Case laws Updates - November 2012

Direct Tax

High Court

Re-assessment proceedings valid basis information from competent authority of a treaty partner

The taxpayer filed its return of income (“ROI”) for Assessment Year (“AY”) 2006-07 declaring a total income of INR12.01 crores under the head income from other sources (“IFOS”), which was processed under section 143(1) of the Income tax Act, 1961 (“Act”) without any adjustment.  Subsequently, the Government of India received information from the Competent Authority of the Government of Japan under the Mutual Exchange of Information (as per Article 26 of the India-Japan tax treaty) that during the subject year, the taxpayer had received an amount equivalent to INR 11.28 lakhs from Japanese Company as interest.  Basis such information, the Assessing Officer (“AO”) issued a reassessment notice under section 148 of the Act with a reason to believe that the interest receipts

had escaped assessment in the hands of the taxpayer as they were not reflected in its books of account.  A writ challenging the initiation of reassessment proceedings was filed by the taxpayer before the High Court (“HC”) contending  that there was no live link / nexus between the material before the AO and the belief that income chargeable to tax had escaped assessment.  The taxpayer argued that the AO without undertaking any enquiry regarding escapement of income acted only on the satisfaction of other authorities which amounted to ‘borrowed’ or ‘dictated’ satisfaction.  The taxpayer also submitted that the income declared under the head IFOS in its ROI already included interest received from the Japanese company.  Rejecting the taxpayer’s contentions and ruling in favour of the Revenue Authorities, the HC observed that at the time of recording reasons for initiation of reassessment, the AO was not expected to hold an enquiry and come to a final determination that the amount in question represented income.  Also, information received from a governmental agency constituted valid material on the basis of which the AO could form a tentative or prima facie belief regarding escapement of income.  Further, it observed that only the belief for reassessment can be challenged by a taxpayer, and not the sufficiency of the reasons for such belief.

Mitsui and Company India Pvt Ltd v ITO and Anr (WP(C) No 1121 of 2012 & CM No 2447 of 2012) (Delhi HC)

Royalty and Fee for Technical Services to be taxed on ‘cash basis’ under the India-Germany tax treaty

The taxpayer, a German corporation, was in receipt of royalty / fee for technical services (“FTS”) from an Indian company in the year under consideration.  The issue for consideration before the HC was whether the Income tax Appellate Tribunal (“ITAT”) was right in holding that royalty and FTS should be taxed on receipt basis (under the India-Germany tax treaty) without appreciating the fact that as per the decision of the Supreme Court (“SC”) in the case of Standard Drum Motors Private Limited v CIT (201 ITR 391), credit to the account of the taxpayer non-resident in the books of an Indian company would itself amount to receipt by the non-resident.  Affirming the ruling of the ITAT, in view of the notification dated August 26, 1985, the HC held that assessment of royalty or FTS should be made in the year in which the amounts are received and not otherwise.  Reliance by the Revenue Authorities on a Special Bench decision in the taxpayer’s own case was dismissed as the same pertained to a year prior to the issuance of the relevant notification dated August 26, 1985.  Accordingly, the HC upheld the ruling of the ITAT that royalty and FTS should be taxed on receipt basis under the India-Germany tax treaty.

DIT (International Taxation) v M/S Siemens Aktiengesellschaft (ITA No 124 of 2010) (Bombay HC)

Director’s liability for private company’s default to be restricted to ‘tax’, excludes interest / penalty

The taxpayer, an individual, was the director of M/s Sarvodaya Realtors Private Limited (“the Company”) and was entitled to receive an income tax refund of a certain amount in his individual capacity.  The jurisdictional AO of the Company sought to adjust the outstanding tax liability of the Company against the refund due to the taxpayer by passing an order under section 179 of the Act.  Aggrieved by such an adjustment without even an opportunity of being heard, the taxpayer filed a writ petition before the HC.  The HC ordered the AO to pass a fresh order under section 179 of the Act after providing the taxpayer an opportunity of being heard.  In the fresh order, the AO held the taxpayer liable for the dues of the Company by stating that the director was unable to show why he should not be treated as an ‘assessee in default’ being the lone surviving director of the Company.  The taxpayer filed a rectification application against the same and in the order disposing off the rectification application, the AO enhanced the outstanding dues of the Company by including interest and penalty.  The taxpayer preferred another writ petition before the HC, in which he contended that ‘tax due’ under section 179 of the Act does not include interest and penalty within its ambit and the Act makes a clear distinction between taxes, penalties and interest.  For the interpretation of the term ‘tax’, he relied on a number of judicial precedents.  Accepting the plea of the taxpayer, the HC opined that legislature in drafting section 179 of the Act has consciously used the term ‘tax due’ instead of the term ‘any sum payable’ as used in other sections of the Act which casts a liability on the survivor / successor of business.  In view of this, the Court has to adopt a circumspect approach and limit itself to the words used in section 179 and not ‘travel outside them on a voyage of discovery’.  Accordingly, the HC held that the personal liability of director should be restricted to the ‘tax’ due by the defaulting company under section 179 of the Act. 

Sanjay Ghai v ACIT and Ors (W P(C) 5175 of 2012 & C M APPL 10572 of 2012; W P (C) 2303 of 2012 & C M APPL 4936 of 2012) (Delhi HC)

‘Family arrangement’ pursuant to settlement of a dispute between family members not exigible to capital gains tax

The taxpayer pursuant to a family arrangement received approximately INR 2.25 crores for giving up of his right, title, and interest in family property.  The Revenue Authorities were of the opinion that there was a clear transfer of rights, title and interest in family property as defined under section 2(47) of the Act and consequently, capital gains tax under section 45 of the Act would, therefore, get clearly attracted.  On appeal, the ITAT held that in the instant case the family arrangement was only a device to settle the genuine dispute amongst the family members in relation to their respective property rights.  Further, it held that since settlement only defines a pre-existing joint interest as separate interests, there is as such no conveyance and the arrangement is bonafide.  Relying on the SC judgment in the case of MaturiPullaiah and Anr v Maturi Narasinham and Ors (AIR 1966 183), the ITAT concluded that there was no transfer of capital assets and hence, no capital gains tax liability would be attracted.  On appeal, the HC dismissed the Revenue’s appeal by holding that the decision of the ITAT was purely based on the finding of facts and hence, no question of law arose from the ITAT’s order.

CIT v Shri Sachin P Ambulkar (ITA No 6975 of 2010) (Bombay HC)

Depreciation allowed on ‘business and commercial brand equity’

The taxpayer, a company had claimed depreciation in respect of ‘business and commercial brand equity’, as an intangible asset.  The claim of the taxpayer was allowed by the ITAT, against which the Revenue Authorities filed an appeal with the HC.  The HC, ruling in favour of the taxpayer, refused to entertain the question raised by the Revenue Authorities. It observed that the contention of the Revenue Authorities that intangible assets like business and commercial brand equity were in the nature of goodwill on which depreciation was not allowable had been put to rest by the SC in the decision of CIT v Smifs Securities Limited (348 ITR 302).  In this decision, it was held by the SC that goodwill, being an intangible asset, under section 32 (1)(ii) of the Act, depreciation would be allowed. 

CIT v Birla Global Asset Finance Co Ltd (ITA No 6835 of 2010) (Bombay HC)

ITAT

10A unit loss eligible for set-off against other income; section 14A of the Act inapplicable

The taxpayer, was a company claiming deduction under section 10A of the Act in respect of the profits derived by it from its newly established undertaking in a Free Trade Zone.  During the year under consideration, the taxpayer incurred a business loss of INR 14.6 lakhs from its 10A unit.  In its ROI, the taxpayer had set off these losses against the rental and interest income earned by it.  During the assessment proceedings, the AO denied the adjustment of the business losses of taxpayer against the rental and interest income by treating such losses as expenditure incurred to earn exempt income under the provisions of section 14A of the Act.  On first appeal, the CIT(A) ruled in favour of the taxpayer.  On further appeal at the instance of the Revenue Authorities, the ITAT observed that provisions of section 10A of the Act are in the nature of ‘deduction’ and not ‘exemption’.  Further, there is no specific provision either under section 10A or sections 70 and 71 of the Act which expressly states that the loss suffered by a 10A unit cannot be set off against income from other units.  Also, the provisions of section 14A of the Act are applicable only in respect of ‘expenditure incurred’ for earning exempt income and not to losses; the losses cannot be construed as expenditure.  On the basis of these observations and placing reliance on rulings of coordinate bench in other cases, the ITAT allowed the taxpayer to set off of its 10A unit losses against the rental and interest income earned by it. 

DCIT v Brijlaxmi Infotech Limited (ITA No 732 of 2010) (Ahmedabad ITAT)

Bangalore ITAT accepts lacuna in law; grants double benefit for waiver of capital loan

The taxpayer, a manufacturer and trader of polymer based industrial paints and sealant products imported certain machineries to establish a manufacturing facility at Bangalore (in the year 1997).  Due to some restrictions imposed by the Reserve Bank of India on the taxpayer, the instalments of imported machineries were paid by its group entity viz Courtaulds Engineering Limited, UK (“CEL UK”) and therefore, the taxpayer had debt payable to CEL UK in its books.  In the meantime, the Akzo Nobel group acquired Courtaulds group worldwide including the taxpayer and consequently due to such restructuring, the debt payable to CEL UK was finally transferred to another company ie Akzo International BV, Netherlands.  As a part of business restructuring and due to other commercial considerations, Akzo International BV waived the debt owned by the taxpayer (in the year 2000).  The fact of the waiver of loan came to the knowledge of the AO after some years of such waiver (in the year 2004) and on this basis, the AO initiated reassessment proceedings for various previous years.  The AO was of the view that the depreciation on the machinery claimed by the taxpayer on the actual cost of the machinery (including the debt owned to the group company) should be reworked by reducing the amount of loan waived from the written down value (‘WDV”) of the machinery.  The AO further held that the depreciation should be reworked for all years starting from the year of waiver of the loan.  On first appeal, the CIT(A) granted partial relief to the taxpayer.  Both, the Revenue Authorities and the taxpayer, filed cross appeals against the CIT (A)’s order. 

The ITAT ruled in favour of the taxpayer by allowing full depreciation claimed by it and in arriving at such conclusion, it observed as under:

·           The relevant provisions under which depreciation allowance could be reworked in the present case are contained in section 43(6) and Explanation 10 to section 43(1) of the Act; the conditions mentioned in both the provisions are not satisfied in the case of the taxpayer.

·           The intention of the Legislature behind allowing depreciation on ‘block of assets’, was to overcome the cumbersome process of dealing with each asset separately.  The merger of various assets into the block of asset can be altered only when as per specified provisions a particular asset is sold, discarded or destroyed in the previous year [section 43(6)].  Since none of these conditions were satisfied in the present case, the action of the Revenue Authorities in altering the block of assets could not be sustained. 

·           Explanation 10 to section 43(1) which provides that where a portion of the cost of an asset has been met in the form of ‘a subsidy or grant or reimbursement’, such portion shall not be included in the actual cost.  This explanation would not apply in the present case as there was no such subsidy or grant or reimbursement; it was only a waiver of loan.  Even otherwise, section 43(1) of the Act would be applicable only in the year of purchase of machinery and cannot be applied in the year of waiver of the loan.  Accordingly, the actual cost of machinery cannot be altered on the basis of Explanation 10 to section 43(1). 

·           There exists a lacuna in law to the extent that while on one hand, the taxpayer got a waiver of loan, not taxable because it was capital receipt, on the other, it was also entitled to depreciation on the entire value of the machinery for which it did not incur any cost.  Thus, the taxpayer stood to benefit both ways.  While it was for the Legislature to provide appropriate safeguards in this regard, as per the law prevalent as on date, the Revenue Authorities were without any remedy.

Akzo Nobel Coatings India Pvt Ltd v DCIT and DCIT v Akzo Nobel Coatings India Pvt Ltd (ITA Nos 751 to 755 and 1131 of 2010 and ITA Nos 771 to 773 and 1164 of 2010) (Bangalore ITAT)

Trade discount to sub-franchisees / retailers not in the nature of commission; therefore not subject to tax withholding under section 194H of the Act

The taxpayer, a partnership firm, was engaged in trading of electrical goods including the business of recharge vouchers, SIM cards and mobile phone handsets.  In 2007, it entered into a franchisee agreement with Bharat Sanchar Nigam Limited (“BSNL”) for acting as a distributor of the products and services offered by BSNL. 

The taxpayer allowed a discount to its sub-franchisee / retailers at all its branches which were claimed as a business deduction.  During assessment proceedings, the AO disallowed taxpayer’s claim for deduction of such discount, holding that no taxes had been withheld under section 194H of the Act on such discount.  On first appeal, the CIT(A) upheld the view of the AO.  On further appeal to the ITAT, the taxpayer argued that discount given to the retailers did not qualify as ‘commission’ within the meaning of section 194H of the Act on account of the following:

·           The maximum retail price (“MRP”) of the products sold to the sub-franchisee by the taxpayer was fixed by BSNL under the Franchisee Agreement.  As per the agreement, the taxpayer received commission of 6.5 percent of the gross value of purchases, and on such commission, BSNL had already deducted tax under section 194H of the Act. 

·           In order to compete in the market, the taxpayer had given trade discount to the retailers / sub-franchisees by forgoing its own profit.  Once the entire commission had been subjected to tax deduction, applying tax deduction to a portion of the same income again was not justified. 

The ITAT accepted the taxpayer’s arguments, holding that the same income could not be taxed twice in the hands of different recipients.  It held that trade discount made available to the sub-franchisees was part of the compensation of the taxpayer which had already been subjected to tax at source by the service provider and accordingly, allowed the claim of the taxpayer. 

M/s Pareek Electricals v ACIT (ITA No 354 of 2012) (Cuttack ITAT)

Composite contracts for turnkey projects can be divisible; profits from overseas supplies not taxable

The taxpayer, a tax resident company of UAE was engaged in the business of fabrication and installation of onshore and off-shore oil facilities and sub-marine pipelines and pipelines quoting.  During the relevant year, it earned income from a turnkey contract with Oil and Natural Gas Corporation (“ONGC”) for fabrication and installation of onshore and offshore oil facilities and pipelines.  It claimed that though there was a single contract, the scope of work under the contract was divided into two distinct components namely (a) Designing, fabrication and supply of material / equipment; and (b) Installation and commissioning of the project.  It was further claimed by the taxpayer that work relating to designing, fabrication and supply of material / equipment was carried out exclusively in Abu Dhabi and was not relatable to the Permanent Establishment (“PE”) in India, accordingly, no income relating to the said activities was liable to tax in India.  On this basis, the taxpayer offered to tax only the income earned from the activities of installation and commissioning of the project in India.

The AO rejected the claim of the taxpayer primarily by holding that the contract with ONGC being a turnkey contract was indivisible, wherein the entire risk of completion and commissioning was on the taxpayer.  The PE in India existed for the entire duration of the project and the taxpayer also had a Dependent Agent PE through its agent in India.  Accordingly, the entire profits under the contracts was liable to tax in India.  The action of the AO was upheld by the Dispute Resolution Panel (“DRP”). 

On further appeal, the ITAT ruled in favour of the taxpayer by holding that only the profits of the taxpayer relating to installation and commissioning activities could be attributed to the PE in India on the basis of the following observations:

·           Though the contract was on a turnkey basis, it was a divisible contract as the scope of work and consideration was separately allocable and stated for the offshore and onshore components.   

·           The taxpayer had a PE in India in the form of a PO which was undoubtedly established to execute the contract with ONGC and not to carry out any
ancillary / auxiliary activities as observed by the AO and the DRP.  Further, it also had a ‘Dependent Agent PE’ and a ‘construction and installation PE’ under the India-UAE tax treaty.

·           However, activities relating to designing, fabrication and supply of material / equipment were carried out and completed entirely outside India and were not attributable to the said PE; the PE was only in respect of installation and commissioning work in India.

M/s National Petroleum Construction Company v ADIT (ITA No 5168 of 2010) (Delhi ITAT)

Mobilization revenues earned beyond territorial waters to be taxable in India

The taxpayer, a company incorporated in Norway entered into a contract with ONGC for undertaking the offshore activities of seismic data acquisition, processing and interpretation, for which it used a vessel ‘Sasha’.  The taxpayer also established a project office (“PO”) in India for managing the contract.  The taxpayer opted for taxation of the revenues under the aforesaid contract on deemed taxation basis under section 44BB of the Act.  In computing the profits under section 44BB of the Act, the taxpayer excluded the mobilization revenues attributable to the operation of the vessel beyond 200 nautical miles from the Indian coastline by taking a no tax position on such revenues.  The AO rejected the taxpayer’s contention and held that the mobilization fee should form part of gross receipts for the purposes of computing profits under section 44BB of the Act.  The order of the AO was upheld by the CIT(A).  On appeal to the ITAT, the taxpayer argued as under:

·           The vessel Sasha operated outside the territorial jurisdiction of India and thus, no income on account of mobilization charges either accrued or could be deemed to have accrued in India.

·           As per the India-Norway tax treaty, business profits could be taxed in India only to the extent attributable to a PE in India.  In the present case, no profits could be attributed to the taxpayer’s PO in India for it had no role to play in the mobilization of the vessel.

The ITAT upheld the order of the AO by observing that the taxpayer was liable to be paid a fixed sum as stipulated in the contract with ONGC, regardless of the actual expenditure incurred for the purpose and in view of the fictional taxing provision contained in section 44BB of the Act, the amount received towards mobilization charges should be included as a part of gross receipts liable to tax in India. 

EMGS Project Office v DDIT (ITA No 306 of 2012) (Delhi ITAT)

Disallowance under section 43B of the Act not to be made in view of Article 7(3) of the India-Mauritius tax treaty; However, section 14A disallowance to be sustained

The taxpayer was a banking company incorporated in Mauritius with a PE in India.  It offered its income to tax as business profits under the Article 7 of the India-Mauritius tax treaty.  During the assessment proceedings, the AO disallowed a part of the bonus debited by the taxpayer in its profit and loss account but not paid before the due date of filing its return of income by applying the provisions of section 43B of the Act.  In addition, the AO also noticed that the taxpayer during the relevant year had borrowed funds for making investments in tax free bonds.  An income tax exemption was claimed on the income from such bonds, however, the taxpayer failed to make any addition on account of expenditure incurred to earn such exempt income.  On the basis of these findings, the AO invoked the provisions of section 14A of the Act to disallow the interest expenses incurred to earn exempt income.  On appeal, CIT(A) confirmed the disallowance under section 43B of the Act made by the AO, however, he deleted disallowance under section 14A of the Act by observing that since the taxpayer had sufficient interest free funds in its bank account for making investment in tax free bonds, no disallowance of interest expense on borrowed capital was called for in the case of the taxpayer. 

Aggrieved by the CIT(A)’s order, both taxpayer and the Revenue Authorities filed an appeal before the ITAT. Reversing the CIT(A)’s order, the ITAT held as follows:

·           In the absence of any restriction on deduction of expenses of a PE under the Article 7(3) of the India-Mauritius tax treaty, all expenses incurred for the purpose of business of the PE (including the unpaid bonus) without having any regard to the provisions of section 43B of the Act would be allowed. 

·           When the exempt income itself does not form part of the ’business profits’ of the taxpayer, there can be no scope for allowing deduction of expenses incurred in relation to such income.  Accordingly, the interest expenses incurred to earn income from tax free bonds would not be allowed as deduction.

M/s State Bank of Mauritius Limited v DCIT (ITA No 2254 of 2005 and ITA No 3005 of 2005) (Mumbai ITAT)

Duration test for constitution of a ‘construction PE’ to be satisfied in respect of each individual contract; Aggregation not permissible

The taxpayer, a Mauritian company was engaged in the business of installation of offshore platforms, decks, pipelines jackets and other similar activities for the purposes of mineral exploration.  In accordance with the India-Mauritius tax treaty, it adopted a view that a building site or construction or assembly project would constitute a PE in India only if such site, project or supervisory activities in connection therewith, continued for a period of more than 9 months.  Since the taxpayer did not exceed the threshold period of 90 days for each of its contracts independently, the taxpayer contended that no PE was constituted in India.   

During the assessment proceedings, the AO rejected this claim of the taxpayer.  The CIT(A) affirmed the order of the AO and held that since the duration of work in India in aggregate on all contracts exceeded the 9 month period , the taxpayer constituted a PE in India.  On further appeal by the taxpayer, the ITAT remanded the matter back to the CIT(A) with a direction to determine the duration of work in India in respect of three contracts independently and not on a consolidated basis.  It further directed the CIT(A) to count the period of stay in India by considering the actual date of commencement and completion of the contracts and not the date mentioned in the agreements.

In the fresh proceedings, the CIT(A) based on the order passed by the ITAT, held that the duration of work in India in respect of each contract of the taxpayer did not exceed the threshold period of 9 months, and hence, the taxpayer did not have a PE in India.  On further appeal at the instance of the Revenue Authorities, the ITAT observed that in the first round of appeals, the direction of the ITAT was confined to examining the duration in respect of each contract for determining whether or not any PE was constituted in terms of Article 5 of the India-Mauritius tax treaty.  Further, it observed that such direction was acted upon by the CIT(A), who after examination of the relevant material held that for all contracts, the duration was less than 9 months and no evidence to the contrary has been produced by the Revenue Authorities.  On the basis of the said observations, it held that since the duration of work in India in respect of each contract was less than 9 months, the taxpayer would not constitute PE in India.  

DCIT v M/s Jay McDerrmott Eastern Hemisphere Limited (ITA No 2089 of 2011) (Mumbai ITAT)

Exemption from MAT provisions under section 115JB of the Act to be available even to an SEZ unit claiming deduction under section 10A of the Act

The taxpayer, a public company registered under the Companies Act, 1956, was engaged in the business of providing information technology solutions and geographical information services.  It had two undertakings viz one located in a Special Economic Zone (“SEZ”) in Mumbai and the other located in a Software Technology Park in Bangalore.  Both these units were eligible for deduction under section 10A of the Act.  While computing its MAT liability for AY 2008-09 and AY 2009-10 respectively, the taxpayer reduced the income of the Mumbai SEZ unit from its book profit as per provisions of section 115JB(6) of the Act.  The AO rejected the position adopted by the taxpayer by holding that:

·           the scope of MAT provisions had been widened by the Finance Act, 2007 to include income exempt under section 10A / 10B of the Act; and

·           section 115JB(6) providing exemption from levy of MAT to SEZ units was inserted by the SEZ Act, 2005 along with section 10AA and therefore, it was applicable only to the units claiming deduction under section 10AA of the Act and not under section 10A of the Act. 

The CIT(A) confirmed the action of the AO against which the taxpayer  preferred an appeal before the ITAT.  The taxpayer argued that section 115JB(6) provides that the MAT provisions would not apply to income of an entrepreneur or a Developer, in a unit or SEZ, as the case may be and does not refer to any section.  Therefore, benefit of section 115JB(6) should be available to all SEZ units.  Moreover, SEZ Act, 2005 is equally applicable to new as well as existing SEZ units and thus the scope of distinction sought to be made by lower authorities was unwarranted.  Accepting this contention, the ITAT ruled in favour of the taxpayer and held that as per the provisions of section 115JB(6) of the Act, irrespective of the fact that SEZ unit of the taxpayer was claiming a deduction under section 10A of the Act, the income of such SEZ unit would not be included while computing book profit for the purpose of MAT for the years under consideration. 

Genesys International Corpn Ltd v ACIT (ITA No 6903 of 2011 and ITA No 609 of 2012) (Mumbai ITAT)

Direct discharge of corporate guarantee by parent company characterized as a capital receipt not chargeable to tax

The taxpayer, an Indian company, was engaged in the business of manufacturing and distribution of writing instruments and stationary products.  It was controlled and operated by a joint venture between Gillette India Private Limited (“GIPL”) (a subsidiary of Gillette USA) and JHPL Holdings Private Limited (“JHPL”).  In AY 2002-03, the taxpayer had raised funds from various banks against the corporate guarantee of Gillette USA.  In addition, it also raised a loan from Gillette USA under the External Commercial Borrowings (“ECB”) scheme of the Reserve Bank of India.  Subsequently, Gillette USA sold its business to Newell Rubbermaid Inc, USA (“Newell”) which did not wish to take over the business of the taxpayer as it was persistently incurring losses.  Accordingly, Gillette USA remitted sums of money to the banks and the taxpayer for release of its corporate guarantee and repayments of loans taken by the taxpayer respectively.  It also waived off the foreign currency loans advanced by it to the taxpayer for working capital under the ECB scheme. 

During the assessment proceedings, the AO held all the remittances made by Gillette USA to the taxpayer whether directly or indirectly, to be revenue receipts taxable as the income of the taxpayer by characterizing such payments to be in the nature of a subsidy/ grant in aid to the taxpayer.  Further, the AO held that the loan waiver by Gillette USA was also chargeable to tax in the hands of the taxpayer.  On appeal, the CIT(A) held the amount which was directly remitted to the banks as  capital receipts not chargeable to tax.  However, the CIT(A) agreed with the order of the AO to the extent of the other sums (ie the waiver of loan and inward remittance) and confirmed the taxation of the same as business income of the taxpayer.  On further appeal, the ITAT upheld the CIT(A)’s order on the first issue.  The ITAT noted that the fact that the amount was not received by the taxpayer and was directly appropriated to the bank for discharge of the stated corporate guarantee, clearly suggested that the sum remitted was not in the nature of profit but a capital receipt.  Further, no evidence was produced by Revenue Authorities to support the finding of the AO that the amount was paid to improve the financial position of the taxpayer by discharging its liabilities and enabling it to earn income.  Accordingly, the ITAT held such sums to be capital receipts not chargeable to tax.  With respect to the direct remittance to the taxpayer for repayment of loans, the ITAT affirmed the CIT(A)’s finding that such sum was taxable as a revenue receipt.  Regarding the waiver of foreign currency loan by Gillette USA, the ITAT restored the matter back to the file of the AO to examine the purpose of taking the loan so as to determine its taxability in the hands of the taxpayer. 

M/s Luxor Writing Instruments Pvt Ltd v DCIT (ITA No 1108 of 2007) (Delhi ITAT)

Income from carbon credits – a non taxable capital receipt

The taxpayer was engaged in the business of generation of biomass based power and was eligible for deduction under section 80IA of the Act on the profits derived by it from its business.  During the year under consideration, the taxpayer earned income from sale of Carbon Emission Reduction Certificates (“CERs”) which were awarded to it on account of generation of clean energy.  The taxpayer had accounted this receipt as capital in nature and had not offered the same for taxation.  During the assessment proceedings, the AO taxed the sale proceeds as revenue receipt by treating the CERs as a tradeable commodity quoted on a stock exchange.  Further, the AO also denied deduction under section 80IA of the Act on such income by holding it to be not directly and inextricably related to the business of the taxpayer.  On first appeal, the CIT(A) upheld the view of the AO.  On further appeal, the ITAT ruling in favour of the taxpayer held that sale of CERs is a non taxable capital receipt due to the following reasons:

·           Revenue earned on sale of CERs is a capital receipt as it is not generated or created due to carrying on of business but accrued due to world concern about the environment.

·           Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions.  The taxpayer got the privilege in the nature of transfer of CERs due to the world concern on global warming and accordingly, the amount received for CERs cannot be said to have any element of profit or gain and thus cannot be subjected to tax in any manner under any head of income.

·           The consideration received by the taxpayer is not for selling or producing any product, by-product or for rendering any service.  Accordingly, it cannot be considered as business income.

My Home Power Limited v DCIT (ITA No 1114 of 2009) (Hyderabad ITAT)

Circulars / Notifications

Format for Tax Residency Certificate prescribed by CBDT

The Central Board of Direct Taxes (“CBDT”) in India has vide Notification No 39 prescribed the particulars which need to be stated in a Tax Residency Certificate (“TRC”) to claim the benefit of a tax treaty in India.  These include name, status of entity (ie individual, company, firm etc), country / specified territory of incorporation or registration, tax identification number in the country or specified territory of residence, residential status for the purposes of tax, period for which the certificate is applicable and address of the enterprise for the period which the certificate is applicable.  Pursuant to the aforesaid notification, the Mauritius Government has already amended its format of TRC to incorporate the details required by India as per the prescribed format. 

Source: Notification No 39 issued by CBDT

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

Date of annual filing in XBRL format with the Registrar of Companies extended

Vide General Circular No 34/ 2012 dated October 25, 2012 issued by Ministry of Corporate Affairs, the time limit for filing financial statements in XBRL format has been extended to December 15, 2012 without any additional filing fee.

Source: General Circular No 34 / 2012 issued by the Ministry of Corporate Affairs, Government of India

Link: www.mca.gov.in

Export of Goods and Software – Realization and Repatriation of export proceeds – Liberalization

Vide Circular No 52 dated November 20, 2012 issued by Reserve Bank of India, the relaxation as to the period of realization / repatriation to India of the amount representing the full export value of goods or software exported available upto twelve months from the date of export has been extended till March 31, 2013.

Source: Circular No 52 / 2012 issued by the Reserve Bank of India

Link: www.rbi.org.in

Indirect_tax

VAT/CST

If an entry in the schedule is an inclusive entry and is wide enough to cover all kinds of an article, no particular kind of that article can be excluded in the absence of a specific exclusion

The taxpayer imported jumbo rolls of paper of different colour, which contained strips of adhesive on one side, then cut the paper into pieces and prepared ‘post-it-paper’.  For seeking a clarification with regard to the rate of tax, the taxpayer made an application to the Authority for Clarification and Advance Ruling (“ACAR”).  ACAR held that ‘post-it-paper’ would fall under the category of unscheduled goods and liable to be taxed at 12.5 percent.  An application for review was filed with ACAR which was rejected.  Aggrieved of the same, the taxpayer approached the HC of Karnataka which remanded the matter to the Commissioner of Commercial Taxes (“Commissioner”).  The Commissioner held that ‘post-it-paper’ would be subject to tax at 12.5 percent as it falls in the residuary clause.  Aggrieved by the order of the Commissioner, the taxpayer filed an appeal before the HC of Karnataka.

The taxpayer contended that ‘post-it-paper’ would be covered under Entry 69(i) of Schedule III of Karnataka Value Added Tax (“VAT”) Act as the entry includes all kinds of paper without stipulating the use or utility to which they are put to use and therefore, be liable to concessional rate of tax of 4 percent.  The Revenue Authorities argued that during the course of manufacture of ‘post-it-paper’, the original paper loses its identity and becomes a commercial commodity distinct from the paper of any kind.  The HC held that the relevant entry is an inclusive entry and is wide enough to cover all kinds of paper other than those specifically excluded. 

3M India Limited v State of Karnataka – 2012-VIL-73-BANG (Karnataka HC)

In order to determine classification of a product in the schedule, common parlance test has to be applied in the absence of a specific definition / entry

The taxpayer was engaged in the manufacture of fruit pulp based drink ‘Slice’.  The taxpayer sought to deposit tax on the sale of ‘Slice’ at the residuary rate of 8 percent whereas the Revenue Authorities demanded 12 percent tax as applicable on the sale of ‘food article’ which was upheld by the AO.  The dealer filed an appeal before the Joint Commissioner which was rejected.  Aggrieved of the order, an appeal was filed before the CESTAT which placed reliance on the definition of “food article” prescribed under the Prevention of Food Adulteration Act, 1954 as no definition was given under the Delhi Sales Tax Act.  It observed that ‘Slice’ fell within the scope of the term ‘food article’ and therefore, upheld the decision of the Joint Commissioner.  Aggrieved of the same, the dealer filed an appeal before the HC of Delhi.

The taxpayer argued before the HC that it was not appropriate to import the definition given under one enactment for the purposes of another, where both the enactments seek to achieve an entirely different purpose.  The taxpayer supported its arguments by relying on the decisions in the case of Union of India v Kalyani Breweries Ltd – 1999 (113) ELT 39 (wherein it was held that beer was not a food article) and S Samuel, M D, Harrisons Malayalm and Another v Union of India and Others – 2003 (134) STC 61 (wherein it was held that tea was not a food article).  The Revenue Authorities contended that the term ‘food article’ had to be given a wide meaning and reliance was placed on the dictionary meaning of ‘food’. 

The HC relied on the case of State of Bombay v Virkumar Gulabchand Shah (1952 AIR 335 SC) and Collector of Central Excise v Parle Exports Pvt Ltd [1988 (38) ELT 741] wherein it was held that common parlance test has to be adopted to determine whether an entry in a taxing statute comprehends one or other article or not.  The HC followed the common parlance theory and held that ‘Slice’ cannot be called a ‘food article’ especially when the major content is water (70 percent approx). 

Varun Beverages Limited v Commissioner of Value Added Tax – 2012-VIL-86-DEL (Delhi HC)

In the absence of specific entry providing rate of tax on works contract, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract

The taxpayer was engaged in the business of civil works contracts.  The taxpayer made an application to the ACAR for seeking a clarification with regard to the rate of tax prior to March 31, 2006 on the execution of civil works contract.  ACAR held that there is no specific entry in respect of works contract upto March 31, 2006, therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract.    The Commissioner found ACAR’s clarification erroneous and held that the goods used in the works contract cannot be treated on par with the normal sale of goods for determining the rate for the period prior to March 31, 2006.  Aggrieved by the order of the Commissioner, the taxpayer filed an appeal before the HC of Karnataka.

The taxpayer contended that section 3(1) of the relevant legislation provides for levy of tax on every sale of goods and section 4 prescribes the rate of tax.  The definition of sale includes deemed sale and, therefore, levy of tax is same for both sales and deemed sales.

The HC agreed with the taxpayer’s contention and held that for the period prior to the April 1, 2006, tax has to be levied as per section 3(1) of the relevant legislation on the value of each class of goods involved in the execution of works contract.

Durga Projects Inc v State of Karnataka & Anr - 2012-VIL-92-BANG (Karnataka HC)

Any transfer of goods between amalgamating and amalgamated companies after effective date of amalgamation specified in scheme should be regarded as ‘Branch Transfers’ unless specifically provided to the contrary

The taxpayer was engaged in the production of pharmaceuticals.  An amalgamation scheme was filed whereunder the taxpayer and five other group companies merged in different proportions into two resultant companies.  The scheme provided that June 1, 1995 would be the date from which the scheme for amalgamation will be effective.  The scheme was approved by the Gujarat HC on May 2, 1997.

The sales tax authorities sought to levy sales tax on transactions between the amalgamating entities during the period June 1, 1995 to May 2, 1997.  This was countered by the amalgamating entities by highlighting that the sanction of the HC of the scheme of amalgamation led to the consequence that the transactions between the amalgamating entities during the period June 1, 1995 to May 2, 1997 would no longer qualify as ‘sales’ and hence not leviable to sales tax.

The HC ruled in favor of the taxpayer and held that in case of amalgamation of companies, such amalgamation is deemed to take effect from the effective date specified in the scheme approved by the HC.  In absence of any provisions to the contrary, any transfer of goods between amalgamating and amalgamated companies after effective date of amalgamation specified in the scheme should be regarded as ‘branch transfers’ and would not be liable to sales tax.  Consequently, any sales-tax paid by taxpayer thereon is refundable as per law.

The HC further clarified that principle of unjust enrichment (as provided in Central Excise laws) is applicable in case of all indirect taxes even in absence of specific statutory provisions.  If amalgamated companies undertake transfer of goods post the effective date and have paid sales tax on such a transaction, they would be eligible for refund only in case the burden of such tax has not been passed on to the customer or any other third party.  In case the burden has been passed on, the principle of unjust enrichment would come into the picture and therefore, the refund would not be available.

Cadila Healthcare Ltd v Deputy CST - (2012) 37 STT 259 (Gujarat HC)

Development of customized software wherein all rights in respect of the software including the intellectual property rights vest with the customer and the software is absolute property of customer is not sale of goods liable to VAT

The taxpayer was engaged in software development and provided software services.  An audit of the taxpayer was conducted wherein the Commercial Tax Officer (“CTO”) concluded that the taxpayer dealt in high-end software development work and in fact executed works contracts.  The CTO was of the view that software development activity attracts tax under works contract as per section 4(1)(c) of the Karnataka VAT Act at 4 percent.  The taxpayer filed objections contending that it was rendering ‘services’ which are subject to the levy of service tax.  This contention was rejected by the CTO and the matter was finally argued before the HC of Karnataka.

The Revenue Authorities contended that as per the settled legal position, software is ‘goods’ where it is capable of being bought and sold and consequently, sale of software would be subject to the levy of sales tax.  The taxpayer contended that it renders ‘software development service’ on which service tax is duly discharged. 

The HC held that the entire agreement was a ‘service agreement’ wherein the taxpayer had given up the rights in the software even before developing it.  The consideration paid to the taxpayer was based on the time or man hours spent in the project.  Further, there were no goods in existence when they entered in to the agreement and the software was the absolute property of the customer at all times. 

Sasken Communication Technologies Ltd v Joint Commissioner of Commercial Taxes, (2012) 55 VST 89 (Karnataka HC)

Movement of goods must be integrally connected with the contract of their supply for determining if a sale is an inter-state sale / sale in the course of import

The taxpayer was engaged in the manufacture and sale of engineering goods including power distribution system.  The taxpayer entered into a contract with Delhi Metro Railways Corporation (“DMRC”) for supply of power distribution system and certain other equipments.  The taxpayer had imported such goods and subsequently, supplied them to DMRC.  On such supplies, no VAT/CST was discharged by the taxpayer considering it to be a ‘sale in the course of import’ / ‘sale occasioning import’.  Certain other goods were manufactured by the taxpayer in their factory outside Delhi and were supplied to DMRC treating them as inter-state sales.  The AO imposed a demand of VAT on the goods imported as well as those supplied from the factory outside Delhi and penalty as well.  Aggrieved of the order, the taxpayer filed an appeal which finally reached before the HC of Delhi.

The taxpayer submitted that the goods were imported only for the requirements of DMRC and the import of goods was occasioned by the order from DMRC.  Further, the supply of goods from the factory constituted inter-state sales in terms of the established legal principles.  The Revenue Authorities contended that only the specifications of the goods were specified by DMRC but there was a possibility of diversion of goods.  Also, orders from DMRC did not stipulate an inter-state movement of goods and there were no such instructions as well. 

As regards the inter-state sales, the HC observed that if a reasonable presumption can be drawn that to fulfill the contract, goods would move inter-state, it would qualify as an inter-state sale under section 3(a) of the Central Sales Tax (“CST”) Act.  In this case, it was evident that DMRC was aware that the goods would be procured from the factories of the taxpayer which were located outside Delhi and even in the absence of specific instructions, an inter-state movement was implied.  With respect to the sale in the course of import, the HC observed that if the movement of goods is integrally connected with the contract, it would qualify as a ‘sale in the course of import’.  In the instant case, the goods were custom made, pre-inspected and in line with DMRCs specifications and therefore, it was evident that the sale of goods to DMRC occasioned the import. 

ABB Limited v Commissioner [DVAT, 2012 (10) TMI 185] (Delhi HC)

The sole criteria for considering a transaction as an inter-state sale is the movement of goods intimately connected with the sale irrespective of the fact that the purchaser moves the goods at his own cost or he bears the insurance charges, etc

The taxpayer effected sales to his buyer located at Warora, Maharashtra and claimed the sale as an inter-state sale as the goods moved from Tamil Nadu to Maharashtra.  The AO passed an order holding the sale to be an intra-state sale and thus assessable under Tamil Nadu General Sales Tax Act (“TN GST Act”) for the reasons that the purchaser bore the insurance charges, moved the goods inter-state at his own cost, the seller was relieved of the liability after the delivery and that the price was ex-godown.  An appeal was made to the Sales Tax Appellate Tribunal which upheld the order of the AO.  Aggrieved by the order, the taxpayer had filed an appeal before the HC of Madras.

The taxpayer did not deny the observations of the Sales Tax Appellate Tribunal but in his defense, he argued that though there was no written agreement as to the terms of sale, yet the invoice and conduct of parties reveal that the sale was an inter-state sale as the movement of goods and sale were intimately linked to each other.  He further argued that the reasons given by Sales Tax Appellate Tribunal cannot be a decisive factor for determining the character of the sale and the transaction was liable to CST as the parties had contemplated movement of goods pursuant to the contract of sale. The Revenue Authorities contended that the transaction can be inferred as that of an intra-state sale as the purchaser had taken over the goods in Tamil Nadu, arranged for transport as well as insured the goods.

The HC stated that from the facts, it was clear that the sale and the movement were intimately connected and the movement of goods was a consequence of sale.  The HC allowed the appeal and held that the sale was an inter-state sale.

Aspick Engineering Pvt Ltd v The State of Tamil Nadu – 2012-VIL-89-MAD (Madras HC)

A transaction of sale cannot be regarded as an inter-state sale where the dispatch instructions for movement of goods to the other State are issued after the purchase of goods as there is no link between the purchase and dispatch

The taxpayer, a company manufacturing tyres and tubes, had purchased natural rubber from State Trading Corporation Ltd (“STC”), Madras.  STC charged CST at the concessional rate of 4 percent against Form C provided by the taxpayer.  During the course of inspection it was found that the taxpayer did not pay tax on such purchases under TN GST Act as the ‘last purchaser’ as the transaction qualified as an intra-state sale – an adverse assessment order was consequently passed.  The first appellate authority confirmed the assessment order passed by the AO because in his opinion, purchase and allocation had not contemplated inter-state movement and the remittance slips indicating the name of the remitter would not make the movement, an inter-state movement.  An appeal was made to the State Sales Tax Appellate Tribunal (“Tribunal”) wherein it was observed that there was no clause in the allocation order or any subsequent agreement specifying that the delivery instruction to despatch the goods to Kottayam or Goa was an incidence of sale.  After taking delivery of the goods, the taxpayer had distributed goods to its branches.  The subsequent movement of rubber was an independent transaction and not connected with this transaction and transaction could not be held to be an inter-state transaction.  The  Tribunal further held that purchases were made by the taxpayer as one unit and the branches and factories were only its limbs.  Further mere furnishing of 'C' Forms would not alter the character of the transaction from an intra-state sale to an inter-state sale.  The Tribunal upheld the demand and dismissed the contention of the taxpayer that assessment of STC as inter-state sales remain unchallenged.

Aggrieved of the Tribunal’s order, an appeal was made to the HC where the taxpayer contended that since STC reserved the right to cancel/ modify the
application / allocation, the contract would be concluded only when the deliveries were affected.  The taxpayer also argued that by not challenging the assessment of STC, the State had already decided the character of the transaction and it cannot change its position.

The HC observed that the fact that STC reserved the right to alter or cancel the allotment did not touch on what the parties contemplated as regards the movement of goods.  The HC held that no records are available to demonstrate that the allotment was intended to result in movement of goods to branches of the taxpayer and that after having purchased the goods, the taxpayer had issued dispatch instructions for movement of the goods to the other states. Since there was no link between the purchase and dispatch, the HC rejected the case of the taxpayer that the movement is nothing but an inter-state sale. 

MRF Limited v The State of Tamil Nadu – 2012-VIl-76-MAD (Madras HC)

Sale of camera by one service provider to another where both the parties are not carrying any business of buying, selling, supplying or distributing goods shall not be liable to VAT/CST

The taxpayer, a company running a diagnostic center in Bangalore had purchased a second hand Gamma Camera from M/s Spect Lab Medicine Services (“Spect”) (who had purchased it originally from M/s Wipro GE Medical Systems Limited, the transaction being liable to sales tax).  Both the taxpayer and Spect were rendering medical services and thus not registered under Karnataka VAT as a result of which no tax invoice was raised.  When the camera was being transported from Pune to Bangalore by road, the check-post authorities in Karnataka detained the camera and demanded a penalty on the ground that no tax invoice or sale bill for movement of goods was produced and neither consignor nor consignee were registered under respective State VAT Acts.  Aggrieved of the order of the check-post authorities, an appeal was filed which finally reached before the HC of Karnataka.

The taxpayer argued before the HC that they and the seller are not doing any business nor they are ‘dealers’ in terms of Karnataka VAT.  Since both of them are not registered under Karnataka VAT, no tax invoice can be issued and instead a debit note has been issued.  The Revenue Authorities contended that the taxpayer did not obtain any prior permission of the competent authorities for inter-state transportation of materials not attracting sales tax under Karnataka VAT as required by a circular.  The HC held that the question of producing the sale bill and tax invoice did not arise since it involved purchases by a service provider from a service provider.  Moreover, the circular was held to be non-applicable in the present case as it was an internal communication only and was not known to the general public.  The documents submitted were considered to be sufficient and the matter was decided in favour of the taxpayer.

Elbit Medical Diagnostics Limited, Bangalore v The Additional Commissioner of Commercial Taxes (Appeals), Zone-1, Bangalore – 2012 (73) Kar LJ 423 (Karnataka HC)

Excise

MODVAT credit cannot be denied on account of storage tanks being immoveable property

The taxpayer availed Modified Value Added Tax (“MODVAT”) credit on structural steel items used in construction of storage tanks for storage of water as well as syrup and molasses (arising as a by-product in course of manufacturing activity).  In the relevant period the MODVAT credit provisions didn’t specifically include ‘storage tanks’ in the definition of ‘capital goods’ – basis this, the Revenue Authorities contended that credit couldn’t be availed on inputs like structural steel items for manufacture of storage tanks by treating storage tanks as ‘capital goods’.

The insertion of ‘storage tanks’ in the definition of ‘capital goods’ in the subsequent period was held by the HC to be clarificatory and the benefit was extended for the earlier periods too by holding the storage tanks to be a component of the main machinery and thereby qualifying as ‘capital goods’ despite the fact that storage tanks were embedded to the land.

CCE v Doodhganga Krishna Sahakari Sakkare Karkhane Niyamit, (2012) 37 STT 41 (Karnataka HC)

Bill of export not mandatory for rebate claims for supply of goods from Domestic Tariff Area to SEZ units under ARE-I

The taxpayers filed claims of rebate under Rule18 of the Central Excise Rules, 2002 on the grounds that they had supplied goods to SEZ units.  During the scrutiny of documents submitted with the rebate claims, original authority noted that bill of exports has not been filed with the claims.  Therefore, show cause notices were issued to the taxpayer proposing to reject the claims.  Subsequently, the adjudicating authority vide impugned orders-in-original (“OIO”) rejected the said rebate claims.  Being aggrieved by the OIO, taxpayer appealed before Commissioner (Appeals), which decided in favour of the taxpayer which was the subject matter of this revision application.

Basis various circulars issued in this regard, the revision application filed by the Revenue Authorities was rejected and it was held that in case export entitlements are not availed, the movement of goods from the place of manufacture in DTA to SEZ shall be on the basis of ARE-1.  In the present case taxpayers are not availing any export entitlement, hence they were not required to file any shipping bill.  Further, although bill of export is required to be filed for making clearances to SEZ, yet the substantial benefit of the rebate claim cannot be denied on this lapse only.

Rohit Poly Product Pvt Ltd, 2012 (284) ELT 137 (GOI)

Expenses incurred towards pre delivery inspection and free sales services provided by dealer to a vehicle owner during the warranty period, is not includible in the transaction value of the vehicle

The taxpayer was manufacturing Indica / Indigo cars at its Pimpari factory in Pune which were sold to end customers through a nation-wide dealer network (vide a group company as an intermediary).  As per the dealership agreement, the dealer was required to carry out pre delivery inspection before a car was actually delivered to the end customer. Further, after a car was delivered to the customer, the customer was entitled to bring the car to the dealer for getting the said car serviced after running the car for certain number of kilometers or certain number of days.  A dealer was required to conduct such servicing free of cost.  The expenses incurred by a dealer to conduct pre delivery inspection and free after sales services were borne by the dealers from the dealer margin.  The contention of the Revenue Authorities was that excise duty should not only be paid by the taxpayer on the price paid by a dealer to the taxpayer for the sale of a car to such dealer, but should also include the aforementioned expenses incurred by the dealer in providing the pre delivery inspection and after sales services free of cost.  This contention was essentially based on the reasoning that such expenses incurred by a dealer are essentially additional consideration to taxpayer for sale of cars by the taxpayer to such dealer (over and above the sale price of a car charged by the taxpayer from such dealer).

The Revenue Authorities were supported in their contention by Circular no 643/34/2002 dated July 1, 2002 and the decision in Maruti Suzuki’s case [2010 (257) ELT 226 (Tri. - LB)].  The taxpayer challenged the validity of the aforementioned circular and contended that once the car is sold by the taxpayer to a dealer, no further transaction takes place between the taxpayer and that dealer and hence no further consideration flows from the dealer to the taxpayer.

The Bombay HC upheld the contention of the taxpayer and held that it is the contractual obligation of the dealer to provide free pre delivery inspection and after sales services to end customers; the dealer is not providing the said free services on behalf of the taxpayer to the end customers. The Bombay HC also held that no amount was flowing from dealers to the taxpayer on account of such free services and hence it cannot be said that there was flow of additional consideration from the dealers to the taxpayer.

The Bombay HC concluded that the Circular relied upon by the Revenue Authorities was erroneous but refused to comment on the Maruti decision since the same is pending before the Supreme Court.

Tata Motors Ltd v Union of India, 2012 (193) ECR 0312 (Bombay HC)

Since no time limit has been prescribed under section 11D of Central Excise Act, if recovery proceedings are initiated within reasonable time, the same cannot be struck down as time barred

The taxpayer was engaged in manufacturing induction furnaces and other engineering goods, thus regularly paying excise duty on such goods.  However they were found selling certain goods on ‘as such’ basis ie without carrying out any manufacturing activity and charging excise duty on the same from the purchasers ie selling the goods at inflated prices and depositing the same with the department by adjusting the excess CENVAT credit lying in their account.

A show cause notice was issued by the Commissioner of Central Excise, Ahmedabad regarding the same as the Revenue Authorities considered the entire transaction to be irregular - as per section 11D the taxpayer was liable to deposit such an amount with the Government in its entirety.  The matter finally reached the Gujarat HC.

The Gujarat HC ruled against the taxpayer and noted that section 11D provides for the deposit of any amount to the Central Government so collected in the guise of duty on any excisable goods which are wholly exempt or are chargeable to nil rate of duty.  On the argument of limitation, the HC held that section 11D does not provide any such rigid time limit; as long as the recovery proceedings are initiated within the reasonable time, the same cannot be quashed as being time barred.  Reasonable period of time will depend upon the facts of the case under consideration.  In the present case nothing has been pointed out to suggest that despite the full knowledge of the method employed by the taxpayer, the Revenue Authorities did not raise any demand for an unreasonably long time.

CCE, Ahmedabad-II  v  Inductotherm (I) Pvt Ltd, 2012 (283)ELT 369 (Gujarat HC)

‘Works contract service' in respect of erection and commissioning of transmission towers had a connection with output service of telecommunication and hence eligible as ‘input service’

The taxpayer availed CENVAT credit of service tax paid on the input side works contract services in respect of erection and commissioning of transmission towers used for provision of telecom services.  The same was challenged by the Revenue Authorities on the grounds that the input works contract services were in respect of erection and commissioning of transmission towers and, as these towers are immovable property, they would not qualify as 'capital goods' under the CENVAT Credit Rules 2004 and consequently there was no connection between the 'works contract service' and the 'output service' of telecommunications.

The taxpayer submitted that status of the transmission towers is not relevant to the relation between the 'input service' and the 'output service'.  To support their argument, the taxpayer relied upon the stay order passed by the CESTAT in the case of Suzuki Motorcycle (I) Pvt Ltd v CCE, Delhi-III [2012 (25) STR 405 (Tri-Del)].  In the said case also, the question was whether 'commercial or industrial construction service' which was used for construction of certain buildings which, in turn, was used for manufacture of excisable goods could be considered to be 'input service' vis-a-vis the manufacture of the goods.  The CESTAT took a prima facie view in favour of the taxpayer (manufacturer) and granted waiver and stay.

The CESTAT held that there is a clear analogy between the instant case and the case of Suzuki Motorcycle (supra) and therefore waiver and stay was granted.

Vodafone Essar Cellular Ltd v CCE&C, Cochin 2012-TIOL-1510

Trading activity was not an ‘exempted service’ prior to 1-4-2011 and thus no question of reversal of service tax credit/ maintaining separate accounts on that activity arises

The taxpayer was registered as input service distributor and was distributing input service credit to its various manufacturing units (“Units”) during the material period.  The Units took the CENVAT credit of those input service and utilized the same for payment of duty of excise on the pharmaceutical formulation (excisable goods) manufactured and cleared during the material period.  Simultaneously the Units were also buying similar formulation from the third parties and marketing the same ie they were engaged in trading activity.  During the material period the trading activity was not specified as an ‘exempt service’ under the CENVAT credit rules.

The Revenue Authorities treated the activity of trading as an ‘exempted service’ and also noted that the Units were not maintaining separate accounts in respect if input services which were utilized in relation to manufacturing of dutiable products and those utilized in relation to the trading activity.  On this basis, the Revenue Authorities issued show-case notices to the Units for recovery of CENVAT credit taken on input services used in relation to trading activity along with applicable interest and penalty. 

The CESTAT prima facie held that the Units were lawfully utilizing the entire credit for payment of duty on the dutiable final products and Units could not have been expected to maintain separate accounts since during the material period the trading activity was not specified as an ‘exempt service’ under the CENVAT credit rules.  As a result, waiver of pre-deposit and stay of recovery was granted.

Micro Labs Ltd  v CCE, 2012 (284) ELT 407

Service tax

When under the contract there was no condition that the user should have been manufacturing the goods only under the brand name of the trade mark owner, the trademark owner is not liable to pay service tax on the remuneration received from other company under the category of ‘Franchise services’

In this case the taxpayer had entered into an agreement with M/s K P Pan Flavour Ltd to allow the use of their trade marks for the purpose of manufacture and sale of Pan Masala.  The show cause notices were issued to taxpayers alleging that the consideration received by it under the aforementioned agreement should be chargeable to service tax under the taxable category of ‘Franchise service’.  Against this, the taxpayer argued that the consideration paid by them would not be classified as ‘Franchise Service’ since M/s K P Pan Flavour Ltd were under no obligation not to manufacture any Pan Masala under the brand name of any other person and hence the conditions laid down under the taxable category of ‘Franchise Services’ were not satisfied.

The matter finally reached before the CESTAT wherein it was held that the consideration received by the taxpayer was not chargeable to service tax under the taxable category of ‘Franchise Service’ on the basis that there was no exclusivity of contract between the respondent and M/s K P Pan Flavour Ltd for the manufacture of Pan Masala.

CC, Kanpur V Kamla Kant & Co  [2012 (28) STR 186]

Service tax (on reverse charge basis for ‘import of services’) is payable on gross amount paid to the service provider inclusive of income tax deducted at source by the Indian service recipient

In this case, the taxpayer had received technical and project consultancy services from an offshore service provider.  Accordingly, the taxpayer paid service tax on reverse charge basis on import of the aforesaid services.  However, in order to determine the taxable value for the purpose of payment of service tax, the taxpayer excluded the amount of Tax Deduction at Source (“TDS”) paid and deposited service tax on the invoice value less the TDS amount.  To this, the Revenue Authorities contended that the TDS amount was also liable to be included in the ‘gross value’ of services provided and accordingly, service tax had to be discharged on the entire invoice value inclusive of the TDS amount.

The CESTAT observed that under the contract entered between the taxpayer and the service provider, it was stated that the taxpayer was liable to pay an amount net of taxes to the service provider and taxes if any payable in addition to the contract price.  The CESTAT held that as per the provisions of service tax laws in cases of liability under reverse charge, the service recipient is deemed as the person providing services.  Further the ‘gross amount’ / consideration payable for any service is the total amount charged for providing such services.  Basis the above, the CESTAT held that the gross value for the purpose of payment of service tax will be the invoice value inclusive of TDS amount.

TVS Motors Co Ltd V CCE, Chennai- III [2012 (28) STR 150]

Benefit under Notification No 12/2003-ST dated June 20, 2003 cannot be denied on the ground that the invoice does not separately state the value of goods sold.

The taxpayers were engaged in fabrication and installation of retail visual identity elements (“RVIs”) and sign boards for petrol pumps. A service tax demand was confirmed on them under ‘erection, commissioning or installation service’ and the exemption under Notification no 12/2003-ST was denied since the taxpayer had neither intimated the value of the goods sold nor provided any sale bills indicating the value of such materials sold.  Also, the Revenue Authorities contended that no sale had taken place as per the Central Excise Act and the ‘deemed sale’ concept given under Constitution cannot be adopted for the purposes of Notification no 12/2003-ST.  Separately, an order demanding excise duty on the fabricated items was set aside by the CESTAT for de novo consideration of issues involving excisability of goods and the valuation thereof.

The CESTAT did not accept the submission that ‘deemed sale’ could not be adopted for the purposes of the impugned Notification because Central Board of Excise and Customs (“CBEC”) itself acknowledged the concept in Draft Guidance Paper issued in respect of 2012-13 Budget.  The CESTAT observed that the taxpayer was eligible for exemption as no proof other than the value of excisable goods arrived at by the authorities would be required as the excise authorities were themselves making out a case that the taxpayer manufactured and sold excisable goods to petrol pumps for executing the contract in question.

Mehta Plast Corporation v  CCE, Jaipur-I 2012-54-VST-353

Where a government authority provides any services which are in the nature of its statutory obligations, the charges so recovered shall not be liable to service tax.

The taxpayer, a Department of the Government of Kerala, was established for providing life insurance coverage to the State Government employees and also for providing general insurance coverage for the assets of the Government/ Government instrumentalities, and the service tax was being discharged in respect of general insurance activities.  Various notices and orders covering different periods were issued to the taxpayer demanding service tax in respect of life insurance segment also.  Some orders were being set aside, some new orders were being passed despite the fact that certain previous orders were being set aside by appellate authorities at different levels. Aggrieved of the same, the taxpayer had filed two writ petitions before the HC of Kerala dealing with the same issue.

The taxpayer contended that it was an organ of the State Government itself and that the operations were in respect of insurance coverage to the employees of the State Government to discharge the statutory obligations under Rule 22A of Part 1 of Kerala Service Rules.  The Revenue Authorities contended that the liability to pay service tax originated from Finance Act, 1994 and it could not be made subject to any prescriptions in some other statues.  The taxpayer could have been granted exemption under section 93 had he sought for it and since he had not sought for it, no benefit should be allowed to him.  The HC held that services of life insurance were provided as part of the statutory obligations and thus not liable to service tax.

Kerala State Insurance Department v Union of India and Others – 2012-54-VST-231 (Kerala HC)

Circulars / Notifications

Customs

1.      Specified items required for the LR-SAM Programme of Ministry of Defence exempted from Customs Duty vide Notification No 57/2012-Customs dated October 18, 2012

Export incentives related

1.      Government announced the new Duty Drawback Rates vide Notification No 92/2012-Customs (N T) on October 5, 2012.  The new Duty Drawback Rates for 2012-13 has come into effect from October 10, 2012

2.      Vide Policy Circular No 7 (RE-2012)/2009-14 dated October 25, 2012, the DGFT clarified that duty credit scrips issued upto July 26, 2012 will continue to have validity of 24 months and duty credit scrips issued after that date will have validity of 18 months                                                                                                

Excise

1.      Specified items required for the LR-SAM Programme of Ministry of Defence exempted from Excise Duty vide Notification No 38/2012-CE dated
October 18, 2012

Service Tax

1.      The revised form ST-3 for filing of service tax return for the period April-June 2012 was issued