TAX CASE UPDATES - OCTOBER 2012

Direct Tax

High Court decisions

Expenditure incurred for acquiring know-how deductible u/s 35AB of the Act

The taxpayer is a manufacturer of equipments which are used for mining. It entered into an agreement with an American company on June 7, 1990 under which the American company was to transfer know-how to the taxpayer for a consideration of US$ 225,000 to be paid in three installments.  The taxpayer paid the first installment of INR 1,749,889 on November 29, 1990.  Subsequently, disputes arose between the contracting parties and the know-how was not transferred by the American company.  The taxpayer claimed a deduction of INR 1,749,889 under section 37 of the Income

Tax Act, 1961 (“Act”) but this claim was rejected by the tax officer who instead allowed the expenditure on an amortized basis under section 35AB of the Act.

The Supreme Court after considering the contention of the taxpayer and facts held that post insertion of section 35AB, such expenditure would clearly be deductible under section 35AB of the Act.  The Court held that despite the fact that the agreement had been terminated and balance payments were not made by the taxpayer, the use of the word ‘for’ in section 35AB needs to be emphasized and since the payment of INR 1,749,889 was made to the taxpayer under an agreement with the American company ‘for’ acquiring know how, the expenditure was covered under section 35AB of the Act and once section 35AB comes into play, section 37 would have no application.

Drilcos India Pvt Ltd vs. CIT (Civil Appeal No. 1400 of 2005) (Supreme Court)

Human error is not a justifiable ground for levy of penalty

For financial year 1999-00, the taxpayer filed a return of income on November 30, 2000 along with the tax audit report.  In the tax audit report, it was stated that the provision for payment of gratuity was not allowable; however, in the tax return the taxpayer claimed a deduction of this expense.  The assessment of the taxpayer was completed under section 143(3) of the Act in which the tax officer overlooked the error. 

However, vide notice under section 148 of the Act, the tax officer sought to reopen the assessment but no reason was stated for such reopening.  The taxpayer filed a letter with the tax officer requesting for the grounds for reopening of assessment and the above error was brought to the notice of the taxpayer.  Upon realizing the error, the taxpayer filed a revised return of income and paid the tax due along with the interest.  However, the tax officer initiated penalty proceedings and levied penalty @ 300 percent of tax sought to be evaded.

The appeal of the taxpayer was rejected by Commissioner of Income Tax (Appeals) [“CIT(A)”]. The imposition of penalty was also upheld by the Tribunal but quantum was reduced to 100 percent.  The High Court dismissed the appeal filed by the taxpayer, however upon appeal, the Supreme Court held that the contents of the tax audit report suggests that there was no concealment of income or furnishing of inaccurate particulars by the taxpayer.  The case was of an inadvertent and bonafide error and the calibre and expertise of the taxpayer has little or nothing to do with it.  Accordingly, the Court held that imposition of penalty in such a case was not justified since an error does not mean that the taxpayer is guilty of either furnishing inaccurate details or concealing income.

PriceWaterHouseCoopers Pvt Ltd v CIT Kolkata-I & Anr (Civil Appeal No 6924 of 2011)

High Court decisions 

Non compete fee paid to the key management personnel of the amalgamating entity is revenue expenditure

The taxpayer merged with three other entities under a scheme of amalgamation. Pursuant to the amalgamation, the taxpayer entered into a non-compete agreement with the Chairman and Managing Director (“CMD”) of the amalgamating companies to ensure that the CMD who had access to all the information on processes, know how, clientele and was in a position to influence the business of manufacture, sale and distribution of the taxpayer’s products did not render advise or consult any third party. Accordingly, to ensure that the CMD’s expertise does not prejudice the good prospects of the business of the taxpayer, the taxpayer paid a sum of INR 2.6 crores as non-compete fee under the said agreement to the CMD with an obligation to not compete for a period of 5 years. 

The taxpayer claimed these expenses as revenue deduction but the claim was disallowed by the tax officer on the ground that the expenditure increased the taxpayer’s market presence and improved its potential in the market, therefore the expenditure conferred an enduring benefit on the taxpayer and hence is capital in nature.  The order of the tax officer was upheld by the CIT (A).  Upon appeal, the Tribunal rejected the claim of the taxpayer. 

Aggrieved, the taxpayer preferred an appeal before the High Court.  The High Court after considering the contentions held that the expenditure was incurred by the taxpayer for fruitful exercise of the business it had acquired pursuant to the amalgamation.  The expenditure was incurred for performing its business and hence was revenue in nature.  Accordingly, the High Court allowed the appeal of the taxpayer. 

M/s Carborandum Universal Ltd v. JCIT (Tax Case (Appeal) No.244 of 2006) (Madras High Court)

Reassessment notice treating taxpayer as a non-resident’s agent is invalid without an order under section 163

The taxpayer purchased certain machineries from a German company.  The scope of the German company was to supply and erect machineries and for the purposes of erection, the German company deputed one of its employees.  During the course of assessment, the tax officer asked the taxpayer to explain why it should not be treated as a representative assessee of the deputed employee who did not pay any tax in India on his salary income.  The tax officer issued a notice under section 148 of the Act for financial years 1998-99 and 1999-00 to reopen the assessments.

The taxpayer filed a petition before the Gujarat High Court contending that without passing an order under section 163(2) of the Act holding the taxpayer as an agent of the deputed employee, notice issued under section 148 of the Act was without jurisdiction. The High Court held that since the tax officer had not passed an order under section 163(2) of the Act (treating the taxpayer as an agent), notice under section 148 of the Act cannot be issued. 

Arvind Mills Ltd v ACIT (Special Civil Application No 8858 of 2003/ 8857 of 2003) (Gujarat High Court)

Interest under section 234D applicable even to refunds granted prior to June 1, 2003

The taxpayer filed its return of income for financial year 2001-02 claiming a refund of approximately INR 23 crores.  The return was processed under section 143(1) of the Act and was granted to the taxpayer.  Subsequently, after completion of assessment under section 143(3) of the Act, the tax officer issued a demand notice of INR 200 crores along with an interest under section 234D of the Act.

The taxpayer filed an appeal against the demand of interest under section 234D of the Act on the ground that section 234D was applicable to refunds granted post June 1, 2003 since the provisions came into effect from this date.  The appeal was dismissed by the CIT (A) and on further appeal, the Tribunal allowed relief to the taxpayer. 

The High Court held that Explanation 2 inserted to section 234D of the Act vide Finance Act 2012 clarifies that the section is applicable to all pending proceedings as on June 1, 2003.  The Explanation is declaratory and there is no doubt that section 234D would need to be applied to all such pending proceedings.  Accordingly, the High Court ruled in favor of the Revenue and reversed the judgment of the Tribunal

CIT v M/s. Indian Oil Corporation Ltd (ITA No 2012 of 2011) (Bombay High Court)

Depreciation allowed to the owner of the asset; even where the transaction to sell is disguised as an agreement to lease

The taxpayer took a lease of a factory shed for a term of thirty years.  The lease deed granted the taxpayer full liberty to transfer, assign the premises on its own terms and conditions.  The lessor had the authority to claim the rent in advance for any period. At the beginning of the lease term, the lessor exercised the option and demanded advance rent for the entire period from the taxpayer.

The tax officer disallowed the deduction of lease rentals to the taxpayer on the ground that the expenditure was capital in nature.  The tax officer also disallowed the depreciation claim to the taxpayer.  Upon appeal, the CIT (A) upheld the order of the tax officer in relation to the treatment of lease rentals but allowed the depreciation claim to the taxpayer.  The Tribunal treated lease rentals as capital expenditure and disallowed the depreciation claim of the taxpayer.  

Upon appeal, the High Court after considering various clauses of the lease agreement and accompanying documentation concluded that the entire transaction was one of sale of property.  Accordingly, the High Court disallowed the deduction on account of lease rentals, holding that the expenditure was capital in nature but allowed the taxpayer depreciation under section 32 of the Act holding that the taxpayer was the owner of the asset. 

Mather & Platt (I) Ltd. v. CIT. (2012 25 taxmann 505) (Bombay High Court)

Denial of deduction under section 10A on account of extraordinary profits not permissible unless Revenue proves existence of an ‘arrangement’ to reduce the tax liability

The taxpayer is a wholly owned subsidiary of a German company and has two divisions in India, one at Kandla in the Kandla Free Trade Zone which is engaged in manufacture and export of industrial sewing machine needles (“Kandla division”) and the other in Mumbai, which is engaged in trading of industrial sewing machine needles (“Mumbai division”). The Kandla division exports its entire production of industrial machine needles to the holding company in Germany.  The taxpayer imports industrial sewing machines and undertakes trading of these imported machines from the Mumbai division.  The industrial sewing machines imported by the taxpayer are of a variety different from those manufactured and exported by its Kandla division. 

For financial year 2003-04, the taxpayer returned an income reflecting a profit of INR 20.54 crore from its Kandla division and claimed 100 percent deduction under section 10A in respect of these profits.  The taxpayer returned a loss of INR 70.29 lacs from its Mumbai division.  The tax officer restricted the deduction claimed by the taxpayer under section 10A of the Act to INR 13.17 crore invoking
section 10A(7) under the Act and taxed the balance amount as income from other sources.  The tax officer further held that trading loss from Mumbai division should be first set off against profits from Kandla division before deduction under section 10A is allowed.  The CIT (A) upheld the order of the tax officer. 

Upon appeal, the Tribunal allowed relief to the taxpayer on the ground that generation of extraordinary profits by the taxpayer does not lead to the conclusion that there exists an ‘arrangement’.   The Tribunal held that the tax officer had not been able to prove that any ‘arrangement’ existed. The tax officer ignored that since the entire production of the Kandla division was exported to the holding company, the division did not incur any marketing costs and hence the reduced cost of production resulted in higher profits of the Kandla division.  The Tribunal also held that the loss from the Mumbai division should not be set off before allowing deduction under section 10A of the Act.

On appeal, the High Court dismissed the ground on ‘arrangement’ holding that the Tribunal had considered the entire facts and there was no ‘question of law’ before the High Court.  On the set off of losses of the Mumbai division against the profits earned by the Kandla division before allowing relief under section 10A of the Act, the High Court ruled in favor of the taxpayer.

CIT vs Schmetz India Pvt Ltd (ITA No. 4508 of 2010) (Bombay High Court)

If cost of acquisition is not ascertainable, capital gains tax liability will not arise

The taxpayer is a private limited company which entered into an agreement with a Hindu Undivided Family (“landlord”) to rent certain floors of an under construction property for 10 years with the understanding that few more floors shall be rented to the taxpayer upon completion of construction.  The floors were to be rented at an agreed monthly rental and the taxpayer also advanced a sum of INR 8.5 lakh to the landlord at an interest of 6% per annum for completion of construction.  It was placed on record that the taxpayer had itself taken a loan of INR 8.5 lakh at an interest of 15 percent per annum.   After 7 years from the date of the agreement, the taxpayer relinquished the tenancy rights for which it received a consideration of INR 15 lakh. 

The taxpayer contended that the consideration received for relinquishment of tenancy rights represented a capital receipt and hence was not liable to tax.  However, the tax officer held that the difference between the consideration and the advance paid (including stamp duty) was liable to tax as ‘capital gains’.  The CIT (A) and the Tribunal upheld that that the relinquishment of tenancy rights resulted in capital gains. 

The High Court held that section 55(2) of the Act inserted a deeming fiction in relation to cost of acquisition of tenancy rights w.e.f 1.4.1995 and this section did not have retrospective effect.  Thus, the section could not apply to the present case since it related to financial year 1985-86.   The Court held that the agreement with the landlord was a composite agreement for renting of property, fixation of monthly rent and advancing loans and it was not possible to determine the cost of acquisition of tenancy rights.   Accordingly, High Court relying on the Supreme Court ruling^[1] held that gains on relinquishment of tenancy rights were not liable to tax since the cost of acquisition could not be determined. 

Amora Chemicals P Ltd. v CIT (ITR No. 5 of 2002) (Gujarat High Court)

Expenses incurred for a new line of business proposed to be undertaken in a joint venture is not deductible

The taxpayer is engaged in the business of printing and publishing of newspapers, periodicals and in the production of video cassettes. For financial year 2000-01, the taxpayer claimed a deduction in relation to expenses incurred towards its share of the joint venture company, proposed to be set up for life insurance business.  However, the proposed insurance business was never launched and the activity of life insurance business was not undertaken by the taxpayer.  The tax officer disallowed the claim of the tax officer in relation to these expenses and the CIT (A) upheld the order of the tax officer holding that these expenses were capital in nature. 

The Tribunal allowed the appeal of the taxpayer on the basis that the expenditure was claimed in respect of an ‘existing business’.  The Revenue filed an appeal before the High Court arguing that the expenditure towards a proposed business, the purpose of which is never fulfilled, cannot be allowed as a deduction. 

The High Court after considering the judicial principles on when the two business activities can be said to be ‘interlinked’ or ‘interlaced’, held that based on the facts of the case while there did exist common funding and a management which conceived the business idea, it did not make the proposed joint venture business an ‘existing business’ in view of the vast differences in the two lines of businesses, absence of common staff, personnel, place of business, etc.  The fact that the identity of the joint venture partner was unknown is also relevant.  Accordingly, the Court held that these expenses would qualify as pre set up expenses in respect of an aborted activity and thereby disallowed^[2]. 

CIT v Hindustan Times (ITA No 95 & 100/2011) (Delhi High Court)

Revenue cannot deny statutory benefit to the taxpayer, even if it has not been claimed in the return of income

The taxpayer, a private company, filed its return of income for financial year 2006-07 returning dividend and long term capital gains as exempt from tax and paid minimum alternate tax (“MAT”) under the provisions of the Act. 

In the return form, the taxpayer inadvertently reported long term capital gains instead of stating its taxable income as ‘nil’.  Upon processing of the return, the Revenue Authorities issued intimation under section 143(1), raising a demand on the taxpayer.  Upon receipt of the intimation, the taxpayer realized the error made in the return and since the time limit to revise the return had lapsed, the taxpayer filed a rectification under section 154 of the Act.  No order was passed in response to the rectification.   The taxpayer filed a revision petition under section 264 of the Act explaining the mistake in the original return of income.  The revision petition of the taxpayer was disposed by the Commissioner. 

The taxpayer filed a writ against the order of the Commissioner.  The High Court after considering the facts observed that the taxpayer claimed long term capital gains as exempt under section 10(38) of the Act and its inclusion in total income was a mere omission.  Accordingly, the High Court held that the order of the Commissioner proceeded on a fundamental error that the taxpayer had not claimed an exemption under section 10(38) of the Act.   Hence the order was not sustainable and the Commissioner should consider the matter afresh on merits.  

Sanchit Software and Solutions (P) Ltd. vs. CIT [2012] 25 taxmann 123 (Bombay High Court)

Tribunal decisions 

Prior to assessment year 2013-14, MAT provisions do not apply to Banking and Electricity companies 

The taxpayer being a bank contended that it was not liable to pay MAT under section 115JB of the Act since provisions of Companies Act, 1956 (“Co Act”) were not applicable to the taxpayer.   The Tribunal observed that section 115JB of the Act is applicable to all companies; however, it requires the taxpayer to state its book profits in accordance with schedule VI of the Co Act. 

Under the Co Act, Electricity and Banking companies were not required to prepare accounts in accordance with schedule VI.  Further, the Finance Act, 2012, effective April 1, 2013 was amended and it was clarified that companies which are not required to prepare its accounts in accordance with Schedule VI, would need to prepare profit and loss account under schedule VI of the Companies Act for the purposes of computing its MAT liability.   The Tribunal held that such an amendment to the Act would mean that prior to financial year 2012-13, provisions of section 115JB of the Act would not apply to companies which were not required to maintain accounts as per Schedule VI of the Co Act, 

M/s State of Hyderabad vs DCIT (ITA No 578/HYD/2010) (Hyderabad Tribunal)

Buying agency services are not in the nature of “Fees for Technical Services”

The taxpayer is a resident of Hong Kong and its sourcing division provides buying agency services to various customers including Adidas India Marketing Private Limited (AIMPL), an associated enterprise of the taxpayer. The scope of the services rendered by the taxpayer included buying agency services, centralized media, advertising planning, market research, public relations, sports marketing services, etc.   Another division of the taxpayer provided regional marketing and administrative support services to the group’s distribution entities including AIMPL.

The taxpayer did not offer to tax the buying commission it received from services rendered to AIMPL.  During the course of assessment, the tax officer held that such commission was in the nature of fee for technical services (“FTS”) and hence liable to tax in India.  The addition made by the tax officer was confirmed by the Dispute Resolution Panel (“DRP”). 

On appeal, the Tribunal held that for a particular stream to be characterized as FTS, it is necessary that the services should be ‘managerial’, ‘technical’ or ‘consultancy’ in nature.  The services rendered by the taxpayer are in the nature of procurement services and these cannot be characterized as ‘managerial’, ‘technical’ or ‘consultancy’ in nature.  Accordingly, the income of the taxpayer does not qualify as FTS. 

Adidas Sourcing Limited v ADIT (ITA No 5300/Del/2010) (Delhi Tribunal)

Subsidiaries engaged in providing marketing support services do not necessarily constitute a dependent agency PE

The taxpayer is a tax resident of Switzerland and operates online platform to facilitate purchase and sale of goods and services to users in India. The taxpayer entered into a marketing support agreement with eBay India Private Limited (“eBay India”) and eBay Motors India Private Limited (“eBay Motors”).  The tax officer held that the revenue earned by the taxpayer from its operations in India was in the nature of FTS under the Act.  Upon appeal, the CIT (A) held that the income is not in the nature of FTS, however, the taxpayer had a permanent establishment (“PE”) in India and invoking Rule 10 of the Income Tax Rules, 1962, attributed 10 percent of the revenues as profits attributable to the Indian PE. 

On appeal, the Tribunal held that the role of eBay India and eBay Motors was limited to providing marketing support to the taxpayer.  These entities had no role in directly introducing specific customers to the taxpayer and the transaction between the buyer and seller is finalized through the taxpayer’s website operated from outside India.  While eBay India and eBay Motors were providing exclusive services to the taxpayer and were thus dependent agents of the taxpayer, neither eBay India nor eBay Motors performed any of the specified activities to qualify as a PE under Article 5 of the tax treaty and hence eBay India and eBay Motors cannot be said to constitute a dependent agent PE of the taxpayer in India. 

eBay International AG v ADIT (ITA No 6784/M/2010) / ADIT v eBay International AG (ITA No 7046/M/2010) (Delhi Tribunal)

Pending proceedings on the amalgamating company have to be completed on the amalgamated company post merger, by issuing fresh notice on the amalgamated entity

WNS Customer Solutions Pvt Ltd (“WNSCS”) filed its return of income for financial year 2005-06 on November 25, 2006 and its case was referred to the transfer pricing officer to determine the arms’ length price for certain international transactions.   Separately, WNSCS filed an application before the Bombay High Court seeking amalgamation with WNS Global Services Pvt Ltd (“WNSGS”) effective
April 1, 2007.  The merger was approved by the Bombay High Court and WNSCS filed a letter with the transfer pricing officer stating that in view of the merger, the assessment could not be concluded on WNSCS.  The letter was not given effect to and the transfer pricing adjustment was made for assessment year 2006-07 on WNSCS.

WNSGS (as successor to WNSCS) filed an appeal before the Tribunal.  The Tribunal held that pursuant to the scheme of amalgamation, WNSCS ceased to exist with effect from April 1, 2007 and the notice under section 143(2) of the Act was issued on WNSCS on October 4, 2007.   Since the company ceased to exist with effect from April 1, 2007 (pursuant to the order of the Bombay High Court), the assessment on WNSCS was not valid.  The Revenue Authorities could carry out the assessment in the hands of the amalgamated company upon issuance of a fresh notice under section 143(2) of the Act. 

WNS Global Services Pvt. Ltd v. DCIT (ITA No.1198/Bang/2010) (Bangalore Tribunal)

Indirect_tax

VAT/CST

Uttar Pradesh (“UP”) State Government cannot levy VAT on inter-state sale of natural gas from the State of Andhra Pradesh

The taxpayer has entered into a production sharing agreement (PSA) with the Government of India for exploration and sharing of natural gas from site located in Andhra Pradesh. In pursuance of PSA, the taxpayer has entered into Gas Sales and Purchase Agreement (GSPA) with its customers. Customers take delivery of natural gas in Gadimoga, Andhra Pradesh (“AP”) on furnishing of Form C to the taxpayer issued by assessing authority of the State of UP. The customers have entered into separate agreements with Reliance Gas Transportation Infrastructure Ltd. (“RGTIL”) and Gas Authority of India Ltd. (“GAIL”) for transportation of gas from Gadimoga, Andhra Pradesh to Hajira in Gujarat and from Hajira (Gujarat) to Auraiya, UP, from where gas is taken to their respective plants or factories for manufacture of fertilizer, chemicals etc. The taxpayer has paid Central Sales Tax on natural gas extracted in Andhra Pradesh. Show cause notice was issued to the taxpayer by State of UP demanding Value Added Tax (VAT) on sale of natural gas as intra-state sales and demand was confirmed. The taxpayer has filed writ petition challenging levy of VAT.

The Revenue contended that gas pipelines carries gas for different customers in a comingled form and hence the gas in transit remains unascertained goods which becomes ascertained goods only at Auraiya, UP - thus sale shall be deemed to have taken place at Auraiya, UP and not in AP, and it cannot be an instance of inter-state sale. The taxpayer contended that the title of natural gas gets transferred to the buyers at the delivery point ie Gadimoga, UP and thereafter natural gas is transported to Gujarat and then to Uttar Pradesh thereby rendering it to be a case of inter-state sale under Section 3 of CST Act.

The High Court concluded in favor of the taxpayer and inter alia held that where situs of sale has not been fixed or covered by any legal fiction created by the appropriate legislature, the location of sale would be the place where the property in goods passes. It is the passing of property within the State, which has to be latched upon for the purpose of determining whether a sale is inside or outside the State. The High Court went on to hold that the natural gas is handed over to a bailee or transporter in terms of the agreement at Gadimoga, AP and after travelling a long distance it reaches the State of UP - movement of gas from Gadimoga itself is indicative of the fact that the sale in question is an inter-state sale.

Reliance Industries Limited v. State of UP [Allahabad High Court (Lucknow Bench) Order dated September 7, 2012]

Non-prescription sunglasses would qualify for concessional VAT rate under Maharashtra VAT laws available for “Medical Devices & Implants”

Maharashtra VAT allows for a concessional VAT rate for goods classifiable under the description “Medical Devices & Implants”. “Spectacles, Correctives, Protective or other” was specifically notified as falling under the aforesaid description in the relevant period. In a ‘Determination of Disputed Question’ (an advance ruling process provided under Maharashtra VAT) it was held by the Commissioner that it would be absurd to say that the sunglasses are medical devices and accordingly held that the non prescription sunglasses would not be eligible for the concessional VAT rate.

Before the High Court the Revenue contended that under the Central Excise Tariff, Chapter Heading 9004 (referred to in the relevant notification under Maharashtra VAT) deals with spectacles as also goggles and while incorporating the provisions of the Central Excise Tariff in the notification, the State government has deliberately not included goggles within the notification. Therefore, sunglasses / goggles would be ineligible for the concessional rate of VAT.

The Bombay High Court rejected this contention and held that corrective spectacles as also protective spectacles are liable to be considered as ‘Medical Device’ as per the VAT notification. It is not the requirement of the notification that the protective spectacles such as protective sunglasses can be considered as medical device only if it is sold under a prescription. The High Court went on to hold that in common parlance protective sunglasses may not be considered as a medical device, but if the legislature for a particular purpose has notified protective sunglasses to be Medical Device, it would not be open to the Commissioner to hold to the contrary. Similarly, the fact that under the Central Excise Tariff, spectacles and goggles are separately classified under different sub-headings would not be of much relevance once it is accepted that the protective sunglasses are covered under the notification.

The Addl. CST v Chheda Marketing (2012) 54 VST 45 (Bombay High Court)

Contract with ONGC for letting out manned cranes and placing them at ONGC’s disposal for carrying out operations conforming to specifications of ONGC (along with the necessary accessories with valid permits/licences, insurance, etc., for performing the duties as advised by ONGC), qualifies as transfer of right to use goods and is subject to VAT

The taxpayer entered into contract with ONGC for letting out manned cranes, for carrying out the operations conforming to specifications of ONGC along with the necessary accessories with valid permits/licences, insurance, etc., for performing the duties as advised by ONGC, at the appointed time and place at sites in Assam. Cranes placed at the disposal of ONGC should be available throughout the contract duration with the required efficiency/fitness to handle loads up to the designed capacity. Per day hire charges for the cranes were inclusive of all expenses necessary for continuance of service of the cranes. Repair and maintenance of the cranes and establishment expenses were of the taxpayer. Issue which arose for consideration was whether the transaction involves the transfer of right to use the goods for consideration and taxable under the Assam Value Added Tax Act, 2003.

The High Court held that for determining whether the transaction involves transfer of right to use the goods, there must be goods available for delivery; there should be consensus as to the identity of goods; the transferee should have legal right to use the goods, to the exclusion of the transferor.

The contract was for hiring of the cranes for carrying out the operations as per the specifications of ONGC. The work was not to be executed by the contractor but by the ONGC itself and the contractor-taxpayer was to provide cranes on hire in connection with the said work. The cranes were at the disposal of the ONGC and per day hire charges were paid for all days, except maintenance days. Services of staff and maintenance were incidental to the hiring of the cranes. Liability to the third party was on account of the fact that in spite of hiring of the cranes by the ONGC, the employees operating the cranes were provided by the taxpayer. It was ONGC alone which was entitled to exclusively use the cranes.

On the basis of the above it was held that the transaction involved transfer of right to use goods for consideration and thus taxable under the Assam Value Added Tax Act, 2003.
Brahmaputra Valley Construction and Suppliers v ONGC, (2012) 53 VST 401 (Gauwahati High Court)

For classification of multifunctional printer/copiers/scanners, dominant or main purpose to be seen

The issue was whether multi functional printers/machines and their spares and consumables, during the period 1st April, 2005 to 31st March, 2007, were taxable under Entry No. 41A of the third schedule of the Delhi Value Added Tax Act, 2004 or are taxable under the residuary head @ 12.5%.

The High Court held that the doctrine of dominant purpose of the multi-functional machine will determine whether it is an input or output unit of an automatic data processing machine. In case the principal or dominant purpose is to act as input or output unit, then it would and will be covered by Entry 41A at Sr. No. 3. However, in case multi-functional machine is a duplicator or a photocopying machine, which incidentally can be used as a printer or a scanner, etc., it would not qualify and cannot be treated and regarded as input or output unit of automatic data processing machine. It would not qualify under Entry No. 41A and will be covered by the residuary tax rate. Accordingly, for the purposes of classification, the principal or dominant purpose has to be determined in each case with reference to machines in question.

In this regard, the High Court examined the relevant portion of Entry No. 41A under Delhi VAT and compared that with the entries under the Central Excise Tariff Act, 1985 as mandated under the interpretative rules provided under Delhi VAT laws – the High Court also recorded its understanding of such interpretative rules under Delhi VAT laws..

Ricoh India Limited v Commissioner, 2012 (193) ECR 0049 (Delhi High Court)

Customs

Refund of SAD/ACD permissible on goods exempted from payment of VAT/Sales Tax

Commissioner (Appeals) had allowed the benefit of Notification 102/2007-Cus (provides for refund of ACD/SAD component of customs duty) to the taxpayer in a scenario where the goods in question were exempted from VAT under Delhi VAT laws. The Revenue filed an appeal and sought to stay the said order of the Commissioner (Appeals) on the ground that the above notification provides for refund on the condition of payment of VAT/CST and given the exemption from VAT, this condition would not be met.

The Tribunal, in its stay order, noted that SAD/ACD component of customs duty (of 4%) is levied for counter-balancing for Sales Tax/VAT, once the importer fulfils the obligation of paying both the SAD/ACD and the Sales Tax/VAT, the taxpayer is entitled to refund of the SAD/ACD. In case the subject goods are exempted from VAT/CST, the same should have also been exempted from SAD/ACD and the taxpayer would be entitled to claim refund of SAD. Basis the above, the Tribunal prima facie held that SAD/ACD refund can be claimed on goods that are exempt from payment of VAT/Sales Tax.

Commissioner of Customs v Katyal Metal Agencies, 2012-TIOL-1053-CESTAT-KOL

Excise

Wrongly taken credit reversed without utilization, taxpayer not liable to pay interest

The taxpayer reversed the entire amount of CENVAT credit attributable to exempted products without utilizing the said credit. The issue was whether taxpayer was liable to pay interest under Section 11AB of the Central Excise Act.

The High Court of Karnataka in CCE & ST v. Bill Forge Pvt. Ltd, had earlier held that interest is compensatory in character and is imposed on taxpayer who has withheld payment of tax as and when it was due and payable. Levy of interest is on the actual amount withheld and the extent of delay in paying the tax from the due date.  

Basis the above, the Karnataka High Court in this case held that the interest cannot be claimed from the date of wrong availment of CENVAT credit and interest would only be payable from the date CENVAT credit is utilized wrongly.

CCE v Pearl Insulation Ltd, 2012 (27) STR 337 (Karnataka High Court)

Assembled TV sets disassembled and cleared to satellite units by taxpayer-manufacturer, classifiable as television receivers under Tariff Entry 8528 only and not as parts of TV

The taxpayer was a manufacturer of various components of television sets.  The components were manufactured at its factory at Delhi. Thereafter, the said components were assembled in the same factory for the purpose of testing of each component and for checking the working of each television set.   Thereafter the television sets so assembled   were disassembled and then transported as parts to various satellite units of the taxpayer company at different places. In these satellite units, the separate components were re-assembled and some further processes were carried out in order to make those sets marketable. The issue before the Supreme Court was  whether such components,  which  are  manufactured  at  and transported from the factory of the taxpayer at  Delhi  are  liable to be assessed as ‘Television Receivers’ or as ‘Parts of Television Receivers’.

The Revenue contended that the taxpayer had chosen to disassemble the television sets as parts before transporting them in order to avail the lower tax rate payable on such parts. In this regard they relied upon Rule 2(a) of the Rules for the Interpretation of Excise Tariff.

The Supreme Court concluded against the taxpayer and held that once the complete television sets were assembled, the manufacturing process was over. It is not relevant as to what happened subsequently or it was not relevant that the television sets (in assembled or disassembled form) were sent to satellite units. On this basis, the Court upheld the classification of the manufactured goods as complete television sets adopted by the Revenue.  The Court laid a lot of emphasis on the factual matrix in the case where at the time of transportation of parts, they were identified as distinct units and that the goods assembled at the satellite units were identified as the parts dispatched from the factory.

The Supreme Court clarified the above conclusion by stating that if the taxpayer had been in the practice of simply manufacturing and transporting parts of Television Receivers in bulk, while leaving the assembling, matching and numbering functions to be done at the satellite units, then the conclusion would have been different.

Salora International Ltd. v CCE, 2012 (284) ELT 3 (Supreme Court)

Service tax

Service tax notification pertaining to SEZ related exemption should be interpreted in a broader manner in light of the policy objectives as enshrined in the SEZ legislation

The taxpayer (Special Economic Zone Developer and Special Economic Zone Units) filed various refund claims towards the Service Tax paid on services consumed within the SEZ and services which were used in the authorized operations of the SEZ units. Some of the refund claims were rejected on the ground that the services in question do not bear a direct nexus with the authorized operations undertaken by the taxpayer. Some other claims were rejected on the ground that they pertained to services which were wholly consumed in SEZ and for such services, as per Notification 15/2009-ST, only exemption is available and not the refund route.

On the first objection the Tribunal held that when the SEZ Approval Committee has given the nexus and justification for use of services in relation to authorized operations, it was totally unwarranted on the part of the adjudicating authority and the appellate authority to go into this question and come to their own findings in the matter. Thus refund claim in relation to input services cannot be disallowed on the ground that the various services does not bear a direct nexus with the authorized operations undertaken by the taxpayer.

On the second objection the Tribunal held that where the service tax liability was discharged in relation to services which were wholly consumed within SEZ, there was no necessity to discharge the service tax liability ab initio. However, that does not mean that in a case where service tax liability has been discharged, the appellant is not eligible or not entitled for refund of the service tax paid under the provisions of Section 11B of the Central Excise Act, 1944 read with Section 83 of the Finance Act, 1994. If the taxpayer was entitled to refund under Section 11B, then the same cannot be denied on the ground that the claim was made under Notification No. 09/2009-ST. In this regard, the overriding effect of Section 51of the SEZ Act was emphasized upon to underline the necessity of interpreting exemption notifications pertaining to SEZs in a broader manner in line with the policy objective of SEZs.

TATA Consultancy Services Ltd. v CCE & ST, 2012-TIOL-1034-CESTAT-MUM

Installation of meters as also their technical testing and analysis are services relating to the transmission and distribution of electricity and eligible for the exemption under Notification No.45/2010-ST dated July 20, 2010

The taxpayer was engaged in the purchase of electricity from Uttar Pradesh Power Corporation Ltd. and transmitting it to various consumers within its jurisdiction and in the course of its business also carried out activities of installation as also technical testing and analysis vis-a-vis meters at premises of electricity consumers. Taxpayer claimed exemption from service tax under Notification No. 45/2010-ST dated July 20, 2010. The exemption was denied by department to taxpayer on the ground that exemption was available only in respect of transmission and distribution of electricity, not in respect of installation, testing etc. of meters and sought to levy service tax under ‘Erection, Commissioning and Installation Services’ and ‘Technical Testing and Analysis Services’.

The Tribunal held that the notification exempts the services relating to transmission and distribution of electricity provided by the service provider to the service receiver from the incidence of levy of service tax. The taxpayer is engaged in transmission and distribution of electricity after purchasing the same from U.P. Power Corporation Limited. Since the taxpayer is selling electricity to the consumer, for billing the consumer for electricity consumed it is essential to install the electricity meter having capacity to withstand the load provided to the consumer. Thus, the activity or service of installation of meters as also technical testing and analysis can easily be termed as service relating to the transmission and distribution of electricity provided by the service provider to the service receiver. Taxpayer is thus entitled to exemption under benefit provided by Notification No. 45/2010-ST.

Purvanchal Vidyut Vitran Nigam Ltd v CCE, 2012-TIOL-1169-CESTAT-DEL

Service tax liability shall not be passed on to the service recipient, if the contract so provides

The taxpayer-trust leased out the premises owned by it to Respondent by a lease deed dated September 25^th, 2007. The lease was terminated on September 30^th 2011 and the premises were handed over to the taxpayer. By virtue of the Finance Act, 2007, a retrospective amendment was introduced levying service tax on the renting of immovable property. Consequent to the said amendment, the taxpayer started charging service tax in its rent bills. The Respondent refused to pay the service tax component on the ground that under the lease deed, the service tax liability was that of the taxpayer. The matter was referred to arbitrator and the taxpayer’s claim against the Respondent for reimbursement of the service tax was dismissed.

High Court dismissed the petition filed by the taxpayer. The Court relied on the clause of the lease deed providing that taxpayer shall be liable to pay property taxes and other outgoings in respect of the premises, whatsoever payable and as levied from time to time promptly and timely, including any revisions thereto, directly to the authorities concerned and no claim for contribution towards such taxes, cesses, levies or increases shall be made by the Lessor-petitioner or be entertained by the Lessee. The Court held that this clause is wide enough to include the service tax “in respect of” the premises. Merely because levy was not statutorily operative at the time of entering into the lease deed did not mean that the said liability did not attach to the taxpayer.

In a given case, a service provider may decide to undertake the burden of service tax itself without passing it on to the service recipient. The intention of the parties in that regard can be determined only by examining the relevant clause in the agreement they execute. Even Section 64A of the Sale of Goods Act, 1969 is useful in understanding the importance of the contract governing the parties. It opens with the words “unless a different intention appears to the terms of the contract”. Therefore it is the contract and not the nature of the levy, which will determine which party, the service provider or recipient, is liable to bear the burden of service tax.

Basis the above, the Court held that clause of the lease reflects the intention of the parties that it is the taxpayer who would bear the incidence of all taxes.

Raghubir Saran Charitable Trust v Puma Sports India Pvt. Ltd., 2012 (193) ECR 0030 (Delhi High Court)

Key Circulars and Notifications

Customs

1.      Notification No.125/2011-Cus dated 30.12.2011 granting exemption to import of goods under SAFTA has been amended. [Notification No. 48/2012 dated 6.9.2012]

2.      W.e.f. 17.9.2012, electronic payment of customs duty has been mandatory for all assesses registered under Accredited Clients Programme or the assesses paying customs duty more than Rs.1 Lakh or more per Bill of Entry. [Notification No.83/2012 dated 17.9.2012 & Circular No. 24/2012 dated 5.9.2012]

Central Excise

1.      Credit of basic excise duty can be used for discharging NCCD liability. [Draft Circular dated 10.9.2012]

Service Tax

1.     Service Tax Rules, 1994 have been amended that half-yearly return in Form ST-3 to be submitted by 25^th October 2012 will cover period April 2012 to June 2012 only. The return for the period July 2012 to September 2012 will have to be filed in a separate form which will be notified separately. [Notification No.47/2012 dated 28.9.2012 & Instruction dated 28.9.2012]

2.     Draft Circular has been issued clarifying availability of service tax abatement on the various charges collected by airlines. [Draft Circular dated 27.9.2012]