Direct Tax update - July 2013

Direct Tax

High Court

Activities of a Liaison Office confined to purchase of goods for export, not taxable under the Income tax Act, 1961

The taxpayer was engaged in the business of sale of sports goods (including apparels) and had its main office in US. From its US office, the taxpayer arranged sports goods for its subsidiaries all over the world for onwards sale to customers. The goods were manufactured on a job to job basis and the same were dispatched directly by the manufacturers. The taxpayer had set up a Liaison Office (“LO”) in India for procurement of apparels from India. While obtaining the permission for setting up the LO in India, the taxpayer stated that the LO will not undertake any activity of trading, commercial or industrial nature and will not enter into any business contracts in its own name without prior approval of the Reserve Bank of India (“RBI”). Further, amongst other things, the taxpayer also committed that all expenditure of LO will be borne by the taxpayer and the LO will not lend or borrow any money in / from India. For the relevant assessment year (“AY”), the taxpayer did not file a return of income (“ROI”) in India. A survey was conducted under section 133A of the Income tax Act, 1961 (“Act”) in the premises of the LO and the assessment proceedings were initiated wherein a nil ROI was filed.

The Assessing Officer (“AO”), while passing the assessment order, concluded that the activities of the taxpayer were beyond the permissible activities of a LO and held that a part of the business was done in India. Accordingly, the AO attributed 5 percent of the export value as income from the Indian operations and taxed the same in the hands of the taxpayer. The Commissioner of Income-tax (Appeals) [“CIT(A)”] confirmed the order of the AO.

Aggrieved, the taxpayer filed an appeal before the Income Tax Appellant Tribunal (“ITAT”). The ITAT allowed the appeal of the taxpayer and held that:

· In the absence of any contract between the taxpayer and the local manufacturer, the LO was only recognized as buyer's agent;

· The taxpayer was entitled to exemption under explanation (b) of section 9(1)(i) of the Act providing that no income shall be deemed to accrue or arise in India for a non-resident, through or from operations confined to the purchase of goods in India for the purpose of export. Thus, no part of its income was taxable in India.

Aggrieved by the order of the ITAT, the Revenue Authorities filed an appeal before the High Court (“HC”). The HC ruled in favour of the taxpayer and inter alia observed as follows:

· The taxpayer was not carrying any business in India;

· The LO identified manufacturers, gave them technical know-how and ensured that goods were manufactured as per the specifications. It did not have any right in the consideration paid to the manufacturer;

· The activity of the taxpayer was confined to assisting the manufacturer in the manufacture of goods according to the specifications to ensure that the goods have an international market and therefore, could be exported. Even, if it was held that the goods supplied to the taxpayer’s affiliates were deemed to be supplied to the taxpayer, the whole purpose of such activities in India was to purchase goods in India for the purpose of export. Accordingly, in such a case, no income would accrue or arise to the taxpayer in India as per the explanation (b) of the section 9(1)(i) of the Act.

CIT v Nike Inc (ITA Nos 976,978,979 & 982 of 2008 and 341 to 344 of 2009) (Karnataka HC)

Deduction under section 80-IA of the Act allowed even when audit report not furnished before the Revenue Authorities

The taxpayer, a company, during the relevant AY, claimed deduction under
section 80-IA of the Act. As per the provisions of section 80-IA of the Act, the deduction was allowed subject to the taxpayer getting its accounts audited by an eligible accountant and furnishing a report of such accountant with the Revenue Authorities. The taxpayer for the relevant AY, got his accounts audited from an eligible accountant, however, he failed to furnish the report along with the ROI. During the course of the assessment proceedings, the AO held that the deduction under section 80-IA cannot be allowed unless the audit report has been furnished along with the ROI.

On appeal, the CIT(A) relying on the decision of Gujarat Oil & Allied Industries v ITO (1982) (2 ITD 454) (Ahmedabad ITAT) allowed the claim of the taxpayer. The CIT(A) held that non-furnishing of the audit report along with the ROI shall not disentitle the taxpayer to claim deduction under section 80-IA of the Act, especially where the taxpayer’s accounts have been duly audited. On further appeal, the ITAT accepted the decision of the CIT(A).

On further appeal, the HC upheld the decision of the ITAT and held that the emphasis under section 80-IA of the Act was not on furnishing of the report but on getting the accounts of the taxpayer audited. Thus, the HC allowed the deduction claimed by the taxpayer.

CIT v Shri Sanjay Kumar Bansal (ITA No 21 of 2008) (Uttarakhand HC)

Madras HC reignites the debate on taxability of fees for technical services in the absence of specific clause in the tax treaty

The taxpayer, a company resident of Thailand, was in receipt of technical know-how fee for a period of 5 years from an Indian company. The taxpayer was of the view that the technical know-how fee was not taxable as royalty under Article 12 of the
India-Thailand tax treaty.

During the course of assessment proceedings, the AO held that the technical fee for transfer of technical know-how could not be treated as royalty, since the fee was for sharing of knowledge which was not covered by the definition of royalty. Further, the payment could not be taxed as business profits as there was no direct nexus between the income and the business activities of the taxpayer. The AO, however, taxed the fee received by the taxpayer under the residuary Article 22 of the India-Thailand tax treaty. On appeal, the CIT(A) held that part payment should be taxed as royalty under Article 12 of the tax treaty and part payment should be taxed as fees for technical services (“FTS”). Since there is no separate FTS clause in India-Thailand tax treaty, the same would be taxable under Article 7 of the tax treaty subject to the taxpayer having a Permanent Establishment (“PE”) in India.

On appeal, the ITAT upheld the order of the CIT(A). However, the ITAT held that the portion of FTS arising in India would be taxed under the provisions of the Act and by referring to section 9(1)(vii) of the Act, the ITAT held that FTS arising in India has to be taxed de hors any business connection.

On further appeal, the HC observed that considering the agreement, the entire payment would not be classified as royalty under the tax treaty. The HC further observed that in the absence of a PE of the taxpayer, FTS cannot be subject to tax under Article 7 of the India-Thailand tax treaty. Furthermore, such FTS payments would not be taxable under Article 22 of the India-Thailand tax treaty, since such payment does not fall under miscellaneous income.

Bangkok Glass Industry Co Ltd v ACIT (2013) (34 taxmann.com 77) (Madras HC)

ITAT

Foreseeable losses accounted for incomplete construction contracts as per Accounting Standard 7 allowable as business expenditure

The taxpayer, a construction company, was engaged in the business of building up of roads, bridges, tunnels, ports etc. For the relevant AY, the taxpayer filed its ROI and claimed foreseeable losses on incomplete construction contracts in accordance with the Accounting Standard (“AS”) 7 issued by the Institute of Chartered Accountants of India (“ICAI”).

During the course of the assessment proceedings, the AO rejected the books of accounts of the taxpayer pointing out various discrepancies and estimated the business income of the taxpayer at 5 percent of the total turnover. On appeal, the CIT(A) held that the AO was not justified in rejecting the books of accounts of the taxpayer. The CIT(A) had also obtained a remand report from the AO. The AO submitted that the foreseeable losses claimed by the taxpayer should not be allowed as it was only based on estimate and were contingent in nature. The CIT(A) rejected the contention of the taxpayer that AS 7 which applied to construction projects, mandatorily required the taxpayer to estimate probable outcome of the project. The CIT(A) ruled against the taxpayer and held that the framework under section 37(1) of the Act does not allow the claim of future losses on incomplete contracts and the AS cannot override the statutory provisions of the Act.

On appeal, the ITAT observed that the books of accounts were audited and the auditors had not given any adverse comments in the report and thus, it upheld the decision of the CIT(A) to the extent of disapproving the action of AO to reject the books of the taxpayer. In relation to the deduction of foreseeable losses claimed by the taxpayer, the ITAT observed that the taxpayer was required to make provisions for foreseeable losses as per AS 7 issued by the ICAI. The ITAT, relying on the decision in the case of Mazagaon Dock Limited v JCIT (2009) (29 SOT 356) (Mumbai ITAT) and Dredging International v ADI (2011) (48 SOT 430) (Mumbai ITAT) held that such losses were calculated on a technical basis and thus, were allowable as deduction to the taxpayer under section 37(1) of the Act.

M/s ITD Cementation India Limited v ACIT (ITA No 2991 of 2011) (Mumbai ITAT)

Payments made for sponsorship rights does not qualify as ‘for the use of any trade mark or brand name’ and therefore, the same cannot be taxed as royalty

The taxpayer, a company engaged in the business of manufacturing and selling of
two-wheelers, was appointed as a global partner of cricketing events organized by International Cricket Council (“ICC”). The taxpayer was granted certain sponsorship rights such as right to advertise on billboards at the venue, advertising space in official brochure / website etc in lieu of agreed consideration. The AO, while passing the draft assessment order, treated the payments made for above rights as royalty under the provisions of the Act and India-Singapore tax treaty. The AO held that since the taxpayer had not withheld taxes, the expenditure should be disallowed under section 40(a)(i) of the Act. Aggrieved by the same, the taxpayer filed objections before the Dispute Resolution Panel (“DRP”). The DRP, in its directions, confirmed the action of the AO and observed that since the payments made by the taxpayer were on account of use of ICC marks, event marks, and official status marks, the same would constitute royalty.

The taxpayer filed an appeal before the ITAT against the assessment order. The ITAT, placing reliance on the decision of the DIT v Sheraton International Inc (2009)
(313 ITR 267) (Delhi HC) and DIT v Sahara India Financial Corporation (2010)
(189 Taxman 102) (Delhi HC), held that the payment was made for advertisement and publicity of the brand name of the taxpayer and for promotion of its products during the cricketing events of ICC. If, the proprietary trade mark or logo of ICC was put alongside the taxpayer’s logo, it was only incidental to the main object of the agreement ie advertising.

Therefore, the ITAT held that the payments made by the taxpayer under the agreement were not for the use of any trade mark or brand name and hence, would not be taxable as royalty under the provisions of the Act or the tax treaty. Consequently, the said payments were not subject to tax withholding under the provisions of the Act. Hence, no disallowance could be made under the provisions of section 40(a)(i) of the Act for non-withholding of taxes.

M/s Hero MotoCorp Limited v ACIT (ITA No 5130 of 2010) (Delhi ITAT)

Penalty leviable for non-filing of tax audit report by the due date in case of belated ROI

The taxpayer, for the relevant AY, filed a belated ROI. Further, the taxpayer also failed to submit the tax audit report before the specified due date for filing the ROI. Accordingly, the AO issued a show cause notice for levy of penalty for failure to furnish tax audit report within the specified time under section 271B of the Act.

In response, the taxpayer submitted that as per the clarifications issued by the Central Board of Direct Taxes (“CBDT”) vide Circular No 6 dated July 18, 2008, the taxpayer was not required to attach a tax audit report, etc with the ROI and thus, no such report was furnished. The AO rejected the taxpayer’s contention and held that such clarifications were not applicable where the ROI was filed after the due date. Accordingly, the AO confirmed the levy of penalty on the taxpayer. Aggrieved, the taxpayer filed an appeal with the CIT(A).

The CIT(A) affirmed the decision of the AO. On further appeal, the ITAT confirmed the levy of penalty on the following basis:

· The ITAT held that even if ROI was filed late, the taxpayer was required to furnish the tax audit report with the AO before the due date of filing the ROI. The ITAT observed that section 44AB requires the assessee to get accounts audited and furnish the same by the specified due date for filing the ROI. Thus, the furnishing of audit report was an independent requirement;

· Further, it observed that only on e-filing the ROI before due date, it could be contended that since no documents are required to be attached with the return, tax audit report should be deemed to have been furnished. This plea would not hold good when the ROI had not been filed within the due date, especially when there is no reasonable cause for non-filing of the audit report.

Himalayan Labour & Construction Coop Society limited v DCIT Mandi (HP) (ITA No 1215 & 1216 of 2011) (Chandigarh ITAT)

Indian branch office cannot be considered as an Agency PE of overseas group companies unless such office qualifies as a ‘dependent agent’ as per the Article 5 of India-US tax treaty

The taxpayer, was the branch office of Varian India Private Limited (”VIPL”), a US company in India. VIPL was, in turn, the wholly owned subsidiary of another US company. The taxpayer was primarily engaged in the distribution of products manufactured by Varian Group of companies ("VGCs") all over the world. VGCs had five overseas entities in USA, Australia, Italy, Switzerland and Netherlands. These products mainly related to analytical instruments, laboratory equipments and other scientific instruments and electronic items. The taxpayer entered into a distribution and representation agreement (“DR agreement”) with all five VGCs for supply and sale of analytical lab instruments manufactured by them to Indian customers directly.

The sale of VGCs products was undertaken by the taxpayer under two models ie direct sale and indent sale. Under the direct sale model, the taxpayer directly imported products from VGCs and sold them to Indian customers on a principal to principal basis, while under the indent sales model, the taxpayer only carried liaisoning and other incidental post-sale support activities in lieu of commission income. The commission income and the income from direct sales were offered to tax in India by the taxpayer.

As per the terms of DR agreement, amongst other things, the role of the taxpayer was that of an independent contractor and its activities were not binding on VGCs. Further, the taxpayer had no authority to negotiate or conclude contracts on behalf of the VGCs, no risk was assumed by the taxpayer and the transactions between the taxpayer and the VGCs were to be at arm’s length price (“ALP”).

During the assessment proceedings, the AO observed that taxpayer was providing services to VGCs which were more than a commission agent and it was not getting any remuneration for after sales and maintenance services’ and ‘sales representation services’. Thus, the AO concluded that the taxpayer was dependent agent of three companies, viz, Varian USA, Varian Australia and Varian Italy. By applying the 'Force of Attraction Rule’, the AO attributed the profits of the three companies, from the similar operations as carried on by the taxpayer in India, to the branch office and held such income to be taxable in India.

On appeal, the CIT(A) upheld the decision of the AO. On further appeal, the ITAT ruled in favour of the taxpayer by holding that it does not constitute an Agency PE of the three companies on account of the following:

· Under Article 5(4) of India-US tax treaty, an agent is deemed to be PE only, if the following conditions are fulfilled viz; he is not independent and habitually exercises an authority to conclude contracts on behalf of its principal or if he has no such authority, but habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of its principal or he habitually secure orders solely or almost wholly for its principal.

· In the instant case, it is to be noted:

- The taxpayer was engaged in providing marketing support and liaisoning activity for pre-sale and incidental and ancillary post-sale activities;

- Further, the taxpayer did not maintain any stock of analytical instruments supplied by the VGCs to the customers in India and it mainly facilitated the process of sale;

- Only the orders relating to indent sale were introduced and liaised by the taxpayer and not secured by it;

- From the plain reading of DR agreements and the material placed on record, it is observed that none of the risks, like market risk, product liability risk, Research &Development risk, credit risk, price risk, inventory risk or foreign currency risk were undertaken by the taxpayer and all these risk factors were borne by VGCs.

Therefore, from the above facts, it was clear that none of the conditions for constituting Agency PE under Article 5(4) of India-US tax treaty were satisfied.

· Further, under Article 5(5) of the India-US tax treaty, an agent is a PE only when the activities of such an agent are devoted wholly or almost wholly on behalf of its principal and the transactions between the agent and principal are not made under the arm's length conditions. The ITAT relied on the findings of the Transfer Pricing Officer (“TPO”) for holding that the taxpayer’s transactions have been at ALP and observed that both these conditions were not complied with in the instant case. Thus, it held that the taxpayer cannot be treated as an Agency PE for the various VGCs under Article 5(5) of the India-US tax treaty.

· Even under the India-Australia tax treaty and India-Italy tax treaty, similar provisions as explained above are there except for clause (d) which provided that if a dependent agent manufactures or processes enterprise's goods or merchandise belonging to enterprise in that State, then such an agent would be deemed as a PE. In the instant case, admittedly, the taxpayer does not manufacture or process any other products developed or manufactured by VGCs. Thus, this clause of Article 5(4) in the above tax treaty would also not apply.

Accordingly, it held that in order to treat any agent as PE it is imperative that such agent should fit into the description of 'Dependent Agent' and has to perform either of the activities as mentioned in Article 5 of relevant tax treaty.

· In relation to the applicability of the ‘Force of Attraction Rule’, the ITAT observed that the same could be applied only if it is established that the foreign enterprise has a PE in India. In the instant case, the taxpayer did not constitute a PE of various VGCs and, therefore, the 'Force of Attraction Rule', would not apply. Accordingly, even the addition made by the AO of 10 percent profit margin on the basis of global accounts of VGCs, should be deleted.

Varian India Private Limited v ADIT (International taxation) (ITA No 4672 to 4676 of 2011) (Mumbai ITAT)

Income from commercial and non-commercial services rendered by an Indian PE to be accounted separately for computing the profits attributable to such PE

The taxpayer, a US company, was engaged in the business of medical transcription and software development related to healthcare. The taxpayer had established a branch office (“BO”) in India to hire skilled software professionals and undertake software product enhancements, customer care and medical transcription services. For such services, the BO received payments from its head office (“HO”). Such payments were not offered to tax in India in view of Article 7(3) of the India-US tax treaty, which provides that in determining the profits of a PE, the amounts charged for specific services, being non-commercial in nature, performed for the HO would be excluded. These included amounts charged by PE to HO or other offices, for use of patent, know-how or other rights and also for commission and other charges for specific services performed or for management etc. The taxpayer also argued that profit cannot be allocated to the BO as the HO had suffered losses during the year under consideration.

The AO, while passing the assessment order, rejected the claim of the taxpayer and estimated the income attributable to the Indian PE at cost plus 15 percent mark-up. On first appeal, the CIT(A) confirmed the order of the AO and held that the services, being commercial in nature, would not fall within the purview of ‘specific services’ as per the Article 7(3) of the India-US tax treaty. However, the CIT(A), reduced the estimation of income attributable to the Indian PE at cost plus 10 percent mark-up.

Aggrieved, the taxpayer and Revenue Authorities filed an appeal before the ITAT. The ITAT rejected the appeal of the taxpayer and observed that:

· Article 7(3) of the India-US tax treaty has two parts. The first part relates to the activities carried out by the BO, which are commercial in nature, whereas the second part relates to the activities which are not commercial in nature and relates to specific services performed by the BO for its HO;

· In the instant case, it is evident that the services performed by the BO were on account of outsourcing of commercial activities by its HO. Hence, income from such services, being commercial in nature, would be taxable in India.

Accordingly, the appeal of the taxpayer was rejected and the profits attributed by the CIT(A) was upheld.

Wellinx Inc v ADIT (ITA No 1651 of 2011) (Hyderabad ITAT)

Ahmedabad ITAT reiterates that the transfer of technology is a condition precedent to satisfy the make available condition; General training services held not taxable as FTS

The taxpayer, an Indian company, made payments to UK based service providers for providing market awareness and in-house training / development training to its employees in India. While remitting the payment, the taxpayer did not withhold taxes by holding that the services does not satisfy the make available condition and hence, were not taxable as FTS under the India-UK tax treaty. The AO, however, rejected the taxpayer’s contention on the ground that the scope of make available condition would include cases where technical services were offered or made accessible to a service recipient and were not merely confined to cases where the recipient was ‘trained or made expert in such technical knowledge etc’. On first appeal, the CIT(A) ruled in favour of the taxpayer.

On further appeal at the instance of the Revenue Authorities, the ITAT ruled in favour of the taxpayer and observed that:

· Unless there is a transfer of technology involved in technical services extended by the UK service providers, the make available condition would not be satisfied. The ITAT held that make available condition under the tax treaty require that the services should enable the person acquiring the services to apply technology contained therein;

· The fees paid to the UK service providers was for training services that were general in nature and did not involve any transfer of technology and, hence, would not satisfy the make available condition.

Accordingly, it held that the consideration for general training services would not be taxable as FTS in India under the India-UK tax treaty.

ITO v Veeda Clinical Research Pvt Ltd (ITA No 1406 of 2009) (Ahmedabad ITAT)

Investment made in companies outside India not to qualify as an international transaction and thus, not subject to transfer pricing provisions

The taxpayer, an Indian company, was engaged in the business of power generation and distribution. The assessment proceedings were completed by the AO for the relevant AY after making certain additions to the returned income of the taxpayer. Subsequently, the Commissioner of Income-tax (“CIT”) observed that during the year under consideration, the taxpayer had invested in companies situated outside India and such transactions were subject to transfer pricing (“TP”) provisions in India. Since, the AO had completed the assessment proceedings without examining / referring these transactions to the TPO, the CIT proposed to initiate revisionary proceedings (under the provisions of section 263 of the Act) holding the assessment order to be erroneous and prejudicial to the interest of the Revenue Authorities.

Before the CIT, the taxpayer contended that the aforesaid transaction did not qualify as an ‘international transaction’ and thus, it was not subject to TP provisions in India. The CIT, however, rejected the contentions of the taxpayer and directed the AO to make assessment afresh by referring such transactions to the TPO for determination of the ALP.

On further appeal before the ITAT, the taxpayer, inter alia, contended that:

· The transaction in question was merely a capital transaction and did not qualify as an ‘international transaction’ to attract the TP provisions in India. Accordingly, there was no requirement of filing any report in Form No 3CEB. Reliance for this purpose was placed on the ruling of the Authority for Advance Ruling (“AAR”) in the case of Amiantit International Holding Limited (2010) (322 ITR 678) (AAR);

· The TP provisions apply to a transaction only in the nature of purchase or sale of any property, lending or borrowing of money or any other transaction mentioned in section 92B of the Act. Further, the taxpayer relied on the Circular No 14 issued by the CBDT dated November 22, 2011 to contend that the TP provisions are applicable only when the income is chargeable to tax under the Act and not on capital investment.

The ITAT, ruled in favour of the taxpayer, by holding that the investment in share capital of a company outside India would not be an international transaction and thus, TP provisions would not apply.

M/s Vijai Electricals Limited v ACIT (ITA No 842 of 2012) (Hyderabad ITAT)

Appeal before the ITAT can be filed only where the taxpayer is aggrieved by the order of the lower authorities

The taxpayer, a Netherlands company, had set up a partnership firm with a UK company for conducting the business in operations of ships in international traffic. The UK partnership firm was a fiscally transparent entity in UK. For the relevant AY, the taxpayer filed its ROI in India declaring nil income on the premise that the income of the taxpayer from operation of ships in international traffic was not taxable in India as per the Article 8 of the India-Netherlands tax treaty.

During the course of the assessment proceedings, the AO observed that the business of operations of ships in international traffic was carried on by the UK partnership firm and accordingly, the income should be taxed in the hands of the UK partnership firm and not the taxpayer. The AO further held that as per the India-UK tax treaty, the benefit could be extended to a person resident in UK and since the firm being, a fiscally transparent entity in UK, did not qualify as a resident in UK, it was not entitled to the benefits of the India-UK tax treaty. Accordingly, the AO denied the benefit claimed under the tax treaty, holding that the partnership firm was not covered by the provisions of Article 9(5) of the India-UK tax treaty and Article 8A of the India-Netherlands tax treaty. Thus, the income from the operations in India of the UK partnership firm was held to be taxable in India.

On appeal, the CIT(A) upheld the decision of the AO. The CIT(A), however, held that since the income would be taxable in the hands of the partnership firm, the taxpayer’s share of profit from the partnership firm would be exempt from tax in India as per the provisions of the Act.

Aggrieved, the taxpayer filed an appeal before the ITAT. The ITAT before going into the merits of the case, examined whether the taxpayer was eligible to file an appeal before the ITAT as CIT(A) had granted full relief to the taxpayer resulting in nil tax liability for the taxpayer. In this regard, the Revenue Authorities contended that since the taxpayer was not aggrieved by the order of the CIT(A), it cannot file an appeal before the ITAT. The ITAT accepted the contention of the Revenue Authorities and held that the appeal of the taxpayer against the order of CIT(A) was not maintainable.

Thus, the ITAT dismissed the appeal of the taxpayer and held that since the taxpayer was not aggrieved by the order of the CIT(A), it cannot file an appeal before the ITAT.

Nedlloyd B V v DDIT (International taxation) (ITA No 2843 of 2007) (Mumbai ITAT)

Cuttack ITAT held against the decision of the coordinate bench; Assessment cannot be held invalid for delay in service of the assessment order

The AO completed the assessment proceedings for the relevant AY after making certain additions to the income of the taxpayer. The order was framed within the due date prescribed under the Act, but there was a delay in the service of the assessment order on the taxpayer. Aggrieved by the same, the taxpayer filed an appeal before the CIT(A) and inter alia contended that the assessment order was invalid and illegal as it was served beyond the time limit prescribed under the provisions of section 153 of the Act. The CIT(A) rejected the contentions of the taxpayer, and upheld the order of the AO.

On appeal to the ITAT, the taxpayer relied on the decision of the Coordinate Bench in the case of Durga Condev Private Limited v ACIT (ITA No 162 of 2012) and contended that the assessment order should have been passed and served on the taxpayer within the time limit prescribed under section 153 of the Act. The taxpayer also contended that though the order was dated December 31, 2010, it was served on the taxpayer on February 1, 2011, which proved that the order was ‘antedated’.

The ITAT rejected the appeal of the taxpayer and held that the provisions of section 153 of the Act prescribed the time limit within which the assessment order should be ‘made’ and replacing meaning of the word ‘made’ with ‘served’ would make the section unworkable. The ITAT followed the principles laid down by the Madras HC in the case of CIT v Hi-Tech Arai Limited (2010) (321 ITR 477), wherein, it was held that the ITAT should not blindly follow its own earlier decision especially when it does not reflect the correct position of law. Further, the ITAT observed that there was no evidence to show that the order was not made before December 31, 2010. Thus, the ITAT observed that as per the provisions of the General Clauses Act, a government document could not be questioned unless and until substantial evidence was produced to dislodge the veracity of the same. Based on the above, the ITAT upheld the validity of the assessment order made by the AO.

Sophia Study Circle v ITO (ITA No 286 of 2012) (Cuttack ITAT)

Chennai Bench of ITAT reaffirms that a commercial property cannot be treated as a residential property merely because rental income was reported under the head ‘income from house property’

The taxpayer, an individual, was the owner of a residential house, land and a commercial property. During the year under consideration, the taxpayer sold the land and invested the sale proceeds in a new residential house property. The taxpayer claimed exemption from capital gains tax as per the provisions of section 54F of the Act which was available only if the taxpayer held one residential property at the time of purchase of new one. During the course of the assessment proceedings, the AO treated the commercial property as the residential property and rejected the exemption claimed by the taxpayer on the ground that the taxpayer was the owner of two residential properties at the time of purchase of the new property. The AO held that since the term ‘residential property’ and ‘commercial property’ was not defined in the Act, the commercial property should be treated as a residential property because the rental income received from commercial property was reported under the head ‘income from house property’. On appeal, the CIT(A) upheld the decision of the AO.

Aggrieved, the taxpayer filed an appeal before the ITAT. The ITAT allowed the appeal of the taxpayer and observed that the various records clearly depicted that the property was used for commercial purposes only. It was held that mere reporting of the rental income from commercial property under the head ‘income from house property’ would not categorize it as a residential property.

Mr I Ifthiqar Ashiq v ITO (ITA No 232 of 2013) (Chennai ITAT)

Circulars / Notifications

CBDT withdraws Circular No 2 dated March 26, 2013 regarding application of Profit Split Method (“PSM”)

The CBDT has withdrawn the Circular No 2, dated March 26, 2013, which mandated the use of PSM for benchmarking specific transactions. The CBDT has stated that the Circular No 2 gave an impression that there was a hierarchy among the six methodologies for determining the ALP (under section 92C of the Act) and that PSM was the preferred method in cases involving unique intangible or in multiple interrelated international transactions. Thus, the CBDT has withdrawn the said Circular with immediate effect.

Source: Circular No 5/2013, dated June 29, 2013, issued by CBDT

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

CBDT issues guidelines for identifying development centre as contract R&D service provider with insignificant risk

The CBDT has issued guidelines where a development centre in India can be treated as a R&D service provider with insignificant risk. In cases, where the foreign principal performs most of the economically significant functions, provides funds / capital and significant assets to Indian development centre, assumes most of the risks etc, the Indian development centre can be treated as R&D service provider with insignificant risk.

Source: Circular No 6/2013, dated June 29, 2013, issued by CBDT

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

CBDT notifies Commodity Transaction Tax Rules, 2013

CBDT has notified new Commodities Transaction Tax (“CTT”) Rules, 2013 wherein, it has provided the list of agricultural products on which CTT shall be levied. Rules regarding payment of CTT, time limits and filing of return of CTT, etc are also notified.

Source: Notification No 46/2013, dated June 19, 2013

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

CBDT notified new form for furnishing of authorisation and maintenance of documents for the purpose of section 94A of the Act

The CBDT has notified a new ‘Form 10FC’ under which a taxpayer authorises CBDT to obtain information about their accounts maintained in notified jurisdiction under section 94A of the Act. As per section 94A, deduction shall not be allowed for payments made to a financial institution located in a notified jurisdiction unless the authorisation in newly notified Form 10FC is furnished to the CBDT.

Source: Notification No 47/2013, dated June 26, 2013

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

CBDT notifies the conditions to be fulfilled to be notified as a recognised association for the purpose of section 43(5)(e) of the Act

The CBDT has notified conditions to be fulfilled by a recognised association in respect of trading in derivatives for the purpose of section 43(5)(e) of the Act. Section 43 (5)(e) of the Act provides that an eligible transaction in respect of trading in commodity derivatives carried out in a ‘recognised association’ shall not be deemed to be a speculative transaction. CBDT has also notified a monthly statement to be furnished by a recognised association in ‘Form 3BC’.

Source: Notification No 51/2013, dated July 4, 2013

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

CBDT issues instruction for receipt and disposal of rectification applications filed under section 154 of the Act

The CBDT has issued instructions to be followed after receipt of rectification application under section 154 of the Act. The CBDT amongst other things, has instructed the Revenue Authorities to maintain a ‘Register of Rectification’ and to dispose of an application within a period of two months from receipt of the application, wherever possible.

Source: Instruction No 3/2013 issued by the CBDT dated July 5, 2013

Link: CBDT Instructions

ICAI issues a new guidance note on tax audit

The ICAI has issued the sixth edition of ‘Guidance note on tax audit under section 44AB of the Act’ dated July 1, 2013. The revised edition provides clarifications and deals with various issues that an auditor faces during the course of a tax audit.

Source: ICAI

Link: Hindu Business Line

Indirect Tax

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

For determining whether multi functional machine is an input or output unit of an automatic data processing machine or not, dominant / principal purpose for which the machine was designed and manufactured needs to be determined

The taxpayer was in the business of manufacturing office automation products. The VAT authority raised a demand against the taxpayer by classifying the automation product as a multi functional printer resulting in a higher VAT rate of 12.5 percent. On the other hand, taxpayer contended that the automation products manufactured by them would qualify as an input or output unit of an automatic data processing machine and would attract VAT at a lower rate.

The taxpayer filed a writ petition before the Delhi HC challenging the tax demand raised by the VAT authority. The HC held that the issue in question required determination of factual aspects viz, whether or not the multi functional machine in dispute is an input or output unit of an automatic data processing machine. For determining the aforesaid fact, the dominant / principal purpose for which the machine was designed and manufactured needed to be ascertained. Basis this factual finding only, it could be determined and decided whether the machine in question would be taxable at the special rate as an input or output unit of an automatic data processing machine or would be taxable under the residuary category. Accordingly, while the HC did not entertain the writ petition and directed the taxpayer to exhaust statutory remedies where both questions of law and facts could be elucidated and examined and it endorsed the ‘dominant purpose’ test for classification.

Canon India Pvt Ltd v Value Added Tax Officer and Anr (2013-TIOL-424-HC-DEL-VAT)

The right to use a vehicle is dependent upon the monthly payment of rentals and therefore, the monthly rentals received or receivable by the dealer during the tax period qualifies as the sale price

The taxpayer entered into an agreement for lease of vehicles. The VAT authority held that the amount to be paid for the entire term of lease shall be included as turnover for the month when the vehicle was delivered to the lessee. The matter finally reached the HC. Before the HC, the taxpayer contended that the provisions of the VAT Act are in pursuance to Article 366(29A)(d) of the Constitution of India which provides for tax on transfer of right to use any goods for any purpose. Thus, incidence of tax is not on delivery of the goods but on the transfer of right to use goods. The transfer of right to use goods is subject to condition of payment of monthly rental and therefore, the rentals received or receivable during the entire term cannot be included in the turnover for the month when the vehicle was delivered to the lessee.

While allowing the appeal of the taxpayer, the HC held that the right to use vehicle was dependent upon the monthly payment of rentals and therefore, the monthly rentals received or receivable by the dealer during a particular tax period was the turnover of the taxpayer and consequently, the sale price exigible to tax.

GE Capital Transportation Financial Services Ltd v The State of Haryana and Another (2013-VIL-34-P&H)

Input Tax Credit (“ITC”) refund cannot be denied under the Tamil Nadu VAT Act (“TNVAT Act”) merely on the grounds of payment of VAT at a rate which is more than the prescribed rate, if the taxpayer is rightfully entitled to the same

The taxpayer was a 100 percent, Export Oriented Unit (“EOU”), engaged in the manufacture and export of all its finished products comprising of cotton made-ups and fabrics. The taxpayer purchased certain raw materials and capital goods, for the manufacture of the finished products, locally on payment of VAT at a rate of 12.5 percent. The taxpayer filed an application for refund of 12.5 percent VAT paid on procurement of raw materials and capital goods which are used for manufacture of finished goods subsequently exported outside India. The refund claim was sought to be denied on VAT paid in excess of 4 percent on the ground that the actual VAT payable on such raw materials and capital goods was 4 per cent and not 12.5 per cent.

The taxpayer filed a writ petition before the HC challenging the order rejecting the refund claim of the taxpayer. The HC referred to the provisions of TNVAT Act wherein section 18(1) provided for the zero rating of the products under certain stated circumstances. The HC also considered section 18(2) that dealt with the right of a dealer, who makes a zero rated sale for refund of the input tax paid or payable by him on purchase of the goods which are exported as such or used in the manufacture of the exported goods. The HC held that going by the provisions of the TNVAT Act, given the fact that the taxpayer is entitled for refund of input tax paid on purchase of goods under section 18(2) of the TNVAT Act, the taxpayer’s claim for refund of amount has to be given without any adjustment. HC rejected the contention of the Revenue Authorities that purchaser of goods is not entitled to the benefit of total refund of the amount and held that if the seller charges tax at a rate over and above what is payable under TNVAT Act when effecting sale to the taxpayer, all that the Revenue Authorities could do is to proceed against the seller of the goods for charging purchaser at a rate not legally sustainable.

Summer India Textile Mills Pvt Ltd v The Commercial Tax Officer, Erode (2013-TIOL-427-HC-MAD-VAT)

ITC cannot be denied to the purchasing dealer on the ground that the selling dealer has not paid tax, when the purchasing dealer has paid the same in the manner so prescribed

The taxpayer was a dealer in lubricants and purchased lubricants from M/s Classic Enterprises (“selling dealer”). On verification of the returns of the selling dealer, it was found that the selling dealer had neither filed monthly returns nor deposited the tax so collected from the taxpayers. Notice was issued to the taxpayer contending that the ITC should be reversed on the failure of the selling dealer to deposit tax although it was an admitted fact that the taxpayer had paid tax to the selling dealer and an adverse order was passed by the Revenue Authorities.

Being aggrieved by the aforesaid order, the taxpayer filed a writ petition before the Madras HC. After referring to the provisions of the TNVAT Act, Madras HC held that section 19(1) of the TNVAT Act states that the input tax credit can be claimed by the registered dealer, if it is established that the tax due on such purchase has been paid by him in the manner prescribed and that was accepted at the time when the self assessment was made. Thus, the liability of non-payment of tax would fall on the selling dealer and not the taxpayer, which had shown the proof of payment of tax on purchase made. Further, the HC held that section 19(16) does not empower the Revenue Authority to revoke the ITC availed on the plea that the selling dealer had not deposited such tax. Thus, HC set aside the impugned order.

Sri Vinayaga Agencies v Assistant Commissioner (CT), Vadapalani-I Assessment Circle, Chennai [2010 (060) VST (0283)]

Excise

Application for settlement can be made after 180 days of seizure even if no Show Cause Notice (“SCN”) has been issued. Also, a pragmatic and practical view should govern the proceedings before the Settlement Commission

The taxpayer had filed an application for settlement after 180 days of seizure, without receiving a SCN. Pursuant to the said application, the Settlement Commission duly settled the case by taking into account all pertinent factors. Vide the order, the Settlement Commission settled the duty along with applicable interest and the said duty was to be adjusted out of cash seized from the taxpayer. The Settlement Commission also granted immunity from penalty and prosecution to the taxpayer.

Aggrieved by such settlement, a writ petition was filed by the Director General, Central Excise Intelligence against the order passed by the Settlement Commission. The Revenue Authorities was aggrieved by the order of the Settlement Commission on the ground that the Commission did not go into the question of full and true disclosure at the stage of admission of the application. The impugned order was also to be considered invalid as there is no recording therein of satisfaction of true and full disclosure on behalf of the taxpayer. Further, the application under section 32E of the Central Excise Act, 1944 (“CEA”) was filed by the taxpayer before the issuance of the SCN and was thus, not maintainable.

The HC observed that only after investigation by the Commissioner (Investigation), the Settlement Commission settled the total duty. Therefore, if the taxpayer has not made a complaint against the amount settled by the Settlement Commission, which is twice the amount admitted by them before the Commission, it is not open for the
taxpayer-Revenue Authorities to assail that amount. Further, the Settlement Commission was conscious of the requirement of true and full disclosure by the taxpayer and this requirement was considered as fulfilled by the Settlement Commission before arriving at the impugned settlement. It was also observed by the HC that section 32E(b) provides that no application for settlement shall be made unless a SCN for recovery of duty issued by the Central Excise Officer has been received by the applicant. The HC also considered section 32E(2) which states that the assessee shall not be entitled to make an application before the expiry of 180 days from the date of the seizure, where any excisable goods, books of accounts or other documents have been seized. In the present case, the taxpayer had filed the application for settlement after the expiry of 180 days from the date of seizure. In this regard, the HC held that both these provisions are directory in nature and need not be obeyed or fulfilled exactly. The HC also held that the aforesaid provisions are to be interpreted harmoniously, which is essential to ensure that neither one of them is rendered repugnant. On this basis, the HC held that the application could have been made after 180 days of the seizure or after receipt of SCN, whichever occurred earlier.

Before dismissing the present writ petition filed by the Director General, Central Excise Intelligence, the HC emphasized that a pragmatic and practical view should govern the proceedings before the Settlement Commission because the very scheme of the provisions of the Settlement Commission is settlement and not adjudication.

Director General, Central Excise Intelligence v Murarilal Harishchandra Jaiswal Pvt Ltd [2013 (291) ELT 484 (DEL- HC)]

Cenvat credit balance standing in the books of accounts as on the date of conversion of a Domestic Tariff Area (“DTA”) to a 100 percent EOU can be utilized for clearances made by the EOU

The taxpayer, a DTA unit converted into a 100 percent EOU, utilized the Cenvat credit balance standing in their books of accounts as on the date of conversion against the clearances made by them post conversion to a EOU.

The Revenue Authority was of the opinion that the taxpayer was not entitled to avail the said Cenvat credit. The matter reached the Tribunal which held that the taxpayer was entitled to avail the credit standing in the books of accounts as on the date of conversion as there is no restriction in the Cenvat Credit Rules, 2004 (“Credit Rules”) to this effect. The Tribunal relied upon the decisions given in the cases of Sun Pharmaceuticals Industries Ltd v CCE [2010 (251) 312 (Tri – Chennai)], GTN Exports Ltd v CCE [2009 (240) ELT 53 (Tri – Chennai)] and CCE v Ashok Iron & Steel Fabricators [2002 (140) ELT 227 (Tri – LB)].

On an appeal filed before the Bombay HC, the HC observed that the decisions given in the case of Sun Pharmaceuticals and GTN Exports Ltd have been accepted by the Revenue Authorities. The HC further observed that the departmental appeal against the CESTAT decision in the case of Ashok Iron & Steel Fabricators has been rejected by the Apex Court. Basis above, the HC dismissed the present appeal filed by the Revenue Authorities and decided the case in favour of the taxpayer.

CCE, Belapur v Sandoz Pvt Ltd [2013 (291) ELT 325 (Bom)]  

Rule 10A of Central Excise Valuation Rules, 2002 (“Valuation Rules”) is not applicable if a taxpayer manufactures final products after procuring inputs by its own, utilizing his own manpower and sells the finished products to the purchaser based upon the price agreed between them even if the purchaser supplies moulds required for the manufacture of final products

The taxpayer was engaged in the manufacture of various plastic moulded articles. The taxpayer entered into a purchase agreement (“Agreement”) with M/s Symphony Limited (“Symphony”) wherein it agreed to manufacture air coolers with Symphony brand name. Under the terms of said agreement:

· The mould required for manufacturing of coolers were supplied by Symphony on returnable basis;

· Symphony was allowed to supervise and monitor the production of air coolers on random basis.

The inputs required for manufacturing of coolers were procured by taxpayer on his own without any interference of Symphony. The taxpayer cleared the coolers to Symphony after discharging Central Excise duty under Rule 6 of Valuation Rules read with section 4(1)( a) of CEA on the basis of transaction value.

The Revenue Authorities relied upon various clauses of the agreement, mentioned below and alleged that the relationship between taxpayer and Symphony was of job worker:

· Sale price of coolers was decided by Symphony and Agreement nowhere provides for determination of price of air coolers, price was based upon the cost of material plus processing charges and is nothing but cost of production;

· Supervision and monitoring of the air coolers were done by Symphony;

· The moulds required for the manufacture of air coolers were supplied by Symphony.

Revenue Authorities alleged that the valuation of the goods should be done under Rule 10A of Valuation rules.

The matter reached the Tribunal where the taxpayer contended the issue involved in this case is squarely covered by the decision of the Tribunal in the case of CCE, Hyderabad v Innocorp Limited (2012-TIOL-956-CESTAT-BANG). The Tribunal held that the Explanation to Rule 10A requires the manufacture / production of goods on behalf of principal manufacturer from inputs / goods supplied by any such principal manufacturer or by any other person authorized by him. This indicates that tax payer should have manufactured the air coolers from the inputs or the goods supplied by Symphony. Tribunal observed that the entire raw material required for the manufacturing of air coolers was purchased by taxpayer independently and Symphony had no say in such purchases. Further taxpayer has received only moulds from Symphony for the manufacturing of such air coolers. Supply of moulds per se would not mean that tax payer is a job worker of Symphony and therefore, Rule 10A of the Valuation rule should not be attracted. Mere fact that supervision is done by Symphony doesn’t mean that Symphony is acting as a principal manufacturer for the manufacturing of air coolers.

Tribunal also held that cost of free supply of moulds needs to be included in the transaction value for the discharge of duty liability under Rule 6 of the Valuation Rules. Tribunal directed the lower authorities to quantify the amount of duty liability on the taxpayer on such amortized cost of the moulds.

Symphony Comfort Systems Limited, Shri Paresh P Mehta, Abhishri Packaging Private Limited, Shri R Tainwala, Shri Rejendran v CCE, Vapi (2013-TIOL-772-CESTAT-AHM)

Cenvat credit of basic excise duty can be utilized for payment of education cess

The taxpayer paid education cess liability on its manufactured products by utilizing the Cenvat credit of basic excise duty from balance in Cenvat credit account. The Revenue Authorities not satisfied by the same demanded the duty on the ground that basic excise duty cannot be used for discharging the liability of education cess. The matter reached before the Tribunal.

The Tribunal held the issue in favour of the taxpayer on the basis that the utilization of credit of basic excise duty for the payment of education cess is allowable since there is no restriction to this effect in the Credit Rules. The CESTAT placed reliance on the decisions of the Ahmadabad CESTAT in the case of CCE v Balaji Industries [2008 (232) ELT 693]. The matter went in appeal before the Gujarat HC. Basis the facts and arguments, the HC agreed with the view taken by the Tribunal and dismissed the appeal of the Revenue Authorities.

CCE v Madura Industries Textiles [2013 (39) STT 541 (Guj HC)]

Service tax

Overseas group company is not providing services of Manpower Supply or Recruitment Agency Service (“MSRS”) to Indian group company if the contract for employment is entered into with the employees directly by the Indian company

Taxpayer, an Indian company, entered into agreements with personnel of the overseas group company located in Germany for their employment for a specific period. Employees being foreign nationals received 25 percent of their salary in India and the rest 75 percent of the salary in Germany. The overseas group company paid 75 percent salary to the employees and consequently claimed the reimbursement from the Indian company. The taxpayer also deducted tax on the income earned by the personnel in India. Revenue Authorities issued a SCN on the basis that the amount remitted to the overseas group company was a consideration for Manpower Supply & Recruitment Service (“MSRS”) that the overseas group company provides to the Indian entity. Aggrieved by the same, the taxpayer filed an appeal before the Tribunal.

Taxpayer contended that since they employed the personnel by entering into agreements with them, there is no supply of manpower by the overseas company. Merely because 75 percent of the salary was paid by the German company, the above activity cannot be made liable to service tax. Taxpayer also placed reliance on various favourable decisions of the Tribunal. On the basis of the foregoing, the taxpayer prayed for grant of interim stay and waiver of pre-deposit. Revenue Authorities on the, other hand, reiterated the finding of the adjudicating authority.

Basis the above facts and arguments, the Tribunal held that the above services would not qualify as MSRS merely on the fact that the overseas company pays 75 percent of the salary to the personnel employed by the Indian company. Also, since the contract of employment was with the employees directly and not with the group company, the services under consideration could not be said to be provided by the group company. Accordingly, pre-deposit was waived and stay was granted.

Volkaswagen India Pvt Ltd v CCE, Pune-I (2013-TIOL-774-CESTAT-MUM)

Hiring of an aircraft where the entire control and possession including liability to maintain and repair is with the hirer is not liable to service tax under Supply of Tangible Goods (“STG”) service

Taxpayer hired an aircraft from a foreign company for rendering cargo services in India. The aircraft was transferred by the foreign company to the taxpayer who exercised entire control over the aircraft including appointment of crew, repair and maintenance etc. Demand was raised by the Revenue Authorities alleging that the above activity is liable to service tax under the head STG service under the Finance Act, 1994 (“the Act”). Aggrieved by the above the taxpayer made an application before the Tribunal for waiver of pre-deposit and grant of stay.

Taxpayer relied on the definition of STG service under the Act and contended that since the effective control and possession of the aircraft was with him the above activity would not be liable to service tax. The Revenue Authorities, however, argued that the control was exercised only for operational purposes and such control cannot be considered to be effective control.

The Tribunal held that neither the fact that the possession of the aircraft was transferred to the taxpayer nor the fact that the aircraft was operated for cargo aviation purposes in India was in doubt. Since the aircraft was handled by the crew appointed by the taxpayer as well as the maintenance and repairs were also undertaken by the taxpayer it can be held that taxpayer was exercising effective control of the aircraft. Therefore, the above transaction did not fall within the definition of STG service under the Act and accordingly, prima facie not liable to service tax. Hence,
pre-deposit was waived and stay was granted.

Blue Dart Aviation Ltd v Commissioner of Service Tax, Chennai (2013-TIOL-777-CESTAT-MAD)

Services of dismantling an existing structure for erection of a new structure in the factory premises are valid input services for availing Cenvat credit

Taxpayer was engaged in manufacturing of steel pipes and tubes and claimed Cenvat credit on services of dismantling an existing structure in the factory for erection of a new structure. This was opposed by the Revenue Authorities and the matter reached before the Tribunal.

The Tribunal after hearing both the sides held that the inclusive part of the definition of ‘input services’ under Rule 2(l) of the Credit Rules specifically includes services used in relation to renovation or repairs of a factory. The service of dismantling was nothing but renovation of the existing structure to create a new structure and accordingly, these services were valid input services for availing Cenvat credit. The appeal of the Revenue Authorities was, therefore, rejected.

CCE, Meerut-II v Jindal Pipes Ltd [2013 (30) STR 686 (Tri-Del)]

Services received by taxpayer from a foreign company for accessing their own data maintained in different countries do not fall within the ambit of ‘Online information and database access or retrieval’

The taxpayer entered into a contract with M/s Equant Pte Ltd, Singapore (“Singapore Company”) for providing Virtual Private Network (“VPN”) which enabled the taxpayer and its branches to retrieve data from the data centre maintained by the taxpayer in India, USA and UK.

The Revenue Authorities was of the view that the taxpayer was receiving online information and data base access or retrieval service through computer network and hence, liable to service tax on reverse charge basis. The matter reached before the Tribunal, where it was contended by the Revenue Authorities that the taxpayer had received online connectivity to their data base in the data centres for access to or retrieval of online information / database and this connectivity is provided by the Singapore Company. Since the service was provided through online computer network, the taxpayer appeared to be the beneficiary of this service in as much as the same enables data updation on regular basis.

The Tribunal held that since the data being retrieved or accessed by the taxpayer was its own data centre which was maintained by it in India, USA and UK, prima facie it cannot be said that the taxpayer has received service of online information and database access or retrieval.

State Bank of India v CST, Mumbai-II (2013-TIOL-767-CESTAT-MUM) (Mumbai Tribunal)

Incentive received from a bank for temporarily keeping share application money as lead banker is not for promoting or marketing of any services of the bank nor has any service been provided by the taxpayer on behalf of any client and is not liable to tax. Share of income received from a NBFC company for the activity of financing done on a principal-to-principal basis is not liable to tax under business support services. No services rendered when reimbursements received from other group companies for common expenses in the nature of electricity charges and office expenses.

The taxpayer was a merchant banker, registered with Securities Exchange Board of India and service tax department. It provided various services classifiable under the category of business auxiliary services, banking & financial services and business support services but was not discharging service tax liability on some of the services namely brokerage / commission on Initial Public Offer (“IPO”), brokerage / commission on fixed income product, IPO finance fee, processing fee, recovery of commission expenses.

The Revenue Authorities was of the view that the taxpayer was liable to pay service tax under the following categories for the aforementioned services:

· Business Auxiliary Services;

· Banking and Financial Service;

· Business Support Services.

The matter reached before Tribunal who considered the submissions of the parties and passed an order in respect of all the aforementioned categories as mentioned below:

Business Auxiliary Services

The taxpayer temporarily kept share application money in a particular bank as lead banker in lieu of an incentive. The Revenue Authorities was of the view that the amount received towards income from financing of application money and processing fees received from the bank for choosing that particular bank for deposit of the application money shall be subject to service tax.

It was held that no service tax was leviable on the incentive received by the taxpayer as there was no element of promoting or marketing of neither any services of the bank nor any service has been provided to the bank by the taxpayer on behalf of any client.

Banking and financial service

As a lead manager and advisor for the IPO, the taxpayer advised its clients (prospective investors) to invest in the shares / debentures of a particular company. In order to provide short term funds to its clients, it entered into an agreement with the NBFC (“finance company”) whose main object was of leasing investment and lending. The Revenue Authorities contended that the taxpayer rendered a service to the NBFC in lieu of which it received share of income.

It was held that no service has been rendered by the taxpayer to the finance company as the activity has been done on a principal-to-principal basis.

Business Support Services

The taxpayer claimed reimbursement of common expenses like electricity etc from other group companies. Revenue Authority was of the view that such reimbursements received represent the consideration for services rendered under the category of ‘Business Support Services'.

It was held that no service can be stated to have been rendered in respect of receipt of reimbursement of common expenses by the taxpayer and accordingly, the same was not liable to service tax.

JM Financial Services Pvt Ltd v Commissioner of Service Tax, Mumbai-I (2013-TIOL-757-CESTAT-MUM) (Mumbai Tribunal)

Flying Training Institutes providing training for obtaining Commercial Pilot Licence and Aircraft Engineering Institutes providing training for Basic Aircraft Maintenance Engineering Licence are exempt from payment of service tax

The taxpayer, was an Aircraft Engineering Institute which provided training for obtaining Basic Aircraft Maintenance Engineering Licence (“BAMEL”) as approved by Directorate General of Civil Aviation (“DGCA”) and issued certificates approved by the DGCA to candidates who successfully completed the approved training curriculum and passed the examinations.

Section 65(105)(zzc) of the Act was introduced wef from July 1, 2003 which provided for levy of service tax on commercial training or coaching services. However,
pre-school coaching and training centre or any institute or establishment which issued any certificate or diploma or degree or any educational qualification recognized by law for the time being in force, was excluded from the meaning of commercial training or coaching centre under section 65(27) of the Finance Act.

Thereafter, section 65(27) was amended wef May 1, 2011 wherein the exclusion earlier provided to preschool coaching and training centre or any institute or establishment which issued educational qualification recognized by law was withdrawn but similar exemption was granted to preschool and educational qualifications and training which were recognized by law vide Notification No 33 /2011-ST dated May 25, 2011 wef from May 1, 2011.

Meanwhile, Central Board of Excise & Customs (“CBEC”) vide Instruction No 137 /132/2010-ST dated May 11, 2011 (“Circular”) clarified that Flying Training Institutes providing training for obtaining Commercial Pilot Licence (“CPL”) and Aircraft Engineering Institutes providing training for obtaining BAMEL come under the category of coaching centres as laid down in section 65(27) of the Act and were assessable to service tax.

Basis this Circular, SCN was issued to the taxpayer. The Writ Petition was filed by the taxpayer before the Delhi HC raising the question whether Flying Training Institutes providing training for obtaining CPL and on Aircraft Engineering Institutes for obtaining Basic Aircraft Maintenance Engineering Licence are liable to service tax.

The taxpayer contended that the Course Completion Certificates issued by the taxpayer were recognized by law and the taxpayer should be exempt from service tax. On the other hand, the Revenue Authorities contended that taxpayer was not issuing any certificate, degree or diploma recognized by law and was only imparting training and prepared the candidate to appear in the DGCA Basic License Examination.

The Delhi HC held that an educational qualification recognized by law will not cease to be recognized by law merely because for practicing in the field to which the qualification relates, a further examination held by a body regulating that field of practice is to be taken. Accordingly the said Circular and SCN issued to the taxpayer were quashed. The HC held that the activity of the taxpayer squarely falls under the exclusion from the definition or the exemption notification.

Indian Institute of Aircraft Engineering v Union of India & Ors (2013-TIOL-430-HC-DEL-ST)
Customs

Goods stock transferred from the Special Economic Zone unit to its DTA unit would be eligible for exemption from the payment of whole of the additional duty of customs leviable under section 3(5) of the Customs Tariff Act, 1975 under Notification No 45/2005-Cus dated May 16, 2005 (“Notification”)

The taxpayer proposed to establish a unit in a Free Trade Warehousing Zone (“FTWZ”) in the State of Maharashtra for warehousing parts and components of wind operated electricity generators procured from outside India and stock transfer the aforesaid goods to its manufacturing unit in Pune. Though the aforesaid goods were subject to VAT at the rate of 5 percent, no VAT was payable as the taxpayer proposed to stock transfer the aforesaid parts.

The taxpayer proposed to avail the benefit of exemption Notification that exempts goods cleared from a Special Economic Zone unit to a DTA from payment of whole of the additional duty of customs leviable (“SAD”) under section 3(5) of the Customs Tariff Act, 1975 (“Tariff Act”). The exemption granted under the Notification was subject to the fulfillment of the conditions mentioned in the proviso of the aforesaid notification which inter alia provided that such clearance should not be exempted from sales tax / VAT. The taxpayer approached the Authority for Advance Rulings (“AAR”) for a confirmation of its proposal to avail the benefit of exemption Notification No 45/2005-Cus.

It was noted by the AAR that in case of a stock transfer two persons are not involved as stock transfer is between the units of the same legal entity, therefore, it does not fall within the definition of ‘sale’ as defined under section 2(24) of the Maharashtra VAT Act (“MVAT”). It was held that VAT is a tax on sale of goods within the State and the same cannot be levied on stock transfer and therefore, no VAT is leviable on such transaction – as opposed to the same being ‘exempt’ from VAT. It was held that since the goods cleared by the taxpayer by way of stock transfer were not exempted from payment of sales tax / VAT, the condition of the Notification could not be considered to have been violated. In view of the fact that the goods are stock transferred and thus do not fall within the ambit of MVAT, the AAR held that the condition of the Notification stands fulfilled and the benefit of exemption Notification is available to the taxpayer.

GE India Industrial Private Limited (2013-TIOL-01-ARA-CUS)

Circulars / Notifications

Customs

Introduction of Risk Management Systems in exports

While Risk Management System was introduced earlier vis a vis imports as a trade facilitation measure and for selective interdiction of high risk consignments for Customs control, the same concept is now being introduced for exports too vide a Customs Circular.

Source: Customs Circular No 23/2013 dated June 24, 2013

Link: http://www.cbec.gov.in/customs/cs-circulars/cs-circ13/circ23-2013.pdf

Legal metrology

Notification amending Legal Metrology (Packaged Commodities) Rules, 2011 (“Legal Metrology Rules”)

The Central Government has issued Notification dated June 6, 2013 amending Legal Metrology Rules. The main amendment is that the definition of ‘industrial and institutional consumers’ has been deleted from Rule 3 and fresh definitions have been inserted under Rule 2 of Legal Metrology Rules.

Source: Notification No GSR 359(E) dated June 6, 2013

Link: http://metrologycentre.com/codes/pcr_amend_13.pdf