KPMG Highlights
KPMG IN INDIA
KPMG Tax Highlights
31 December 2012
Table of Contents
1
Overseas Mergers & Acquisition
14
Applicability of 14A disallowance
2
Software Taxability
15
Principle-agent relationship
3
Tax Residency Certificate
16
Taxability of partnerships under the tax treaty
4
Fees for Technical Services
17
Secondment arrangement
5
Permanent Establishment
18
GAAR and Indirect Transfer
6
Residuary Article under the tax treaties
19
Transfer Pricing
7
Depreciation on Goodwill
20
Miscellaneous
8
Non-compete fees
21
Excise
9
Composite Contracts
22
Customs
10 Carbon Credits
23
Service tax
11 Sham Transactions & tax avoidance
24
25
Foreign Trade Policy
VAT
12 Mergers & Acquisition
13 Slump Sale
1
Overseas Mergers & Acquisition
Apex Court ruling in the case of Vodafone
The Apex Court in the case of taxpayer has ruled on the jurisdiction of the Indian tax authorities. The tax authorities
had alleged that Vodafone International Holdings B.V., Netherlands failed to withhold tax on the payment of
consideration to Hutchison Telecommunications International Limited (HTIL) for acquisition of a controlling interest
in an Indian company which is now a part of the Vodafone group. The controlling interest was obtained by acquiring
the shares of a Cayman Island company that indirectly held more than 50 percent of the shares of the Indian
company. In this context, the Apex Court, inter alia, observed and held as follows:
Interpretation of Section 9(1)(i) of the Act
• Charge to capital gains under Section 9(1)(i) of the Act arises on existence of three elements, viz, transfers, the
existence of a capital asset and the situation of such asset in India.
• Section 9(1)(i) of the Act does not have ‘look through’ provisions, and it cannot be extended to cover indirect
transfers of capital assets/property situated in India.
• Accordingly, the transfer of the share in CGP (which was not situated in India) did not result in the transfer of a
capital asset situated in India, and thus the gains from this transfer could not be subject to Indian tax.
Extinguishment of HTIL’s interests
• The tax authorities argued that the rights of HTIL over the control and management of the Indian company
constituted ‘property’ in the hands of HTIL. Accordingly, the extinguishment of such rights under the Share
Purchase Agreement (SPA) resulted in a taxable transfer of a capital asset situated in India.
• The Supreme Court held that extinguishment took place because of the transfer of the Cayman Island share and
not by virtue of the various clauses of the SPA.
Role of Cayman Islands company in the transaction
• The sole purpose of the Cayman Island company was not only to hold shares in subsidiary companies but also to
enable a smooth transition of business. Therefore, it could not be said that the Cayman Island company had no
business or commercial substance.
Rights and entitlements
• As a general rule, in a case where a transaction involves transfer of shares, such a transaction cannot be broken
up into separate individual components, assets or rights. The present transaction was a ‘share sale’ and not an
‘asset sale’ and concerned sale of an entire investment.
• A controlling interest is an incident of ownership of shares in a company which flows out of the holding of shares
and hence is not an identifiable or distinct capital asset independent of the holding of the shares.
• In essence, the character of the transaction was an alienation of shares, and when the parties had agreed on a lump
sum consideration; there was no question of any allocation of such consideration for the transfer of any other rights or
entitlements.
Applicability of Section 195 of the Act
• The question of withholding tax at source would not arise as the offshore transfer between the two non-residents
was not liable to capital gains tax in India.
• For the purposes of Section 195 of the Act, tax presence has to be viewed in the context of the transaction that is
subjected to tax, and not with reference to an entirely unrelated matter.
Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 (SC)
For further details please refer to our Flash News dated 20 January 2012 available at this link
Buy-back of shares held by Mauritian Company held to be a colourable device to avoid taxes in India
The Board of directors of the applicant, a closely held public limited company, proposed a scheme of buy-back of
its shares in accordance with Section 77A of the Company Act, 1956. Only one shareholder, A Mauritius accepted
the offer of buy-back.
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The question before the AAR, inter alia, was whether capital gains that would arise to A Mauritius would be exempt
from tax in India under the India-Mauritius tax treaty and whether the Applicant had any liability to withhold tax at
source on the remittance of buy-back proceeds to A Mauritius?
In connection with the above, the AAR observed and held as follows:
• No dividends were paid by the applicant after the introduction of Section 115-O of the Act. The applicant had
allowed its reserves to accumulate.
• There was no proper explanation on the part of the taxpayer as to why no dividends were declared subsequent
to the introduction of Section 115-O of the Act while the company was making regular profits and while dividends
were being distributed before its introduction.
• Other shareholders have not accepted the offer of buyback because it would have been taxable in India in their
hands as capital gains.
• The proposal of buy-back was a scheme devised for tax avoidance and was a colorable device for avoiding tax
on distributed profits under Section 115-O of the Act.
• Therefore, the distribution in question would satisfy the definition of dividends under the Act and consequently
would be taxable under the Act as well as under Article 10 of the India-Mauritius tax treaty, and liable to
deduction of tax at source.
A Ltd [2012] 343 ITR 455 (AAR)
For further details please refer to our Flash News dated 5 April 2012 available at this link
Legal ownership prevails over beneficial ownership for determining capital gains
CRL Mauritius, a company based in Mauritius sold its entire holding in CRIL, India to Moody’s Analytics Inc, Cyprus
(M Cyprus). Further, CMRL Mauritius sold its entire holding in Exevo US (E Inc) to another US company, Moody’s
US (M US).
The question posed by the Moody’s and Copal Group (Group entity included CRL, CMRL) for consideration before
the AAR, inter alia, was whether the capital gains arising on direct and indirect transfer of shares in Indian
companies (i.e. sale of shares of CRIL by CRL Mauritius to M Cyprus and sale of shares of E Inc by CMRL
Mauritius to M USA) would be chargeable to tax in India under the provisions of the India-Mauritius tax treaty.
The revenue contended before the AAR that the transaction was a scheme for avoidance of tax in India for the
following reasons:
• The place of effective management of CRL Mauritius and CMRL Mauritius was the UK, for the reason that the
whole transaction under consideration was left to the discretion and management of an individual, a resident of
the UK, who was the CEO of CPL Jersey and was also a common director of E Inc and CRIL.
• The beneficial ownership of shares rested with CPL Jersey, since the shares in Indian companies were held by it
through its wholly owned subsidiaries.
The AAR, based on the facts of the case, observed and held as follows:
• The role of the resident of UK did not appear to be a role in connection with the running of business of CRL
Mauritius and CMRL Mauritius. Also, as there is no sufficient or cogent material to deny that the control and
management of these companies is with their board of directors, it cannot be concluded that the place of
effective management of these companies is not in Mauritius.
• The AAR is bound by the decision of the Supreme Court in the case of Azadi Bachao Andolan, wherein it was
held that what is relevant in the context of a tax treaty is not whether the income is actually taxed in Mauritius,
but whether in terms of the tax treaty, it can be taxed in Mauritius.
• Company law recognizes the recorded owner of the shares and not the person on whose behalf it may have
been held. The theory of legal ownership prevails over the apparent legal ownership.
Therefore, the benefit of tax treaty to the Applicant cannot be denied and the capital gains on sale of shares by
Mauritian companies cannot be taxed in India.
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Moody's Analytics Inc. [2012] 24 taxmann.com 41 (AAR)
For further details please refer to our Flash News dated 7 August 2012 available at this link
Transfer of shares in Indian company by a Mauritius holding company to a Singapore company as a part of
internal re-structuring is not liable to capital gains tax under the India-Mauritius tax treaty
The Applicant, a company incorporated in Mauritius, holds investments in a listed company in India viz., Glaxo
Smithlkine Pharmaceuticals Limited (Indian company). As a part of the group restructuring exercise, the Applicant
proposes to transfer its holding in Indian company by way of off-market sale to its group company in Singapore.
The question for consideration before the AAR, inter alia, was whether the gains arising on sale of shares of the
Indian company would be chargeable to tax in India under the provisions of the India-Mauritius tax treaty and
whether Section 115JB of the Act would be applicable to foreign companies.
The AAR, based on the facts of the case, observed and held as follows:
• In terms of the India’s tax treaty with Mauritius and the decision of the Supreme Court in the case of UOI v. Azadi
Bachao Andolan [2003] 263 ITR 706 (SC), the capital gains on sale of shares of an Indian company by a
Mauritius company will not be taxable in India;
• The term ‘company’ used in Section 2(17) of the Act includes a company incorporated outside India. Also,
Section 115JB of the Act on its wording makes no distinction between a resident company and a non-resident
company. Hence, Minimum Alternate Tax (MAT) provisions would equally apply to foreign companies and this
would be irrespective of the existence of a PE of the foreign company in India. In this regard, the AAR has
deviated from its earlier ruling in the case of Timken Co. [2010] 326 ITR 193 (AAR).
• Also, the application of Section 115JB of the Act cannot be limited to domestic companies for the reason that
there are practical difficulties for the foreign companies to prepare their accounts in terms of Schedule VI of the
Companies Act, 1956 (Companies Act).
Castleton Investment Limited [AAR No. 999 of 2010 dated 14 August 2012]
For further details please refer to our Flash News dated 22 August 2012 available at this link
No capital gains on transfer of Indian shares if foreign companies are merged without consideration
The Applicant, a company incorporated in Switzerland, was a wholly owned subsidiary of another company
incorporated in Switzerland (Company C). Pursuant to the proposed merger of the Applicant with Company C, all
the assets and liabilities of the Applicant would be assumed by Company C, including its holding in a subsidiary in
India (Indian company). On merger, no consideration would pass to the Applicant.
The question for consideration before the AAR, inter alia, was whether on merger, any capital gains under Section
45 of the Act would arise to the Applicant and whether such capital gains would be exempt under Section 47(via) of
the Act.
In connection with the above, based on the facts and arguments of the case, the AAR, inter alia, observed and held
as follows:
• The change of ownership of the shares of the Indian company from the Applicant to Company C would involve
the transfer of shares and be within the inclusive definition of ‘transfer’ given under Section 2(47) of the Act;
• The transaction does not fulfill the condition specified under section 47(via) of the Act i.e. at least 25 percent of
the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated
foreign company. This is because the shareholders of the Applicant merging with Company C will not or cannot
become shareholders of Company C, as Company C is the only shareholder of the Applicant;
• As the gain, if any, in the instant case is not determinable within the scope of Section 45 and Section 48 of the
Act, no capital gains arises to the applicant as a result of the merger.
Credit Suisse (International) Holding AG [2012] 210 Taxman 412 (AAR)
For further details please refer to our Flash News dated 11 September 2012 available at this link
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Expert Committee issues draft report on retrospective amendments relating to indirect transfer
The expert committee constituted by the Prime Minister of India has issued its draft report on retrospective
amendments relating to indirect transfer on 9 October 2012. The key recommendations made by the committee are
as follows:
• Amendments relating to taxation of indirect transfer of assets made by the Finance Act, 2012, should be applied
prospectively;
• The word ‘substantially’, used in Explanation 5 to Section 9(1)(i) of the Act, should be defined as a threshold of
50 per cent of the total value derived from the assets of the company or entity;
• The phrase ‘directly or indirectly’, used in Explanation 5 to Section 9(1)(i) of the Act, may be clarified as
representing a ‘look through’ approach. This implies that, for determination of value of share of a foreign
company, all intermediaries between the foreign company and the assets in India may be ignored; and
• Interest and penalty should not be charged/ levied under the provisions of the Act in cases where a tax demand
is raised on account of a retrospective amendment relating to indirect transfer of assets.
Source: www.itatonline.org
For further details please refer to our Flash News dated 10 October 2012 available at this link
Software Taxability
Taxability of supply of equipment comprising hardware and software
The taxpayer, a tax resident of Finland, supplied GSM equipment comprising both hardware and software to Indian
telecom operators under independent buyer-seller agreements. The installation activities were undertaken by the
wholly owned subsidiary of the taxpayer, Nokia India Private Limited (NIPL) under independent contracts with the
Indian telecom operators.
The issue for consideration before the Delhi High Court was whether the consideration received by the taxpayer for
the supply of hardware and software would be chargeable to tax in India under the Act and the India-Finland tax
treaty.
Based on the facts of the case, the Delhi High Court, inter alia, observed and held as follows:
Whether payments for supply of equipment are taxable
• In a transaction relating to the sale of goods, the relevant factor would be as to where the property in the goods
passes.
• Even in the case of one composite contract, offshore supply is to be segregated from installation.
• Relying on the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd v. DIT
[2007] 288 ITR 408 (SC), the High Court concluded that where the property in goods passed to the buyer outside
India (i.e. on the high seas), the equipment was manufactured outside India, and the sale had taken place outside
India, the income from the supply of equipment would not be taxable in the hands of the taxpayer in India.
Whether payments for software constitute royalty
• The language of the tax treaty differs from the language in the amended section 9(1)(vi) of the Act.
• The Bombay High Court in the case of CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Bom) has held
that the amendments in the Act cannot be read into the treaty.
• In its earlier decision in the case of DIT v. Ericsson A.B. [2012] 343 ITR 370 (Delhi), which had a similar fact
pattern as that of the taxpayer, it was held that a copyrighted article does not fall within the purview of ‘royalty’.
• Accordingly, the payment for software was held to be not taxable as ‘royalty’ in India.
DIT v. Nokia Networks OY [2012] 25 taxmann.com 225 (Del)
5
For further details please refer to our Flash News dated 15 September 2012 available at this link
Payment for use of dedicated servers does not amount to Royalty
The taxpayer, an Indian company, was the owner/ host of a website where individuals could register and exchange
relevant information for matrimonial alliances. The taxpayer, inter alia, availed the following services from
Rackspace USA:
• Dedicated servers and a support team for the taxpayer.
• Direct and unlimited access to live experts and guaranteed 100 percent network uptime and hardware
replacement guarantee.
• Bandwidth of 100 GB per server which was increased based on the usage rate.
• High level of security for the data stored on the servers including backups and restorations The Assessing
Officer (AO) treated the payment made by the taxpayer to Rackspace USA as ‘royalty’ under the Act, as well as
under the India-USA tax treaty.
Based on the facts of the case, the Mumbai Tribunal observed and held as follows:
• Rackspace USA provided web hosting services with all backup, security and uninterrupted services;
• All the equipment and machines relating to the services provided to the taxpayer were under the control of
Rackspace USA and situated outside India;
• The taxpayer could not operate nor had any physical access to the equipment that provides service, and
therefore, the taxpayer was not using the equipment but was only availing the services provided by Rackspace
USA;
• Therefore, the payments made for procuring the services of Rackspace USA cannot be treated as ‘royalty’ under
the Act as well as the tax treaty;
• Accordingly, no tax was required to be deducted from the payments made by the taxpayer to Rackspace USA.
ITO v. People Interactive (I) P Ltd [ITA No. 2180/Mum/2009]
For further details please refer to our Flash News dated 22 March 2012 available at this link
Payments for purchase of software is not royalty
The Mumbai Tribunal in the case of Sonata Information Tech. Ltd held that payments made to Indian residents for
purchase of software are not treated as royalty. Therefore, tax was not liable to be deducted on the aforesaid
payments under Section 194J of the Income-tax Act, 1961 (the Act).
The Tribunal relied on the decision of Solid Works Corporation wherein the Mumbai Tribunal relying on the Delhi
High Court’s decision in the case of Ericsson A.B.3 held that the consideration received by the taxpayer was not
royalty and therefore, the business income of the taxpayer could not be taxed in the absence of a Permanent
Establishment (PE) in India.
The Tribunal held that though the decision of Solid Works Corporation was rendered in context of tax treaty, the
ratio is equally applicable to the definition of royalty under the Act.
ACIT v. Sonata Information Tech. Ltd [ITA No.4446/Mum/2011 (AY 2007-08)]
For further details please refer to our Flash News dated 11 May 2012 available at this link
Payments for subscription services amounts to royalty
The Applicant, a tax resident of Singapore, is engaged in providing social media monitoring service for companies,
brands or products. The clients who subscribed for the Applicant’s service could login to its website to do a search
on what is being spoken about different brands on various blogs, forums, social networking sites etc. The question
for consideration before the AAR was whether the subscription fee received by the Applicant from its Indian
customers was taxable in India.
Based on the facts of the case, the AAR held that the subscription payments are taxable as ‘royalty’ on account of
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the following:
• The Applicant was engaged in the business of gathering, collating and making available or imparting information
concerning industrial and commercial knowledge, experience and skill, and consequently, the payment received
from the subscribers/clients in India would be taxable as ‘royalty’ under the Act; and
• The said payment would also qualify as ‘royalty’ under the India-Singapore tax treaty since the payment was for
the grant of use or right to use the process or information concerning industrial, commercial or scientific
experience, for consideration.
Thought Buzz Pvt. Ltd. [2012] 346 ITR 345 (AAR)
For further details please refer to our Flash News dated 18 May 2012 available at this link
Payments made towards acquisition of cable capacity taxable as ‘royalty’
The Applicant is an Indian company engaged in the business of providing telecommunication services in India. The
Applicant entered into an agreement with a Saudi Arabian Company (STC) for transfer, to the Applicant, the right to
use the capacity in the EIG cable system (Europe India Gateway submarine cable linking Indian subcontinent and
the United Kingdom) for a consideration of USD 20 million.
The applicant contended, inter-alia, that, as the amounts payable to STC represented payment made for acquiring
a ‘capital asset’ which was entirely situated outside India, such payment could not be taxed in India both under the
Act and under the India-Saudi Arabia tax treaty.
The issue for consideration before the AAR was whether the payment made by the Applicant to STC for acquisition
of the cable capacity would be chargeable to tax in India.
In connection with the above, based on the facts and arguments of the case, the AAR observed and held as
follows:
• No right of ownership, property in or title to the capacity, facilities or network infrastructure, equipment or
software was conveyed to or vested in the Applicant;
• The transfer of capacity by STC to the Applicant amounted to ‘making available’ the right to use the capacity in
the EIG cable system;
• In view of the clarificatory amendment in Section 9(1)(vi) of the Act, the payments made by the Applicant to STC
for the acquisition of cable capacity were for a right to use a process and a right to use commercial or scientific
equipment and would therefore be taxable in India as ‘royalty’.
Dishnet Wireless Limited [2012] 24 taxmann.com 298 (AAR)
For further details please refer to our Flash News dated 31 August 2012 available at this link
No tax to be deducted at source under Section 194J of the Act from 1 July 2012 on software acquired from
a resident if such software is acquired without any modifications and tax has already been deducted
No deduction of tax shall be made on payment to a transferor, being a resident, by the transferee for acquisition of
software, where(i) The software is acquired in a subsequent transfer and the transferor has transferred the software without any
modification,
(ii) Tax has been deducted- (a) Under Section 194J on payment for any previous transfer of such software; or
(b)Under Section 195 on payment for any previous transfer of such software from a non-resident, and
(iii) The transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause
(a) or (b) of clause (ii) along with the Permanent Account Number of the transferor.
Notification No. 21/2012 [F.No.142/10/2012-SO (TPL)] S.O. 1323(E), dated 13-6-2012]
7
Tax Residency Certificate
Capital gains on transfer of shares in Indian company by Mauritius Company holding valid TRC is not
chargeable to tax under the India-Mauritius tax treaty
The AAR, in the case of Dynamic India Fund - I, held that the capital gains arising to a Mauritius entity, which holds a
valid TRC, from a proposed sale of investment in India shall not be taxable in India under Article 13(4) of the IndiaMauritius tax treaty. Further, it was held that the provisions of GAAR which are effective from 1 April 2013 are not relevant
at this stage. However, as and when they come into force, it will be open to the tax department to consider those
aspects; notwithstanding this ruling.
Dynamic India Fund I [2012] 209 Taxman 417 (AAR)
For further details please refer to ourFlash News dated 20 July 2012 available at this link
CBDT prescribes details to be included in the Tax Residency Certificate to be obtained by non-resident and
resident of India
Recently, the Central Board of Direct Taxes (CBDT) has issued notification with effect from 1 April 2013 which
prescribes that certain details should be included in the Tax Residency Certificate (TRC) to be obtained by the nonresident to claim tax treaty benefit. Further, the CBDT also notifies the Form 10FA and Form 10FB for resident of
India to obtain TRC from the Assessing Officer (AO).
CBDT Notification No. S.O. 2188(E), dated 17 September 2012
For further details please refer to our Flash News dated 26 September 2012 available at this link
Fees for Technical Services
Provision of services taxable only if ‘made available’
The taxpayer, an Indian company, is engaged in the business of prospecting and mining for diamonds and other
minerals. The taxpayer engaged the services of a non-resident, based out of the Netherlands, to conduct the air
borne survey for providing high quality, high resolution, and geophysical data suitable for selecting probable mining
targets. The AO treated the payment made by the taxpayer to the non-resident for its services as FTS under Article
12 of the India-Netherlands tax treaty and treated the taxpayer as an assessee in default for failure to deduct tax at
source. The Karnataka High Court observed and held as follows:
• The service provider, in order to render technical services uses technical knowledge, experience, skill, know how
or processes. To attract tax liability under the India-Netherland tax treaty, that technical knowledge, experience,
skill, know how or process which is used by the service provider to render technical service should also be ‘made
available’ to the recipient of the services, so that the recipient also acquires technical knowledge, experience,
skill, know how or processes so as to render such technical services;
• The use of a product which embodies technology shall not per se be considered to make the technology
available;
• In the instant case, the non-resident performed the surveys using substantial technical skills. However, it had not
made available the technical expertise in respect of such collection or processing of data to the taxpayer, which
expertise the taxpayer could apply independently and without assistance of the non-resident.
• Therefore, the payment does not satisfy the requirement of FTS under the tax treaty. Hence the taxpayer could
not be treated as an assessee in default for failure to deduct tax at source.
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CIT v. De Beers India Minerals Pvt. Ltd. [2012] 346 ITR 467 (Kar)
For further details please refer to our Flash News dated 25 May 2012 available at this link
Payment for online advertisement on the portal of a foreign company is not royalty
The Mumbai Tribunal has held that the payments made to a foreign company for services rendered relating to
uploading and display of the banner advertisement on its portal is not taxable in India as royalty or Fees for
Technical Services (FTS). In rendering this decision, the Tribunal has followed its earlier decision in the case of
Yahoo India (P.) Ltd v. CIT [2011] 46 SOT 105 (Mum).
Pinstorm Technologies Pvt. Ltd. v. ITO [2012] 24 taxman.com 345 (Mum)
For further details please refer to our Flash News dated 1 August 2012 available at this link
Fees paid to a foreign company for registering on its website are not FTS
The taxpayer, a tax resident of Switzerland, operated India specific websites for providing an online platform to
users based in India for the purchase and sale of goods and services. The taxpayer derived income in the form of a
‘User fee’ from sellers registered on the taxpayer’s website. For availing certain support services in connection with
its India-specific websites, the taxpayer also entered into a Marketing Support Agreement (MSA) with its Indian
group companies.
In connection with the above, based on the facts of the case, the Income-tax Appellate Tribunal (the Tribunal),
inter-alia, observed and held as follows:
• By making its website available in India to the sellers for displaying their product, the taxpayer is not rendering
any managerial, technical or consultancy services to the sellers and therefore the services do not qualify as
FTS within the meaning of section 9(1)(vii) of the Act;
• As the Indian group companies provide services exclusively to the taxpayer and have no other source of
income, they constitute dependent agents of the taxpayer in India. However, the activities performed by the
India group companies do not satisfy the conditions set out in Article 5(5) of the India-Switzerland tax treaty to
constitute a Dependent Agent Permanent Establishment (DAPE) of the taxpayer in India;
• The Indian group companies, performing only marketing support services, cannot be said to be taking any
managerial decisions on behalf of the tax payer to qualify as a place of management under Article 5(2) of the
tax treaty; and
• Therefore, the taxpayer does not have a Permanent Establishment (PE) within the meaning of Article 5 of the
tax treaty.
eBay International AG v. ADIT [2012] 25 taxmann.com 500 (Mum)
For further details please refer to our Flash News dated 3 October 2012 available at this link
Geophysical services are taxable under special provisions (Section 44BB) and not as Fees for Technical
Services
The taxpayer engaged in the business of providing geophysical services to oil and gas exploration industry entered
in to the contract for procuring data, processing and interpreting the data in respect of an offshore exploration block
in India. The taxpayer received mobilisation as well as de-mobilisation charges for providing services in connection
with the prospecting for extraction or production of mineral oils. The taxpayer applied for lower withholding tax
certificate to the concerned authority under Section 197 of the Act. However, the concerned authority did not grant
the same and directed the taxpayer to deduct tax at the rate of 10 percent in respect of all revenues received. The
Authority for Advance Ruling (AAR) accepted the taxpayer’s claim and held the ruling in favour of the taxpayer.
The High Court held that Section 44BB of the Act is a special provision applicable to the business of providing
services or facilities in connection with, or supplying plant and machinery on hire, used or to be used, in the
prospecting for, or extraction or production of mineral oils including petroleum and natural gas. However, Section
44DA is broader and more general in nature. It is a well settled rule of interpretation that if a special provision is
made respecting a certain matter, that matter is excluded from the general provision under the rule which is
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expressed by the maxim ‘Generallia specialibus non derogant’. If Section 44DA of the Act covers all types of
services rendered by the non-resident that would reduce Section 44BB to a useless lumber or dead letter and such
a result would be opposed to the very essence of the rule of harmonious construction.
Section 44DA of the Act requires that the foreign company should carry on business in India through a PE situated
therein and the right, property or contract in respect of which the royalty or FTS is paid should be effectively
connected with the PE. However, such requirement has not been spelt out in Section 44BB of the Act. If both the
Sections have to be read harmoniously and in such a manner that neither of them becomes a useless lumber then
the only way in which the conditions can be given effect to is to understand them as referring only to the
computation of profits, and to understand the amendments as having been inserted only to clarify the position.
Where the services are general in nature and fall under the sub-section read with Explanation 2 to Section 9(1)(vii)
of the Act, then the taxpayer rendering such services as provided in Section 44BB of the Act cannot claim the
benefit of being assessed on the basis that 10 percent of the revenues will be deemed to be the profits as provided
in Section 44BB of the Act. In other words, If both the Sections have to be read harmoniously and in such a manner
that neither of them becomes a useless lumber then the only way in which the conditions can be given effect to is to
understand them as referring only to the computation of profits, and to understand the amendments as having been
inserted only to clarify the position. Where the services are general in nature and fall under the sub-section read
with Explanation 2 to Section 9(1)(vii) of the Act, then the taxpayer rendering such services as provided in Section
44BB of the Act cannot claim the benefit of being assessed on the basis that 10 percent of the revenues will be
deemed to be the profits as provided in Section 44BB of the Act. In other words,
DIT v. OHM Ltd [2012] 28 taxmann.com 120 (Del)
For further details please refer to our Flash News dated 14 December 2012 available at this link
Permanent Establishment
Mere presence of a computer server in India amounts to existence of a PE in India
Areva T & D India SAS France (Areva France) proposed to enter into an Information Technology Sharing Services
Agreement (the Agreement) with the applicant, to provide information technology support services. The services,
inter alia, comprised of worldwide network for data transfer between group companies which would connect to all
global applications of Areva France, intranet and internet traffic, messaging system for all e-mail communication
etc. As per the Agreement, Areva France could sub-contract these services either to a third party service provider
(Service Provider) and/or to any other subsidiary of the group.
The question for consideration before the AAR, inter alia, was whether the payments by the applicant to Areva
France were taxable in India under the provisions of the Act and the India-France tax treaty.
Based on the facts of the case, the AAR observed and held as follows:
• Presence of equipment in India, at the disposal of Areva France would create a PE for Areva France in India;
• The employees of the applicant would be equipped to carry out the activities on their own, without reference to
Areva France, once the Agreement comes to an end. Accordingly, services provided by Areva France would
make available technical knowledge/experience to the applicant.
• The consideration for support services rendered by Areva France under the Agreement would qualify as FTS
under the Act as well as the India-France tax treaty.
• As the applicant constitutes a PE in India, the income by way of FTS would be taxed under Section 44DA of the
Act, which, inter alia, deals with taxation of FTS when the foreign company has a PE in India.
Areva T & D India Ltd [2012] 18 taxmann.com 171 (AAR)
For further details please refer to our Flash News dated 29 February 2012 available at this link
Subsidiary in India attending to the business of the Multinational Group constitutes a PE in India
10
The applicant, a tax resident of Singapore, was engaged in the business of door-to-door express shipments by air
and land and performing related transport services. The applicant entered into an agreement with one of its group
company in India for movement of packages to and from India i.e. inbound and outbound. The question for
consideration before the AAR, inter alia, was whether there was a PE of the applicant in India under the IndiaSingapore tax treaty.
The AAR, based on the facts of the case, observed and held as follows:
• The business of the Aramex Group as regards the articles sent to India could not be performed without the
association of the Indian company;
• The Indian company had a fixed place of business and branches in India and business of the Aramex Group was
being carried on by the Indian company i.e. obtaining order, collecting articles and transporting them to a
destination so as to be taken over and delivered by the Group. Thus, the Indian company was a fixed place PE of
the Aramex Group in India under Article 5(1) of the tax treaty;
• The Indian company secured orders in India wholly for the Aramex Group and had the right to conclude contracts
for the Group for its express shipment business. Therefore, the Indian company was also an Agency PE of the
Aramex Group under Article 5(8) of the India-Singapore tax treaty;
• The exception with respect to control over a subsidiary not constituting a PE under Article 5(10) of the tax treaty
was not applicable as the whole business in India of the Group was carried on within the geographical contours of
India. Further, mere description of the Indian company as an independent entity or non-exclusive agent was not
good enough; and
• Therefore, the Indian company constituted a PE of the applicant in India under Article 5 of the tax treaty and the
receipt from outbound and inbound consignments attributable to PE in India was liable to tax in India.
Aramex International Logistics Private Limited [2012] 208 Taxman 355 (AAR)
For further details please refer to our Flash News dated 13 June 2012 available at this link
Residuary Article under the tax treaties
Taxability of income under residuary Articles in tax treaties
The taxpayer, an Indian company engaged in the business of trading and export of sea foods, made payments to a
Singapore based company towards consultancy charges without deduction of tax at source on the basis that the
services were rendered outside India and therefore not taxable as Fees for Technical Services (FTS) under Section
9(1)(vii) of the Income-tax Act, 1961 (the Act).
The AO held that, as the services were used in India, the amounts paid to the non-resident were taxable in India as
FTS. On appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] held that, as the consultancy charges were
not covered by the scope of FTS under Article 12 of the India-Singapore tax treaty and also as the non-resident did
not have a PE in India, there was no obligation on the taxpayer to withhold tax on the payments made to the nonresident.
Before the Kolkata Tribunal, the tax department contended that, even though the consultancy charges were not
taxable in India as business profits under Article 7 or as FTS under Article 12 of the India-Singapore tax treaty,
these amounts were taxable in India as residuary income under Article 23 of the India-Singapore tax treaty.
The Kolkata Tribunal, on the issue of taxability of consultancy charges as residuary income under Article 23 of the
India-Singapore tax treaty, held as follows:
• A tax treaty assigns taxing rights of various types of income to the source state upon fulfillment of conditions laid
11
down in respective clauses of the tax treaty. Only when these conditions are satisfied, does the source state get
the right to tax such income.
• When a tax treaty does not provide for the taxability of a particular kind of income under the tax treaty provision
dealing with that particular kind of income, the taxability cannot be invoked under the residuary provisions of
Article 23 of the tax treaty.
• Article 23 of the tax treaty begins with the words ‘items of income not expressly covered’ by the provisions of the
other Articles, and therefore, does not apply to items of income which can be classified under other Articles of the
tax treaty whether or not taxable under those Articles.
• Accordingly, the income from consultancy services which cannot be taxed under Article 12 or Article 7 of the tax
treaty because the conditions for taxability specified therein are not satisfied, cannot be taxed under Article 23 of
the tax treaty either.
• Therefore, in the instant case, the taxpayer is not liable to withhold tax on the payments made to the nonresident.
DCIT v. Andaman Sea Food Pvt Ltd [2012] 52 SOT 562 (Kol)
For further details please refer to our Flash News dated 13 July 2012 available at this link
Depreciation on Goodwill
Goodwill in the form of difference between the amount paid and the cost of the net asset acquired from the
amalgamating company is an asset eligible for depreciation under the Act
Pursuant to a Scheme of Amalgamation of an Amalgamating Company with the taxpayer, duly sanctioned by the
High Court, the assets and liabilities of the Amalgamating Company were transferred to and vested in the taxpayer.
The excess consideration paid by the taxpayer over the value of the net assets acquired from the Amalgamating
Company was considered as goodwill arising on amalgamation on account of the reputation which the
Amalgamating Company was enjoying in order to retain its existing clientele. The taxpayer claimed depreciation on
goodwill under Section 32 of the Act, treating it as an intangible asset. The AO disallowing the claim for
depreciation contended that as no amount was actually paid on account of goodwill it is not an asset falling under
Explanation 3(b) to Section 32(1) of the Act.
The Supreme Court did not dispute the factual finding of the Tribunal and the Commissioner of Income-tax
(Appeals) [CIT(A)] that, as a part of the Scheme, assets and liabilities of the Transferor were transferred for a
consideration and the difference between the cost of the net assets and the amount paid constituted goodwill.
Explanation 3(b) to Section 32(1) of the Act states that the expression ‘asset’ shall mean an intangible asset, being
know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of a
similar nature. The Supreme Court held that the principle of ejusdem generis would strictly apply to the words ‘any
other business or commercial rights of a similar nature’ of Explanation 3(b) to Section 32(1) of the Act. Accordingly,
‘goodwill’ would be an asset under Explanation 3(b) to Section 32(1) of the Act and depreciation on ‘goodwill’ would
be allowable under Section 32 of the Act.
CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com 222 (SC)
For further details please refer to our Flash News dated 29 August 2012 available at this link
Consideration paid for acquiring the clientele is an ‘intangible asset’ and is eligible for depreciation
The taxpayer, a share broker vide Deed of Assignment of Business, Sale of Goodwill and Master Services
Agreement, purchased entire clientele business of Ashmavir Financial Consultants Pvt. Ltd. (AFC).The taxpayer
has booked the aforesaid expenditure as purchase of goodwill and has claimed 25 percent of depreciation. The AO
rejected the taxpayer’s claim. The CIT(A) upheld the order of the AO.
12
The Tribunal held that the specific words of Section 32 of the Act reveal the similarity in the sense that all the
intangible assets specified are tools of the trade which facilitates the taxpayer to carry on the business. Therefore,
the expression ‘any other business or commercial rights of similar nature’ would include such rights which can be
used as a tool to carry on the business. Further commercial rights gain significance in the commercial world as they
represent a particular benefit or advantage or reputation built over a certain span of time and the customer
associate with such assets. The purchase of the clientele business by the taxpayer from AFC is a right which can
be used as a tool to carry on the business. Relying on the Supreme Court’s decision in the case of Smifs Securities
Ltd and Mumbai Tribunal’s decision in the case of Jyoti India Metal Industries Pvt. Ltd it was held that the taxpayer
is entitled for the depreciation.
India Capital Markets P Ltd v. DCIT (ITA.No.2948/Mum/2010)
For further details please refer to our Flash News dated 17 December 2012 available at this link
Non-compete fees
A ‘non-compete right’ is not an ‘intangible asset’ and therefore not eligible for depreciation
The taxpayer, a joint venture of Sharp Corp, Japan, and L&T Ltd, paid L&T, a consideration for not competing with
it for seven years. The taxpayer claimed that the non-compete fee was revenue in nature. It also claimed,
alternatively, that the rights under the non-compete agreement were an ‘intangible asset’ under Section 32(1)(ii) of
the Act, eligible for depreciation. The AO rejected the taxpayer’s claim.
The High Court held that the advantage derived by the taxpayer from the non-compete agreement entered into with
L&T is for a substantial period of seven years and ensures a certain position in the market by keeping out L&T. The
advantage cannot be regarded as being merely for facilitation of business and ensuring greater efficiency and
profitability. The advantage falls in the capital field. With regard to depreciation on an ‘intangible asset’, the High
Court held that the non-compete rights cannot be treated as an ‘intangible asset’ under Section 32(1)(ii) of the Act
because the nature of the rights mentioned in the definition of an ‘intangible asset’ spell out an element of
exclusivity which inures to the taxpayer as a sequel to the ownership. The ‘intangible asset’ should be such that,
but for the ownership of the ‘intangible asset’, the taxpayer would be unable to either access the advantage or
assert the right ‘in rem’ i.e. as against the world. In the case of a non-competition agreement, it is a right ‘in
personam’ where the advantage is restricted and does not confer an exclusive right to carry-on the primary
business activity. The rights under a non-competition agreement cannot be transferred; the same is purely
personal. As a result of the above the said right cannot be termed as an ‘intangible asset’.
Sharp Business System v. CIT [ITA 492/2012 & CM APPL. 14836/2012, dated 5 November 2012]
For further details please refer to our Flash News dated 22 November 2012 available at this link
Composite Contract
Loss making onshore activity does not indicate that the composite contact was artificially split to avoid
payment of taxes
The taxpayer, a tax resident of China, entered into contracts with two Indian customers for offshore supply of
equipment and onshore supplies and services, including installation and commissioning of thermal power units. A
separate consideration was specified for each activity in the agreements.
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The taxpayer, relying on Ishikawajma-Harima Heavy Industries Ltd v. DIT [2007] 288 ITR 408 (SC), claimed that
the profit from offshore supply was not taxable in India. As regards the onshore activities, the taxpayer claimed a
loss vis-à-vis its project office, which constituted its Permanent Establishment (PE) in India.
The AO contended that the original contract was for erection of power plants and was split into two parts in such a
way that the activities in India would always result in loss. Further, on the basis that the PE in India was not
compensated at arm’s length for its services, the AO made a transfer pricing adjustment for services rendered by
the PE in connection with offshore supplies.
Based on the facts of the case, Kolkata Tribunal observed and held as follows:
• The transactions have to be looked at as a whole, and not on a standalone basis, when the overall transaction is
split in an unfair and unreasonable manner with a view to evade taxes;
• In each set of the contracts, there was a ‘cross fall breach clause’ which provided that a breach in one contract
would automatically be classified as breach of the other contract. This clause gave an indication that the
‘offshore supplies’ contract and ‘onshore supplies’ contract had to be viewed as an integrated contract;
However, this fact by itself did not indicate that the onshore services and supplies contract was understated so
as to avoid tax in India. That would be the situation in which while offshore supplies showed unreasonable
profits, the onshore supplies and services resulted in unreasonable losses;
• In the instant case, if both these contracts were put together, there was no profit earned by the taxpayer.
Therefore, there could not be an occasion, even otherwise, to tax income from these contracts in India.
• Since the working of overall losses given by the taxpayer was not examined by the AO, the matter was
remanded to him to examine the taxpayer’s claim regarding overall loss on the project.
Dongfang Electric Corporation v. DDIT [2012] 52 SOT 496 (Kol)
For further details please refer to our Flash News dated 3 July 2012 available at this link
Income from composite contract entered by a consortium including Offshore supplies fully taxable in India
considering the Consortium as an AOP
The applicant, a tax resident of France, along with other members formed a consortium and obtained a contract
from Bangalore Metro Rail Corporation Limited (BMRC) for design, manufacture, supply, installation, testing and
commissioning of signaling/train-control and communication systems. The question for consideration before the
Authority for Advance Ruling (AAR), inter alia, was whether the amounts received by the applicant for offshore
supply i.e. supply of overseas plant and materials and offshore designing and training of personnel for operation
and maintenance would be taxable in India under the provisions of the Act and India-France tax treaty.
Based on the facts of the case, the AAR observed and held as follows:
• The tender floated by BMRC was a composite tender for installation and commissioning of a signaling and
communication system;
• A contract for the installation and commissioning of a project cannot be split up into separate parts as consisting
of independent supply of goods and for installation at the work site;
• The basic principle in interpretation of a contract is to read it as a whole and to construe all its terms in the
context of the object sought to be achieved and the purpose sought to be attained by implementation of the
contract [relying on the rulings in the case of Linde A.G. (AAR No. 962 of 2010) (AAR) and in Roxar Maximum
Reservoir Performance WLL (AAR No. 977 of 2010)(AAR)];
• The AAR relied on the decision of the Supreme Court in the case of Vodafone International Holdings BV [2012]
341 ITR 1 (SC) wherein the Apex Court observed that it is the task of the Revenue/Court to ascertain the legal
nature of the transaction and while doing so it has to ‘look at’ the transaction as a whole and not to adopt a
dissecting approach;
• Accordingly, the contract could not be split-up to treat a part of it as confined to offshore supply of equipment not
capable of being taxed in India; and
• Therefore, the income from the contract had to be taxed as a whole, under the Act and the tax treaty. The AAR
also held that the applicant along with the other members of the consortium were liable to be taxed as an
‘Association of Person’ (AOP) in respect of the income arising from the contract.
14
Alstom Transport SA [2012] 208 Taxman 223 (AAR)
For further details please refer to our Flash News dated 13 June 2012 available at this link
Carbon Credits
Sale consideration on transfer of carbon credits is a capital receipt. There is no element of profit and
therefore it cannot be taxed under the Act
The taxpayer was engaged in the business of power generation through a biomass power generation unit. During
AY 2007-08, it had received Carbon Emission Reduction Certificates (CERs), popularly known as ‘Carbon Credits’,
for the project activity of switching off of fossil fuel from naphtha and diesel to biomass. The taxpayer sold these
CERs to a foreign company and accounted the sale consideration as capital in nature and therefore had not offered
the same for taxation. The AO held the sale proceeds to be a revenue receipt since the CERs were a tradable
commodity and even quoted on the stock exchange. Accordingly, the AO added the net receipt from the sale to the
returned income. The CIT(A) confirmed the order of the AO.
The Hyderabad Tribunal held that Carbon credit is in the nature of ‘an entitlement’ received to improve the world’s
atmosphere and environment by reducing carbon, heat and gas emissions. It is not generated or created due to
carrying on business but it is accrued due to ‘world concern’. Due to that a taxpayer gets a privilege in the nature of
the transfer of carbon credits. A person who has surplus carbon credits can sell them to others to have the
emission commitment capped under the Kyoto Protocol.
Transferable carbon credit is not a result or incidence of one’s business and it is a credit for reducing emissions.
The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to
overcome one’s negative point carbon credit. The amount received is not received for producing and/or selling any
product or by-product, or for rendering any service for carrying on the business. Carbon credit is entitlement or
accretion of capital and hence income earned on the sale of these credits is a capital receipt. Reliance was placed
on the judgement in the case of Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 (SC) wherein the Supreme Court
held that the transfer of surplus loom hours to other mills out of those allotted to a taxpayer under an agreement for
control of production was capital receipt and not income. Similarly, in the present case, the taxpayer transferred the
carbon credits like loom hours to some other concerns for a certain consideration. Therefore, the receipt of such
consideration cannot be considered as business income, and was a capital receipt. Carbon credit does not
increase profit in any manner and does not need any expense. There is no cost of acquisition or cost of production
to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income and it cannot be
subjected to tax in any manner under any head of income. It was not liable for tax for the year under consideration
in terms of Sections 2(24), 28, 45 and 56 of the Act.
My Home Power Ltd. v. DCIT [2012] 27 taxmann.com 27 (Hyd)
For further details please refer to our Flash News dated 8 November 2012 available at this link
Sham Transactions & tax avoidance
Sale of pledged shares at loss to a group company which set-off capital gain arising from the transfer of
other shares is not a ‘colourable transaction’
The taxpayer in Assessment Year (AY) 1993-94 sold certain shares of Rustom Spinners Ltd and derived long-term
and short-term capital gain. The taxpayer had also sold certain equity shares of Rustom Mills and Industries Ltd
and claimed long-term capital loss. The AO was of the view that the transfer of shares would be complete only
when the share certificates along with duly executed transfer forms are delivered to the purchaser. However, in the
15
present case, there was no valid transfer since the share certificates were in the possession of IDBI bank who had
lien over such shares. Further, the AO noted that the purchaser company and the taxpayer were part of the same
group of companies. Consequently, the full transaction was intended to create loss to the taxpayer so that its
capital gains resulting from the sale of shares of Rustom Spinners Ltd could be set-off.
The Gujarat High Court observed that since the taxpayer had entered into the agreement, given Power of Attorney
and received the full sale consideration from the purchaser company, the transfer of shares was complete by virtue
of Section 2(47) of the Act. There is no provision in the Act which would prevent the taxpayer from selling loss
making shares. Further, there is no restriction that such a sale cannot be effected with a group company. Simply
because such shares were sold during the previous year when the taxpayer had also sold some shares at profit by
itself would not mean that this is a case of ‘colourable device’ or that there is a case of tax avoidance. In the
present case, the shares were pledged to IDBI Bank and therefore, it would not be possible for the taxpayer to
deliver the original share certificates to its purchaser along with the on the legal relation between the taxpayer and
IDBI and the purchaser’s right to have shares transferred in its name. However, this would not establish that the
sale of shares was only a paper transaction and a device contrived by the taxpayer. Accordingly the High Court
held that the transaction could not be treated as a duly signed transfer forms. This may have repercussions
‘colourable device’ created for tax avoidance.
CIT v. Biraj Investment Pvt. Ltd. [2012] 24 taxmann.com 273 (Guj)
For further details please refer to our Flash News dated 17 September 2012 available at this link
When a transaction is sham, it cannot be considered as a part of tax planning or legitimate avoidance of
tax liability
The taxpayer provided a guarantee to the extent of INR 1 billion in favour of Vysya Bank Ltd. for extending financial
facilities to Geekay Exim India Ltd. Geekay Exim India Ltd is a company belonging to G. K. Rathi Group. Since
Geekay Exim India failed to repay its loan, the bank invoked the guarantee under which the taxpayer agreed to
transfer its own land to the Bank. In its return of income for the year under consideration the taxpayer had set off
capital gains arising on transfer of land to the bank against the short term as well as long term capital loss arising
from sales of shares.
The facts with respect to capital loss on sale of shares are as follows:
• The taxpayer has invested INR 480 million (INR 150 per share including premium of INR 140 per share) in its
four subsidiary companies during the period 28 March 2000 to 30 March 2000. This amount was received by the
taxpayer from a company belonging to G. K. Rathi Group. The same amount was again reinvested by the above
mentioned four subsidiary companies into another group company of G. K Rathi Group.
• The abovementioned shares in four companies (along with other shares already held by taxpayer in these four
companies) were sold to Radha Financial Services Pvt. Ltd. and Diplomat Trading Pvt. Ltd. at INR 5 in Financial
Year (FY) 2000-2001, which resulted in substantial long term and short term capital losses to the taxpayer.
• Further the taxpayer had converted its loan given to Killick Halco Ltd., a loss making company, into equity at a
premium of INR 700 per share on 31 March 2000. During the year under consideration, the shares held in Killick
Halco Ltd were sold to Snowcem India Limited (a group company) at INR 83 per shares which again resulted in
substantial losses to the taxpayer.
• Further shares acquired in Pelican Paint Ltd. at INR 518 and INR 365 per share in FY 1998-1999 and 19992000 respectively were sold to Snowcem India Limited (a group company) at INR 10 during the year under
consideration which again resulted in substantial losses.
• The Bombay High Court held that the share transactions were merely a sham to claim the set-off of artificial
capital loss against the capital gains arising out of transfer of land. The High Court observed that there was a
concurrent finding of the authorities below that the transaction was a colourable device and relying on the
Supreme Court ruling in Vodafone International Holdings [TS-23-SC-2012], it held that a colourable device
cannot be a part of tax planning. Therefore, where a transaction is sham and not genuine as in the present case
then it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. On the alternate
plea raised by the taxpayer that the value of the land should be allowed as business loss since the guarantee
was given in the normal course of business, the High Court remitted the matter back to the Tribunal.
Killick Nixon Limited v. DCIT [2012] 208 Taxman 45 (Bom)
16
For further details please refer to our Flash News dated 22 March 2012 available at this link
Sale & lease back of machinery not a ‘sham’ or ‘colourable’ device to avail benefit of depreciation
The taxpayer had purchased igni-fluid boilers from its sister concern for a total consideration of INR 25 million in FY
1994-95. The taxpayer paid INR 5 million to its sister concern and for the balance it entered into a finance
agreement with Wipro Finance Limited by way of a hire purchase agreement. On the same day the taxpayer
entered into a lease agreement with its sister concern for the same boilers. The AO claimed that the sale and lease
back arrangement was a sham and colourable device adopted by the taxpayer to avail benefit of depreciation and
the alleged purchase by the taxpayer was merely a financial accommodation for its sister concern.
The Madras High Court observed that the AO was not correct in rejecting the taxpayer’s claim on the ground that it
had not taken actual possession of boilers. Since the law recognized constructive delivery as an acceptable mode
of delivery and possession and the fact that the taxpayer had not taken physical possession, per se, did not
pronounce anything against the sale that took place between the taxpayer and its sister concern. The High Court
further observed that the genuineness of the said transaction could not be questioned as there was no material on
record to show that the sale between the taxpayer and its sister concern was a sham transaction. Further the fact
that the sister concern of the taxpayer had undertaken responsibility to meet the liability of the taxpayer to pay the
hire purchase amount was not relevant to decide whether the sale transaction was colourable. It was also observed
that in subsequent years the revenue itself had accepted the transaction to be a genuine. Further, relying on the
Supreme Court ruling in the case of Vodafone International Holdings B.V. the High Court held that while
ascertaining the legal nature of the transaction one has to look at the entire transaction as a whole and not to adopt
a dissecting approach and hence it was held that the transaction was not a sham or a colourable device just to
enable the taxpayer to claim the benefit of depreciation.
CIT v. High Energy Batteries (India) Ltd. [2012] 208 Taxman 213 (Mad)
For further details please refer to our Flash News dated 29 May 2012 available at this link
Transfer of shares through a legitimate scheme of arrangement is not a ‘Tax avoidance device’
The Bombay High Court while approving the scheme of arrangement in the case of Unichem Laboratories Limited
(along with other petitioners) has held that a tax efficient transfer of shares under a scheme of arrangement under
Sections 391 to 394 of the Companies Act, 1956, could not be held to be a tax avoidance device just because such
transfer would have been liable to capital gains tax if transferred otherwise. It also reaffirmed that the Income-Tax
Authority is not required to be heard while sanctioning the Scheme.
AVM Capital Services Pvt. Ltd. (Company Petition No. 670 of 2011, dated 12 July 2012) (Bom) (HC)
For further details please refer to our Flash News dated 20 July 2012 available at this link
Income from sale of CCD taxable as interest income
The applicant, a tax resident company of Mauritius, and V Ltd (V), an Indian company, made an investment in
another Indian company, S Ltd (S) by way of equity shares and CCDs. Prior to the mandatory conversion date, the
applicant was given the put option to sell shares and CCDs on specified dates to V. A call option was also given to
V to purchase the said shares and CCDs from the applicant. V exercised this option and proposed to purchase the
stake in S from the applicant. The issue before the AAR, inter alia, was whether the gains arising to the Applicant
on the sale of shares and CCDs of S Ltd are exempt from capital gains in India under Article 13(4) of the IndiaMauritius tax treaty?
Based on the facts of the case, the AAR, inter alia, observed and held as follows:
• Relying on the Supreme Court’s decisions in the case of CWT v. Spencer and Co. Ltd. [1973] 88 ITR 429 (SC)
and Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC), the AAR observed that the CCDs created or
recognised the existence of a debt, which remained till it was repaid or discharged.
• The income derived from the sale of CCDs would be taxable as interest income since the CCDs were a debt
instrument.
• In the instant case, CCDs did not carry any interest, but instead, gave the option for the conversion into shares
at a different price. The conversion rates for CCDs into equity shares varied depending upon the period of
17
holding of these CCDs. The AAR observed that this was ‘Interest’ falling within the meaning of Section 2(28A) of
the Act as well as under Article 11 of the tax treaty.
• The amount paid by V was clearly towards the debt that was taken by S from the Applicant. Hence, the
appreciation in the value of CCDs was clearly a payment of ‘Interest’ and was taxable under the provisions of
Article 11 of the tax treaty.
• On a perusal of agreement, it was held that the Indian holding and subsidiary companies are one and the same.
• Accordingly, the entire gains arising to the applicant on the sale of CCDs were not exempt from capital gains tax
in India under the tax treaty. Further, the AAR held that that sale of Indian company’s shares by a Mauritius
company is not exempt under the tax treaty.
Z, In re [2012] 345 ITR 11 (AAR)
For further details please refer to our Flash News dated 5 April 2012 available at this link
Mergers and acquisitions
Gujarat High Court allows appeal of Vodafone Essar Gujarat Limited and approves Scheme of Arrangement
for transfer of Passive Infrastructure Assets
The Company Judge of the Gujarat High Court rejected the Scheme of Arrangement (Scheme) on the ground that
the sole object of the Scheme was to avoid tax.
On an appeal, the division bench of the Gujarat High Court, while approving the Scheme, held that:
• The Scheme is supported by adequate commercial rationale including recommendations of the working group
on the telecom sector.
• Transfer of an undertaking by way of gift for commercial reasons is tantamount to reconstruction of business
and, hence, is an ‘arrangement’ covered under Section 391 of the Companies Act.
• A scheme which is supported by adequate commercial rationale may result in the benefit of saving income tax or
other taxes, which itself cannot be a ground for coming to the conclusion that the sole object of framing the
Scheme is to defraud the tax authorities.
• While examining the Scheme each and every objection of a third party cannot be considered by carrying out
microscopic examination.
• The Court accepted the locus of the tax department to raise objections to the Scheme in its capacity as a
creditor of the Company.
Vodafone Essar Gujarat Limited v. DIT [2012] 24 taxmann.com 323 (Guj)
For further details please refer to our Flash News dated 12 September 2012 available at this link
Transfer of shares at cost by Indian company to an overseas parent company as part of a group
restructuring exercise cannot be treated as a sham transaction or colourable device
The Mumbai Tribunal, in the case of Euro RSCG Advertising Pvt. Ltd. held that the transfer of shares at cost by an
Indian company to an overseas parent company as a part of a group restructuring exercise cannot be treated as a
sham transaction or colourable device. Further, it was held that the cost of acquisition has to be taken as per the
book value and not the fair market value as adopted by the AO, more so because the same has been accepted by
the tax department in scrutiny proceedings in the earlier years. The share purchase agreement cannot be brushed
aside, unless there is something on record to prove that it was a non-genuine arrangement.
Euro RSCG Advertising Pvt. Ltd. v. ACIT [2012] 53 SOT 90 (Mum)
Note: This case is argued by KPMG in India Tax Dispute Resolution Team
For further details please refer to our Flash News dated 20 July 2012 available at this link
Gift of shares in an Indian company by a foreign company could be regarded as a genuine transaction
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British India Steam Navigation Co. (UK Co) gifted the shares of Hill Park Ltd (HPL), a company incorporated in
India, to the taxpayer during the year 2007. Both the taxpayer and UK Co. were a 100 percent-owned subsidiary of
the same parent company based in the UK.
The main issue for consideration before the Mumbai Tribunal was whether such transaction can be termed as a
‘gift’ within the meaning of Section 47(iii) of the Act.
In connection with the above, based on the facts and arguments of the case, the Tribunal, inter-alia, observed and
held as follows:
• As the term ‘gift’ is not defined under the Act, reference could be made to the definition of ‘gift’ under the Transfer
of Property Act, 1882 (TPA);
• Under the provisions of the TPA, there is no requirement that a ‘gift’ can be made only between natural persons
out of natural love and affection. Therefore, a company can also gift shares, provided its Articles of Association
permit the making of such a gift; and
• In the instant case, the UK Co was authorised to make such gift as per the laws of the UK and the gift would be a
capital receipt in the hands of the taxpayer.
DP World Pvt Ltd v. DCIT [2012] ITA No. 3627/Mum/2012 (Mum)
For further details please refer to our Flash News dated 19 October 2012 available at this link
Slump sale
Delhi High Court holds that transfer of an undertaking under a Scheme is 'Slump sale' taxable under
Section 50B of the Income-tax Act
The taxpayer had entered into a Scheme of Arrangement under Section 391 to 394 of the Companies Act, 1956
(the Scheme) pursuant to which it transferred its project finance business and assets-based financing business to
its subsidiary for a lump sum consideration. The Scheme had been approved by the Calcutta High Court. The
taxpayer has filed a writ petition challenging the order of the Settlement stating the transfer of the project finance
business as taxable under Section 50B of the Act as ‘slump sale’.
The Delhi High Court, dismissing the writ, rejected the contention that a transfer under the scheme sanctioned by
the Court is not a sale under Section 50B of the Act. The High Court also rejected the contention that Section
2(42C) of the Act deals with a limited category of transactions being ‘sale’ and the broader and wider definition of
the term 'transfer' under Section 2(47) of the Act is not applicable to ‘slump sales’.
SREI Infrastructure Finance Ltd v. Income Tax Settlement Commission and Ors [2012] 207 Taxman 74 (Del)
For further details please refer to our Flash News dated 20 April 2012 available at this link
Transfer of tangible and intangible assets pertaining to sealants and adhesive business is a slump sale
taxable under Section 50B of the Act
The taxpayer sold/transferred/assigned trademarks, copyrights, know-how, assets and goodwill pertaining to the
Sealants and Adhesives Business through separate agreements for an aggregate consideration of INR 320 million.
The taxpayer offered to tax sale consideration amounting to INR 18.9 million received on account of goodwill and
non-compete fee. Consideration received on the sale of Trademarks, know-how, copyright, amounting to INR 280
million was not offered for taxation taking the view that same being capital receipt, was not taxable.
Based on the facts of the case, the Mumbai Tribunal held that in spite of separate agreement for each asset
specifying separate consideration, the transaction involved the sale of the entire business and therefore was a
slump sale. Further the Tribunal held that the provisions of Section 50B read with Section 2(42C) of the Act and
Explanation 1 to Section 2(19AA) of the Act were applicable to the transaction.
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Mahindra Engineering and Chemical Products Ltd. v. ITO [2012] 51 SOT 496 (Mum)
For further details please refer to our Flash News dated 4 May 2012 available at this link
The Mumbai Tribunal rules that negative net worth cannot be ignored for the purposes of computing capital
gains on slump sale of business under section 50B of the Income-tax Act
The Special Bench of the Mumbai Tribunal held that the negative figure of net worth of the undertaking should not
be ignored for working out capital gains in the case of a slump sale under Section 50B of the Act. The Special
Bench held that to contend that the cost or net worth can never be negative is too wide a proposition to be
accepted in the case of a capital asset in the nature of an undertaking. It was held that the legislature has very
rightly used the words ‘deducting from’ only to make its intention clear that for determining the income chargeable
under the head ‘capital gains’, if the amount of net worth is positive, that should be reduced from and if it is negative
then it should be added to the full value of consideration.
DCIT v. Summit Securities Limited [2012] 135 ITD 99 (Mum)
For further details please refer to our Flash News dated 9 March 2012 available at this link
Applicability of 14A disallowance
Section 14A does not apply to shares held as stock-in trade
During the year under consideration, the taxpayer had received dividend income which was exempt from tax.
However, the taxpayer did not make any disallowance of expenditure relating to the said exempt income. In the
books of account, the taxpayer had shown the shares as stock-in trade and was of the view that such stock-in-trade
could not be taken into account while computing the disallowance under Rule 8D of the Income-tax Rules, 1962
(the Rules). The Assessing Officer (AO) computed the disallowance under Section 14A of the Act as per Rule 8D of
the Rules and disallowed the expenditure holding that the provisions of Section 14A of the Act were applicable
even in relation to the dividend received from the trading shares. The Commissioner of Income-tax (Appeal)
[CIT(A)] excluded the stock-in trade from the purview of computation of disallowance of expenditure under Rule 8D
of the Rules.
The Mumbai Tribunal relying on the decision of Karnataka High Court in the case of CCI Ltd. v. JCIT (2012) 250
CTR 291 (Kar) has held that since the taxpayer had not retained the shares with the intention of earning dividend
income, the disallowance of interest in relation to the dividend received from trading shares cannot be made. It was
further held that, there being a direct decision of the Karnataka High Court on this issue, the same has to be
followed, in preference to the Special Bench’s decision of the of Mumbai Tribunal in the case of ITO v. Daga Capital
Management P. Ltd. [2009] 117 ITD 169 (Mum) (SB).
DCIT v. India Advantage Securities Ltd (ITA No 6711/ Mum/2011, dated 14 September 2012)
For further details please refer to our Flash News dated 12 October 2012 available at this link
Principal-agent relationship
Supreme Court held that tax should not be withheld on the vendor’s discount since it is not commission or
brokerage
The taxpayer, an association of stamp vendors, bought stamps from the State Government at prescribed discounts
ranging from 0.5 percent to 4 percent. The tax department claimed that the stamp vendors were ‘agents’ of the
State Government and that the discount was ‘commission or brokerage’, liable for tax deduction at source under
Section 194H of the Act. The taxpayer urged that the transaction was for sale of stamps in bulk quantity and the
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discount was nothing but cash discount given to purchasing members.
The Supreme Court ruled in favour of the taxpayer by holding that the discounts in the range of 0.5 percent to 4
percent given to the stamp vendors were for purchasing the stamps in bulk quantity and the discount was in the
nature of a cash discount. Accordingly, the transaction was regarded a sale. Consequently, Section 194H of the Act
has no application to the transaction and tax is not liable to be deducted from the discount.
CIT v. Ahmedabad Stamp Vendors Association [2012] 25 taxmann.com 201 (SC)
For further details please refer to our Flash News dated 11 September 2012 available at this link
Taxability of partnership under the tax treaty
Legal fee received by Swiss law firm for adjudication proceedings outside India is taxable in India
The Applicant was a Switzerland based partnership firm (the firm) and its partners are tax residents of Switzerland.
The firm is engaged in the practice of law in Switzerland and it does not carry out its activities in any other country.
The Applicant was appointed by an Indian company for representation in an adjudication proceeding in Switzerland.
The question posed for consideration before the AAR was whether the firm could be treated as a resident of
Switzerland under the India-Switzerland tax treaty and whether the legal fee received by the partnership firm from
the Indian company would be taxable in India.
The AAR, based on the facts and arguments of the case, observed and held as follows:
• The definition of the term ‘person’ provided in the tax treaty includes, inter alia, a company, body of persons, or
any other entity ‘which is taxable under the laws in force in either contracting state’. The firm is not a ‘person’
under the tax treaty for the following reasons:
 There is no definition of the term ‘person’ in Swiss Law corresponding to Section 2(31) of the Act which
confers the status of a ‘person’ on a partnership firm;
 The partnership firm is not a taxable entity in Switzerland.
• Although the partners of the firm are residents of Switzerland, they cannot invoke the tax treaty to determine the
taxability of the legal fees received by the firm since they have not received the legal fees from the Indian
company;
• The source of income for rendering professional services to the Indian company is in India. The fact that the
major part of the services are rendered outside India in respect of a dispute arising in India cannot alter the
source of income;
• Accordingly, the firm will not be treated as a resident under the tax treaty and will not be entitled to treaty
benefits. Therefore, the legal fees received by the firm will be taxable in India.
Schellenberg Wittmer along with its partners [2012] 210 Taxman 319 (AAR)
For further details please refer to our Flash News dated 11 September 2012 available at this link
Secondment arrangement
Reimbursement under secondment agreement does not qualify as FTS
The taxpayer, an Indian Company, in terms of the secondment agreement with Abbey Plc., reimbursed the salary
and other administrative costs relating to the seconded employees to Abbey Plc. without any deduction of tax at
source. The AO held that with Abbey Plc. being the legal employer of the seconded employees, the payments
made by the taxpayer to Abbey Plc. were for managerial services and would fall within the purview of FTS.
The issue for consideration before the Bangalore Tribunal was whether such payments constituted FTS under the
Act and the India-UK tax treaty.
21
Based on the facts and circumstances of the case, the Tribunal, inter alia, observed and held as follows:
• In terms of the secondment agreement between the taxpayer and Abbey Plc. and the decision in the case of IDS
Software Solutions India Private Limited v. ITO [2009] 122 TTJ 410 (Bang), the taxpayer was the real and
economic employer of the seconded employees;
• As the taxpayer had reimbursed to Abbey Plc only the actual expenditure incurred without any mark-up, the
same ought not to be treated as income in the hands of Abbey Plc; and
• As the agreement was for secondment of employees and not for rendering any services, such reimbursement
cannot be treated as FTS under the Act. Further, even if such payments are held to be taxable under the Act,
they cannot be taxed under the treaty as the term ‘managerial services’ is not present in Article 13(4) of the
India-UK tax treaty and also such services do not satisfy the condition of ‘make available’ under the treaty.
Abbey Business Services (India) Private Limited v. DCIT [2012] 53 SOT 401 (Bang)
Reimbursement of salary of seconded employees to foreign company is income in the hands of the foreign
company
The AAR has held that the salary reimbursed by the applicant to the foreign parent company under the secondment
agreement is income in the hands of the foreign parent company, in view of the fact that:
• The applicant does not become the employer of the seconded employee;
• What is paid by the applicant to the foreign parent company could not be construed as reimbursement of salary.
• The AAR relied on its earlier ruling in the case of Centrica India Offshore Private Ltd [AAR No. 856 of 2010] in
reaching this conclusion.
Target Corporation India Pvt. Ltd. [2012] 348 ITR 61 (AAR)
GAAR and Indirect Transfer
Expert Committee Report on General Anti Avoidance Rules
The expert committee constituted by the Prime Minister of India has issued its draft report on General Anti Avoidance
Rules (GAAR) on 3 September 2012. The key recommendations made by the committee are as follows:
• The tax mitigation arrangement should be distinguished from the tax avoidance arrangement before invoking
GAAR. Furthermore, GAAR should not be applicable to every tax avoidance arrangement unless it is abusive,
contrived and artificial. The Committee has also recommended an illustrative list of tax mitigation arrangements
or a negative list for not invoking GAAR.
• GAAR should be deferred for 3 years. The Committee also recommended that an immediate pre-announcement
in this regard be made by the Government to be in synchronization with international practice and in order to
remove uncertainty in the minds of taxpayers.
• A monetary threshold of INR 30 million of tax benefit (including tax only, and not interest, etc.) to a taxpayer in a
year should be used for the applicability of GAAR provisions. Tax may include Dividend Distribution Tax (DDT)
or Profit Distribution Tax.
• The Assessing Officer (AO) should be able to seek expert opinion in this regard from the Transfer Pricing Officer
to ascertain whether rights, or obligations, created in an arrangement are the same as ordinarily created
between persons dealing at arm's length.
• The Committee has recommended reintroducing the definition of the phrase ‘lacks commercial substance’ as
defined in the earlier version of GAAR in the Direct Taxes Code (DTC) Bill, 2009 and 2010. The said definition
gives due regard to the presence of significant business risks or net cash flow impact on any party to the
arrangement etc, to determine whether or not an arrangement lacks commercial substance.
• All investments (though not arrangements) made by a resident or non-resident as on the date of commencement
of GAAR provisions should be grandfathered so that on exit (sale of such investments), GAAR provisions are
not invoked for examination or denial of tax benefit.
22
• Where CBDT Circular with respect to Mauritius is applicable, GAAR provisions shall not apply to examine the
genuineness of the residency of an entity set up in Mauritius.
• The GAAR provisions should not be invoked to look into an aspect/element, where Specific Anti Avoidance
Rules (SAAR) is applicable to that particular aspect/element. In a case where a tax treaty has inbuilt antiavoidance provisions in the form of a Limitation of Benefits (LOB) clause etc. (e.g., Singapore), the Committee
has recommended that tax treaty override should not prevail. GAAR can be appropriately considered in cases
where a tax treaty does not have an inbuilt anti-abuse provision.
• It should be clarified that, where only a part of the arrangement is impermissible, the tax consequences of an
‘impermissible avoidance arrangement’ will be limited to that portion of the arrangement.
• The Government should abolish the tax on gains arising from transfer of listed securities, whether in the nature
of capital gains or business income, to both residents as well as non-residents. In order to make the proposal tax
neutral, the Government may consider increasing the rate of Securities Transaction Tax (STT) appropriately.
• Where a Foreign Institutional Investor (FII) chooses not to take any benefit under a tax treaty and subjects itself
to tax in accordance with domestic law provisions, then, the provisions of GAAR shall not apply to such FII.
• While determining tax consequences of an impermissible avoidance arrangement, corresponding adjustment
should be allowed in the case of the same taxpayer in the same year as well as in different years, if any.
However, no relief by way of corresponding adjustment should be allowed in the case of any other taxpayer. The
Committee also viewed that such compensation across parties is not desirable since it would diminish GAAR‘s
deterrent role and corresponding adjustments across different taxpayers would militate against deterrence.
• The AO is empowered to initiate GAAR proceedings only during the course of pending assessment proceedings.
Further, in the show cause to the taxpayer the AO gives a detailed reasoning alongwith the list of specified
explanations and this may be prescribed in the rules.
• While processing an application under Section 195(2) or 197 of the Act the AO Shall not invoke GAAR where
the taxpayer submits a satisfactory undertaking to pay tax along with interest, in case it is found that GAAR
provisions are applicable in relation to the remittance during the course of assessment proceedings.
• The administration of the AAR should be strengthened so that ruling may be obtained by non-residents as well
as residents within the time frame of 6 months.
For further details please refer to our Flash News dated 3 September 2012 available at this link
Expert Committee issues draft report on retrospective amendments relating to indirect transfer
The expert committee constituted by the Prime Minister of India has issued its draft report on retrospective amendments
relating to indirect transfer on 9 October 2012. The key recommendations made by the committee are as follows:
• Amendments relating to taxation of indirect transfer of assets made by the Finance Act, 2012, should be applied
prospectively;
• The word ‘substantially’, used in Explanation 5 to Section 9(1)(i) of the Act, should be defined as a threshold of
50 per cent of the total value derived from the assets of the company or entity;
• The phrase ‘directly or indirectly’, used in Explanation 5 to Section 9(1)(i) of the Act, may be clarified as
representing a ‘look through’ approach. This implies that, for determination of value of share of a foreign
company, all intermediaries between the foreign company and the assets in India may be ignored; and
• Interest and penalty should not be charged/ levied under the provisions of the Act in cases where a tax demand
is raised on account of a retrospective amendment relating to indirect transfer of assets.
For further details please refer to our Flash News dated 10 October 2012 available at this link
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Transfer Pricing
Tax department cannot dictate to the taxpayer whether or not to incur expenditure. Arm’s length price (ALP)
of royalty expenditure not to be linked with profit/income resulting therefrom
The taxpayer was engaged in the business of manufacturing and trading of refrigerators, washing machines,
compressors etc. For Financial Years (FYs) 2001-02 and 2002-03 the Transfer Pricing Officer (TPO) disallowed the
transaction of payment of royalty by the taxpayer to its associated enterprise (AE). Tax department contended that
the taxpayer has been incurring huge losses year after year. The royalty payments did not enable the taxpayer to
achieve profits from its operations and the increase in turnover also did not result in any profit. Thus payment of
royalty to the AE was not justified.
Commissioner (Appeals) [CIT(A)] ruled that it was imperative for the taxpayer to upgrade its technology due to
competition and market dynamics. There were profits at the gross level and the losses at the net level were due to
increase in operating costs. The TPO disregarded the business and commercial realities of the business of the
taxpayer and acted in a mechanical manner. Royalty payment should have been allowed even if the taxpayer had
suffered continuous losses in the business. The Tribunal agreed with the decision of the CIT(A) that the royalty
payment was justified and held that the TPO was wrong in disallowing the same.
The High Court ruled that it is not for the tax authorities to dictate to the taxpayer as to how he should conduct his
business and what expenditure should be incurred. The High Court relied on various judgments and concluded that
it is not necessary for the taxpayer to show that any legitimate expenditure incurred by him was also incurred out of
necessity or that the expenditure incurred has actually resulted in profit or income. The taxpayer only needs to show
that the expenditure should have been incurred ‘wholly and exclusively’ for the purpose of business. The High Court
further ruled that whether or not to enter into the transaction is for the taxpayer to decide. The quantum of
expenditure can be examined by the TPO as per law but he has no authority to disallow the expenditure on the
ground that the taxpayer has suffered continuous losses. The High Court also relied on the Organization for
Economic Co-operation and Development (OECD) Guidelines to substantiate that tax administrations should not
disregard and restructure the transactions as actually undertaken by the taxpayer except in exceptional
circumstances.
CIT v. EKL Appliances Ltd. (ITA Nos. 1068/2011 & ITA Nos. 1070/2011)
For further details please refer to our Flash News dated 12 April 2012 available at this link
Cost plus remuneration model is more appropriate in case the taxpayer is merely a low risk bearing
sourcing support service provider and no additional allocation for location savings required.
The taxpayer was engaged in the business of sourcing of apparel merchandise from India for GAP Group. Taxpayer
used Transactional Net Margin Method (TNMM) to substantiate cost plus 15% remuneration to be the ALP. The
TPO, based on the Functions, Assets and Risks (FAR) analysis rejected such approach and held that commission
at the rate of 5% on the Free on Board (FOB) value of goods sourced by the AE through Indian vendors was the
most appropriate ALP. The Dispute Resolution Panel (DRP) upheld the TPO/Assessing Officer (AO)’s order.
Tribunal ruled that the tax department has not been able to substantiate that the taxpayer has borne any business
risks and how the taxpayer’s routine activities led to development of any valuable supply chain or human asset
intangible. With regard to the tax departments’ contention that the taxpayer had generated location savings in India,
the Tribunal ruled that location savings arise to the industry as a whole and there is nothing to prove that the
taxpayer was the sole beneficiary. Thus, no separate / additional allocation is called for on account of location
savings.
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Tribunal further held that the PLI of percentage of FOB value of goods procured by AE resulted in distorted results.
If a particular PLI results in abnormal results then another method and PLI should be chosen so as to provide
rational results. Tribunal concluded that for non risk bearing procurement facilitating functions, the appropriate PLI
will be net profit / total cost (TC). With regard to the tax department’s reliance placed on the Li & Fung case [Li &
Fung India (P) Ltd. v. DCIT [2012] 12 ITR 748 (Del) ] the Tribunal held that in the Li & Fung case the taxpayer was
not able to establish that the AE was carrying out the critical functions. However, the facts in the taxpayer’s case
(GAP India) are different as all the significant functions are performed by the AE. Thus, the Tribunal concluded that
the taxpayer cannot be held to be entitled to remuneration on the basis of Li & Fung case (i.e. on FOB value of
goods procured).Tribunal accepted taxpayer’s suggestion that even if the Li & Fung ruling is applied, the Operating
Profit/ TC worked out to 32% and thus, Tribunal held that taxpayer’s TP adjustments be made by adopting 32% cost
plus mark up of the taxpayer for assessment year (AY) 2006-07 and 2007-08.
GAP International Sourcing India P. Ltd vs. ACIT [ITA Nos. 5147/Del2011 & 228/Del/2012 AYs 2006-07 &
2007-08]
For further details please refer to our Flash News dated 4 October 2012 available at this link
Taxpayer had placed substantial evidence on record and successfully demonstrated benefits received from
management services rendered by AE.
Taxpayer entered into various international transactions and applied TNMM to determine their ALP. TPO accepted
the ALP of all the international transactions using TNMM except management service fee and coordination cost.
TPO characterized these as intra group services received from the AE and computed the ALP of these payments as
'Nil'. DRP held that due to some evidence submitted, it cannot be said that no services were received and directed
the TPO to verify the costs of services based on appropriate allocation keys. TPO gave ad hoc relief of 40%.
At the CIT(A) level, the taxpayer contended that illustrative documentary evidence was submitted to the TPO
substantiating and demonstrating description of services, explanation on the type of services received, how these
services have been received and in what manner and to what extent benefits have been derived by the taxpayer.
The payment had been quantified by an allocation methodology adopted by the group companies.
Tribunal held that the taxpayer had placed substantial evidence on record and had been able to establish the nature
and benefits of services provided by AE and the tax department had not brought out anything to negate such
evidence. Tribunal further held that only a business expert can evaluate the true intrinsic and creative value of such
services. The term “benefit” to a company in relation to its business has a very wide connotation and it is difficult to
accurately measure these benefits in terms of money value separately. The taxpayer is engaged in only one class
of business and thus entity level benchmarking using TNMM shall be most appropriate for all international
transactions with AE.
McCann Erickson India Pvt. Ltd. v. ACIT [ITA No. 5871/Del/2011]
For further details please refer to our Flash News dated 19 June 2012 available at this link
The concepts of ‘arm’s length price’ and ‘ordinary profit’ are different and any excess profit over arm’s
length profit cannot be the basis for denial of tax holiday deduction under Section 10A of the Income-tax
Act
The taxpayer was engaged in back office operations and enjoyed tax holiday benefits under Section 10A of the
Income-tax Act, 1961 (the Act). TPO accepted the transactions to be at arm’s length and stated in the transfer
pricing order that profit reported by the taxpayer were above the arm’s length profit. AO held that the excess profit
worked out in the context of TP was not entitled for deduction under Section 10A of the Act and passed a draft order
denying deduction under Section 10A of the Act. The DRP confirmed the addition proposed by the AO. At the
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Appellate level, the taxpayer contended that the provisions of Section 10A(7) and Section 80-IA(10) of the Act, do
not state that ‘ordinary profits’ are to be computed with reference to TP provisions. The ALP has to be determined
using the most appropriate method as per the TP provisions whereas ‘ordinary profits’ is a commercial concept.
Tribunal ruled that:
• Transfer Pricing regulations are a separate and distinct code - the anti-avoidance provisions contained in
Chapter X of the Act are a separate code enacted for the specific purpose of computing income from
international transactions having regard to the ALP. Any adjustment that the AO would like to make with
reference to the income would have to be made independent of the order of TPO.
• Difference in concepts of ALP and ‘ordinary profits’ - The ALP is determined on the basis of the most
appropriate method determined in accordance with the rules. ALP cannot be used to determine ‘ordinary profits’
for the purpose of Section 10A(7) of the Act.
• Assessment not vitiated - Any irregularity committed by the AO in following the pre-determined procedures
does not invalidate the assessment. It is only an irregularity which is cured once the AO passes an order giving
effect to the order of the Tribunal.
Visual Graphics Computing Services (India) Pvt. Limited v. ACIT (ITA No.2073/Mds/2011)
For further details please refer to our Flash News dated 22 May 2012 available at this link
Where the TPO fails to show expressly how all or any of the comparables selected by the taxpayer are not
comparable, then a presumption has to be drawn that those cases are comparable
The taxpayer in its TP Study considered TNMM with Net Cost Plus (NCP) margin as the PLI to benchmark its
international transactions with AEs. The TPO, without giving any cogent reasons for rejecting taxpayer’s
comparables, applied his own set of comparables and made an adjustment. CIT(A) eliminated six comparables
selected by TPO on account of functional differences, controlled transactions, significantly higher turnover and
brand value etc. In the final set of comparables, CIT(A) included all comparables selected by taxpayer. Since the
taxpayer’s NCP fell within the permissible +/-5 percent range, CIT(A) deleted entire adjustment.
Tax department contended that the CIT(A) included comparables selected by the taxpayer without determining
whether or not these were comparable. The CIT(A) was duty bound and should have examined the comparables
given by the taxpayer.
Tribunal ruled that where the taxpayer furnishes a list of comparable companies and the TPO fails to show
expressly how such companies are not comparable, then a presumption has to be drawn that those companies are
comparable. CIT(A) had rightly rejected the comparables selected by TPO due to functional differences, high
turnover and brand value, existence of controlled transactions etc.
The Tribunal further held that the duty of the CIT(A) is to dispose of the appeal on the grounds raised before him
and not to redo assessment. The CIT(A) is not duty bound to examine the comparables given by the taxpayer to
find out whether or not these were, in fact, comparable. Further, if the Departmental Representative (DR) is allowed
to fill in the gaps left by the AO/TPO it would amount to conferring the jurisdiction of the CIT under Section 263 of
the Act to the DR, which is not permitted by the statute.
Phoenix Mecano (India) Ltd. v. DCIT [ITA No 7646/Mum/2011]
For further details please refer to our Flash News dated 9 January 2012 available at this link
26
Miscellaneous
India notifies the tax treaty with Norway
India and Norway signed a revised tax treaty on 2 February 2011. The revised tax treaty has now been notified and
shall be given effect to in India in respect of income and on capital gain arising in any fiscal year beginning on or
after 1 April 2012. Following are some of the important amendments of newly introduced India-Norway tax treaty:
• The Most Favoured Nation (MFN) clause provided under the old tax treaty and which is applicable to Royalty,
Fees for Technical Services (FTS) and Offshore activities has been deleted and as per the new tax treaty, the
withholding tax rate shall not exceed 10 per cent of the gross amount of the Royalties or FTS..
• The new tax treaty has introduced an Insurance Permanent Establishment (PE) clause which states that, an
insurance enterprise, except in regard to re-insurance, shall be deemed to have a PE in the other Contracting
State if it collects premiums in the territory of that other State or insures risks situated therein through a person
other than an agent of an independent status.
• The new tax treaty introduced the Article on ‘Limitation of Benefits’ as per which a resident shall not be entitled to
the benefits of this tax treaty if one of the main purposes of the transaction undertaken by such a resident was to
obtain the benefits under this tax treaty that would not otherwise be available.
• The amended tax treaty has reduced the tax rate of dividends to 10 percent in all cases from earlier 15 or 25
percent.
• The amended tax treaty has reduced the rate of interest to 10 percent from earlier 15 percent.
Notification No. 24/ 2012, dated 19 June 2012
India notifies protocol amending tax treaty with Switzerland
India has notified the second protocol amending the tax treaty with Switzerland which was signed on 30 August
2010. The amended protocol shall be effective in India in respect of income arising in any fiscal year beginning on
or after 1 April 2012. The Protocol rationalises the provisions relating, inter alia, to shipping business (Article 8),
taxation of business profits (Article 7), and Exchange of Information (Article 26). The following are the key features
of the protocol:
•
Article 26 has been amended to facilitate and strengthen the exchange of information. Under the new article
information received can be used for other purposes than the levy of the income tax if admissible in both
countries and provided that the requested authority agrees. Further information requested must be relevant for
levy of income tax and all the domestic means should be exhausted before the initiation of the request.
•
Under the present tax treaty if the Indian Government grants better terms to another OECD country with respect
to taxes on interest, dividends, and royalties and for FTS, Switzerland and India shall enter into negotiations
without undue delay. Under the protocol, there is now an automatic MFN clause whereby the reduced rate of
tax granted to the OECD country is automatically provided under the tax treaty.
•
The new protocol amended the existing protocol by introducing an anti-conduit provision whereby the beneficial
provisions in respect of dividends, interest, FTS and other income shall not apply if the same is paid under or as
part of conduit arrangement. The ‘conduit arrangement’ has been defined under the protocol.
•
The new protocol has amended Article 8 of the tax treaty to provide the mechanism for taxation of income from
operation of ships in international traffic. The new Article 8 provides that profits from operation of ships in
international traffic shall only be taxed in the foreign enterprise.
•
The definition of the term ‘resident’ has been amended to include pension funds or a recognised pension
scheme of the contracting state.
27
Notification No. 62/2011, dated 28 December 2011
Protocol amending the India-UK and Northern Ireland tax treaty
India and UK signed a Protocol on 30 October 2012 amending the Convention for Avoidance of Double Taxation and
Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains. The key amendments to the tax treaty
are as follows:
• Article 4 of the tax treaty, i.e. the ‘Resident’ Article, now provides that the benefits of the tax treaty will apply to income
derived by a partnership firm to the extent such income is taxed in the UK either in the hands of the partnership or in the
hands of its partners.
• According to Article 11 of the tax treaty, i.e. the ‘Dividends’ Article, the gross amount of dividend will be taxed at the
following rates:
 15 percent if such dividend is paid out of income derived directly or indirectly from immovable property by an
investment vehicle which distributes most of its income annually and whose income from such immovable property
is exempt from tax; and
 10 percent in all other cases.
• Further, anti-abuse provisions are included in the ‘Dividends’ Article which provides that if the main purpose of any
person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid
is to take advantage of the dividend article, then no relief shall be available to the taxpayers.
For further details please refer to our Flash News dated 9 November 2012 available at this link
Indexation benefit under Section 48 of the Act is available on redemption of non-cumulative redeemable
preference shares
The taxpayer was engaged in the business of share broking and also dealt in shares. The taxpayer had subscribed
to four lakh non-cumulative redeemable preference shares in 1992. These shares carried fixed rate of dividend and
were redeemable after 10 years. The preference shares were issued by a group company, Enam Finance
Consultants Pvt. Ltd. During AY 2002-03, the taxpayer redeemed 3 lakh shares at par and claimed a long term
capital loss, after availing the benefit of indexation. The AO treated non-cumulative redeemable preference shares
as ‘bonds or debentures’ since the instrument carried a fixed holding period and fixed rate of return and hence
denied the indexation benefit on the said transaction. Further, the AO also denied the benefit of long term capital
loss on the ground that the taxpayer as well as issuer company were part of the same group and there was no
‘transfer’ upon redemption of preference shares as per the provisions of the Act.
The Bombay High Court relying on the decision of the Supreme Court in the case of Anarkali Sarabhai v. CIT
[1997] 224 ITR 422 (SC) held that the redemption of preference shares amounts to ‘transfer’ as per the provisions
of Section 2(47) of the Act. The High Court further observed that the terms ‘bonds’ or ‘debentures’ are not defined
under the Act, but have a settled connotation under the Companies Act, 1956 (Companies Act). After observing
various provisions under Company law, the High Court observed that there is distinction between bonds or
debentures and preference shares. The High Court inter alia relied on the decision of Supreme Court in the case of
R.D. Goyal v. Reliance Industries Ltd. [2003] 113 Com Cases 1 (SC) to arrive at the conclusion that there is clear
distinction between bond and share capital. Thus it was held that the redemption of preference shares results into
‘transfer’ under Section 2(47) of the Act and benefit of indexation is also available upon redemption. Further, as
regards AO’s allegation that it was a sham transaction since the management of the taxpayer company and the
issuer company was the same, it was held that since the management of the taxpayer company and the issuer
company was the same, it was held that since the transaction was not questioned by the revenue for over ten
years, that both the taxpayer and the Company of which the taxpayer held redeemable preference shares were
juridical entities and the mere fact that both were under common management would not necessarily indicate that
the transaction was not genuine. The tax department did not bring any material on record whatsoever to
substantiate the contention that the transaction was sham and it does not give rise to any substantial question of
law.
CIT v. Enam Securities Private Limited [2012] 345 ITR 64 (Bom)
Reduction towards profits on transfer of DEPB under Section 28(iiid) of the Act while computing benefit
under Section 80HHC of the Act should be restricted only to surplus. The Supreme Court reverses the
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Bombay High Court ruling in Kalpataru on DEPB issue
The taxpayer was a manufacturer and exporter of fabrics and garments. During the year under consideration the
taxpayer sold the DEPB (Duty Entitlement Pass Book) and DFRC (Duty Free Replenishment Certificate) which had
accrued to it on export of its product. In its return of income while computing deduction under Section 80HHC, the
taxpayer reduced only the difference between sale proceeds and face value of the DEPB and not the entire sale
proceeds of the DEPB from the profit of the 80HHC unit. The AO while computing deduction under Section 80HHC
of the Act reduced the entire sale proceeds of the DEPB as against the difference between sale proceeds and face
value of DEPB. The matter was referred to the Special Bench of the Mumbai Tribunal.
The Supreme Court held that the face value of the DEPB was taxable under Section 28(iiib) of the Act and the
difference between face value and sale value was taxable under Section 28(iiid) of the Act.
The Supreme Court on a perusal of the Handbook on DEPB and Export and Import policy of the Government of
India observed and held as under:
• The objective of the DEPB scheme was to neutralise the incidence of customs duty on the import content of the
export product.
• It had direct nexus with the cost of import for manufacturing of export product.
• The DEPB was a kind of assistance given by the Government of India to the exporter to pay customs duty on
imports and therefore it was in the nature of cash assistance under Section 28(iiib) of the Act.
• The face value of the DEPB was taxable under Section 28(iiib) of the Act in the year in which a person applies for
DEPB.
• The difference between face value and sale value was taxable under Section 28(iiid) of the Act at the time of
transfer of DEPB.
• The High Court was not correct in drawing parallel with the sale of license under Section 28(iiia) of the Act
wherein entire sale proceeds are treated as profit of business.
Topman Exports v. CIT [2012] 342 ITR 49 (SC)
For further details please refer to our Flash News dated 23 February 2012 available at this link
TDS Disallowance applies only to amounts ‘payable’ as at 31st March and not to amounts already ‘paid’
during the year
The taxpayer had incurred brokerage expenses of INR 3.875 million and commission of INR 243 thousand during
the year under consideration. No tax was deducted at source on the said expenditure by the taxpayer. Further out
of this expenditure only INR 178 thousand was payable at the year end and the rest was paid during the year. The
AO disallowed the entire expenditure under Section 40(a)(ia) of the Act.
The Special Bench of the Tribunal observed that when Section 40(a)(ia) of the Act was proposed to be inserted by
the Finance Bill 2004, it was proposed to make it applicable to any ‘amount credited or paid’. However, when
enacted by the Finance Act 2004, it applied only to the ‘amount payable’. The words ‘credited/ paid’ and ‘payable’
had different connotations and the latter referred to an amount which is unpaid. The change in language between
the Bill and the Act was conscious and with a purpose. The legislative intent was clear that only the outstanding
amount or the provision for expense and not the amount already paid is liable for disallowance if tax at source is not
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deducted. Consequently, Section 40(a)(ia) of the Act can apply only to expenditure which is ‘payable’ as of 31
March and does not apply to expenditure which has been already paid during the year. However, one of the
members on the bench dissented with the view of the majority.
Merilyn Shipping & Transports v. ACIT [2012] 136 ITD 23 (Visakh) (SB)
For further details please refer to our Flash News dated 18 April 2012 available at this link
Claim of deduction made by the taxpayer in the assessment and appellate proceedings but not in the
income-tax return, can be entertained and allowed by the appellate authorities
During the Financial Year (FY) 2003-04 the taxpayer paid certain fees to the Securities and Exchange Board of
India (SEBI) worth INR 4 million for a provision which was made in FY 2001-2002. However, inadvertently in the
return of income the taxpayer claimed deduction of only INR 2 million. During the assessment proceedings, the
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taxpayer made a claim of INR 4 million under Section 43B of the Act. The AO rejected the claim on the ground that
he had no authority to allow any relief or deduction which had not been claimed in the return of income. However,
the CIT(A) allowed a deduction of INR 4 million as per the provisions of Section 43B of the Act, which clearly
indicate that only actual payments made are to be allowed as a deduction. The Tribunal upheld the order of the
CIT(A).
The Bombay High Court relying on various judicial precedents held that the taxpayer is entitled to raise additional
grounds not merely in terms of legal submissions, but also additional claims not made in the return filed by it. The
appellate authorities have the discretion whether or not to permit such additional claims to be raised. They may
choose not to exercise their jurisdiction in a given case. The appellate authorities have jurisdiction to deal not
merely with additional grounds, which became available on account of change of circumstances or law, but with
additional grounds which were available when the return was filed. The tax department has not suggested or
established that the omission was deliberate, mala-fide, etc. The conclusion that the error in not claiming the
deduction in the return of income was inadvertent cannot be faulted. Further, in relation to the tax department’s
reliance on the Supreme Court’s decision in the case of Goetze (India) Limited v. CIT [2006] 157 Taxman 1 (SC), it
was held that the Supreme Court did not hold anything contrary to what was held in the previous judgments and
hence, even if a claim is not made before the AO, it can be made before the appellate authorities. The jurisdiction
of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment.
CIT v. Pruthvi Brokers & Shareholders [2012] 208 Taxman 498 (Bom)
For further details please refer to our Flash News dated 11 July 2012 available at this link
Extension of time limit to rectify assessments in specific circumstances of past arrears of demand
Under the Income-tax provisions, an income-tax authority can amend any order passed by it with a view to rectify
any mistake apparent from the record. However, barring certain prescribed exceptions, such a rectification was
permitted only if it was made within four years from the end of the FY in which the order sought to be amended was
passed.
This impacted those taxpayers, who disputed the figures of arrear of demands, since such demand was already
paid or reduced/eliminated in the appeals, etc. In such cases, the un-rectified arrears of demand were shown as
outstanding in the records of the AOs. In some cases, the AOs uploaded such disputed demands on the Financial
Accounting System portal of Centralised Processing Center, Bengaluru which resulted in adjustment of refund
arising out of processing of income-tax returns for other tax years against such arrear demands. However, the AOs
were unable to correct or reconcile such disputed demand on the ground that the rectification order was timebarred.
The CBDT, considering the genuine hardship faced by taxpayers, has issued instructions to its subordinate incometax authorities to process the rectification of tax assessments that were otherwise time-barred, in specific
circumstances of such past arrears of demand.
Circular No. 4 of 2012, dated 20 June 2012
For further details please refer to our Flash News dated 27 June 2012 available at this link
Protocol to a tax treaty does not apply retrospectively unless explicitly intended otherwise
The taxpayer, a banking company incorporated in the UAE, operated in India through its branches which
constituted a Permanent Establishment (PE) of the taxpayer in India within the meaning of Article 7 of the IndiaUAE tax treaty. During the year under consideration, the income from banking operations in India was offered to tax
in India after claiming deduction for head office expenditure attributable to the operations in India.
The taxpayer relied on the provisions of Article 7(3) of the India-UAE tax treaty (prior to 1 April 2008) to hold that
the restrictions with respect to the allowability of head office expenditure contained in Section 44C of the Act is not
applicable to it for periods prior to 1 April 2008.
The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] held that the protocol
amending the provisions of Article 7(3) of the tax treaty is clarificatory in nature and is to be applied retrospectively
and accordingly disallowed head office expenditure in excess of the restrictions contained in Section 44C of the
Act. In connection with the above, the Mumbai Tribunal, inter alia, observed and held as follows:
• It is a cardinal principle that, when two sovereign nations enter into a tax treaty and have come to an
understanding regarding the terms expressed in the tax treaty, such terms cannot be unilaterally changed.
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• Where both the countries had not used the limitation clause for applicability of domestic law in determining the
profits and deduction of expenditure of a PE under Article 7(3) of the tax treaty, such limitation cannot be read
into even impliedly, that such a provision existed.
• When a particular provision in a tax treaty is introduced from a particular date, it has to be, prima facie, taken to
be prospective in operation, unless it is expressly or by necessary implication provided to have retrospective
operation.
• The parties interpreting the tax treaty get a vested right under existing tax treaty and any such interpretation
giving retrospective effect not only impairs the vested right but attracts the new disability in respect of
transactions already entered in the past.
• In the instant case, the retrospective operation cannot be taken to be intended unless, by necessary implication, it
has been made to have the retrospective effect.
Thus, the amendment brought in Article 7(3) of the tax treaty will not apply retrospectively.
Abu Dhabi Commercial Bank Ltd. v. ADIT [2012] 23 taxmann.com 359 (Mum)
For further details please refer to our Flash News dated 2 August 2012 available at this link
The Supreme Court held that the AAR ruling can be challenged by way of writ under Articles 226/227 of the
constitution, and if so filed, the High Court should dispose the same expeditiously
The taxpayer has filed SLP before the Supreme Court under Article 136 of the Constitution of India, challenging the
ruling of AAR. The question before the Supreme Court in this petition was whether the ruling pronounced by the
AAR can be challenged by the petitioner or by the tax department before the Supreme Court or the High Court.
The Supreme Court held that AAR is a body exercising judicial power conferred on it under chapter XIX-B of the
Act and hence it is a Tribunal within the meaning of Articles 136 and 227 of the constitution of India. It further held
that Articles 136, 226 and 227 of the Constitution are constitutional provisions vesting jurisdiction on the Supreme
Court and the High Courts and a provision of the Act of legislature making the decision of the AAR binding could
not come in the way of the Supreme Court or the High Courts to exercise jurisdiction vested under the Constitution.
Further the Supreme Court overruled the AAR ruling in the case of Groupe Industrial Marcel Dassault [2012] 340
ITR 353 (AAR) and held that to not permit an advance ruling of AAR to be challenged before the High Court under
Articles 226 and/or 227 of the Constitution of India would be to negate a part of the basic structure of the
Constitution. Further, the Supreme Court also held that when an advance ruling of AAR is challenged before the
High Court under Articles 226 and/or 227 of the Constitution of India, the same should be heard directly by a
Division Bench of the High Court and decided as expeditiously as possible. Though Article 136 of the Constitution
of India states that the Supreme Court may ‘in its discretion’ grant special leave to appeal against any order passed
by any court or Tribunal in the territory of India, the Supreme Court may still, in its discretion, refuse to grant special
leave on the ground that the challenge to the advance ruling of the AAR can also be made to the High Court on the
same grounds even if good grounds are made out in SLP under Article 136. In this SLP, neither a substantial
question of general importance arise nor is it shown that a similar question is already pending before this Court for
which the petitioner should be permitted to approach this Court directly against the advance ruling of the AAR.
Accordingly, the SLP is disposed by granting liberty to the petitioner to move the appropriate High Court under
Article 226 and/or 227 of the Constitution.
Columbia Sportswear Company v. DIT [2012] 23 taxmann.com 444 (SC)
For further details please refer to our Flash News dated 10 August 2012 available at this link
Freebies to doctors violate law and are not allowable as deduction
The Medical Council of India, which is a regulatory body constituted under the Medical Council Act, 1956 in
exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics)
Regulations, 2002 on 10 December 2009 imposing a prohibition on medical practitioners and their professional
associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and
allied health sector industries. Section 37(1) of the Act provides for deduction of any revenue expenditure from the
business income if such expense is laid out/expended wholly and exclusively for the purpose of business or
profession. However, the Explanation appended to this sub-section denies claim of any such expense, if this has
been incurred for a purpose which is either an offence or prohibited by law.
Thus, the claim of any expense incurred in providing above mentioned or similar freebies being in violation of the
provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be
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inadmissible under Section 37(1) of the Act, being an expense prohibited by the law. This disallowance shall be
made in the hands of such pharmaceutical or allied health sector Industries or other taxpayer which has provided
aforesaid freebies and claimed it as a deductible expense in its accounts against income.
Circular No. 5/2012 [F. No. 225/142/2012-ITA.II], dated 1 August 2012
For further details please refer to our Flash News dated 17 August 2012 available at this link
CBDT prescribes conditions to avail lower withholding tax at the rate of five percent under Section 194LC
of the Act on interest paid on borrowings made in foreign currency
The CBDT has issued a Circular granting a blanket approval to all borrowings by way of loan agreement and long
term infrastructure bonds that satisfy certain prescribed conditions. The prescribed conditions, inter alia, include
compliance with External Commercial Borrowing (ECB) regulations/Reserve Bank of India (RBI) guidelines.
Circular No. 07/2012, dated 21 September 2012 [(F. No. 142/17/2012-SO(TPL)]
For further details please refer to our Flash News dated 24 September 2012 available at this link
Retrospective amendment is not applicable to the matter which has already attained finality before
introduction of the amendment
An appeal was filed by the taxpayer under Section 260A of the Act against the decision of the Tribunal dated 31
August 2005. Since an appeal was filed after 180 days, the appeal was barred by limitation and hence application
for condonation of delay was filed. The Allahabad High Court, relying on the decision of the full bench of its own
jurisdiction in the case of CIT v. Mohd. Farooq (2009) 317 ITR 305 (All), rejected the application for condonation of
delay and accordingly dismissed the appeal. The taxpayer then challenged the said order before the Supreme
Court by special leave wherein the Supreme Court ordered to expeditiously hear and dispose of the review petition.
In the review petition the taxpayer contended that the High Court has the power to condone the delay in view of
insertion of Sub-section (2A) of Section 260A of the Act inserted by the Finance Act, 2010, with effect from 1
October 1998. The Allahabad High Court dismissed the review petition, relying on the decision of Supreme Court in
the case of Babu Ram v. C. C. Jacob and others AIR [1999] SC 1845, and held that cases already settled before
the amendment cannot be re-opened. The High Court observed that on 11 December 2009, when the instant
appeal was dismissed on the ground of limitation, there was no discretion with the court to condone the delay since
the power to condone the delay has come to the court by virtue of the amendment made by Finance Act 2010,
which inserted sub-section (2A) in Section 260A of the Act. The High Court inter alia relied on the decision of Ace
Investment Limited v. Settlement Commission (2004) 264 ITR 571 (Mad). Further, it also held that the remedy of
appeal is a statutory right and hence it has to be presented in accordance with the procedure, the manner and
within the time prescribed by the statute, and the principles of natural justice cannot be attracted so far as the
question of limitation is concerned.
J.B. Roy v. DCIT (Income Tax Appeal No. 127 of 2006 dated 7 September 2012) (All HC)
For further details please refer to our Flash News dated 15 October 2012 available at this link
Judicial conflict as to whether Tribunal has power to extend stay beyond 365 days was resolved in the
favour of taxpayer
The taxpayer was granted a stay of demand on the first occasion by an Order dated 4 March 2011 for six months
which was further extended to another six months vide Order dated 16 September 2011 and then another six
months vide Order dated 12 March 2012. The taxpayer approached the tribunal for grant of a further stay. The tax
department, relying on the decision of the Karnataka High Court in the case of CIT v. Ecom Gill Coffee Trading Pvt.
Ltd. (ITA No. 160 of 2012), contended that the Tribunal had no power to extend a stay beyond 365 days, even if the
delay was not attributable to the taxpayer. The taxpayer placed reliance on the decision of Bombay High Court. in
the case of CIT v. Ronuk Industries [2011] 333 ITR 99 (Bom), and on the decision of Special Bench, in the case of
Tata Communications Ltd v. ACIT [2011] 138 TTJ 257 (Mum), wherein it was held that the Tribunal had jurisdiction
to extend a stay beyond 365 days. The Delhi Tribunal had to consider whether it was the view of the Bombay High
Court and that of the Special Bench had to be followed or that of the Karnataka High Court.
The Delhi Tribunal observed that in the case of Narang Overseas (P) Ltd v. ACIT [2008] 114 TTJ 433 (Mum) (SB),
it was held by the Special Bench that if there is a cleavage of opinion amongst different High Courts and there is no
decision of the jurisdictional High Court on the issue, then the view favourable to the taxpayer has to be followed.
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As the view of the Bombay High Court in Ronuk Industries and that of the Special Bench in Tata Communications
Ltd is favourable to the taxpayer, that has to be followed and it has to be held that the taxpayer is entitled to a stay
of the demand even after the expiry of the period of 365 days if the delay in disposal of the appeal is not exclusively
attributable to it.
Qualcomm Incorporated v. ACIT (Stay Petition no. 177 to 183/ Del/2012)
A family arrangement cannot be construed as 'transfer' for capital gain purposes
The Karnataka High Court held that the family arrangement / partition cannot be construed as 'transfer' for capital
gain purposes. Therefore, there is no liability to pay capital gain tax under Section 45 of the Income-tax Act, 1961
(the Act).
• The High Court had considered similar issue in the case of CGT v. K N Madhusudan, wherein it was held that :
 The word ‘transfer’ does not include partition or family settlement as defined in the Act.
 What is recorded in the family settlement is nothing but a partition.
 Every member has an anterior title to the property which is subject matter of partition or a family
arrangement.
 Under family arrangement there is adjustment of shares, crystallisation of respective rights in the family
properties and therefore it cannot be construed as a transfer in the eye of law.
 When there is no transfer there is no capital gain and consequently no capital gain tax.
• In this case, the Tribunal had, after considering entire material, categorically held that the transaction is a family
arrangement. Since there was no transfer, there was no question of capital gains and hence, capital gains tax.
• The High Court held that the order of the Tribunal was in accordance with the law.
CIT v. R Nagaraja Rao [2012] 207 Taxman 236 (Kar)
For further details please refer to our Flash News dated 19 April 2012 available at this link
The Income-tax Appellate Tribunal Specifies Procedure and Guidelines for hearing of appeals via VideoConferencing
On 2 March 2012, the Income-tax Appellate Tribunal (the Tribunal) took a decision to set-up E-Tribunal for hearing
appeals viz. Video Conferencing.
Pursuant to such decision, the Tribunal issued a Practice Note alongwith the regulations regarding hearing of
appeals through Video Conferencing system. It is provided that the appeals and applications fixed before the
Nagpur Tribunal will be heard through Video Conferencing by the Members of the Tribunal sitting at Mumbai
Tribunal E-Bench (EB).
For further details please refer to our Flash News dated 23 November 2012 available at this link
Excise
Valuation
Goods sold consistently at a price below the cost of production cannot be accepted as assessable value
The central excise authorities rejected the valuation of motor cars which were sold consistently at a price lower than
its cost of manufacture to penetrate the market and insisted the taxpayer to compute the assessable value by
including the cost of production an other expenses on the ground that the cars were not ‘ordinarily sold’ in the
course of wholesale trade as the cost of production was much more than their wholesale price.
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The taxpayer contended that, since no additional consideration is received over and above the assessable value
declared and the dealings with their buyers were at arm’s length, the price declared should be accepted as the
assessable value. The Apex Court held that, as per Section 4, ‘normal price’ is the price at which the goods are
‘ordinarily sold’. Admittedly taxpayer had been selling cars at a loss continuously for five years, and therefore, the
transactions of the taxpayer could not fit into description of the expression ‘ordinarily sold’. The main reason for the
taxpayer to sell their cars at a lower price than the manufacturing cost and profit was to penetrate the market and
this will constitute extra commercial consideration and not the sole consideration. Hence, the price charged cannot
be considered as the ‘normal price’ under Section 4, and accordingly one has to resort to the valuation rules for the
purpose of determining the assessable value.
CCE v. Fiat India Private Limited & Others [2012-TIOL-58-SC-CX]
Manufacturing definition
Each and every kind of packing/ labeling may not amount to ‘manufacture’ as defined under Section 2(f) of
the Central Excise Act, 1944
The taxpayer provides an online platform to facilitate the sale of goods by various merchants. The taxpayer also
provided logistical services (storage, packing and shipping) in relation to the goods sold by the merchants. All the
activities undertaken by the taxpayer are intended to protect the merchant’s goods, facilitate inventory management
and the logistics of storage, retrieval, shipment and transportation of goods. None of the activities performed by the
taxpayer alter the primary packing or the original labeling affixed by the merchant under applicable regulations and
also no change is made in the MRP/RSP. The taxpayer had sought an Advance Ruling as to whether the proposed
activities would constitute “manufacture” under Central Excise Act 1944 (Central Excise Act).
The AAR has held that, each and every case of fixing a label or a sticker cannot come within the purview definition
of ‘manufacture’ under Section 2 (f) of Central Excise Act. Value addition is a relevant consideration. There is no
value addition happening in the present case, where admittedly the position is that the original labels including the
declaration of MRP/RSP is not being altered by the taxpayer. Stickers that are affixed to goods for the purposes of
inventory management, and which convey no information about the product to the consumer cannot come within its
scope.
Amazon Seller Services Private Limited [2012-TIOL-04-ARA-CX] [AAR]
CENVAT Credit
Notification for amending provisions
The Central Government amended the CENVAT Credit Rules, 2004 effective from 1 July 2012. The main objective
of the amendment is to bring the CENVAT Credit provisions in line with the provisions under the new Service tax
regime (Negative List based levy). The key changes are as follows:
• The definition of ‘capital goods’ has been expanded to cover various motor vehicles when used for providing the
output services and for transportation of goods.
• The definition of ‘exempted services’ is amended to specifically provide that, the ‘exempted services’ shall not
include a service which is exported in terms of the Service Tax Rules, 1994.
• Specific provision is made for refund of CENVAT Credit to service providers of services taxed on a reverse
charge basis, by way of insertion of a new rule. However, a Notification with regard to the mechanism is awaited.
• A specific mechanism has been prescribed for distribution of credit by an input service distributor.
Notification No. 28/2012 - C.E (NT) dated 20 June 2012
Credit cannot be claimed in the case the supplier has not paid duties to the Government
The taxpayer availed CENVAT Credit on goods purchased from a registered vendor. The subsequent
investigations carried out by the central excise authorities revealed that the said vendor had not paid any duties to
34
the Government and accordingly the central excise authorities demanded the taxpayer to reverse the credit availed.
The taxpayer contended that, they had taken the precaution to verify that the supplier is registered under central
excise provisions and accordingly credit availed cannot be denied at their end.
The CESTAT held that, the CENVAT Credit scheme cannot allow credit out of public revenue, when the input duty
has not been paid initially into the public revenue. Accordingly, the taxpayer cannot be given duty credit if the
supplier from whom they have purchased the goods has not paid the duty to the Central Excise Department in the
first place, as there are other legal recourses available to the taxpayer to obtain compensation from the supplier.
Ellen Industries v. CCE [2012-TIOL-1115-CESTAT-MAD]
Circular – area based exemption
The Central Board of Excise and Customs (CBEC) clarified that the area based exemption which provides
exemption from the payment of excise duties to specified goods cleared from industrial units in the states of
Uttaranchal and Himachal Pradesh for a period of ten years from the date of commencement of commercial
production, would continue even in cases of (i) change in the ownership of the unit claiming the exemption or (ii)
physical re-location of the unit within the exempted zone or (iii) expansion of units by acquiring adjacent lands and
installation of additional plant and machineries therein.
Circular No. 960/3/2012-CX, dated 17 February 2012
Customs
Refund
Refund of SAD of customs is required to be claimed within one year from the date of its payment and not
from the date of finalisation of the assessment even under Provisional assessment
The imports made by the taxpayer were provisionally assessed and on finalisation of the provisional assessments,
the taxpayer filed a refund claim for Special Additional Duty of customs (SAD) paid, as per provisions of Notification
No. 102/07-Cus dated 14 September 2007. One of the conditions of the said Notification was that the refund claim
should have been filed within one year from the date of payment of duty. However, by the time the assessment was
finalised and refund claim was filed, the period of one year has elapsed and accordingly the customs authorities
rejected the refund claim. In this regard the taxpayer contended that the assessment of bill of entry was provisional
until it was finalised and hence they should have been allowed one year time limit from the date of the order
finalizing the provisional assessment, and not from the date of payment of duty. The CESTAT held that the said
Notification is a self contained code, which requires claim to be filed within one year from the date of payment of tax
and accordingly the refund claim filed is time barred.
Global International v. CCE [2012-TIOL-934-CESTAT-DEL]
If VAT is exempted on the sale of goods, SAD refund claim cannot be rejected
The taxpayer imported the goods on payment of Special Additional Duty of Customs (SAD) and subsequently
claimed the same as refund under Notification No. 102/2007-Cus dated 14 September 2007. The said Notification
grants refund of SAD, in case at the time of sale of such goods, the importer pays the appropriate sales tax or value
added tax (VAT). The customs authorities denied the refund on the ground that the goods are exempt from the
payment of sales tax/ VAT and accordingly no sales tax/ VAT is paid at the time of sale of such goods.
The CESTAT held that, what is abated cannot be taken away indirectly. The SAD is levied to counter-balance the
effect of sales tax/ VAT and if sales tax/ VAT itself is not payable on the goods, then consequently SAD is also not
required to be paid and as a result the SAD paid is required to be refunded.
Comm. of Customs v. Katyal Metal Agencies [2012-TIOL-1053-CESTAT-KOL]
35
Duty liability
In the case of deficiency in the quality of goods imported, duty is required to be paid on the negotiated
price and not on the basis of price of the identical goods
The taxpayer imported the goods and cleared the same on provisional basis. Subsequent to testing of the said
goods, it was found that the imported goods are not up to standard, and accordingly negotiation took place with the
supplier and the rate negotiated was less than the rate originally agreed upon. However, the customs authorities
disregarded the negotiated price and applied the price which was declared by the taxpayer in respect of an identical
consignment which was imported by the taxpayer earlier.
The CESTAT held that as it was undisputed that the goods which were imported did not conform to the
specification given to the supplier and negotiations took place between the importer and supplier and, as a special
case, the goods were agreed to be accepted subject to reduction in the price, the negotiated price is required to be
accepted as the assessable value.
Binani Cement Limited v. Comm. of Customs [2012-TIOL-1587-CESTAT-AHM]
Project Imports benefit available only if the entire consignment is imported under Project Imports
The substantial goods required for the setting up of the Mega Power Project were imported by the taxpayer on
payment of duty, by classifying the same under their respective tariff headings. However, only with respect to the
import of few remaining consignments, the taxpayer claimed the benefit of Notification No. 21/2002-Cus read with
Project Import Regulations, 1986, by classifying the same under Chapter 9801, as Project Imports.
The Customs Authorities rejected the registration sought by the taxpayer on the ground that, considerable items/
goods required for the said project had already been imported and cleared on payment of duty on merits without
registering under Project Import Regulations. The CESTAT held that it is imperative that, for classification under
Heading 9801, as Project Imports, the bundle of items/ goods must be complete so as to be considered to be
“required for the setting up of a power plant or for the substantial expansion of an existing power plant”. In the
present case, substantial part of the material requirements for the Power Project imported are cleared on payment
of duty at merit rates. The benefit of Project Imports is claimed only with respect to some items of machinery and
these items alone cannot, by any stretch of imagination, constitute the whole bundle of goods/items of “required for
the setting up of a power plant or the substantial expansion of an existing power plant”.
Samalkot Power Limited & Others v. Comm. of Customs [2012-TIOL-1059-CESTAT-BANG]
Circular
24X7 customs clearance operations introduced in identified Air Cargo Complexes and Seaports
In order to facilitate imports and exports, the CBEC has started, on a pilot basis, 24X7 Customs clearance with
effect from 01 September 2012, at identified Air Cargo Complexes (viz., Bangalore, Chennai, Mumbai and Delhi)
and Seaports (Chennai, JNPT, Kandla and Kolkata) in respect of the following categories of imports and exports:
(a) Facilitated Bills of Entry where no examination and assessment is required; and
(b) Factory stuffed export containers and export consignment covered by Free Shipping Bills
Circular No. 22/2012-Cus dated 7 August 2012
E-payment of customs duties made mandatory
The CBEC has made the e-payment of duty mandatory for importers paying customs duty of Rupees one lakh or
more per Bill of Entry and for importers registered under the Accredited Clients Programme, with effect from 17
September 2012.
Circular No. 24/2012-Cus dated 5 September 2012
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For further details please refer to our Flash News dated 10 September 2012 available at this link
Service tax
Negative List Regime with effect from 1 July 2012
With the introduction of the Negative List Regime, there is a paradigm shift from ‘selective taxation’ to
‘comprehensive taxation’. Earlier more than 115 services were taxable whereas under the Negative List regime all
services other than those mentioned in Negative List are taxable, provided they are not specifically exempted by
way of Mega Notification. In addition, certain services are specifically brought into the service tax net by
introduction of list of declared services. Further, ‘Place of Provision of Services Rules’ have been introduced to
replace the present Export Rules and Import Rules. Also, changes have been made in reverse charge mechanism
wherein it will be joint liability of service provider and recipient to discharge service tax in certain cases.
For further details please refer to our Flash News dated 9 July 2012 available at this link
Service Tax (Settlement of Cases) Rules, 2012 and Service Tax (Compounding of offences) Rules, 2012
notified under Service tax Law
The CBEC notified Service Tax (Settlement of Cases) Rules, 2012 and Service Tax (Compounding of Offences)
Rules, 2012. These rules provide for specific provisions, procedures and forms for settlement commission and
compounding of offences under Section 89(1) (i.e. prosecution provisions) of the Finance Act.
Notification No. 16/2012 dated 29 May 2012 and Notification No. 17/2012, dated 29 May 2012
Clarification on Service tax on remittance of foreign currency in India
The Government has clarified that no Service tax is applicable on the amount of foreign currency remitted to India
from overseas as ‘transaction in money’. Consequently, this has been excluded from the definition of ‘service’
under Section 65B of the Finance Act, 1994.
Further, it has also been clarified that no Service tax is applicable on any fee or conversion charges levied for
sending such money as the person sending the money and the company conducting the remittance are located
outside India, and such services are deemed to be provided outside India in terms of Place of Provision of Services
Rules, 2012.
Circular No. 163/14/2012-ST, dated 10 July 2012
Levy of Tax on Construction activity
Bombay High Court upholds constitutional validity of service tax on construction activities
The Finance Act, 2010 wide Explanation inserted in the categories of ‘Commercial or Industrial Construction
Service‘ and ‘Construction of Residential Complex Service’ effective from 1 June 2010 provided for a deeming
fiction of provision of construction service if any amount is paid before the issuance of completion certificate and
levy of service tax on ‘preferential location services.’ A petition was filled in the Bombay High Court challenging
these amendments the grounds that the tax on land and buildings can be levied by States and not by Central
Government and there is no provision of service per se.
The Bombay High Court dismissed the petition and upheld the levy inter alia on the ground that service tax on
37
construction activity is not a tax on land or building per se but a tax on an activity which occurs on land and hence
the Central Government has the legislative powers to introduce the levy of service tax on such activity. It further
held that the taxable category of ‘preferential location service’ is towards the additional advantage which the buyer
gets in terms of flat facing a particular direction, road etc. for which an additional payment is made and it cannot be
said that such tax is on land and buildings.
Maharashtra Chamber of Housing Industry and Others v. UOI and Others [2012-TIOL-78-HC-MUM-ST]
For further details please refer to our Flash News dated 30 January 2012 available at this link
CBEC clarification on levy of Service tax
The CBEC issued clarification on applicability of service tax on construction services under various business
models and divergent practices being adopted in the construction sector such as a Tripartite arrangement,
Redevelopment/Rehabilitation projects, Build-Operate-Transfer (BOT) projects, Joint Development agreements etc.
The key highlights of the Circular are as follows:
•
Service tax would be payable on flats allotted by the builder/developer to the land owner in exchange of
development rights. In such cases, the consideration for such flats can be derived by applying the valuation
principles prescribed under service tax law i.e. adopting the sale price of similar flats sold near to the date the
land is made available for development
•
Reconstruction activities undertaken by a society by directly engaging a builder/developer would not be liable to
service tax as the same is meant for personal use of the society/its members
•
Investment amount received by the builder/developer from an investor before commencement of the
construction would be treated as a consideration received in advance for services to be provided and therefore,
would be liable to service tax. In the case of subsequent sale to other customers, before the issuance of
completion certificate, the said transaction would also be subjected to service tax
•
For BOT projects, transfer of right to use and/or develop the land by the Government or its agency for a specific
period to a concessionaire, for construction of building for furtherance of business or commerce would be liable
to service tax under the category of ‘renting of immovable property services’
•
In cases where the landowner and builder/developer collectively form a new entity or operate under joint/
collaboration basis, such new entity would be treated as a separate person and its transaction with the
builder/developer and owner of the land would be required to be examined for applicability of service tax.
Circular No. 151/2/2012-ST dated 10 February 2012
Applicability of Service tax on construction of residential complexes under joint development agreement
with the land owners
In the instant case, the Appellants inter-alia constructed flats under a joint development agreement with the land
owners and allotted flats in lieu of the land to the land owner. The department demanded Service tax on the value
of the flats handed over to the landlord after 67 percent abatement. The Appellant contested that there was no
relationship of service provider and service recipient between the Appellant and the land owner and it was a joint
venture for profit. In terms of the joint venture, both the parties joined together in the business of construction of the
complex and the land owner brought in the capital by way of his land.
The CESTAT held that a service provider and service receiver relationship existed between the Appellant company
and the land owners. As both the parties were neither taking risks jointly nor doing any common activity and there
was no participation by the land owners in organizing or carrying out the activity, the activity of handing over of flats
by the Appellant to the land owners would be liable to Service tax.
LCS City Makers Pvt Ltd v. Commissioner of Service tax [2012-TIOL-618-CESTAT-MAD]
Applicability of VAT in Maharashtra on newly constructed properties
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•
The constitutional validity of amendment in the Maharashtra Value Added Tax Act 2002 (MVAT Act), imposing
Value Added Tax (VAT) on newly constructed properties was challenged by Maharashtra Chamber of Housing
Industry (MCHI) vide writ petition no. 2022 of 2007 in the Bombay High Court.
•
The Bombay High Court upheld the constitutional validity of the same vide judgment dated 10 April, 2012.
•
Against the said judgment, MCHI had filed Special Leave Petition No.17738 and 17709 of 2012 (SLP) before
the Supreme Court of India. The Supreme Court had admitted the SLP filed by MCHI, however, no stay has
been granted to the judgment of the Bombay High Court. Therefore, the developers were liable to obtain
registration under MVAT Act and pay tax on newly constructed properties under MVAT Act with effect from 20
June, 2006.
•
Considering the above, the Sales tax Department had issued a Trade Circular No.14T of 2012 dated 6 August,
2012 wherein the Developers were liable to get themselves registered under MVAT Act on or before 16 August,
2012 and pay the tax, file the returns and apply for administrative relief on or before 31 August, 2012.
•
The SLP filed by the MCHI as well as by the Promoters and Builders Association came for hearing before the
Supreme Court of India on 28 August, 2012, The Supreme Court passed an interim Order dated 28 August,
2012 clarifying the following:
 Time for registration for Developers under MVAT Act has been extended till 15 October, 2012
 The due date for payment of tax and filing of returns has been extended till 31 October, 2012
 In case the Developers pay tax before the due date, process of recovery of tax, interest or penalty shall
remain stayed
 The above payment of tax by concerned Developers shall be subject to the final decision in this matter by
the Supreme Court
 In case the amendment in the MVAT Act is held unconstitutional and the tax so deposited / paid by the
Developers is ordered to be returned by the State Government to the Developers, the same shall be
returned alongwith interest at such rate that may be ordered by the Court finally at the time of disposal of the
matter.
•
To give effect to the interim Order, the Commissioner of Sales Tax has issued a Trade Circular No. 17T of 2012
dated 25 September, 2012 and extended the due date for registration for the Developers till 15 October, 2012
and due date for payment of tax and filing of returns to 31 October, 2012.
•
Under the earlier Trade Circular No. 14T of 2012 dated 6 August, 2012 with regard to the imposition of VAT on
newly constructed properties in the state of Maharashtra, the Sales tax Department issued a new Trade
Circular No.18T of 2012 dated 26 September, 2012 clarifying certain points.
•
The Trade Circular had majorly clarified that no other method apart from the earlier prescribed 4 methods will
be admissible for discharging the tax liability by the Developers. In case any short payment is made by the
Developer by choosing other than above mentioned four options, the balance tax shall be recovered according
to the provisions of law.
Later, a writ petition was filed by Builders Association of India & Maharashtra Chamber of Housing & Industry and
Ors Vs The State of Maharashtra, and Ors. [Writ Petition (Lodg) No. 2440 Of 2012 with Writ Petition No. 2502 of
2012] seeking the benefit of a composition scheme notified under the MVAT Act, 2002 by a Notification dated 9
July 2010 in respect of the period commencing from 26 June 2006 in the same manner as extended by the
Notification to agreements which are registered on or after 1 April 2010. However, on 30 October 2012, the High
Court dismissed the same.
39
Foreign Trade Policy
Annual supplement to Foreign Trade Policy notified
The Government notified the Annual Supplement to Foreign Trade Policy 2009-14. The Director General of Foreign
Trade (DGFT) has also notified the Handbook of Procedures and Appendix to the Handbook of Procedures. The
important changes made in the Foreign Trade Policy are as under:
•
The zero percent duty under the Export Promotion Capital Goods (EPCG) Scheme has been extended up to 31
March 2013.
•
Exporters may import capital goods on payment of duty in cash and subsequently receive a duty credit scrip on
completion of export obligation. Since the duties have been paid upfront at the time of import of capital goods,
the export obligation would be 85 percent of normal export obligation.
•
To promote manufacturing activity and employment in the North Eastern Region of the country, export
obligation under the EPCG Scheme would be 25 percent of the normal export obligation.
•
The present Policy allows scrips under different schemes of Chapter 3 of Foreign Trade Policy to be used for
import of goods under the conditions of these Schemes. Now these scrips shall be permitted to be utilized for
payment of Excise Duty for domestic procurement also. Earlier only scrips under SFIS were so permitted for
procurement of goods from the domestic market.
Notification No. 1/(RE-2012)/ 2009-14 and Public Notice No.02/ (RE:2012)/2009-2014, both dated 05 June
2012
VAT
Rate amendments
The general rate of VAT has been amended in following states:
State
Puducherry
Orissa
Old rate
(percentage)
4
12.5
4
New Rate
(percentage)
5
14.5
5
5
5.5
14
14.5
5.5
5
14.5
14
Karnataka
Effective
Date
1 January
2012
Notification No.
1 April
2012
1 August
2012
Notification S.R.O.No.126/2012- NO.12277-FIN.CT1-TAX-0025/2012 Dated 30th March,
2012
Notification I No FD 143 CSL 2- Dated 31st July,
2012
1 August
2013
Notification IX No FD 143 CSL 2- Dated 31st
July, 2012
Notification No.
31.12.2011
GO.MS.
68/F2/2011,
dated
The VAT rate in the state of West Bengal has been increased to 14.5 percent for certain goods such as air
conditioners, motor cars, televisions, mobile phones and watches above a certain price with effect from 1 April
2012.
Notification No. 456-F.T. dated 31st March 2012
Sales not liable to tax
40
Sale of goods to Mumbai high region not an interstate sale
The taxpayer a licensed manufacturer of Helium gas with a factory at Palghar in the district of Thane imported
liquefied Helium gas and manufactured the requisite quality of Helium gas in its factory. The assessee sold Helium
gas to ONGC which is engaged in the production of crude oil at Mumbai High (located about 150 kms from the
coastline of the State of Maharashtra). The taxpayer claimed that the sales which were effected were sale in the
course of export under Section 5(1) of the Central Sales Tax Act 1956 (CST Act) since Mumbai High is located
beyond the territorial waters of India and accordingly the sale transaction should be exempt from tax. However, the
authorities construed the same as an interstate sale and sough to levy Central Sales Tax (CST). The High Court
held that the Continental Shelf and the Exclusive Economic Zone do not constitute a part of the territory of India
and accordingly, Mumbai High should not be considered to be part of any State in India. Thus, movement of goods
from the State of Maharashtra to Mumbai High does not constitute a movement from one State to another State
which is a mandatory requirement to attract the levy of tax under the provisions of the CST Act.
Commissioner of Sales Tax v. Pure Helium (India) ltd. (2012-VIL-11-BOM)(HC)
Sale of goods by duty free shop is exempt from tax
The Supreme Court held that tax is not payable on sale of goods by duty free shops at international airports to
passengers coming into India since Section 5 of the CST Act exempts sale of goods by transfer of document to title
to goods before the goods have crossed the customs frontiers of India. The department contended that such sales
can only be claimed to be exempt if it is affected by transfer of documents of title to goods and not by giving
physical possession of goods to customers. The Supreme Court held that sale of goods at the duty free shop (a
custom bonded premise) must be construed as sale of goods before the goods have crossed the customs frontiers
and physical delivery of goods would not make the sales taxable.
Hotel Ashoka v. AC of Commercial taxes & ANR [2012-TIOL-08-SC-VAT]
Refund
Refund claim cannot be rejected or delayed for the pendency of his/her vendor’s assessment
The petitioner a dealer and exporter of finished leather and shoe apparel claimed refund of the input tax credit in
respect of the exports made. The refund claim was originally allowed. However, thereafter a notice was issued
seeking to withdraw the refund claim on the ground that its sellers had not reported the sales turnover and remitted
the tax and it was directed to pay the tax immediately. In the appeal, the High Court held that so long as the
purchasing dealer has complied with the requirements under the law, the claim of the purchasing dealer cannot be
denied by the revenue. The mere fact that the revenue has not made assessment on the taxpayer’s vendor cannot
stand in the way of granting refund to the taxpayer. It is for the revenue to take necessary action against the
vendors who had not remitted the tax. So long as the vendor is a registered dealer, the claim of the taxpayer cannot
be rejected or delayed.
Althaf Shoes (P) Ltd v. Assistant Commissioner (CT) [2012] 50 VST 179 (Mad)
Legislature Power
State has power to tax deemed sale only if it is a works contract involving transfer of property in goods
The issue involved was whether a contract for programming and provision of computer software is treated as a
works contract taxable by the state legislature or a service contract falling within the power of Parliament.
The Commercial Tax Officer (CTO) issued a notice to the dealer stating that agreements executed were works
contracts subject to VAT. The Assessing authority held that there was transfer of intellectual property from the
technicians of the dealer to the clients who constituted a sale of intangible goods liable to VAT since the
deliverables were both in terms of hardware and software.
Allowing the appeal, it was held that the terms of the agreement between the parties gave no indication of a sale or
41
purchase of this software and hence the entire agreement was for provision of service subject to service tax. On the
conception of such an invention or discovery or idea, the dealer agreed to disclose it to the client and the client had
full power and authority to file and prosecute patent applications. Therefore, even before rendering the service, the
dealer had given up its rights to the software to be developed by the dealer. Furthermore, the consideration was
also based on the time spent by the dealer on the development. The title to the project/ software to be developed
lay with the customer even before the dealer started rendering the service. At no point in time was the software the
property of the dealer.
Sasken Communication Technologies Ltd. v. JCCT (Appeals) and another [2012] 55 VST 89 (Kar)
Entry Tax
In the state of West Bengal, entry tax has been introduced with effect from 1 April 2012 at the rate of 1 percent on
the entry of specified goods into a local area for consumption, use or sale therein. Exempt goods, goods liable to
VAT at 1 percent and certain goods liable to VAT at 4 percent are presently excluded.
Notification No. 453- F.T dated 31 March 2012
42
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