actually deposited by selling dealer even if selling dealer’s registration certificate has been cancelled

The taxpayer traded in electronic goods and was a registered dealer under the Delhi Value Added Tax Act, 2004 (“DVAT Act”). The taxpayer purchased goods from dealers registered under DVAT Act who charged VAT on the tax invoices issued for sale of such goods. The Revenue Authorities disallowed the input tax credit claimed on account purchases from two dealers since those dealers did not deposit the tax collected by them.

The matter reached before the Delhi HC in which the taxpayer contended that taxpayer as a purchasing dealer had no control over the functioning of selling dealers. He also contended that in the absence of any statutory responsibility during the relevant period, it could not be held liable for non deposit of tax by the selling dealers. In response, the Revenue Authorities submitted that non- deposit of tax by the purchasing dealers and consequent cancellation of their registration certificate showed that the transaction undertaken by the purchasing dealer were merely a sham and the same was done in collusion with the taxpayer.

The HC held that in the absence of any mechanism which enabled a purchasing dealer to verify the tax deposited by a selling dealer for the period under consideration, the benefit of input tax credit cannot be denied to the taxpayer.

Shanti Kiran India Pvt Ltd v Commissioner Trade & Tax Department
[2013 (196) ECR 0193] (Delhi HC)

In the absence of any specific restriction on use of second hand machinery for setting up the unit, taxpayer entitled for exemption even if second hand machinery used for setting up the unit

The taxpayer was a medium scale industrial unit engaged in the manufacture of paper and paper boards used for writing, printing and such other purposes. The taxpayer took benefit of Notification No 729/93 (“Notification”) issued under the provisions of Kerala General Sales Tax Act, 1963. As per the Notification, new industrial units under medium and large scale industries were provided exemption from sales tax for a period of seven years from the date of commencement of commercial production. However, the aggregate exemption under the Notification could not exceed 100 percent of the ‘Fixed Capital Investment’. ‘Fixed Capital Investment’ was further defined in the Notification as total investment of land, building, plant and machinery, power generating system, delivery vehicles and the like required for industrial purposes.

The taxpayer established an industrial unit in 1999 and claimed the benefit of exemption provided under the Notification. However, the State VAT authorities sought to deny the benefit of exemption in respect of the ‘second hand machinery’ imported by the taxpayer. While denying the benefit to the taxpayer, the VAT authorities also relied on the manual issued by them in respect of the Notification which clarified that all brand new plant and machinery were eligible for exemption under the Notification and second hand capital goods would not qualify for the same.

The Kerala HC upheld the eligibility of exemption to the taxpayer on the basis that there was no restriction under the Notification to deny exemption in respect of ‘second hand machinery’. While rendering its decision, the HC relied on the decision of SC in case of State of Karnataka v Balaji Computers (2006 147 STC 269) wherein, the apex court made an observation that in case there is any doubt that the language employed in a notification admits two views and is ambiguous, the view which is beneficial to assessee had to be taken. The HC also observed that the manual on which the state VAT authorities had relied on was only to create awareness of the concessions available in the Notification and therefore, the same cannot override the exemption provided in the Notification.

Victory Paper & Board (India) Ltd v State of Kerala and Others [2013 (60) VST 64] (Kerala HC)

Central Excise

An application filed before the Settlement Commission after the adjudication order is passed but before it is actually dispatched to the taxpayer cannot be rejected on the grounds of maintainability

A Show Cause Notice (“SCN”) was issued to the taxpayer demanding differential excise duty and reversal of Cenvat credit. On January 10, 2011 the taxpayer addressed a letter to the Commissioner specifically stating that a decision had been taken to file a settlement application under section 32E of the Central Excise Act, 1944 (“CEA”). The letter recorded that the taxpayer would file an application for settlement of the case probably within that week itself and requested the Commissioner to keep the adjudication proceedings in abeyance, until a settlement application was filed. On January 11, 2011 the Superintendent (Adjudication) addressed a letter to the Additional Director General, DGCEI, Mumbai for supply of documents relied upon in the SCN to the taxpayer. The Commissioner, notwithstanding the request of the taxpayer and without waiting for the supply of documents to the taxpayer, passed an adjudication order dated January 13, 2011 which was dispatched to the taxpayer on January 19, 2011. The taxpayer filed a settlement application before the Settlement Commission on January 14, 2011.

By a majority order, two members of the Settlement Commission held that under section 32E, an application to the Settlement Commission has to be filed by the taxpayer after the issuance of a SCN but before passing of an adjudication order. The majority held that the settlement application, which was filed on
January 14, 2011, was not maintainable since the Commissioner had already adjudicated upon the SCN on January 13, 2011. The taxpayer filed the present writ petition against the said order of the Settlement Commission.

After hearing both the sides, the HC held that a purposive interpretation has to be placed on the expression ‘before adjudication’. The adjudication process cannot be regarded as being complete merely upon the signing of an order by the adjudicating authority. If the adjudicating authority were to keep the order in its own drawer without dispatching it to the taxpayer, the latter would have no means of knowing that such an order has been passed. An adjudication order must be placed by the adjudicating authority out of his control by dispatching it to the taxpayer. In the instant case, since the adjudication order was dispatched to the taxpayer (on January 19, 2011) after the settlement application had been filed (on January 14, 2011), it should be deemed that the adjudication was completed on January 19, 2011 only. Accordingly the settlement application could not have been dismissed as being not maintainable on account of treating it as being filed after passing of an adjudication order.

Vishnu Steels v The Union of India & Anr (2013-TIOL-339-HC-MUM-CX)
(Mumbai HC)

Sales tax paid by the principal manufacturer on raw materials consigned directly to the job-worker cannot be added to the assessable value of the finished goods on which duty is discharged by the job worker

The taxpayer manufactured seamless stainless steel tubes / pipes for M/s IVCRL Infrastructures & Projects Ltd (“IVCRL”) on job-work basis. Steel coils were purchased by IVCRL from Steel Authority of India Ltd (“SAIL”) on payment of applicable sales tax but the consignment was directly shipped to the taxpayer’s premises. The taxpayer used the steel coils for carrying out the job-work activity and claimed Cenvat credit of the excise duty paid on such coils. On the final product manufactured, the taxpayer paid excise duty on assessable value consisting of raw materials cost and job work charges.

Revenue Authorities alleged that amount of sales tax paid on purchase of steel coils by IVCRL should be included in the assessable value of the job work goods. The matter reached before the CESTAT on an appeal made by the taxpayer. It was contended by the taxpayer that they were just the consignees of the purchases made by IVRCL and sales tax paid on such purchases could not be considered a part of landed cost of goods in their hands. To support the above view, the taxpayer relied upon the decisions given in the case of Surendra Steel Rolling Millls [2003 (155) ELT 357)] and Prem Khalsa Iron & Steel Rolling Mills [2005 (191) ELT 192)] which were on the same point and cover the issue in taxpayer’s favour.

The Revenue Authorities argued that the sale tax amount which is indicated on the invoice of the SAIL should be considered while computing the landed cost of material in the hand of taxpayer and excise duty should be paid on the value which included sale tax amount.

The CESTAT held that the amount of sales tax could not be included in the landed cost of the inputs / raw materials for the reason that the said cost was not incurred by the taxpayer. The CESTAT held that IVRCL may claim credit of sale tax paid which discharging its sales tax liability. Further the CESTAT also discussed the alternative scenario wherein the goods would have been first received by IVRCL in their premises and then dispatched to the taxpayer’s premises. In that case, IVRCL would have taken credit of the excise duty paid on such goods and would have prepared an invoice enabling the taxpayer to avail credit of such excise duty and the invoice so raised would not indicate the amount of sales tax. Basis the above and the decisions cited by the taxpayer, the CESTAT decided the appeal in favour of the taxpayer.

Ratnamani Metals & Tubes Ltd v CCE [2013 (290) ELT 684 (TRI-AHMD)] (Ahmedabad CESTAT)  

Materials used for making the manufacturing area dust free and fire retardant qualify as ‘inputs’ in terms of Rule 2(f) of the CENVAT Credit Rules, 2001 and thus, the credit of taxes paid on the procurements should be available to the taxpayer

The taxpayer were in the business of manufacture of ‘colour picture tubes’ and they were claiming credit of various materials (viz cement powder, paint etc) which were being used to make the production floor dust free and fire retardant. Credit was disallowed by the Revenue Authorities on the ground that these materials were building materials and they were not required to be used either directly or indirectly in the manufacture of finished goods.

The CESTAT observed that the definition of ‘inputs’ under Rule 2(f) of the CENVAT Credit Rules, 2001 (then applicable) included all goods used for the manufacture of final product or within the factory of production for any other purpose. Basis that definition, the CESTAT held that credit on paints and other material used on the production floor to make it dust free and fire retardant should be available as ‘inputs’ as the same were used for purposes which were essential for assembling the final product.

The Revenue Authorities appealed before the Allahabad HC wherein it was argued by the Revenue Authorities that the impugned materials were not used in the manufacture of final products rather these were used for the production floor. The taxpayer in its defence, placed reliance on an earlier decision of Allahabad HC in its own case only where credit was allowed on the same materials.

The Allahabad HC held that the word ‘input’ was to be examined with the word ‘manufacture’ and the definition of ‘manufacture’ covered not only the materials used in the final product but, included incidental and ancillary materials required for the completion of the final product. In this regard, the Allahabad HC relied on the decision of the SC in the case of Flex Engineering Ltd v CCE [2012 (5) SCC 609], where the SC observed that physical presence of an input in the final finished goods is not a pre-requisite for claiming MODVAT credit under a specific rule; an input may very well be indirectly related to manufacture and still be necessary for the completion of the manufacture of the final product. Basis the above and the decision cited by the taxpayer, the Allahabad HC decided the appeal in favour of the taxpayer and allowed credit of materials which were being used to make the production floor hall dust free and fire retardant.

Commissioner of Customs & Central Excise v Samtel Color Ltd
(2013-TIOL-370-HC-ALL-CX) (Allahabad HC)

Export Oriented Unit clearing goods for export is entitled to claim rebate of excise duty paid on finished goods under Rule 18 of Central Excise Rules, 2002

The taxpayer was a 100 percent Export Oriented Unit, (“EOU”) and was manufacturer for export of bulk drugs and formulations. The taxpayer was exporting the goods on payment of the applicable excise duty and sought rebate of such duty under Rule 18 of the Central Excise Rules, 2002 (“CER”).

The Revenue Authorities rejected the claim of the taxpayer on the ground that the goods so manufactured by the taxpayer were exempted from excise duty, in terms of Notification No 24/2003 CE, dated March 31,2003 (“Notification”). Therefore, the taxpayer was not allowed to pay the duty and claim the rebate of duty so paid. The Revenue Authorities while rejecting the refund claim held that the exemption under Notification is an absolute exemption notification and therefore, the taxpayer was bound to claim such exemption. It was not open to taxpayer to pay the excise duty under and thereafter seek rebate of the same. The Revenue Authorities also contended that the taxpayer has paid the duties of excise, on its own volition and had claimed the same as rebate of duty, in terms of Rule 18 of the CER, in contravention of the provisions of the Act. Further, when any duty was paid without availing the exemption, such payments could not be considered as duties of excise and therefore, no rebate can be availed, as per Rule 18 of the CER.

In response to the Revenue Authorities’ contention that the Notification was an absolute exemption notification, the taxpayer contended that proviso under Notification clearly stipulates that exemption was not applicable for the goods when they were brought to any other place in India. Thus, the notification grants exemption for the goods cleared by an EOU. The taxpayer further, submitted that the exemption notification was to be read as a whole to understand whether the exemption was absolute or not and the Revenue Authorities had ignored the proviso to the notification in reaching its conclusion. As per the proviso, excise duty exemption is not applicable when the goods are cleared for consumption in India. Hence, when excise duty is payable there is no question of the finished goods being exempt from duty.

The taxpayer further argued that it had followed all procedures stipulated under Rule 5 of CENVAT Credit Rules, 2004 (“Credit Rules”) and had cleared the final product for export on payment of duty. As the payment of excise duty on export of goods is legal therefore, the taxpayer was eligible to claim rebate. The taxpayer further contended that there is no bar under Rule 18 of CER that a 100 percent EOU can’t export on payment of export duty. Therefore, the rebate claim filed by taxpayer under Rule 18 was tenable. The taxpayer further, argued that it does not make any local sales and therefore, no excise duty would be payable by the taxpayer. Therefore, the Revenue Authorities were bound to pay the rebate amount to the taxpayer, in cash, since he was not in a position to utilize the credit against it tax liability.

Basis the above facts and arguments, the HC held that the Revenue Authorities were bound to grant the rebate payable to the taxpayer, in cash, subject to certain conditions to safe guard the interests of the Revenue Authorities.

Orchid Health Care v UOI (2013-TIOL-416-HC-MAD-CX) (Madras HC)

'Liril Active Shower Gel' is correctly classifiable under heading 34.01 as ‘Soap' and not under heading 33.04 as Cosmetics

The dispute pertained to classification of the product 'Liril Active Shower Gel' for excise duty purposes. The taxpayer classified this under tariff heading 34.01 (which covers soaps in various forms) whereas, the Revenue Authorities contended that the same should be classified under Heading 33.04 (Beauty or make-up preparations and preparations for the care of the skin other than medicaments, including sunscreen or suntan preparations; manicure or pedicure preparations).

The CESTAT in the case [2003 (151) E.L.T. 387 (TRI - Mumbai)] ruled in favor of the taxpayer on the basis of the undisputed fact that the product was for washing of the skin / bath and noted that the advertising of the taxpayer, that the product makes its users feel fresh can, by no means justify its classification in Heading 33.04. The matter reached the SC which upheld the CESTAT’s decision and held that the product 'Liril Active Shower Gel' should be covered by Heading 34.01 and not by
Heading 33.04.

CCE v Hindustan Lever Ltd (2013-TIOL-27-SC-CX–LB)

For Domestic Tariff Area clearances of a 100 percent EOU, education cess and Secondary & Higher education cess would be chargeable only once under section 93 of the Finance Act, 2004 and section 138 of Finance Act, 2007 on the sum of basic customs duty and additional customs duty

The taxpayer is a 100 percent EOU and in addition to exports out of India, it also made clearances for domestic tariff area (“DTA”) on payment of excise duty. DTA clearance of a 100 percent EOU attracts excise duty in terms of proviso to section 3(1) of CEA. In terms of this proviso, the excise duty leviable would be equal to the aggregate of duties of customs charged on the import of like goods into India including education cesses thereon. The dispute was as to whether education cess and Secondary & Higher education cess (“S&H cess”) is to be levied again in respect of DTA clearances of a 100 percent EOU on the aggregate of the duties of customs which already includes the education cess and S&H cess. The taxpayer contended that once the aggregate of customs duties has been worked out in which the education cess had also been added, the question of arriving at the quantum of excise duty by adding further education cesses once again does not arise. The Revenue Authorities argued that since this excise duty was to be equal to the aggregate of duties of customs including education cess and S&H cess thereon, the taxpayer would be liable to pay education cess and S&H education cess once again on the excise duty calculated as mentioned above (under section 93 of Finance Act, 2004 and section 138 of Finance Act, 2007), since education cesses are a separate levy.

The CESTAT noted that sections 93 and 94 of Finance Act, 2004 and sections 138 and 139 of Finance Act, 2007 while defining the measure of education cess and S&H cess in respect of excisable goods and imported goods respectively, specifically provide that the aggregate of duties of excise or aggregate of duties of customs, on which this cess is to be levied as surcharge, would not include education cess and S&H cess and thus, the intention of the legislature was never to charge education cess on education cess. The CESTAT also noted the settled position of law that there can be no objection for double taxation if the legislature has distinctly enacted it, but while interpreting general words of taxation, the same cannot be so interpreted as to tax the subject twice over to the same tax. On the basis of the foregoing, it was clearly held that the education cess and S&H cess would be chargeable only once on the aggregate of basic custom duty and additional customs duty and not once again on the excise duty so calculated.

Kumar Arch Tech Pvt Ltd v CCE [2013 (290) ELT 372 (TRI – LB)]

Service tax

Denting and painting activities are essential for the transforming bus bodies into a finished product and thus are to be considered as manufacturing activities

The taxpayer was working within the factory of JCBL Ltd (to elaborate) and was undertaking the following activities in relation to manufacture of bus bodies:

(i) Inspection & rectification of buses (including denting & painting work)

(ii) Shifting of bus structure from inner plant (loading and unloading)

(iii) Material & scrap shifting and supply to lines & miscellaneous work

The Revenue Authorities contended that all the above activities amounted to production or processing of goods for, or on behalf of, the client and were accordingly, liable to service tax under the category of Business Auxiliary Service (“BAS”). The matter reached before the CESTAT.

The taxpayer, submitted that the activities performed by them are incidental and ancillary to manufacture and hence, covered by the definition of manufacture under section 2 (f) of Central Excise Act, 1944. Reliance was also placed on Note 6 of section XVII of the Central Excise Tariff and it was contended that the activity of denting and painting are essential for transforming the semi-finished bus body into a complete and finished article and hence, they amounted to manufacture.

The CESTAT held that the processes of denting and painting carried out on the bus bodies before they are cleared out of the factory are essential for both completion of ‘manufacture’ and for transforming the semi-finished article into a complete and finished article. Hence, the above processes would amount to manufacture. As regards the activity of shifting of goods, it would not fall under BAS as the words production and processing would cover only the activities which bring some change in goods. Further, the activity of shifting of goods would not get covered under the category of cargo handling services since these goods could not be regarded as cargo in common parlance. Accordingly, the taxpayer’s position was upheld.

Sharwan Kumar v CCE Chandigarh-I [2013 (30) STR 176 TRI-DEL] (Delhi CESTAT)

Cenvat credit is available on input services used in manufacturing exempt products which were further used to process final dutiable products

The taxpayer (“ONGC”) was engaged in the business of supplying crude oil to its purchasers from its process platforms in Mumbai along with transferring the
semi-stabilized crude oil to ‘Uran process platforms’ where it undergoes the process of stabilization. The process of stabilization yields both crude oil (exempt) and various downstream products like including Naphtha, Ethane-Propane, LPG and residual gas (taxable). Input Services were availed at both the Uran plant and at the administrative offices at Mumbai. The Revenue Authorities denied Cenvat credit on the basis that the input services were used exclusively at the Mumbai Offshore for manufacture of crude oil which was an exempt product. The matter finally reached the Bombay HC.

HC relied on the decisions in the case of Commissioner of Central Excise Delhi [2004 (171) ELT 145 SC] and Collector of Central Excise v Solaris Chemtech Limited 2007 [(214) ELT 481 SC] wherein, it was held that the crude oil being an intermediate product was necessary for the manufacture of the final product and as long as the final product was dutiable the taxpayer would be entitled to credit in respect of input services used in or in relation to the manufacture of final product. The fact that the intermediate product used in the manufacture of the final product is exempted would not make a difference for the entitlement of the credit. However, the taxpayer would be required to comply with the provisions of Rule 6 of CCR and accordingly would be entitled to credit only on the quantity of input services used in the manufacture of ultimate dutiable final product. For the above reasons, the HC held that the order passed by the CESTAT was not correct.

Oil & Natural Gas Corporation Ltd v CCE, CST & CC [2013 (196) ECR 0331] (Bombay HC)

Rendering of services for transportation of personnel by a helicopter and keeping the helicopter ready for the same in lieu of minimum fixed charges and hourly charges basis the actual flying hours is not an activity covered under the service of ‘supply of tangible goods service’

The taxpayer obtained a permit from the Director General of Civil Aviation permitting it to provide non-scheduled air transport services’. Agreements were entered into with the State Government for providing service of transportation of their personnel. For this purpose, the taxpayer had to provide manpower for flying helicopters and bear the expenses in relation to the maintenance of these helicopters. The taxpayer had to keep the helicopters ready at a particular place to provide an instant service to the personnel as and when required. The taxpayer charged certain minimum fixed charges (basis minimum fixed flying hours) as well as hourly charges basis the actual operation of the helicopters. The taxpayer was not discharging any service tax on such monthly charges recovered by them.

The Revenue Authorities wanted to levy service tax under the taxable category of “supply of tangible goods”. The matter reached the CESTAT, which held that the services of transportation of the personnel cannot be taxable under the category of ‘supply of tangible goods service’ merely because fixed monthly consideration is charged or because the taxpayer’s have to provide ready helicopters as and when required. Though the agreements read as ‘Charter Agreements’, the terms of the same were for providing transportation of the personnel only. So the services qualified as those of ‘transportation of passengers’ which was not a taxable service during the disputed period.

Mesco Airlines Ltd v CCE New Delhi (2013-TIOL-653-CESTAT-DEL)
(Delhi CESTAT)

No restriction for an input service distributor on distribution of credits for the services received prior to its registration as an input service distributor. The only condition required to be fulfilled for claiming such credits is making payment of service tax before availing such credits

The taxpayer registered itself as an input service distributor on October 4, 2008 and distributed the Cenvat credits to its other manufacturing units. Such credits distributed also included those credits which were availed prior to the registration as an ‘input service distributor’.

The Revenue Authorities denied the distribution of Cenvat credit to its other manufacturing units for the services received prior to the registration as an ‘input service distributor’. The matter reached before the CESTAT where, it was contended by the taxpayer that it was registered under the provisions of the Service Tax Rules, 1994 and there is no restriction in respect of the credit distributed with respect to the date on which the tax liability has been discharged.

The CESTAT held that the there is no restriction under the CCR with regard to the period for availing Cenvat credit of service tax paid. The only condition required to be satisfied for distributing credits for the period is that the payment of service tax should be made prior to the registration. Restriction on an ‘input service distributor’ to distribute credits on or after registration is unwarranted and is not provided for, in the law.

Dagger Forst Tools Ltd v CCE, Mumbai-I [2013 (30) STR 206 TRI - MUM]
(Mumbai CESTAT)

Demand in respect of admissibility of credit should be raised on the ISD and not on the units. Credits are admissible after the place of removal of the goods

The head office of the taxpayer was registered as an input service distributor (“ISD”) and distributed Cenvat credit to its units. In the due course of its business, the taxpayer had availed the Cenvat credit of service tax paid on various input services on the basis of invoices issued by their head office which was registered as ISD.

The Revenue Authorities were of the view that the credit has been received elsewhere and not by the taxpayer. The Revenue Authorities also contended that the credit taken in respect of various services have no nexus with the manufacture and certain portion of the credit which has been availed is for the services received beyond the place of removal.

The matter reached before the CESTAT where the taxpayer contended that the demand in respect of admissibility of credit should be raised on the ISD and not on the units as the credit has been availed by the taxpayer based on invoices issued by ISD and not on the basis of the invoices of the service providers. Further, in terms of
Rule 7 of the CCR, denial of the Cenvat credit distributed by the ISD is not justified when the credit distributed against the documents referred to in Rule 9 of CCR does not exceed the amount of service tax paid thereof and credit on services relatable to exempted goods / services has not been distributed.

The CESTAT agreed with the contentions of the taxpayer on the point that denial of the Cenvat credit distributed by the ISD was not justified. On the issue of disallowance of credit on various services on the ground that there is no nexus with the manufacture and the credit is admissible only up to the place of removal, it was held that credit of service tax on various services for such as advertising agency services, business auxiliary services, etc was admissible.

Castrol India Ltd v CCE Vapi [2013 (30) STR 214 TRI - AHMD]
(Ahmadabad CESTAT)

Outward transportation service used for delivering goods at the door step of the customer is an eligible input service where the place of removal is ‘premises of the buyer’ ie ownership remains with the seller till it reaches the ‘premises of the buyer’

The taxpayer was registered under the category of "goods transport agency" for the purpose of service tax. The taxpayer pays service tax on the outward freight charges and takes the Cenvat credit under the CCR as the ownership of goods was that of the taxpayer till the goods reached the premises of the buyer.

The Revenue Authorities were of the view that the taxpayer is not entitled to claim Cenvat credit on the service tax paid towards outward transportation of goods cleared from the factory (place of removal). The matter reached before the Punjab and Haryana HC.

The HC relied on its own decision in the case of Ambuja Cements Ltd v Union of India 2011 [(40) VST 64 P&H] and Circular issued by the Central Board of Excise and Customs (“CBEC”) on August 23, 2007 wherein, it was held that in terms of Rule 2(l) of the CCR, outward transportation up to the place of removal falls within the expression “input service”. If a manufacturer is to deliver the goods to the purchaser at its premises, the place of removal would not be the factory gate of the manufacturer but that of the purchaser. Therefore, if the ownership of the goods and the property in the goods has been transferred to the purchaser at his doorstep, the outward transportation of goods cleared from the factory would be an input service within the meaning of Rule 2(l) of the CCR.

CCE v Haryana Sheet Glass Ltd [2013 (59) VST 456] (Punjab and Haryana HC)

Circulars / Notifications

Service Tax

Voluntary Compliance Encouragement Scheme Rules Notified

The Service Tax Voluntary Compliance Encouragement Scheme (“VCES”) introduced in Budget 2013 has come into effect upon enactment of the Finance Bill, 2013 on May 10, 2013. The Government has, vide Notification issued the Service Tax Voluntary Compliance Encouragement Rules, 2013 given effect to this Scheme.

Source: Notification No 10/2013-ST dated May 13, 2013

BMR Update: http://www.bmradvisors.com/upload/documents/Vol8issue%205%2041369049183.pdf

Circular on VCES

The Government has, vide a detailed circular clarified a few issues pertaining to the Service Tax Voluntary Compliance Encouragement scheme.

Source: Circular No 169/4/2013 - ST dated May 13, 2013

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

Customs

The CBEC has issued a circular clarifying the classification of tablet computers under HSN 8471 30.

Source: Circular No 20/2013-Customs dated May 14, 2013

Link: Circular at http://www.cbec.gov.in/customs/cs-circulars/cs-circ13/Circular-20-2013.pdf and BMR update thereon at http://www.bmradvisors.com/upload/documents/Vol8%20issue%205%203%20Buzz1369049481.pdf

Ministry of Finance issues clarification on Oil and Gas industry

Clarification by Ministry of Finance in relation to challenges faced by Oil and Gas Industry in availing exemptions granted to goods imported for petroleum exploration operations.

Source: Circular No 21/ 2013 – Customs dated May 16, 2013

Link: Circular at http://www.cbec.gov.in/customs/cs-circulars/cs-circ13/Circular-21-2013.pdf and BMR update thereon at http://www.bmradvisors.com/upload/documents/Vol8%20issue%205%205%20(2)1369050957.pdf