snk newsletter december 2013
TRANSCRIPT
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Issue 091111
September, 2013
SNKNewsletter
Website: www.snkca.com Email: [email protected]
DIRECT TAXES ... 1 - 12
DIRECT TAXESJudicial pronouncements
INDIRECT TAXES . 13 - 15
IMPORTANT DUE DATES 15
Issue 12 December, 2013
Rajshri Production Pvt. Ltd. Vs. Addl CIT [TS-570-ITAT-
2013(Mum), ITAT Mumbai Bench, dtd. 22.10.2013, in fa-vour of assessee]
Cogent reasons recording AO's dissatisfaction manda-
tory for invoking Sec 14A disallowance
For invoking Sec 14A, AO should indicate cogent reasons
that he is not satisfied about the claim of the assessee; The
AO did not record any reason that he was not satisfied with
the explanation by the assessee; Mere mention of AO's dis-
satisfaction not sufficient; Matter remitted to the AO with di-
rection to pass a reasoned and speaking order; Relied onDelhi HC ruling in Maxopp Investment
Varsha R. Taurani Vs. ACIT [TS-552-ITAT-2013(Mum),
ITAT Mumbai Bench, dtd. 30.10.2013, in favour of reve-
nue]
Disallows 'interest' expense u/s 14A though actual divi-
dend income not received
Upholds CIT(A)s order disallowing deduction for interest ex-
penditure u/s 14A; Assessee utilised borrowings to acquire
preference shares, dividend income from which was exempt;
Marginal note to Sec. 14A clearly states that expenditure in-
curred in relation to income not includible in total income,
actually earned or not, shall be disallowed; Interest not allow-
able as deduction against 'income from other source', though
no dividend income was earned; Relies on Delhi ITAT ruling
in Ever Plus Securities & Finance Ltd.; Distinguishes SC rul-
ing in Rajendra Moody
Prakash Vasantlal Golwala Vs. ACIT [Corrigendum in ITA
No. 558/Ahd./2013, ITAT Ahmedabad bench, dtd.
29.10.2013, in favour of revenue]
Law of jurisdictional High Court is not binding if there is
a later contrary judgement of non-jurisdictional High
Court.
Sec. 22: Property used by firm in which assessee-owneris partner is not used for assessees business & not enti-
tled for exemption
The assessee, a partner in a firm, was the owner of a house
property. He claimed that the house property was used by
the employees of a firm in which he was a partner and that it
should be considered to have been used for a business car-
ried on by him. The assessee relied on CIT v/s. Rasiklal
Balabhai 119 ITR 303 (Guj) where it was held that the annual
letting value (ALV) of a godown owned by the assessee and
used for the business carried on by him in partnership was
not liable to be included in his total income u/s 22. However,
the AO & CIT(A) relied on the contrary judgement in Prodip
Kumar Bothra 244 CTR 366 (Cal) where it was held that
house property income is not taxable only if the property is
used for the assessees ones own business and is not ex-
empt if used for the business of the firm in which the as-
sessee is a partner. On appeal by the assessee to the Tribu-
nal, dismissing the appeal, ITAT held that -
1. Though the jurisdictional High Court in Rasiklal Balab-hai 119 ITR 303 held that the annual letting value of
house property owned by the assessee and used for the
business carried on by him in partnership was not liable
to be included in his total income u/s. 22, the Calcutta
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High Court has dissented from this
view in Prodip Kumar Bothra244
CTR 366 and held that the exemp-
tion in respect of house property
cannot be allowed to assessee if the
property is used by the partnershipfirm because the owner of the
house property and the occupier of
the property must be the same per-
son. The Karnataka High Court
in K.N. Guruswamy 146 ITR 34
(Kar) and the Allahabad High Court
in Shiv Mohan Lal 202 ITR 60 (All)
& Mustafa Khan 276 ITR 602 (All)
has taken the same view as the Cal-
cutta High Court that user by a part-nership firm/ HUF is not user by the
assessee-owner for business pur-
poses. In view of the divergent
views expressed by the High
Courts, the thumb rule that the lat-
est decision of the High Court is
required to be followed to maintain
judicial discipline. As the judgement
of the (jurisdictional) Gujarat High
Court is earlier in point of time andthe judgement of the (non-
jurisdictional) Calcutta and other
High Courts is later in point of time,
the view expressed by the Revenue
Authorities has to be affirmed and
the assessees ground dismissed;
2. Also, a litigant, especially the
learned counsel, who is an expert,
is expected to place before the
Court all decisions either in favour
or against him. We are constrained
to note that this fair approach was
not adopted in this case.
Oracle India P. Ltd. Vs. CIT [ITA no.
25/2012, 287/2008, 417/2009,
447/2009, 461/2009, 683/2009, Delhi
High Court, dtd. 25.11.2013, in favour
of assessee]
Sec. 37(1): Expenditure on acquiring
master copy of software subject to
obsolescence is deductible as reve-
nue expenditure
The assessee entered into a license
agreement with Oracle Corp under
which it acquired a non-exclusive & non-
assignable right to duplicate software
products which were owned by Oracle
Corp and to sub-license the same toparties in India. The assessee paid re-
curring royalty of 30% for the said right.
In addition to the royalty, the assessee
periodically paid an amount towards
expenditure on import of software mas-
ter copy. The said master copy was
used to replicate the software. The as-
sessee claimed that the said master
copies were versions of Oracles new
product offerings which had very accel-erated obsolescence and that at any
point of time it was not possible to say
whether the version will be current for
one day or one month. The AO allowed
a deduction for the recurring royalty but
held that the expenditure for acquiring
the software master copy was capital
expenditure. On appeal, the CIT(A) re-
versed the AO on the ground that owing
to obsolescence, there was no enduringbenefit as there were frequent correc-
tions and up-gradation of the software.
On appeal by the department, the Tribu-
nal reversed the CIT(A) and held that
the expenditure was capital in nature on
the ground that the master copy was an
asset of enduring benefit. On appeal by
the assessee, reversing the Tribunal,
Delhi high Court held that the as-
sessees claim that the master copieshad high accelerated obsolescence and
that even at the point of time of import it
was difficult to say whether the version
would be replaced by a new or updated
version after one day or a month had
not been disproved. Also the facts
showed that there were periodical im-
ports of the master copies and that the
average price per copy was minimal.
This was not a case where the master
copies contained operating or system
software, which normally did not require
frequent up-gradation or changes. It is
also not the case of an assessee which
is the end user of software. It is a case
where the assessee is required to re-
peatedly pay for the master copy media
in view of frequent newer or updated
versions of the application software fromtime to time. Once newer or better ver-
sion of the application software is avail-
able, the earlier version is not saleable
and does not have any market value for
the seller i.e. the assessee. Also, as per
the matching concept in accountancy,
while determining whether expenditure
is capital or revenue in nature, the ques-
tion whether the expenditure would cre-
ate an asset which is of value in furtherassessment periods and should be am-
ortised (i.e. depreciated) as long as it
has value (subject to the statutory provi-
sions) requires to be considered. If the
expenditure does lead to creation of an
asset but of a limited or short life, it has
to be treated as a liability and not as a
fixed asset. The said expenditure can-
not be valued for price for future finan-
cial years (Oracle Software 320 ITR 546(SC),Ashahi India Safety Glass 346 ITR
329 (Del), G.E. Capital Services 300
ITR 420 (Del), O.K. Play 346 ITR 57
(P&H), IAEC Pumps 232 ITR 316 (SC)
referred)
London Star Diamond Company (I) P.
L.td. Vs. DCIT [ITA No. 6169/M/2012,
ITAT Mumbai bench, dtd. 11.10.2013,
in favour of assessee]
Loss on foreign exchange forward
contracts is incidental to the exports
business and not a speculation
loss. However, if the contract is pre-
maturely cancelled, the assessee has
to justify the loss
The assessee, an exporter of diamonds,
entered into forward contracts with
Banks to hedge the exchange loss, if
any, in respect of the outstanding re-
ceivable in foreign currency. The as-
sessee suffered a loss of Rs. 4.69 crore
on account of the maturity & premature
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cancellation of the said forward con-
tracts. The AO & CIT(A) held that the
forward contracts constituted a
speculative transaction u/s 43(5) and
that the loss suffered thereon was a
speculation loss which could not be
set-off against the other income. On
appeal by the assessee to the Tribunal,
ITAT held that-
1. Though a forward contract for pur-
chase or sale of foreign currency
falls in the definition of speculation
transaction u/s 43(5) as it is settled
otherwise than by the actual delivery
or transfer of the commodity, it can-
not be regarded as constituting a
speculation business under Expla-nation 2 to s. 28. A forward contract,
entered into with banks for hedging
losses due to foreign exchange fluc-
tuations on the export proceeds, is
in the nature of a hedging contract
and is integral or incidental to the
export activity of the assessee and
cannot be considered as an inde-
pendent business activity. There-
fore, the losses or gains constitutebusiness loss or gains and do not
arise from speculation activities. The
fact that there is a premature can-
cellation of the forward contract
does not alter the nature of the
transaction. There is also no re-
quirement in the law that there
should be a 1:1 correlation between
the forward contracts and the export
invoices. So long as the total valueof the forward contracts does not
exceed the value of the invoices, the
loss has to be treated as a business
loss (Sooraj Mull Magarmull 129 ITR
169 (Cal), Badridas Gauridu 261
ITR 256 (Bom), Panchamahal
Steel 215 Taxman 140 (Guj)
and Friends and Friends Ship-
ping (Guj) followed; contrary view
in S. Vinodkumar Diamonds (ITAT
Mum) referred);
2. On facts, the loss arising on cancel-
lation of matured forward contracts
is allowable as it is attributable to
the genuine failure of the trade debt-
ors to comply with the credit terms
and conditions. As regards the loss
arising on account of premature
cancellation of the forward con-tracts, the assessee requires to ex-
plain the reason for the premature
cancellation. The explanation that
the maturity of date of some of such
premature cancelled forward con-
tracts fell during the week-end and
therefore they were cancelled three
days prior to the due date is accept-
able and the loss is allowable. The
explanation that some other forwardcontracts were prematurely can-
celled due to business reasons and
to avoid higher loss requires to be
examined by the AO. The corre-
spondence with the banks and the
RBI guidelines on the issue as well
as the accounting treatment by the
banks also requires to be examined.
The assessees alternative argu-
ment that the said loss is damagespayable to the banks for breach of
contracts or settlement of the con-
tracts also requires examination by
the AO.
CIT Vs. Riyaz A. Sheikh [ITA No.
1969 of 2011, Bombay High Court,
dtd. 26.02.2013, in favour of as-
sessee]
Amount received by partner on hisretirement is not chargeable to tax
as capital gains
The assessee, a partner in a firm, re-
ceived Rs. 66 lakhs over and above his
capital contribution on his retirement
from the firm. The assessee claimed
that the said sum was a capital receipt
not chargeable to tax. However, the
AO held that the retirement had re-
sulted in a relinquishment of his pre-
existing rights in the partnership firm
and, therefore, the same was in the
nature of capital gain on transfer of
goodwill and liable to tax under sec. 45
read with sec. 2(47)(i) & (ii) of the Act.
The CIT(A) and Tribunal reversed the
AO on the ground that when a partner
retires from the firm and receives his
share of an amount calculated on the
value of the net partnership assets in-
cluding goodwill of the firm, there is no
transfer of interest of the partner in the
goodwill, and no part of the amount
received is assessable as capital gain
u/s 45 of the Act. It was also held that
the decision of the Bombay High Court
in Tribhuvandas G Patil 115 ITR 95
followed in N A Mody 162 ITR 420 has
been reversed by the Supreme Court
in Tribhuvandas G Patel 236 ITR 515
(SC) and that this legal position had
been noted in Prashant S Joshi 324
ITR 154 (Bom). On appeal by the de-
partment to the High Court, dismissing
the appeal, High Court held that the
Tribunal has correctly referred to the
fact that N.A. Mody 162 ITR 420 (Bom)
followed Tribhuvandas G. Patel 115
ITR 95 and that the same has been
reversed by the Apex Court
in Tribhuvandas G. Patel263 ITR 515.
This Court in Prashant S. Joshi 324
ITR 154 (Bom) has also referred to the
d e c i s i o n o f T r i b u v a n d a s G .
Patel rendered by this Court and its
reversal by the Apex Court. Moreover,
the decision of this Court in Prashant
S. Joshi placed reliance upon the deci-
sion of the Supreme Court in CIT v/s.
R. Lingamallu Rajkumar 247 ITR 801
wherein it has been held that amounts
received on retirement by a partner is
not subject to capital gains tax.
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CIT Vs. M/s. Dynamic Enterprises
[ITA No. 1414/2006, Karnataka High
Court, dtd. 16.09.2013, in favour of
assessee]
Sec. 45(4) does not apply if the retir-
ing partner takes only money to-
wards the value of his share and
there is no distribution of capital as-
sets among the partners
The assessee partnership firm was con-
stituted on 09.01.1985 with Anurag Jain
and Nirmal Kumar Dugar as its part-
ners. On 13.04.1987, Nirmal Kumar
Dugar retired from partnership and L.P.
Jain entered the partnership and con-tributed capital for purchase of land to
construct a housing complex. The as-
sessee-firm purchased land for a con-
sideration of Rs.2.5 lakhs. Another re-
constitution took place on 1.7.1991 by
which L.P. Jain retired from the firm and
Pushpa Jain and Shree Jain were in-
ducted as partners. Later, on
28.04.1993, five partners belonging to
the Khemka Group were inducted. Prior
to the induction of the Khemka Group,
the assets of the firm were revalued.
The three old partners retired through
deed of retirement dated 01.04.1994
and received the enhanced value of the
property in FY 1994-95. The AO held
that the introduction of the Khemka
Group and the retirement of the old
partners was a device adopted to trans-
fer the immovable property and to
evade capital gains tax and stamp duty.
He assessed the firm on capital gains.
This was upheld by the CIT(A) though
reversed the Tribunal. The Tribunal held
that as the land continued to remain
with the assessee-firm, there was no
transfer u/s 2(47) and that the retiring
partners had merely withdrawn the
amounts standing to their credit in the
capital account. On appeal by the de-
partment to the High Court, it was felt
that there was a confl ict be-
tween Mangalore Ganesh Beedi
Works 265 ITR 658 and Gurunath Talk-
ies 328 ITR 59 and the issue was re-
ferred to the Full Bench. The Full Bench
held that:
1. Sec. 45(4) deals with a distribution of
capital assets on the dissolution of a
firm or other AOP or BOI or other-
wise and provides that if in the
course of such distribution of capital
asset there is a transfer of a capital
asset by the firm, the firm shall be
chargeable to tax on capital gains. In
order to attract sec. 45(4), the condi-
tions precedent are (1) there should
be a distribution of capital assets of a
firm; (2) such distribution should re-
sult in transfer of a capital asset by
firm in favour of the partner; (3) on
account of the transfer there should
be a profit or gain derived by the firm
and (4) such distribution should be
on dissolution of the firm or other-
wise. In other words, the capital as-
set of the firm should be transferred
in favour of a partner, resulting infirm ceasing to have any interest in
the capital asset transferred and the
partners should acquire exclusive
interest in the capital asset. On facts,
the partnership firm purchased the
property and it was not in the name
of any partner. No partner brought
that capital asset as capital contribu-
tion into the firm. Also, there was no
dissolution of the firm because thefirm continued to exist even after the
retirement of some partners. What
was given to the retiring partners is
cash representing the value of their
share in the partnership. No capital
asset was transferred on the date of
retirement. In the absence of distri-
bution of a capital asset and in the
absence of transfer of capital asset
in favour of the retiring partners, noprofit or gain arose in the hands of
the partnership firm and so the ques-
tion of the firm being assessed u/s
45(4) would not arise;
2. The departments argument that the
transaction by which the five incom-
ing partners brought money into the
firm and the three erstwhile partners
retired by taking money (leaving the
capital asset in the firm) is a device
adopted to evade payment of profits
or gains is not acceptable because it
proceeds on the premise that the
immovable property belongs to the
erstwhile partners and that after the
retirement the erstwhile partners
have taken cash and given the prop-
erty to the incoming partners. The
property belongs to the partnership
firm and not to the partners. The
partners only had a share in the part-
nership asset when they retired and
took their share in cash, they were
not relinquishing their interest in the
immovable property. What they relin-
quished is their share in the partner-
ship. Therefore, there is no transfer
of a capital asset and no capitalgains or profit arises (Ganesh Beedi
W o r k s 2 6 5 I T R 6 5 8 a p -
proved;Gurunath Talkies 328 ITR
59 reversed; Narayanappa vs.
Bhaskara Krishnappa AIR 1966 SC
1300, Malbar Fisheries Co 120 ITR
49 (SC), Sunil Siddharthbhai 156
ITR 509 (SC), A.N. Naik Associ-
ate 265 ITR 346 (Bom) referred).
Siddhivinayak Kohinoor Venture Vs.
ACIT [TS-590-ITAT-2013(PUN), ITAT
Pune Bench, dtd. 31.10.2013, in fa-
vour of assessee]
Part of municipality approved hous-
ing project also eligible for Sec 80IB
deduction
Part project (comprising of row houses)
treated as independent housing project
and Sec 80-IB deduction allowed;
Housing project not defined in Income
Tax Act nor in local authoritys Develop-
ment Control Rules; Rejects Revenues
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SNKDIRECT TAXESJudicial pronouncements
stand that project should mean as ap-
proved by local authority (comprising
of row houses as well as flats); Applica-
tion for completion filed with municipal
authority before cut-off date; Delay in
issuing completion certificate could notbe attributed to assessee and deduction
cannot not be denied.
CIT Vs. NR Portfolio Pvt. Ltd. [TS-593
-HC-2013(DEL), Delhi High Court,
dtd. 22.11.2013, in favour of revenue]
HC reverses Tribunal ruling, taxes
unexplained share application
money pre 2012
HC reverses CIT (A) and ITAT ruling
and confirms income addition u/s 68 on
account of share application money
received without establishing genuine-
ness of investor; Highly implausible that
an unknown person made substantial
investment in a private limited company
without adequately protecting invest-
ment and ensuring appropriate returns;
Assessee adopted prevaricate and non-
cooperative attitude before AO during
assessment; Identity, creditworthiness
or genuineness of transaction not es-
tablished by merely showing that trans-
action was through banking channels.
ITO Vs. Zinger Investments (P.) Ltd.
[(2013) 38 taxmann.com 388
(Hyderabad - Trib.), ITAT Hyderabad
Bench, dtd. 21.08.2013, in favour of
assessee]
Where no monetary consideration
was involved in transfer of manufac-
turing division along with all its as-
sets and liabilities under amalgama-
tion scheme, same could not be con-
sidered as slump sale under section
50B.
The assessee transferred its manufac-
turing division to NIL under a scheme of
amalgamation as per which all the as-
sets and liabilities of the assessee were
vested in NIL. The assessee in return
received certain investments held by
NIL besides allotment of equity shares
to the shareholders of the assessee.
The Assessing Officer held that the
transfer of the manufacturing division to
NIL would tantamount to a 'slump sale'
attracting liability of capital gains undersection 50B. On appeal, the CIT(A)
deleted the order of Assessing Officer.
The aggrieved revenue filed the instant
appeal.The Tribunal held in favour of
assessee as under:
1. To qualify as slump sale two condi-
tions have to be satisfied, viz., (A)
there must be transfer of one or
more undertakings as a result of
sale, and (B) the sale should be for a
lump sum consideration without val-
ues being assigned to the individual
assets and liabilities;
2. In the instant case it was not dis-
puted that there was no monetary
consideration involved for transfer of
the assets and liabilities of the manu-
facturing division to NIL, though
there might have been transfer of anundertaking;
3. Since there was no monetary consid-
eration involved in transferring the
manufacturing division under
scheme of amalgamation approved
by the High Court, it couldnt be con-
sidered to be a slump sale so as to
attract the liability of the capital gain
under section 50B.
ACIT Vs. Prathima Educational Soci-
ety [TS-561-ITAT-2013(Hyd), ITAT
Hyderabad Bench, dtd. 08.11.2013, in
favour of assessee]
Uncorroborated excel sheets seized
during search, not sufficient evi-
dence
Unsigned Excel sheets recovered from
the computer during search & seizure
cannot be considered as sufficient evi-
dence to confirm collection of capitation
fee; Unsigned Excel sheets whose au-
thor is not identified was not further sup-
ported by independent corroboration;
Not sufficient evidence to reflect that
capitation fees was actually collected;
CIT is empowered to grant or refuse the
registration only on the two conditions
laid down under Sec. 12AA(3); Sheetswere dumb documents and cannot form
reason to cancel registration; Relied
upon Madras HC ruling in Sarvodaya
Ilakkiya Pannai
Kathiroor Service Co Operative bank
Ltd. Vs. CIT [Civil Appeal No. 7460 of
2013, The Supreme Court of India,
dtd. 27.08.2013, in favour of revenue]
Sec. 133(6): AO empowered tolaunch fishing and roving enquiry
with a view to detect tax evasion
The ITO issued a issued a notice u/s
133(6) to the assessee-bank u/s 133(6)
of the Act calling for general information
regarding details of all persons who
have made cash transactions and time
deposits of Rs. 1,00,000/- and above for
the period of three years between
01.04.2005 and 31.03.2008. The as-
sessee claimed that sec. 133(6) does
not empower the ITO to conduct a rov-
ing or fishing enquiry into the affairs of
the assessee or regarding the deposits
made by its customers. It was also con-
tended that the AO can only seek case
specific or area specific information u/
s 133(6). The High Court dismissed the
Writ Petition. On appeal by the as-
sessee to the Supreme Court, dismiss-
ing the appeal, The Supreme Court held
that the legislative intention behind sec.
133(6) was to give wide powers to the
income-tax department to gather gen-
eral particulars in the nature of survey
and store those details in the computer
so that the data so collected can be
made use of for checking evasion of tax
effectively. It would not fall under the
restricted domains of being area spe-
cific or case specific. S. 133(6) does
not refer to any enquiry about any par-
ticular person or assessee, but pertains
to information in relation to such points
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SNKDIRECT TAXESJudicial pronouncements
or matters which the assessing author-
ty issuing notices requires. This clearly
llustrates that the information of general
nature can be called for and names and
addresses of depositors who hold de-
posits above a particular sum is cer-tainly permissible (Karnataka Bank Ltd
vs. Government of India (2002) 9 SCC
106 followed; M.V. Rajendran vs.
ITO 260 ITR 442 (Ker) approved).
Maharashtra Housing & Area Devel-
opment Authority Vs. ADIT [Stay Ap-
plication No. 293/Mum/2013, ITAT
Mumbai Bench, dtd. 25.11.2013, in
favour of assessee]
AOs action of recovering out-
standing taxes without affording rea-
sonable time to take remedial steps
is a misuse of powers and a gross
violation of the directions laid down
by the Courts. AO has to refund the
taxes recovered
The assessee received the order of the
CIT(A) on 16.11.2013. It filed an appeal
before the Tribunal on 18.11.2013 whichwas the next working day. The as-
sessee also filed an application before
the Tribunal requesting stay of demand.
The said application was fixed for hear-
ng on 22.11.2013. However, the AO,
without awaiting the outcome of the stay
application, attached the assessees
bank account u/s 226(3) on 18.11.2013
and withdrew Rs. 159.84 crore. The as-
sessee argued before the Tribunal that
the coercive action of the AO was wrong
because (i) the AO had taken coercive
action before the expiry of time of filing
the appeal against the order of the CIT
(A), (ii) the action was taken even prior
to the disposal of the stay application by
the Tribunal and (iii) no prior notice was
given to the assessee before taking the
recovery action u/s 226(3). The Tribunal
held that the action of the AO in recov-
ering the outstanding without affording
the assessee minimum reasonable time
to take remedial steps is a misuse of
powers and a gross violation of the di-
rections laid down by the Courts as well
as the basic rule of law and principles of
natural justice. Accordingly, we direct
the Revenue to refund the entire
amount of Rs. 159.84 crore to the as-sessee within 10 days from the receipt
of this order (Mahindra & Mahindra Ltd
UOI 59 ELT 505, Mahindra & Mahin-
dra W.P. 2164/2007, UTI Mutual Fund
345 ITR 71 (Bom), RPG Enter-
prises 251 ITR 20 (Mum) & MSEB 81
ITD 299 (Mum) followed).
CIT Vs. Great Value Food [TS-580-HC
-2013(P&H), Punjab and Haryana
High Court, dtd. 29.10.2013, in favour
of assessee]
Default in payment of 234B/ C inter-
est does not trigger penalty u/s 221
No penalty u/s 221 can be levied for
default in payment of interest u/s 234B
and 234C; Penalty u/s 221 leviable only
when assessee is in default for making
payment of "tax"; Definition of 'tax' u/s 2
(43) does not include penalty or interest;Tax, penalty and interest are different
concepts under the Act; Relied on Cal-
cutta HC ruling in Shreeniwas & Sons;
Distinguished Kerala HC ruling in
E.K.Varghese
DIT Vs. Alcatel Lucent USA Inc. [ITA
No. 327/2012, 330/2012, 338/2012 &
339/2012, Delhi High Court, dtd.
07.11.2013, in favour of revenue]
Sec. 234B: A non-resident assessee
which does not admit income charge-
able to tax must be inferred to have
induced the Indian payer not to de-
duct TDS and so it is liable for ad-
vance-tax interest
The assessee, a USA company, sup-
plied telecom equipments to customers
in India. It claimed that it did not have a
PE in India and that the income was not
chargeable to tax. The AO rejected the
claim and attributed 2.5% of the sale
proceeds of the hardware as profit at-
tributable to the PE in India. He also
levied interest u/s 234B for failure to pay
advance-tax. Before the CIT(A), the as-
sessee accepted that the income was
chargeable to tax but argued, relying on
Jacabs Civil Incorporated 330 ITR 578(Del), that as it was a foreign company
and the income was liable for TDS, it
was not liable to pay advance-tax. The
CIT(A) and Tribunal accepted the as-
sessees contention. On appeal by the
department to the High Court, allowing
the appeal, High Court held that:
1. There is a distinction between a case
where the assessee admits that it
has income chargeable to tax in India
but does not pay advance tax on the
basis that the Indian payer ought to
have deducted tax at source u/s 195.
In such a case (as was the fact situa-
tion in Jacabs), the assessee is enti-
tled to take credit for the tax which
was deductible by the Indian payer
while computing its advance tax li-
ability even though no tax was in fact
deducted. However, in a case where
the assessee does not admit any
income in the return, this benefit is
not available. An inference or pre-
sumption can be drawn that the as-
sessee had represented to its Indian
telecom dealers not to deduct tax
from the remittances made to it even
though there is no positive or direct
evidence to that effect;
2. The argument that the Indian partiesshould have discharged their TDS
obligations u/s 195 despite the pre-
sumed request of the assessee is
one of convenience or despair and
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SNKDIRECT TAXESJudicial pronouncements
not acceptable because in a practical
view of the matter, the Indian payers
could not have resisted the as-
sessees request given future busi-
ness prospects and the need to keep
the assessee in good humour;
3. Also, having denied its tax liability
and leading the Indian payers to be-
lieve that no tax was deductible it is
inequitable & unfair on the as-
sessees part to shift the responsibil-
ity to the Indian payers & expect
them to deduct tax from the remit-
tances. The assessee must take re-
sponsibility for its volte face. Onceliability to tax is accepted, all conse-
quences follow; they cannot be
avoided;
4. Also, applying equitable principles,
as the assessee deprived the reve-
nue of the advance tax, it must pay
compensation by way of interest.
Dattani & Co. Vs. ITO [Tax Appeal
No. 847 to 849 of 2013, Gujarat HighCourt, dtd. 21.10.2013, in favour of
assessee]
ITAT duty-bound to deal with all
judgements cited during hearing of
appeal
The assessee filed an appeal against
an addition for alleged bogus pur-
chases/sales which was dismissed by
the Tribunal. The assessee filed an ap-peal before the High Court claiming that
he had relied on the judgement in CIT
vs. President Industries 258 ITR 654 in
the verbal and written submissions and
that the Tribunal had not considered it.
The High Court remanding the case to
the Tribunal for fresh consideration,
held that whenever any decision has
been relied upon and / or cited by the
assessee and / or any party, the author-ity / tribunal is bound to consider and /
or deal with the same and opine
whether in the facts and circumstances
of the particular case, the same will be
applicable or not. In the instant case,
the Tribunal has failed to consider and /
or deal with the aforesaid decision cited
and relied upon by the assessee. Under
the circumstances, all these appeals
are required to be remanded to the Tri-
bunal to consider the addition made by
the AO towards alleged bogus pur-
chases/sales and to take appropriate
decision in accordance with law and on
merits and after considering the deci-
sion of this Court in the case of CIT vs.
President Industries 258 ITR 654.
Paresh S. Shah Vs. ITO [M.A. 721 &722/Mum/2012 arising out of ITA No.
7149 & 7150/Mum/2008, ITAT Mumbai
Bench, dtd. 20.09.2013, in favour of
revenue]
Failure to comply with the criterion
necessary to represent the matter
before the Tribunal, in time, renders
appeal liable for dismissal
The assessee filed an appeal before theTribunal but repeatedly sought adjourn-
ments. He also did not file a letter of
authority authorizing his CAs to appear
in the appeal. The Tribunal dismissed
the appeal on the ground that the as-
sessee is not interested in pursuing the
appeal. Thereafter, the assessee filed a
Miscellaneous Application seeking res-
toration of the appeal. The Tribunal re-
stored the appeal even though nopower of attorney was filed even at this
stage. Even after recalling the appeals
the assessee continued to seek ad-
journments on one pretext or the other.
The Tribunal dismissed the appeals and
also awarded costs. The assessee
again filed a Miscellaneous Application
seeking restoration of the appeal. At the
hearing of the MA, the power of attor-
ney of the Counsel was not filed. TheTribunal, dismissing the MA held that-
1. It deserves to be noticed here that in
Mumbai, despite repeatedly pointing
out in each and every case, learned
counsels rarely follow the practice of
filing the power of attorney and many
Members of the Tribunal, who do not
believe it be their obligation to verify
the availability of power of attorney,
may not point out the same to the
counsels and it results in counsels
appearing without filing a power of
attorney. There are equal numbers of
occasions where several other Mem-
bers, including Members of this
Bench, have had occasion to point
out that there was no power of attor-
ney and counsels filed xerox copies
or take further time to file power of
attorney. In fact some would go to
the extent of stating that they as-
sumed that the power of attorney is
on record and when we verify the file
(though it is their duty to file power of
attorney) and inform the counsel that
there is no power of attorney then
fresh power of attorney is filed. Par-
ticularly in the bench which is pre-
sided over by the Vice President, the
registry notes on the file that the
power of attorney of a person, who is
representing the matter, is not on
record and then the power of attor-
ney is filed, notwithstanding the fact
that before filing the power of attor-
ney the same counsel or Chartered
Accountant must have already taken
adjournments on several occasions.
2. On facts, there is no sufficient cause
for restoration of the appeal under
the proviso to Rule 24. The power of
attorney has not been filed. The ap-
peals were dismissed twice as ad-
journments were sought on spurious
grounds. The assessee and his
counsels have done lackluster at-
tempt to represent the matters by not
fulfilling the entire criterion necessary
to represent the matter before the
Tribunal, in time.
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Cadbury India Ltd. Vs. ACIT [ITA No.
7408/Mum/2010, ITAT Mumbai bench,
dtd. 13.11.2013, partly in favour of
assessee]
Transfer Pricing: ALP of royalty for
trademark usage and technical know-
how fee can be determined as per
TNMM. Approval of RBI & Govt.
means payment is as at arms length
The assessee entered into an agree-
ment with its parent company, Cadbury
Schweppes, pursuant to which it agreed
to pay royalty for the use of trademarks
and royalty for the use of technical know
-how at 1.25% each of the net sales.
This was approved by the RBI and the
SIA (Government). The assessee
adopted the Transaction Net Margin
Method (TNMM) for computing the
ALP of the international transactions by
comparing the net margin of the com-
pany at entity level with that of compa-
nies engaged in food products, bever-
ages and tobacco business. The TPO
held that the transactions pertaining topayment of royalty for trademarks and
technical know-how fee had to be sepa-
rately and independently bench-marked
using the Comparable Uncontrolled
Prices (CUP) method. He held that the
ALP of royalty and technical know-how
fee should be computed at 1% of sales
the instead of at 1.25% of the sales.
This was reversed by the CIT(A) who
held that the royalty and technical know-how fee paid by the assessee were at
ALP. On appeal by the department to
the Tribunal HELD dismissing the ap-
peal:
The assessee has been paying royalty
on technical know-how to its parent AE
since 1993. Other group companies
across the Globe are also paying the
same royalty. Also, the payment is as
per the approval given by the RBI and
the SIA. Hence there cannot be any
scope of doubt that the royalty payment
on technical know-how is at arms
length. As regards the royalty on trade-
mark usage, the assessee is in fact pay-
ing a lesser amount if the payment is
compared with the payment towards
trademark usage by other group compa-
nies using the brand Cadbury in other
parts of the world. Accordingly, the roy-alty payment on trademark usage is
also within the arms length and does
not call for any adjustment (Lumax In-
dustries (ITAT Del) (attached) followed).
The Departments request for a remand
to the TPO to examine the AMP ex-
penses in the light of Maruti Suzuki 328
ITR 210 (Del) (and L. G. Electronics 140
ITD 41 (Del)(SB)) rejected
Verizon Communications Singapore
Pte Ltd. Vs. ITO [(2013) 39 tax-
mann.com 70 (Madras), Madras High
Court, dtd. 07.11.2013, in favour of
revenue]
In view of FA 2012 retro amend-
ments, IPLC charges from Indian
party is taxable as "royalty" under
section 9(1)(vi) & DTAA
In view of retrospective amendmentsmade to the definition of "royalty" in sec-
tion 9(1)(vi) by the Finance Act,2012 by
inserting Explanations 4 and 5 with ef-
fect from 1-6-1976, bandwidth payments
made by Indian party to non-resident for
International Private Leased Circuit
(IPLC) for providing endto-end internet
connectivity outside India (where con-
nectivity for Indian leg provided by
VSNL due to Indian regulatory require-
ments) is taxable as 'royalty' under sec-
tion 9(1)(vi) of the Act as well as under
article 12(3) of Indo-Singapore DTAA.
DIT Vs. Infrasoft Ltd. [ITA No.
1034/2009, Delhi High Court, dtd.
22.11.2013, in favour of assessee]
Non-exclusive & non-transferable
license to use customized software
not taxable as royalty under Article12 of India-USA DTAA
The assessee, a USA company, set up
a branch office in India for the supply of
software called MX. The software was
customized for the requirements of the
customer (not shrink wrap). The Indian
branch imported the software package
in the form of floppy disks or CDs and
delivered it to the customer. It also in-
stalled the software and trained the cus-tomers. The AO & CIT(A) held that the
software was a copyright and the in-
come from its license was assessable
as royalty under Article 12 of the India-
USA DTAA. On appeal by the as-
sessee, the Tribunal held, follow-
ing Motorola 270 ITR (AT) (SB) 62, that
the income from license of software was
not taxable as royalty. Before the High
Court, the Department argued that inview of CIT vs. Samsung Electron-
ics 345 ITR 494 (Kar), the right to make
a copy of the software and storing it
amounted to copyright work u/s 14(1) of
the Copyright Act and payment made
for the grant of a license for the said
purpose would constitute royalty. HELD
by the High Court dismissing the ap-
peal:
In order to qualify as a royalty payment
under Article 12(3) of the India-USA
DTAA, it is necessary to establish that
there is a transfer of all or any rights
(including the granting of any licence) in
respect of a copyright of a literary, artis-
tic or scientific work. There is a clear
distinction between royalty paid on
transfer of copyright rights and consid-
eration for transfer of copyrighted arti-
cles. Right to use a copyrighted article
or product with the owner retaining his
copyright, is not the same thing as
transferring or assigning rights in rela-
tion to the copyright. The enjoyment of
some or all the rights which the copy-
right owner has, is necessary to invoke
the royalty definition. Viewed from this
angle, a non-exclusive and non-
transferable licence enabling the use of
a copyrighted product cannot be con-
strued as an authority to enjoy any or all
of the enumerated rights ingrained in
Article 12 of DTAA. Where the purpose
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SNKDIRECT TAXESJudicial pronouncements (International Taxation)
of the licence or the transaction is only
to restrict use of the copyrighted product
for internal business purpose, it would
not be legally correct to state that the
copyright itself or right to use copyright
has been transferred to any extent. The
parting of intellectual property rights in-
herent in and attached to the software
product in favour of the licensee/
customer is what is contemplated by the
Treaty. Merely authorizing or enabling a
customer to have the benefit of data or
instructions contained therein without
any further right to deal with them inde-
pendently does not, amount to transfer
of rights in relation to copyright or con-
ferment of the right of using the copy-
right. The transfer of rights in or over
copyright or the conferment of the right
of use of copyright implies that the
transferee/licensee should acquire
rights either in entirety or partially co-
extensive with the owner/ transferor who
divests himself of the rights he pos-
sesses pro tanto. The license granted to
the licensee permitting him to download
the computer programme and storing it
in the computer for his own use is only
incidental to the facility extended to the
licensee to make use of the copyrighted
product for his internal business pur-
pose. The said process is necessary to
make the programme functional and to
have access to it and is qualitatively
different from the right contemplated by
Article 12 because it is only integral to
the use of copyrighted product. Apart
from such incidental facility, the licensee
has no right to deal with the product just
as the owner would be in a position to
do. Consequently there is no transfer of
any right in respect of copyright by the
assessee and it is a case of mere trans-
fer of a copyrighted article. The payment
is for a copyrighted article and repre-
sents the purchase price of an article
and cannot be considered as royalty
either under the Income-tax Act or un-
der the DTAA (Ericson AB 343 ITR 370
(Del) & Nokia Networks OY 25 tax-
mann.com 225 followed; Samsung Elec-
tronics 345 ITR 494 (Kar) not followed).
Metro & Metro Vs. ACIT [ITA No. 393/
Agra/2012, ITAT Agra bench, dtd.
01.11.2013, in favour of revenue]
Law on taxation of fees for technicalservices u/s 9(1)(vii) & Article 12 and
disallowance u/s 40(a)(i) for failure to
deduct TDS explained
The assessee paid Rs 52 lakhs towards
leather testing charges to TUV Product
Und Umwelt GmbH, a tax resident of
Germany, without deduction of tax at
source. The AO & CIT(A) disallowed the
expenditure u/s 40(a)(i) on the ground
that the assessee had failed to deduct
tax at source. Before the Tribunal, the
assessee argued that (a) as Article 12
of the India-Germany DTAA does not
provide that India shall tax fees and
royalties, the same cannot be taxed in
India; (b) as the services were not ren-
dered by the foreign company in India,
the income was not chargeable to tax in
India u/s 9(1)(vii); (c) as the services
were rendered by an automated proc-
ess and there was no human interven-
tion, it did not constitute fees for techni-
cal services as defined in sec. 9(1)(vii);
(d) as the services were used for a
100% EOU whose products were sold
outside India, the source of the income
was outside India and so the exception
in sec. 9(1)(vii) (b) applied; (e) disallow-
ance u/s 40(a)(i) was confined toamounts payable as at the end of the
year as held by the jurisdictional High
Court in Vector Shipping in the context
of sec. 40(a)(ia) and (f) as the taxability
of the services was brought in by a ret-
rospective amendment, the disallow-
ance u/s 40(a)(i) could not be made.
The Tribunal held that:
1. The argument that as Article 12(1) of
the India-German DTAA provides
that the source State (India)
may (and not shall) tax fees for
technical services, the income is not
chargeable to tax in India is not ac-
ceptable because the DTAA does not
provide for taxation of any income. It
allocates the right to tax income
amongst the Contracting States.
Once it enables the Contracting State
to levy tax (by the use of the word
may), the domestic law of the State
come into play. Article 12 of the
DTAA permits India to levy tax on
fees for technical services and roy-
alty though the rate of tax cannot
exceed 10% (Pooja Bhatt 2008 TIOL
558 ITAT Mum referred);
2. the argument that as the services
have been rendered outside India,
the fees thereof cannot be assessed
u/s 9(1)(vii) is not acceptable in view
of the retrospective amendment to
sec. 9(1) by the Finance Act 2010
(Ashapura Minichem 131 TTJ
291, GVK Industries 332 ITR 130
& Clifford Chance 154 TTJ 537
(Mum) (SB) referred;
3. the argument that sec. 9(1)(vii) does
not apply because the entire testing
process is automated and does not
involve human skills and interplay is
not acceptable. While in principle it is
correct that if there is no human inter-
vention in a technical service, it can-
not be treated as a technical service
u/s 9(1)(vii), there is nothing on re-
cord to demonstrate the precise proc-
ess of leather testing adopted by theGerman company. Further, the wider
observations in Siemens (ITAT Mum)
that if there is not much human in-
volvement, it cannot be termed as
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SNKDIRECT TAXESJudicial pronouncements (International Taxation)
rendering of technical services is not
correct. It is a question of presence
of or absence of human involvement
and not a question of more of, or less
of, human involvement (Right Flo-
rists 154 TTJ 142, SiemensLtd, Bharti Cellular 319 ITR 139 (Del)
& 330 ITR 239 (SC) referred);
4. the argument that as the assessee is
a 100% EOU, the fees should be
considered to have been used for a
source of income outside India and
therefore not taxable u/s 9(1)(vii)(b)
is not acceptable because even
though the business is a 100% EOU,
it is still a business carried on in In-
dia. Even if the entire products are
sold outside India, the fact of such
export sales by itself does not make
the business having been carried
outside India. A customer is not the
source of income. But if the manu-
facturing facilities are outside India
and the customers are also outside
India, the source will be outside India
and the exception in sec. 9(1)(vii)(b)
will apply;
5. the argument that sec. 40(a)(i) ap-
plies only to amounts payable as at
the end of the year and not to
amounts already paid as held
in Merlyin Shipping 136 ITD SB 23
(Vizag) as approved (by the jurisdic-
tional High Court) inVector Shipping
Services is not acceptable becausethat was in the context of sec. 40(a)
(ia) and not sec. 40(a)(i). Sec. 40(a)
(i) cannot be interpreted in such a
manner so as to restrict the scope of
section to only amounts remaining
payable at the end of the year;
6. However, the argument that disallow-
ance u/s 40(a)(i) cannot be made as
the amount has been made taxable
by the retrospective amendment to
sec. 9 is acceptable. An assessee
cannot be penalized for not perform-
ing the impossible task of deducting
TDS in accordance with the law
which was brought in subsequently
(Channe l Gu ide139 ITD 49
& Sterling Abrasives (Ahd) followed).
CIT Vs. Siemens Public Communica-
tion Networks Ltd. [TS-591-HC-2013
(KAR), Karnataka High Court, dtd.
09.10.2013, in favour of revenue]
Karnataka HC holds subvention re-
ceipt taxable, breaks ranks with
other Courts
Subvention payment received from Sie-
mens AG (Principal shareholder)
treated as 'revenue' receipt; Amounts
paid by shareholder, not only to make
good losses, but also to help assessee
run more profitably; After receiving sub-
vention from Siemens AG, assessee
turned business from loss to profit; Ap-
plies 'purpose' test to hold that payment
made as recurring expenses/working
capital; HC reverses ITAT ruling; If fi-
nancial assistance extended for repay-
ment of loan for setting up new unit or
expansion, such aid could be treated as
capital receipt; Reliance placed on SC
rulings in Ponni Sugars & Chemicals
Ltd and Sahney Steel and Press Works.
Vodafone India Services Pvt. Ltd. Vs.
UOI [Writ petition no. 1877 of 2013,
Bombay high Court, dtd. 29.11.2013,
partly in favour of assessee]
Existence of income is a jurisdic-
tional requirement for the applicabil-
ity of T. P. provisions. AO must deal
with it after giving personal hearing
before making reference to TPO. The
dept should not treat the assessee
as an adversary who has to be taxed,
no matter what
The assessee, an Indian company, is-
sued equity shares at the premium of
Rs.8591 per share aggregating
Rs.246.38 crores to its holding com-
pany. Though the transaction was re-
ported as an international transaction
in Form 3 CEB, the assessee claimed
that the transfer pricing provisions did
not apply as there was no income aris-
ing to it. The AO referred the issue to
the TPO without dealing with the pre-
liminary objection. The TPO held that
he could not go into the issue whetherincome had arisen or not because his
jurisdiction was limited to determine the
ALP. He held that the assessee ought
to have charged the NAV of the share
(Rs. 53,775) and that the difference
between the NAV and the issue price
was a deemed loan from the assessee
to the holding company for which the
assessee ought to have received 13.5%
interest. He accordingly computed theadjustment for the shares premium at
Rs. 1308 crore and the interest thereon
at Rs. 88 crore. The AO passed a draft
assessment order u/s 144C(1) in which
he held that he was bound u/s 92-CA(4)
with the TPOs determination and could
not consider the contention whether the
transfer pricing provisions applied. The
assessee filed a Writ Petition challeng-
ing the jurisdiction of the TPO/AO tomake the adjustment. On the merits of
the adjustment, the assessee filed ob-
jections before the DRP. Before the
High Court the assessee argued that (i)
it was a precondition before the transfer
pricing provisions apply that there has
to be income arising to the assessee.
As the allotment of shares at a premium
does not give rise to income, the trans-
fer pricing provisions do not apply, (ii)
there was a breach of natural justice
because neither the TPO nor the AO
had heard the assessee on, or decided,
the fundamental issue as to whether the
transfer pricing provisions applied at all,
(iii) the DRP does not offer an alterna-
tive remedy because the DRP has no
power to quash the draft assessment
order even if it is satisfied that the same
is without jurisdiction & (iv) the DRP
cannot take an unbiased view because
one of its members is the DIT (TP). The
High Court held that:
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SNKDIRECT TAXESJudicial pronouncements (International Taxation)
1. The assessees contention that the
DRP does not offer an alternative
remedy because it does not have the
power to quash the assessment or-
der even if it is satisfied that the
same is without jurisdiction is notacceptable because in Vodafone 37
taxmann.com 250 it was held that
the DRPs power to confirm would
include the power not to confirm and
to annul the draft assessment order;
2. It is clear from sec. 92(1) that there
must be income arising/ potentially
arising by an international transac-
tion for the application of the transfer
pricing provisions. This is a jurisdic-
tional requirement and has to be
dealt with by the AO when specifi-
cally raised by the assessee before
making reference to the AO. Grant of
personal hearing before referring the
matter to the TPO has to be read into
s. 92CA(1) in cases where the very
jurisdiction to tax under Chapter X is
challenged by the assessee (Veer
Gems 351 ITR 35 (Guj) disagreed
with to the extent it holds that no
hearing is required at the stage of
reference to the TPO even on juris-
dictional issues). If, after the hearing
the assessee, the AO holds that
there is an international transaction,
that would be binding on the TPO;
3. The departments contention, based
on CBDT Instruction No.3 dated20.05.2003, that the action of the AO
in referring the international transac-
tion is a mere administrative act is
not acceptable. The AO is bound to
hear the assessee in respect of juris-
dictional issues before making the
reference. The failure to do so is an
illegality;
4. The assessees contention that the
DRP would not give a fair hearing as
one of its members is the DIT (TP) is
not acceptable because it overlooks
the fact that these are not appeal
proceedings but to finalize the draft
assessment order. Also, the DIT(TP)
who approved the TPOs order is not
on the panel;
5. The Revenue should keep in mind
t h e s a g e a d v i c e o f N a n i
Palkhivala that the department
should not cause misery and harass-
ment to the taxpayer and the gnaw-
ing feeling that he is made the victim
of palpable injustice. In this case it
would be natural for the assessee to
feel harassed as neither the AO nor
the TPO gave a hearing or dealt with
the preliminary objection. It is hoped
that the revenue will be more sensi-
tive to the just demands of the as-
sessee and not treat the assessee
as an adversary who has to be
taxed, no matter what;
6. The DRP should decide the as-
sessees objection regarding charge-
ability of alleged shortfall in share
premium as a preliminary issue. In
case the DRPs decision on the pre-liminary issue is adverse, the as-
sessee shall be entitled to challenge
it in a writ petition if it can show that
the DRPs decision on the prelimi-
nary issue is patently illegal notwith-
standing the availability of alternate
remedy before the ITAT.
English Indian Clays Ltd. Vs. ACIT
[(2013) 39 taxmann.com 50 (Cochin -
Trib.), ITAT Cochin Bench, dtd.
18.10.2013, in favour of revenue]
Payment made to a foreign company
for marketing survey and identifying
potential foreign customers for as-
sessee's product was only for con-
sultancy services and it was taxable
in India as FTS
The assessee engaged a foreign com-
pany SR as marketing agent for South
East Asian countries. SR had to study
the market situation in South East Asia
for the products manufactured by the
assessee and it had to market the prod-
ucts of the assessee in those countries.
The CIT(A) found that payment made to
SR was consultancy charge, therefore,
tax had to be deducted. Accordingly, it
confirmed the disallowance made by
the Assessing Officer. Aggrieved-
assessee filed the instant appeal. The
Tribunal held in favour of revenue as
under:
1. The work of SR was to identify the
potential customers and file a report
regarding the market strategy and
developmental studies;
2. The agreement did not enable SR to
market the products of the assessee
in South East Asian countries. The
company SR only had to do survey
and file a report so that the assessee
could market its products after con-
sidering the report filed by the foreign
party;
3. Therefore, the payment made to SR
was only consultancy charge. It was
not a case of marketing the products
in the foreign country. The CIT (A)
had rightly confirmed the order of the
Assessing Officer. Thus, the order of
the lower authority holding assessee
liable for TDS was to be confirmed.
US Technology Resources (P.) Ltd.
Vs. ACIT [(2013) 39 taxmann.com 23
(Cochin Trib), ITAT Cochin Bench,
dtd. 27.09.2013, in favour of revenue]
Where assessee-company was mak-
ing use of advice, input, experience
and assistance rendered by US
based company in its decision mak-
ing process of financial and risk
management, etc., services so ren-
dered would be technical services
under India-US DTAA.
The assessee-company, engaged in
providing software development ser-vices to the customers in India, claimed
deduction of payment made to US
based company (foreign company) to-
wards management services rendered
-
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SNKDIRECT TAXESJudicial pronouncements (International Taxation)
by it. In course of assessment, the As-
sessing Officer opined that the payment
made by the assessee to foreign com-
pany would come within the ambit of
consultancy fees and, therefore, the it
was liable to deduct tax on these pay-ments under section 195.
Since assessee failed to deduct tax at
source, the Assessing Officer disal-
lowed payments made by assessee by
invoking provisions of section 40(a)(ia).
Further, the CIT (A) confirmed said dis-
allowance. The aggrieved-assessee
filed the instant appeal. The Tribunal
held in favour of revenue as under:
1. The assessee was making use of the
advice, input, experience and assis-
tance rendered by the foreign com-
pany in its decision making process
of financial and risk management,
etc;
2. The foreign company was also giving
training to the assessee's employees
in making use of the inputs, experi-
ence, experimentation, assistance
and advice rendered by them for tak-
ing a better possible decision in or-
der to achieve the desired objec-
tives;
3. Decision making process is a highly
complicated and technical one,
unless the assessee gets a technical
input and advice from financial and
risk management experts it may bedifficult to select a right process for
the growth of the company;
4. It was not the case of the assessee
that in given set of facts/problem, the
foreign company gave its solution or
advice. The solution or decision was,
admittedly, taken by the assessee on
the basis of the advice/service ren-
dered by the foreign company;
5. Therefore, the technical knowledge,
experience, skill possessed by the
foreign company with regard to fi-
nancial and risk management was
made available in the form of advice
or service which was used by the
assessee in the decision making
process not only in management
affairs but also in financial matters;
6. Therefore, such service rendered by
the foreign company was technical in
nature as per India-USA treaty.
Poompuhar Shipping Corporation
Ltd. Vs. ITO [T.C. (A) Nos. 2206 to
2208 of 2006, Madras High Court,
dtd. 09.10.2013, in favour of as-
sessee]
Sec. 9(1)(vi) / Article 12 : Equipment
rental is taxable as royalty even if
payer does not have control. The ret-
rospective insertion of Explanation 5
to sec. 9(1)(vi) is purely clarificatory
The High Court had to consider the fol-
lowing issues in the context of a bare-
boat charter of a shipping vessel from a
foreign party, the income whereof was
held assessable as royalty u/s 9(1)(vi)
& Article 12 in the hands of the foreignparty: (i) whether the expression use or
right to use in clause (iva) of Explana-
tion 2 to s. 9(1)(vi) & Article 12 of the
DTAA requires that there should be a
transfer of effective control for use in
favour of the lessee?, (ii) what is the
impact of the retrospective insertion of
Explanation 5 to s. 9(1)(vi) on the tax-
ability of equipment royalty?, (ii)
whether a ship can be regarded asequipment?, (iii) whether if the ship is
used for plying between coastal waters,
it can be said to be used for
international traffic?, (iv) whether the
two berths reserved for the ships char-
tered by the assessee can be said to be
a permanent establishment of the for-
eign owner? & (v) whether a person
who is treated as an agent u/s 163
can also be proceeded against u/s 201for failure to deduct TDS? The High
Court held that:
1. The assessees argument that in a
case where physical possession is
not with the transferee or the lessee
or the hirer, the payment made for
the use of or right to use of equip-
ment would not constitute royalty is
not acceptable. Under clause (iva)of Explanation 2 to s. 9(1)(vi)
royalty means the consideration
paid for the use or right to use.
Irrespective of whether there is any
transfer or not, the consideration
paid for use or right to use simplic-
iter is sufficient for the consideration
being called as royalty. The pres-
ence or absence of possession,
effective/general control and cus-tody with the assessee, even
though may be matters of agree-
ment, are not of any relevance to
decide the character of payment.
The same result applies under Arti-
cle 12 of the DTAA (Gosalia Ship-
ping 113 ITR 307 (SC), OECD
Commentary referred);
2. Explanation 5, inserted by Finance
Act, 2012, w.r.e.f. 01.06.1976 clari-
fies that irrespective of control or
possession or use or location in
India such right, property or infor-
mation with the payer; the payment
is taxable as royalty. The Revenue
does not need the assistance of
Explanation 5 because even if the
possession of the ship is with the
owner, he has parted with the rightto use the ship and the considera-
tion thereof constitutes royalty
even without Explanation 5;
3. The assessees argument that ship
is not an equipment for purposes
of s. 9(1)(vi) is not acceptable. The
word any preceding an equipment
clearly points out the need for con-
struing equipment widely so as to
embrace every article employed by
the employer for the purposes of his
business. A ship is plant u/s 43(3).
Plant includes all equipment used
by a business man for carrying on
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SNKDIRECT TAXESJudicial pronouncements (International Taxation) / Circulars / Notifications / Instructions
his business. As a ship is used to
carry on business, it is equipment;
4. The argument that a ship used for
plying between coastal lines on the
Indian shore is used in international
traffic is not acceptable in view of
the OECD Commentary;
5. On the question of permanent estab-
lishment, a moving ship is a place of
business in the place where the ship
is docked. The fact that the ship
moved from one point to another is
the result of the nature of business
contract and the movement is an in-
tegrated one having business and
geographical coherence. Accord-ingly, the foreign enterprise has a
permanent establishment in India
when its ships are in India and the
berths are reserved for it. However,
the royalties paid are not effectively
connected or attributable to such
permanent establishment. Accord-
ingly, the payment falls for considera-
tion only under Article 12 and not
under Article 7;
6. The assessees argument that a per-
son who is treated as an agent u/s
163 cannot be proceeded against u/s
201 for failure to deduct TDS is not
correct because the two provisions
operate in different spheres. S. 195
casts an obligation on TDS on any
person responsible for paying,
whereas s. 163 is for assessment
purposes. Proceedings u/s 201 has
nothing to do with the status of the
assessee as an agent u/s 160 and
163 which would assume signifi-
cance only for assessment purposes
(Premier Tyres 134 ITR 17 (Bom)
noted)
Diageo India (P.) Ltd. Vs. DCIT [(2013)
34 taxmann.com 284 (Trib. Mumbai),
ITAT Mumbai bench, dtd. 19.06.2013,
in favour of revenue]
Advertisement, marketing and sales
promotion expenses incurred by as-
sessee, resulting in brand promotion
of foreign AE is an international
transaction, triggering transfer pric-
ing mechanism
The main issue for adjudication is
whether the amount spent on advertise-
ment and brand promotion expenses,
can be held to be giving rise to benefit
to the A.E., treating it as an international
transaction within the ambit of section
92B. With regard to the issue that such
a nature of transaction is an interna-
tional transaction within the ambit of
section 92B read with section 92F, it
has been settled by the Special Bench
in case of L.G. Electronics India (P.)
Ltd. v. Asstt. CIT [2013] 140 ITD 41/29
taxmann.com 300 (Delhi-Trib), that it
does fall within the realm of international
transaction and, hence, transfer pricing
mechanism is triggered.
Cost/value of the international transac-
tion of brand promotion through adver-
tisement, marketing and promotion ex-
penses incurred by the Indian A.E. forthe brand owned by the foreign entity
has to be determined on the basis of
principle laid down by the Special Bench
in LG Electronics India (P.) Ltd. wherein
detailed guidelines and factors have
been laid down for determining the cost/
value of such international transactions.
Therefore, this issue needs to be re-
manded back to the file of the TPO/
Assessing Officer. However, while ap-plying the ratio of the decision in L.G.
Electronics India (P.) Ltd., the TPO
should keep in mind following aspects
which are relevant in the present case-
1. Income from bottling arrangement
will form part of the sales for the pur-
pose of computing ratio of advertise-
ment expenses and net sales;
2. Sales related expenditure should be
excluded while determining the cost/
value of international transactions, as
held by the Special Bench that the
expenditure in connection with the
sales, which do not lead to brand
promotion cannot be brought within
the ambit of advertisement, market-
ing and promotion expenses for de-
termining the cost/value of such
transactions with the A.E
3. Insofar as applicability of methodol-
ogy is concerned, the DRP has ap-
plied CUP method and, therefore, the
TPO will apply CUP method after
selecting the comparables which are
involved in similar type of business,
and if required, fresh comparables
should also be looked into from the
same genus of comparables and
other relevant factors such as prod-ucts, market share, assets employed,
functions performed and other similar
attributes. Suitable adjustment if re-
quired should also be made in natu-
ralising the effect of difference, if any;
and lastly,
4. In assessee's case, CUP method has
been applied for making adjustment
on account of advertisement and
brand promotion expenses and no
mark-up has been applied either by
the TPO or by the DRP. Thus, the
TPO will consider this aspect while
applying the ratio of Special Bench
in L.G. Electronics India (P.) Ltd.
Circulars / Notifications /
Instructions
Notification No. 86/2013, dtd.
01.11.2013
Vide the above notification, Cyprus has
been notified as notified jurisdictional
area under Sec. 94A.
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SNKINDIRECT TAXESJudicial pronouncements / Circulars / Notifications / Instructions
Due Dates of key compliances pertaining to the month of December 2013:
5thDecember Payment of Service Tax & Excise duty for the month of November
6thDecember Payment of Service tax & Excise duty paid electronically through internet banking for the monthof November
7thDecember TDS/ TCS Payment of November10thDecember Excise Return ER1/ER2/ER6
15thDecember PF Contribution for the month of November
15thDecember Due date for payment of 3rdinstallment for corporate and 2ndinstallment for non corporate as-sessee of advance Tax.
21stDecember ESIC payment of for the month of November
The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any individ-ual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information presentedherein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business decisions.This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.
Further, the Notification states that
Form A-3 pertaining to the period July,
2013 to September 2013 shall be fur-
nished by December 15, 2013.
Notification No. 16/2013-ST dtd.
22.11.2013
At present, it is mandatory to make e-
payment of service tax in case of as-
sesses who have paid service tax of
Rs. 10,00,000 or more in the preceding
financial year.
But vide the above notification, the said
threshold limit of Rs. 10 lakhs has been
change to Rs. 1 lakh w.e.f. 01.01.2014.
Notification No. 15/2013-Central Ex-
cise (NT), dtd. 22.11.2013
Vide the above notification, the thresh-
old limit of Rs. 10 lakhs for e-payment
has been change to Rs. 1 lakh w.e.f.
01.01.2014.
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