THE issues before the Bench are - Whether Service tax paid in pursuance of a show cause notice can be disallowed on the ground that the liability has not crystallized; Whether the cost of acquisition accepted in previous years is to be re-
computed on account of high premium paid to associated enterprise and whether transfer of shares at cost by the Indian subsidiary to its non-resident parent as part of a group re-structuring scheme can be construed as a bogus transaction. And the verdict partly goes in favour of the assessee.
computed on account of high premium paid to associated enterprise and whether transfer of shares at cost by the Indian subsidiary to its non-resident parent as part of a group re-structuring scheme can be construed as a bogus transaction. And the verdict partly goes in favour of the assessee.
Facts of the case
A) The assessee company is engaged in rendering range of communications services including advertising, sales promotion, direct marketing, corporate communications and public relations. It had got registered for payment of service tax under the category “advertising agency services” and paid service tax only on the income from creation of advertisement and commission received from customers for placement of advertisements in media. However, it had not paid service tax on the renegotiated prices and also on discounts/incentives received as the assessee was of the belief that these incomes were not liable to service tax. In pursuance of a survey carried out by the service tax authorities on 11-8-2006 a show cause notice was issued to the assessee on 19-10-2006, as to explain why the service tax was not paid on a difference and liabilities written back under “advertisement agency services” and on annual volume discount under “business auxiliary services”
A) The assessee company is engaged in rendering range of communications services including advertising, sales promotion, direct marketing, corporate communications and public relations. It had got registered for payment of service tax under the category “advertising agency services” and paid service tax only on the income from creation of advertisement and commission received from customers for placement of advertisements in media. However, it had not paid service tax on the renegotiated prices and also on discounts/incentives received as the assessee was of the belief that these incomes were not liable to service tax. In pursuance of a survey carried out by the service tax authorities on 11-8-2006 a show cause notice was issued to the assessee on 19-10-2006, as to explain why the service tax was not paid on a difference and liabilities written back under “advertisement agency services” and on annual volume discount under “business auxiliary services”
categories and why outstanding service tax liability along with interest and penalty should not be levied. After various discussions with the service tax authorities, the assessee decided to pay the service tax liability along with interest to avoid further litigation. The assessee deposited service tax liability of Rs.81.39 lacs along with the interest for the financial year 2001-2002, 2002-2003, 2003-2004, 2005-2006 and 2006-2007. In the tax audit report, the payment was duly reported and was claimed as a revenue deduction under section 37(1).
In assessment the AO held that the amount of service tax and interest paid was a liability which was not crystallized during the year as there was no formal written order, but was paid in response to show cause notice only. Thus, the same cannot be allowed as deduction in the current year either under section 37 or under Section 43B. In first appeal the CIT(A) did not entertain the assessee’s plea.
B) The assessee had sold 10400 shares of “Euro RSCG Target Media Pvt. Ltd.” to its parent company “M/s Havas International” for sale consideration of Rs.2.42 crore. The company had held 2400 shares of Euro TM (acquired in 2002) till December, 2005. The cost of acquisition for the same was Rs.82,25,295/-. On 18.1.2006 the company transferred its media business to Euro TM for a consideration of 8000 shares of Euro TM valued at Rs.1,60,00,000/-. As a part of global re-structuring process, a share purchase agreement dated 6th March, 2006 was entered into between Havas International, assessee and another shareholder of Euro TM to transfer the shareholding of Euro TM to Havas International at cost of acquisition to the company. In view of the above, 10,400 shares were transferred to Havas International at Rs.2,42,25,295/- being the cost to the company in the year 2006-2007. The 8000 shares which were acquired on 18-1-2006, sold on 20-9-2006, were sold at cost, therefore, the short term capital gain was computed at ‘Nil’. 2400 shares, which were acquired in the year 2002, reported a long term capital loss of Rs.14,85,063/- after availing indexation benefit.
In the course of assessment the AO observed that as per the valuation report of equity shares of Euro TM as on 31.12.2005, it was reported that NAV of one equity share of Euro TM was Rs.208. Based on the above, the AO re-computed the cost of acquisition and sales consideration resulting in short term capital gain and long term capital gain at Rs.1,70,40,000 and Rs. 44,91,158 respectively. It was of the view that since both the buyers and sellers were closely related parties, allotment of the shares on such a high premium was highly unreasonable, and therefore, the cost of acquisition was determined as per the fair market value.
The assessee argued that the cost of acquisition of the shares had been accepted in the earlier years, thus the same cannot be recomputed in the current assessment year. The valuation report relied upon by AO was prepared for purpose of submission to RBI. In first appeal the CIT(A) affirmed the actions of the AO.
In appeals, having heard the parties, the Tribunal held that,
A) ++ Once the payment of service tax has been made during the year, it does not make any difference whether the same is under dispute before the service tax authorities. This issue is no more res integra as the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v., has decided this very question in the context of provision of Section 43B of the Act. Before the Apex Court the issue related to payment of sales tax as per the demand raised by the sales tax department and the assessee had deposited the liability of sale tax under dispute. The Apex Court held that merely because the assessee was disputing the liability would not mean that the liability had not accrued;
++ Section 43B is non obstante clause and from the plain reading of the same, it is evident that deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess, or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him, irrespective of the previous year in which the liability to pay was incurred on the payment of such sum as per method of accounting regularly employed by the assessee as per section145. For the claim of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant which is to be taken into account. The year in which the assessee incurred the liability to pay such tax, duty etc. has no relevance and cannot be linked in the matter of giving benefit of deduction under Section 43B. The case laws as have been relied by the learned AR also supports this proposition of law specifically judgment of the Hon’ble Allahabad High Court in the case of CIT Vs. C.L.Gupta & Sons. Similar proposition has been held in the case CIT Vs. Dharampal Satyapal Sons Pvt. Ltd. and the Special Bench decision in the case of DCIT Vs. Glaxo Smithkline Consumer Healthcare Ltd. Following the ratio laid down in the above case laws and since no contrary decision has been cited before us, therefore, on the facts and circumstances of the case, we hold that the amount of service tax along with interest paid by the assessee is allowable in view of the provisions of Section 43B. Accordingly disallowance of amount of Rs.81,39,000/- is deleted and ground No.1 of assessee is allowed;
B) ++ it is also not in dispute that cost of acquisition of shares as appearing in the balance sheet of the earlier years i.e. in the assessment year 2006-2007 is at Rs.2,42,25,295/-, which has been accepted also by the AO in the scrutiny proceedings under Section 143(3) in that year. Here in this case, in pursuance of an agreement, the shares of Euro TM were to be transferred to parent company i.e. M/s Havas International, on the book value and the same was done so in this year. Once the cost of acquisition as shown in the books of account on the value which has been accepted earlier by the department and also evidenced by the terms of agreement between the parties specifically clause 9 to 11, as have been reproduced above, it cannot be held that the cost shown by the assessee is fictitious. There was no occasion or any material on record to doubt the book value of the shares by the Assessing Officer;
++ as clarified by the counsel, the valuation certificate was only for the purpose of RBI for showing NAV value of the shares. Here in this case, at the time of acquisition of shares, it has been clearly mentioned in the agreement that a premium aggregating to Rs.1,59,20,000/- was given for the face value of Rs.10/-each. This agreement cannot be brushed aside, unless there is something on record to prove that it was any kind of make believe arrangement. This is a transaction solely between the parent company and the holding company; the same cannot be treated as a sham transaction as the shares have been transferred purely on the book value disclosed earlier. Apparently it is also not clear, what gain assessee will achieve to enhance the book value of shares in the earlier years. The premium paid on shares in earlier years by Euro TM is clearly evidenced by Clause 9 of the agreement and assessee has duly disclosed the same. The shares has been transferred on same value, thus, there is no gain to the assessee atleast. It is also seen that on one hand, the AO has worked out the short term capital gain at a huge amount and at the same time has also increased the long term capital loss, which will be set off in the computation. On these facts we do not find that it is a case of make belief arrangement or colorable device as held by the AO, as nothing has been brought on the record that the book value which was shown in the earlier years was fictitious, specifically when the same has been accepted by the department in scrutiny proceedings. In view of this fact, we hold that the addition made on account of short term capital gain by reducing the value of cost of acquisition of shares is uncalled for. Since sales price has not been disputed before us by the AR, we do not find it proper to adjudicate on this point. In the result, ground No.2 is treated to be allowed in part to the extent that cost of acquisition has to be taken as per book value for the purpose of computation of short term capital gain.
In assessment the AO held that the amount of service tax and interest paid was a liability which was not crystallized during the year as there was no formal written order, but was paid in response to show cause notice only. Thus, the same cannot be allowed as deduction in the current year either under section 37 or under Section 43B. In first appeal the CIT(A) did not entertain the assessee’s plea.
B) The assessee had sold 10400 shares of “Euro RSCG Target Media Pvt. Ltd.” to its parent company “M/s Havas International” for sale consideration of Rs.2.42 crore. The company had held 2400 shares of Euro TM (acquired in 2002) till December, 2005. The cost of acquisition for the same was Rs.82,25,295/-. On 18.1.2006 the company transferred its media business to Euro TM for a consideration of 8000 shares of Euro TM valued at Rs.1,60,00,000/-. As a part of global re-structuring process, a share purchase agreement dated 6th March, 2006 was entered into between Havas International, assessee and another shareholder of Euro TM to transfer the shareholding of Euro TM to Havas International at cost of acquisition to the company. In view of the above, 10,400 shares were transferred to Havas International at Rs.2,42,25,295/- being the cost to the company in the year 2006-2007. The 8000 shares which were acquired on 18-1-2006, sold on 20-9-2006, were sold at cost, therefore, the short term capital gain was computed at ‘Nil’. 2400 shares, which were acquired in the year 2002, reported a long term capital loss of Rs.14,85,063/- after availing indexation benefit.
In the course of assessment the AO observed that as per the valuation report of equity shares of Euro TM as on 31.12.2005, it was reported that NAV of one equity share of Euro TM was Rs.208. Based on the above, the AO re-computed the cost of acquisition and sales consideration resulting in short term capital gain and long term capital gain at Rs.1,70,40,000 and Rs. 44,91,158 respectively. It was of the view that since both the buyers and sellers were closely related parties, allotment of the shares on such a high premium was highly unreasonable, and therefore, the cost of acquisition was determined as per the fair market value.
The assessee argued that the cost of acquisition of the shares had been accepted in the earlier years, thus the same cannot be recomputed in the current assessment year. The valuation report relied upon by AO was prepared for purpose of submission to RBI. In first appeal the CIT(A) affirmed the actions of the AO.
In appeals, having heard the parties, the Tribunal held that,
A) ++ Once the payment of service tax has been made during the year, it does not make any difference whether the same is under dispute before the service tax authorities. This issue is no more res integra as the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v., has decided this very question in the context of provision of Section 43B of the Act. Before the Apex Court the issue related to payment of sales tax as per the demand raised by the sales tax department and the assessee had deposited the liability of sale tax under dispute. The Apex Court held that merely because the assessee was disputing the liability would not mean that the liability had not accrued;
++ Section 43B is non obstante clause and from the plain reading of the same, it is evident that deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess, or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him, irrespective of the previous year in which the liability to pay was incurred on the payment of such sum as per method of accounting regularly employed by the assessee as per section145. For the claim of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant which is to be taken into account. The year in which the assessee incurred the liability to pay such tax, duty etc. has no relevance and cannot be linked in the matter of giving benefit of deduction under Section 43B. The case laws as have been relied by the learned AR also supports this proposition of law specifically judgment of the Hon’ble Allahabad High Court in the case of CIT Vs. C.L.Gupta & Sons. Similar proposition has been held in the case CIT Vs. Dharampal Satyapal Sons Pvt. Ltd. and the Special Bench decision in the case of DCIT Vs. Glaxo Smithkline Consumer Healthcare Ltd. Following the ratio laid down in the above case laws and since no contrary decision has been cited before us, therefore, on the facts and circumstances of the case, we hold that the amount of service tax along with interest paid by the assessee is allowable in view of the provisions of Section 43B. Accordingly disallowance of amount of Rs.81,39,000/- is deleted and ground No.1 of assessee is allowed;
B) ++ it is also not in dispute that cost of acquisition of shares as appearing in the balance sheet of the earlier years i.e. in the assessment year 2006-2007 is at Rs.2,42,25,295/-, which has been accepted also by the AO in the scrutiny proceedings under Section 143(3) in that year. Here in this case, in pursuance of an agreement, the shares of Euro TM were to be transferred to parent company i.e. M/s Havas International, on the book value and the same was done so in this year. Once the cost of acquisition as shown in the books of account on the value which has been accepted earlier by the department and also evidenced by the terms of agreement between the parties specifically clause 9 to 11, as have been reproduced above, it cannot be held that the cost shown by the assessee is fictitious. There was no occasion or any material on record to doubt the book value of the shares by the Assessing Officer;
++ as clarified by the counsel, the valuation certificate was only for the purpose of RBI for showing NAV value of the shares. Here in this case, at the time of acquisition of shares, it has been clearly mentioned in the agreement that a premium aggregating to Rs.1,59,20,000/- was given for the face value of Rs.10/-each. This agreement cannot be brushed aside, unless there is something on record to prove that it was any kind of make believe arrangement. This is a transaction solely between the parent company and the holding company; the same cannot be treated as a sham transaction as the shares have been transferred purely on the book value disclosed earlier. Apparently it is also not clear, what gain assessee will achieve to enhance the book value of shares in the earlier years. The premium paid on shares in earlier years by Euro TM is clearly evidenced by Clause 9 of the agreement and assessee has duly disclosed the same. The shares has been transferred on same value, thus, there is no gain to the assessee atleast. It is also seen that on one hand, the AO has worked out the short term capital gain at a huge amount and at the same time has also increased the long term capital loss, which will be set off in the computation. On these facts we do not find that it is a case of make belief arrangement or colorable device as held by the AO, as nothing has been brought on the record that the book value which was shown in the earlier years was fictitious, specifically when the same has been accepted by the department in scrutiny proceedings. In view of this fact, we hold that the addition made on account of short term capital gain by reducing the value of cost of acquisition of shares is uncalled for. Since sales price has not been disputed before us by the AR, we do not find it proper to adjudicate on this point. In the result, ground No.2 is treated to be allowed in part to the extent that cost of acquisition has to be taken as per book value for the purpose of computation of short term capital gain.
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