DECEMBER 2013 India Tax Konnect Editorial Recently, the Government of India unveiled the Gross Domestic Product (GDP) and fiscal deficit numbers. Fiscal deficit rose to 84.4 percent of GDP during April-October 2013, as against 71.6 percent during the same period last year. However, GDP grew 4.8 percent in the second quarter of Financial Year (FY) 13-14 because of improvement in various sectors i.e., electricity, gas, water supply, etc. Therefore, the Planning Commission is optimistic about better economic performance during the second half of FY13-14 and is expecting six percent GDP growth rate in the next financial year. The Bombay High Court dismissed the writ petition of Vodafone India Services Pvt. Ltd and sent the matter back to the Dispute Resolution Panel (DRP). This case is related to a transfer- pricing adjustment over the issue of shares by Vodafone India. Vodafone India issued shares to a Mauritian-based group company at a fair market value. However, the tax department has determined the value of the shares as substantially higher than what was adopted by Vodafone India. The differential amount is being sought to be taxed by the authorities as income in the hands of Vodafone India. The Indian Government designated Cyprus as a notified jurisdiction area on account of the lack of effective exchange of information. Accordingly, all parties to a transaction with a person located in Cyprus shall be treated as associated enterprises, and the transactions shall be treated as international transactions resulting in the application of transfer pricing regulations including maintenance of documentation, etc. Further, the taxpayer has to fulfill certain specified conditions to get deduction of expenditure. Any sum payable to a Cyprus entity on which tax is deductible at source shall be liable for withholding tax at 30 percent or the rate prescribed in the provisions of Income-tax Act, 1961 (the Act) or the rates in forces, whichever is higher. The Madras High Court in the case of Verizon Communications Singapore Pte Ltd. held that the consideration received by a non-resident taxpayer from the Indian customers for provision of bandwidth/telecom services outside India was for the ‘use of, or the right to use equipment’ and it was therefore held as royalty under the Act. Alternatively, the payments could also be considered to be for the use of process provided by the taxpayer, and therefore held as royalty. On the transfer pricing front, the Mumbai Tribunal in the case of Credit Lyonnais held that services provided by the taxpayer were crucial services and inevitable for the decision making of providing loan by foreign branches. Such services cannot be said to be a mere facilitation for conclusion of the loan agreement or signing thereof, under the Protocol of the India-France tax treaty. The Tribunal upheld attribution of 20 percent of fees charged by foreign branches on account of agent fee, commitment fee and arrangement fees, but observed that such additions should only be in respect of the fees excluding the interest charged by the foreign branches. We at KPMG would like to keep you informed of the developments on the tax and regulatory front and its implications on the way you do business in India. We would be delighted to receive your suggestions on ways to make this Konnect more relevant. Contents International tax 2 Corporate Tax 3 Mergers and acquisitions 5 Transfer Pricing 7 Indirect tax 8
Transcript
DECEMBER 2013
India Tax Konnect
Editorial Recently, the Government of India unveiled the Gross Domestic Product (GDP) and fiscal deficit numbers. Fiscal deficit rose to 84.4 percent of GDP during April-October 2013, as against 71.6 percent during the same period last year. However, GDP grew 4.8 percent in the second quarter of Financial Year (FY) 13-14 because of improvement in various sectors i.e., electricity, gas, water supply, etc. Therefore, the Planning Commission is optimistic about better economic performance during the second half of FY13-14 and is expecting six percent GDP growth rate in the next financial year.
The Bombay High Court dismissed the writ petition of Vodafone India Services Pvt. Ltd and sent the matter back to the Dispute Resolution Panel (DRP). This case is related to a transfer-pricing adjustment over the issue of shares by Vodafone India. Vodafone India issued shares to a Mauritian-based group company at a fair market value. However, the tax department has determined the value of the shares as substantially higher than what was adopted by Vodafone India. The differential amount is being sought to be taxed by the authorities as income in the hands of Vodafone India.
The Indian Government designated Cyprus as a notified jurisdiction area on account of the lack of effective exchange of information. Accordingly, all parties to a transaction with a person located in Cyprus shall be treated as associated enterprises, and the transactions shall be treated as international transactions resulting in the application of transfer pricing regulations including maintenance of documentation, etc. Further, the taxpayer has to fulfill certain specified conditions to get deduction of expenditure. Any sum payable to a Cyprus entity on which tax is deductible at source shall be liable for withholding tax at 30 percent or the rate prescribed in the provisions of Income-tax Act, 1961 (the Act) or the rates in forces, whichever is higher.
The Madras High Court in the case of Verizon Communications Singapore Pte Ltd. held that the consideration received by a non-resident taxpayer from the Indian customers for provision of bandwidth/telecom services outside India was for the ‘use of, or the right to use equipment’ and it was therefore held as royalty under the Act. Alternatively, the payments could also be considered to be for the use of process provided by the taxpayer, and therefore held as royalty.
On the transfer pricing front, the Mumbai Tribunal in the case of Credit Lyonnais held that services provided by the taxpayer were crucial services and inevitable for the decision making of providing loan by foreign branches. Such services cannot be said to be a mere facilitation for conclusion of the loan agreement or signing thereof, under the Protocol of the India-France tax treaty. The Tribunal upheld attribution of 20 percent of fees charged by foreign branches on account of agent fee, commitment fee and arrangement fees, but observed that such additions should only be in respect of the fees excluding the interest charged by the foreign branches.
We at KPMG would like to keep you informed of the developments on the tax and regulatory front and its implications on the way you do business in India. We would be delighted to receive your suggestions on ways to make this Konnect more relevant.
Contents
International tax 2
Corporate Tax 3
Mergers and acquisitions 5
Transfer Pricing 7
Indirect tax 8
Non-resident taxpayer liable to pay interest for default in payment of advance tax, since the tax liability was not admitted in its tax return and the Indian payers did not deduct tax
The Delhi High Court held that the taxpayer was liable to pay interest under Section 234B of the Act for default in payment of advance tax, since the liability to pay tax in India was not admitted by the taxpayer in its Indian tax return and the Indian payers did not deduct tax on payments made to such taxpayer.
While reaching its conclusions, the High Court distinguished its earlier decision in the case of DIT v. Jacabs Civil Incorporated and Mitsubishi Corporation [2010] 330 ITR 578 (Del) on the basis that in that case the taxpayer had admitted taxable income in its income-tax return. However, in the present case, the taxpayer did not admit any taxable income in the income-tax return.
DIT v. Alcatel Lucent USA Inc. and DIT v. Alcatel Lucent World Services Inc (ITA 327/2012, ITA 330/2012, ITA 338/2012, ITA 339/2012, 328/2012, ITA 329/2012, ITA 336/2012, ITA 337/2012 & ITA 340/2012)
Notifications/Circulars/Press releasesThe Ministry of Finance notifies Cyprus as a notified jurisdictional area under section 94A of the Act
The Ministry of Finance vide Notification 86/2013 has notified Cyprus as a notified jurisdictional area under Section 94A of the Act. The key implications of the notification are:
• If the taxpayer enters into a transaction with a person in Cyprus, then all the parties to the transaction shall be treated as associated enterprises and the transaction shall be treated as an international transaction resulting in application of transfer pricing regulations including maintenance of documentation
• No deduction in respect of any payment made to any financial institution in Cyprus shall be allowed unless the taxpayer furnishes an authorisation allowing for seeking relevant information from the said financial institution
• No deduction in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus shall be allowed unless the taxpayer maintains and furnishes the prescribed information
• If any sum is received from a person located in Cyprus, then the onus is on the taxpayer to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount shall be deemed to be the income of the taxpayer
• Any payment made to a person located in Cyprus shall be liable for withholding tax at 30 percent or the rate prescribed in the provisions of the Act or the rates in force, whichever is higher.
Notification No. 86/2013 dated 1 November 2013, published in Official Gazette through SO 4625 GI/13
International tax
DecisionsPayment for ‘International Private Lease Circuit’ taxable in India as royalty
The taxpayer, a non-resident company, was engaged in the business of providing international connectivity services in the Asia Pacific region including India. The taxpayer provides International Private Lease Circuit (IPLC) which can transport voice data and video traffic. While the Indian leg of the connectivity service was provided by an Indian company (VSNL) using the gateway/ landing station belonging to it, the international leg of the connectivity service was provided by the taxpayer outside India, using its telecom service equipments situated outside India.
The Assessing Officer (AO) held that the payments received by the taxpayer for providing IPLC to customers in India was taxable as ‘royalty’ under the provisions of Section 9(1)(vi) of the Act and under Article 12(3) of India-Singapore tax treaty. The Commissioner of Income-tax (Appeals) [CIT(A)] and Income-tax Appellate Tribunal (the Tribunal) also confirmed the AO’s order.
Based on the facts of the case, the Madras High Court (High Court), inter-alia, observed and held as follows:
• The payments received by the taxpayer are in the nature of ‘royalty’ under the provisions of the Act and under the tax treaty
• Even if the payment is not treated as one for the use of the equipment, it would be for use of the ‘process’ provided by the taxpayer
• Explanation 5 to Section 9(1)(vi) of the Act clearly points out that the traditional concepts relating to control, possession, location on economic activities and geographic rules of source of income recede to the background, and are not of any relevance in considering the question of royalty
• The decisions in the cases of Asia Satellite Telecommunications Co. Ltd. v. DIT [2005] 332 ITR 340 (Del) (HC), Dell International Services India Pvt. Ltd. [2005] 305 ITR 37 (AAR) and Cable and Wireless Networks India (P) Ltd. [2009] 315 ITR 72 (AAR) are distinguishable as these decisions were rendered prior to the insertion of the aforesaid Explanation 5, which gives a very expansive meaning to the term ‘royalty’.
Verizon Communications Singapore Pte Ltd., [Appeal Nos. 147 to 149 of 2011 and 230 of 2012 (Madras HC)]
The taxpayer was engaged in the business of production and distribution of feature films, T.V. serials, trading in shares and securities and financing and manufacturing of PVC. For Assessment Year (AY) 2008-09, the AO found that the taxpayer had earned dividend income of INR 3.125 million which was claimed exempt under Section 10(34) of the Act. Further, the AO noted that the taxpayer had made investment of INR 108.1 million in shares and mutual funds. The AO held that the provisions of section 14A were applicable to the taxpayer’s case. Referring to the Bombay High Court ruling in Godrej & Boyce Mfg. Co. Ltd. v. DCIT & Anr. [2010] 328 ITR 81 (Bom), the AO worked out the disallowance under Rule 8D(2)(iii) at INR 0.353 million and added it to the total income of the taxpayer. The CIT(A) confirmed the disallowance.
Before the Mumbai Tribunal, the taxpayer submitted that it had not borrowed funds for earning any exempt income. It further submitted that the investment in mutual funds was made out of surplus funds and investment in shares was made several years back. The taxpayer argued that it had not incurred any expenditure directly in respect of investment made by it. Further, a direct expenditure of INR 62 thousand was already suo-moto disallowed. Hence, the further disallowance under Section 14A of the Act was not warranted. The Tribunal noted that Section 14A of the Act read with Rule 8D of the Rules are attracted, when a taxpayer claims an expenditure for earning exempt income and the AO is not satisfied with the correctness of the claim. Section 14A(3) of the Act provides that if any taxpayer claims that no expenditure has been incurred in relation to exempt income, the AO, being not satisfied about such claim, can make disallowance. Rule 8D deals with the methodology of calculating the disallowance. The Tribunal, relying on the decision of Delhi High Court in the case of Maxopp Investment Ltd. & Ors. v. CIT [2012] 247 CTR 162 (Del), held that for invoking Section 14A of the Act, the AO should indicate ‘cogent reasons’ why he is not satisfied with the correctness of the claim of the taxpayer and remanded the matter back to the file of AO.
Rajshri Production Pvt. Ltd. v. Addl. CIT [TS-570-ITAT-2013(Mum)]
Where taxpayers’ returns, claiming interest deduction, were treated as non est, waiver of such interest could not be subsequently taxed as remission of liability
During the year under consideration, the taxpayer availed the one-time settlement scheme of the bank, whereby a portion of interest was waived, which related to previous AYs. The taxpayer claimed that since the returns filed for the years to which interest was related, were held as non est, the deduction of interest was to be held as not allowed. Therefore, the interest waived could not be taxed under Section 41(1) of the Act as cessation of liability. However, the AO rejected the taxpayer’s contention on the grounds that the taxpayer had been issued notice under Section 139(9) to rectify its returns for such years, to which it had not responded. Therefore, in absence of any specific order on disallowance, interest was included as income under Section 41(1) of the Act. The CIT(A) held that the claim of interest cost in the books of account for the previous years would constitute an allowance or deduction of expenditure or trading liability, and thus, it was taxable under Section 41(1) of the Act. However, the Tribunal allowed the taxpayer’s appeal.
The Madras High Court held that in the context of Section 139(9) of the Act, when the return filed is treated as non est in the eyes of law, the expression ‘where an allowance or deduction has been made in the assessment for any year’ has to be read as any allowance or deduction considered in the assessment for the purpose of invoking Section 41(1) of the Act. For the applicability of Section 41(1) of the Act, the pre-requisite condition is that an allowance or deduction has been made in the assessment for any of the years in respect of an expenditure, loss or trading liability incurred by the taxpayer and subsequently during any previous year, the taxpayer has received remission or obtained refund of the said amount. Thus, Section 41(1) of the Act creates a legal fiction and hence, has to be strictly complied with if any addition to the income is sought to be made by the revenue. Thus, unless the amount had been allowed as a deduction in the earlier years, the question of invoking Section 41(1) of the Act does not arise. The Tribunal further held that, when a taxpayer makes a self assessment under section 140A and pays self assessment tax thereon, it does not mean an assessment by a competent authority and hence it cannot be said that the amount had been allowed as a deduction in the earlier years, therefore the question of invoking Section 41(1) of the Act on this count also does not arise.
Where there was a tacit agreement in the form of offer and acceptance for sale of assets and existence of such assets could not be doubted, said sale and its lease back should not be rejected for the purpose of allowing depreciation
The taxpayer, a leasing company, entered into a sale and lease back (SLB) agreement in respect of certain assets, namely, meters, shunt capacitor banks and outdoor circuit breakers with the Tamil Nadu Electricity Board (Electricity Board). As per the SLB agreement, the taxpayer purchased certain assets from the Electricity Board and leased them back to the
Electricity Board and claimed depreciation on said assets. The AO disallowed the claim for such depreciation, treating those SLB transactions as loan transactions. The CIT(A) held that the taxpayer satisfied all the conditions for claiming depreciation and allowed the depreciation claimed. The Tribunal took the view that there was no actual delivery or handing over of possession of the machinery/equipment by the Electricity Board to the taxpayer on completion of the sale and there was also no redelivery or handing over of possession of the equipment by the taxpayer to the Board. The Tribunal, therefore, held that it was purely a finance transaction and, therefore, no depreciation could be allowed.
The Madras High Court held that there was a tacit agreement in the form of offer and acceptance for the sale of the assets and the existence of such assets cannot be doubted and the parties to the transaction were convinced about it. There is no reason why the said sale and its lease back should be rejected. The parties to the sale-cum-lease back agreement were an existing leasing company and a reputed State owned Electricity Board and hence, in the absence of any material to the contrary, the claim made based on the sale-cum-lease back agreement cannot be rejected. As far as the ratification of the said transaction on the subsequent date by the Electricity Board is concerned, such later ratification by itself cannot be a ground to reject the sale-cum-lease back. Merely because the agreement provided for the deduction of the lease instalments from the current consumption charges by way of priority, it cannot be held that the transaction is not a SLB, but a mere loan transaction. The provision for repayment of the lease amount by way of instalments from the current consumption charges is one mode of repayment in order to ensure that there is no default in paying the instalments. Merely because the assets were all eligible for 100 per cent depreciation, it cannot be held that the entire transaction would become doubtful. So long as the sale-cum-lease back agreement was real as between the parties, and the transaction was carried out in accordance with the law, in the absence of any flaw in the agreement, one should not doubt the whole transaction. The very fact that the sale was accepted as between the taxpayer and the Electricity Board and after the settlement of the lease amount, the taxpayer would continue to retain its ownership in no uncertain terms stipulated in the agreement, and when such a transaction was not against law, there was no reason to doubt the transaction. Thus the taxpayer was eligible for the depreciation.
First Leasing Co. of India Ltd. v. ACIT [2013] 38 taxmann.com 213 (Mad)
Tribunal refuses depreciation claimed through rectification application under Section 154 of the Act. Also rejects taxpayer’s reliance on amended Section 32
The taxpayer filed the return of income (ROI) for AY 2003-04 without claiming depreciation. The taxpayer did not provide for depreciation in its books of account. The taxpayer then filed an application under Section 154 of the Act to allow depreciation. The AO, accepting the claim, passed an order under Section 154 of the Act. Thereafter, in the re-assessment proceedings, the AO withdrew the depreciation allowed in the rectification order on the ground that since the taxpayer had failed to claim the depreciation in the ROI,
there was no mistake apparent which could be rectified under Section 154 of the Act. The CIT(A), relying on Mumbai Tribunal ruling in Jay Bharat Co-op. Housing Society Ltd. v. ITO [2011] 10 ITR (Trib) 717 (Mum), confirmed the AO’s order. The CIT(A) also observed that the taxpayer’s income would be lesser than the returned income if the depreciation claim was allowed. Aggrieved, the taxpayer filed an appeal before the Tribunal. Before the Delhi Tribunal, the taxpayer submitted that the Revenue had disallowed depreciation merely on the grounds that it was not claimed in the ROI. The taxpayer argued that the Revenue has overlooked the Explanation 5 to Section 32(1) of the Act which was inserted by the Finance Act (2001) with effect from April 1, 2002. Explanation 5 provides that the provisions of Section 32(1) of the Act shall apply, whether or not the taxpayer has claimed a deduction for depreciation in computing its total income. The taxpayer relied on the ruling in Dr. Mrs. Sudha S Trivedi v. ITO [2009] 31 SOT 38 (Mum) and submitted that the claim of depreciation should be allowed in the light of Explanation 5. Ruling in favor of the Revenue, the Tribunal observed that the taxpayer had not claimed depreciation either in its ROI or in the course of the assessment proceedings. Further, it did not claim depreciation in return against notice under Section 148 of the Act or in reassessment proceedings. The Tribunal held that the taxpayer was not entitled to depreciation and dismissed its claim.
Tibrewala Industries Pvt. Ltd. v. ITO [TS-573-ITAT-2013(DEL)
High Court allows filing of revised return during assessment along with condonation request and directs revenue to consider the application and revised returns on merits and in accordance with law
The taxpayer during assessment proceedings for AY 2007-08 had made an additional claim for deduction by filing a revised computation. The AO rejected the taxpayer’s claim. However, the CIT(A) and the Tribunal admitted the taxpayer’s plea. Aggrieved, the tax department preferred an appeal before the Karnataka High Court. The question before the High Court was whether during the course of scrutiny of return or revised return of income, a taxpayer can make an additional claim for deduction, other than by filing a revised return. In response, the taxpayer requested for permission to file a revised return to make the additional claim along with an application for condonation of delay under Section 119(2)(b) of the Act and prayed for directions for condonation to be considered by the appropriate authorities within a stipulated time frame. The High Court accepted the taxpayer’s plea and allowed the taxpayer to file a revised return of income within a period of four weeks along with an application for condonation of delay before the appropriate authority. The High Court also directed the AO and the appropriate authority to consider the application for condonation of delay and revised return on merits and in accordance with law, expeditiously.
CIT v. Axa Business Services Pvt Ltd. [TS-530-HC-2013(KAR)]
Forward contract is an integral part of exports and hence constitutes hedging and not speculative transaction
The taxpayer exported diamonds and usually had outstanding receivables in foreign currency. It entered into forward
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• For the loss amounting to INR. 4.21 million on premature cancellation three days prior to due date the Tribunal held that since the maturity date of these premature cancelled FCs fell during the weekend and therefore, the taxpayer cancelled such FCs three days prior to the due date was an acceptable explanation and directed the AO to allow the claim after due verification of the concerned weekends. The issue of allowability of the balance premature loss amounting to INR 1.89 million was set aside before the AO to examine the argument of the taxpayer that it should be allowed as a general business loss, which contention was earlier not examined by the AO.
London Star Diamond Company (I) P. Ltd. v. DCIT [TS-547-ITAT-2013(Mum)]
Mergers and acquisitions
DecisionsDepreciation on Non-Compete Fees
The taxpayer acquired software development and training divisions from PMGL. The taxpayer paid INR 3.64 billion towards acquisition of Intellectual Property Rights (IPRs) and INR 1.80 billion as non-compete fees. The taxpayer claimed depreciation on IPR as well as non-compete fees. The Tribunal reversed the decision of the CIT(A) allowing depreciation on non-compete fees on the basis that a non-compete fee is not an asset, but only a right to sue for breach of agreement and depreciation cannot be allowed on the same. The High Court held that the IPRs were acquired and non-compete fees were paid under a composite agreement, therefore, the non-compete clause should be considered as a supporting clause which strengthens the IPRs acquired and should be eligible for depreciation under Section 32 of the Act.
Pentasoft Technologies Limited v. DCIT [TS-578-HC-2013(MAD)]
In the absence of specific provision, amalgamation does not take away benefits given under the Act
The taxpayer had sold shares of Reliance Salgaocar Power Co. Pvt. Ltd (RSPCL) on 29 September 2003. RSPCL was approved
contracts with banks to hedge the exchange loss, if any. Further, in accordance with the statutes, the taxpayer also revalued the outstanding export receivable. It incurred loss of INR 46.9 million on forward contracts (FC) which were entered to safeguard the outstanding receivables. The taxpayer referred to the provisions of Section 43(5) of the Act and contended that the loss was outside the scope of the ‘speculation transaction’ and the loss, being an integral part of the export business, constituted ‘business loss’. During the assessment proceedings, the AO noted that the total outstanding receivable in foreign exchange was much higher than any of the figures of export trade and receivable. The AO dismissed the applicability of clause (a) of the proviso to Section 43(5) of the Act stating that the taxpayer had failed to demonstrate that the transactions were incurred for hedging the risk against the raw material or merchandise. The AO concluded that the foreign exchange contracts constituted speculative transactions. The AO contended that the FCs could not have any nexus with the export of diamonds. Accordingly, the AO concluded that the foreign exchange/currency derivative transactions were not covered by the exclusions provided in the proviso to Section 43(5) of the Act and treated the loss as speculative loss. Thus, the assessment was completed with an addition of INR 46.9 million. The CIT(A) also dismissed the taxpayer’s appeal. Aggrieved, the taxpayer filed an appeal before the Tribunal.
The Mumbai Tribunal had to determine whether the taxpayer’s transactions constituted ‘hedging transactions’ covered under clause (a) of the proviso to Section 43(5) of the Act. The Tribunal referred to judicial precedents which supported the proposition that the FC transactions, when entered into with the banks for hedging the losses due to foreign exchange fluctuations on the export proceeds, were to be considered integral or incidental to the export activity of the taxpayer. Therefore, the Tribunal held that the losses or gains constituted business loss or gains and not speculation activities. The Tribunal also agreed with taxpayer’s argument that the ‘fact of premature cancellation cannot alter the nature of the transaction’. The Tribunal stated that it is not the requirement of the law that 1:1 correlation between the FCs and the export invoices should exist and should be established by the taxpayer. However, the Tribunal noted that considering the fact that these FCs were an integral part or incidental to the core business of export of diamonds and hence, constitutes ‘hedging transaction’ and not the ‘speculative contracts’. Further the Tribunal also held that the onus was on the taxpayer to explain satisfactorily why premature cancellation of some FCs was resorted to. Based on the above discussion, Tribunal subdivided the alleged speculation loss of INR 46.9 million into the following two types:
• Loss on Cancellation of Matured FCs amounting to INR 41.48 million related to FCs cancelled or terminated on or after the due date was to be allowed. As, the FCs booked as integral parts of the export invoices lived their booking period in full and they were either terminated by the Bank on or after due date of maturity of the contract as the actual realisations were not received in time.
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15 October 2003, resolving to amalgamate RSPCL with REL with appointed date of 1 April 2003 and court order, approving the same, dated 18 December 2003, RSPCL ceased to exist from 1 April 2003. The taxpayer had claimed exemption on long term capital gain under Section 10(23G) of the Act. The AO denied the exemption stating that RSPCL ceased to exist from 1 April 2003 and the exemption was not available to the company unless the new company was an eligible enterprise approved under Section 10(23G) of the Act.
The Tribunal held that RSPCL has enjoyed the approval of the central government under Section 10(23G) of the Act up to 31 March 2004 and such approval was not withdrawn and, therefore, approval had to be presumed to be in force on date of sale. It also held that the taxpayer was assured at the time of investment that it would be entitled to benefit under Section 10(23G) of the Act, which cannot be denied in the case of events like amalgamation in which the taxpayer has no role to play. Where amalgamation puts the taxpayer in a disadvantageous/negative position in claiming any benefit, the legislative intent is clearly expressed in terms of a specific provision such as in clause 12 to Section 80-IB of the Act. Therefore, the Tribunal allowed the exemption to the taxpayer.
‘Beneficial ownership’ under Section 79 of the Act
The taxpayer had claimed set-off of brought forward losses. During the previous year, one of the corporate shareholders holding 80 percent shares in the taxpayer transferred 76.8 percent shares to new shareholders of the taxpayer. It was claimed that the new shareholders were shareholders of the transferee company and therefore, in spite of the change in shareholding, the same group continued to control the shares and the taxpayer was entitled to claim set-off of losses. The taxpayer further argued that Section 79 refers to the beneficial holding which means that the section would not apply if shares carrying 50 percent voting power continued to be held by the same group of persons. The AO denied the claim of the taxpayer and disallowed the set-off of losses in view of Section 79 of the Act. The Tribunal held that the shareholders and the company are distinct entities and it could not be construed that any change in shareholding between them has not resulted in change in shareholding in the taxpayer. The Tribunal held that provisions of Section 79 were applicable to the case and dismissed the appeal.
Just Lifestyle Pvt Ltd v. DCIT [TS-562-ITAT-2013(Mum)]
Taxation of cash payment to retiring partner
The taxpayer, a partnership firm, was in the real estate business. In terms of the reconstitution deed dated 28 April 1993, 5 new partners were introduced to the firm. Prior to the reconstitution, the assets of the firm were revalued on the basis of a valuation report dated 28 March 1993. All the three existing partners of the firm retired with effect from 1 April 1994 and received enhanced value in FY 1994-95. The AO alleged that there was a transfer from old firm to new firm and was liable to capital gains tax.
According to the AO, reconstitution was a devise to transfer immovable properties avoiding income-tax and stamp duty. The taxpayer contended that it had paid credit standing to the credit of the retiring partners’ capital accounts and there was
no transfer of asset liable to any capital gains tax. The CIT(A) upheld the order of the AO. The Tribunal, considering the fact that retirement was after one year from admission and also that there was no transfer as defined under Section 2(47) of the Act, held that the firm was not liable to pay capital gains tax.
On an appeal the question before the Court was whether the taxpayer firm was liable under Section 45(4) of the Act when a retiring partner takes only money towards the value of his share without any distribution of capital asset/assets? The Karnataka High Court held that the five new partners brought in cash and three partners retired taking their share in the partnership and the business was carried on by five new partners and thus, on 1 April 1994 there was neither dissolution of the firm nor distribution of assets. Therefore, there was no question of the taxpayer being liable under Section 45(4) of the Act.
CIT v. Dynamic Enterprises [TS-556-HC-2013(KAR)]
Asset revaluation accounted as loan held violative of conditions under Section 47(xiii) of the Act
The taxpayer, a partnership firm engaged in the business of automobile dealership, got converted into a company. At the time of conversion, the land belonging to the partnership firm was revalued as per the market value and the difference of book value and the revalued value was credited to the partner’s current accounts. This amount was treated as a loan to partners in the company’s books at the time of conversion. The taxpayer claimed the conversion was not a transfer under Section 47(xiii) of the Act and therefore, there was no capital gain liability. The AO denied the exemption on the grounds that the partners were getting consideration such as loan which violated the conditions under Section 47(xiii) of the Act.
The Tribunal held that treatment of revaluation difference as loan violated the condition that all assets of the firm should be treated as the assets of the company. It was also held that it was an indirect transfer of land and an accounting technique enabling distribution of the assets to partners. The Tribunal denied the exemption under Section 47(xiii) of the Act.
K.T.C. Automobiles (P) Ltd. v. DCIT (Coch) [ITA No. 446/Coch/2013]
Transfer Pricing
DecisionsThe Mumbai Tribunal upheld attribution of 20 percent of fees and other charges after excluding interest charged by foreign branches, as appropriate compensation for the Indian branch
The taxpayer facilitated foreign currency loans to its clients from overseas branches, but did not show any income on the said transaction. All negotiations and discussions with potential clients were done by the syndication desks in Hong Kong. The role of the taxpayer was to provide financial analysis of the borrower, general market conditions in India and regulatory environment. The arrangement fees were received by the lead arrangers or co-lead arrangers. All other support and facilities like preparation of loan documents, legal opinions, signature and execution of loan document were done by the syndication desk and legal team in Hong Kong. The Transfer Pricing Officer (TPO) computed the arm’s length charges being 25 percent of the total amount comprising interest and fee received by the offshore branches. The CIT(A) reduced the adjustment from 25 percent to 20 percent of the interest and fee amount.
The Tribunal held as follows:
• The taxpayer provided services regarding client’s creditability analysis, the capacity to repay the loan and risk involved in the loan transaction. Therefore, the role of the taxpayer in providing such a crucial service is inevitable for taking the decision of providing loan. The plain reading of paragraph 4 of the protocol of the tax treaty makes it clear that if the role of the Permanent Establishment (PE)
is only to facilitate the conclusion of foreign trade or loan agreement or mere signing thereof, then no profit shall be attributed to PE in terms of Article 7(2) of the tax treaty.
• Since the taxpayer’s role in providing the services was the core-basis for taking the decision to grant the loan, the nature of services provided by the taxpayer did not fall under the terms of facilitation of conclusion of loan agreement or signing thereof as stipulated under paragraph 4 of the Protocol.
• When the loan was provided by the syndicate and the taxpayer had not contributed to the loan amount, then as regards the interest charged on loan, this cannot be attributed to the taxpayer. Only the fee and other charges received by the foreign branches should be taken into consideration for making adjustment under TP provisions.
• Since none of the parties to the appeal had come out with the suitable comparables, the estimation made by the CIT(A) at the rate of 20 percent was just and proper, however, this would be only in respect of the fee and charges excluding the interest received by the foreign branches.
Credit Lyonnais v. ADIT (ITA No.1935/Mum/2007)
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The Tribunal also held that no service tax was payable on expenses reimbursed during the course of marketing TV channels i.e., cartoon network and POGO channel etc. in terms of Delhi High Court ruling in Intercontinental Consultants and Technocrats Pvt. Ltd [2012-TIOL-966-HC-Del-ST].
ESPN Software India (P) Ltd vs. CST, New Delhi and Turner International India Pvt. Ltd v. CST, New Delhi [Final order No. 58020-58022/2013]
Notifications/Circulars/Press releasesExemption to services provided in relation to serving of food or beverages by a canteen maintained in a factory
From April 2013, the services provided by any air-conditioned restaurant, eating joint or mess, including services provided by air-conditioned canteens in factory or offices, attract service tax.
Now, the Government has exempted from service tax services, provided in relation to the serving of food or beverages, by a canteen maintained in a factory (as defined under the Factories Act, 1948) having the facility of air-conditioning or central air-heating, at any time during the year.
Notification No. 14/2013-ST, dated 22 October 2013
Recovery of Government dues during pendency of stay application cannot be initiated except under specified circumstances
In January 2013, Central Board of Excise and Customs (CBEC) vide the Circular No.967/01/2013-CX (the Circular) directed the authorities to recover confirmed tax dues/ interest/ penalty in cases where there is no order for staying recovery. It also included situations where the stay applications remained pending for long periods without any fault on the part of the taxpayer.
In this background, the Bangalore Tribunal passed a General Order directing the authorities not to take coercive action during the pendency of stay application unless in the following situations:
• Service tax/ Excise duty has been collected but not paid
• Admitted duty/service tax liability [before adjudicating authority/Commissioner (Appeals)] is yet to be discharged with interest
• Taxpayer has deposited the entire duty/service tax liability determined at any stage
Indirect Tax
Service Tax - DecisionsDonation received as a prerequisite for providing services liable to service tax
The issue was whether the amount collected as donation while booking halls for social functions should be included in the gross amount received for providing ‘Mandap Keeper Services’.
The Mumbai Tribunal has held that since a donation was compulsory for the booking of the hall for social functions, it would be considered as part of the gross consideration received for providing ‘Mandap Keeper Services’ and therefore, liable to service tax.
CCE v. Shri Kutch Kadva Patidar Samaj, Nashik and others [2013-TIOL-1706-CESTAT-MUM]
Service tax on distribution rights acquired from overseas broadcasting company
In this case, the prima facie issue was whether service tax was leviable on the following issues:
• whether acquisition of channel distribution and ad-sale rights amounted to import of broadcasting services
• whether licensing/sub-licensing of cartoon characters to clients in India was taxable as ‘intellectual property service (IPR service)’
• whether service tax was leviable on expenses reimbursement on marketing of Pogo and Cartoon Network Channels in India
The Delhi Tribunal held that acquisition of channel distribution and ad-sale rights did not amount to import of broadcasting services and were therefore not liable to service tax in light of the following:
• grant of distribution rights was not akin to permitting the right to receive communication signals in any form by transmission through electromagnetic waves
• the transaction would not be liable to service tax under the taxable category of ‘Broadcasting Services’ under reverse charge mechanism since Indian agent/ subsidiary did not receive telecast signals from the foreign entity
• communication signals were received directly by MSO/DTH providers etc. and not by the Indian agent/ subsidiary.
Further, the Tribunal observed that cartoon characters, shown as trademark of cartoon network were covered under the definition of artistic work as defined under Section 2(c) of the Copyright Act, 1957, under clause (i) as drawing, engraving or a photograph. Hence, they were excluded from the definition of IPR service and accordingly, not taxable.
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• Commissioner (Appeals) has rejected the appeal on the grounds that such an appeal was filed beyond the prescribed time limit.
Further, certain procedural modifications have been made, in the Circular, empowering the authorities to file an application for ‘out of turn’ hearing in specified cases, which should be considered within 30 days of filing the application.
Suo moto Misc. order No. 25453/2013 dated 2 April 2013[2013(32) S.T.R 126 (Tri – Bang.)]
Central Excise - DecisionsCENVAT credit on input services received before commencement of production of goods
In this case, the taxpayer received ‘technical testing and analysis services’ from outside India and paid service tax on them under the reverse charge mechanism. The service tax paid was subsequently claimed as CENVAT Credit. However, the Central Excise authorities denied the credit on the grounds that the testing and analysing service has been used in respect of a product which was yet to be manufactured by the taxpayer.
The Mumbai Tribunal held that even if a service had been procured in connection with the manufacture of goods to be produced by the taxpayer in the future, and even if it so happens that ultimately the goods are not manufactured, the service would be an input service used in or in relation to the manufacturing activity and therefore, CENVAT credit cannot be denied.
Wockhardt Limited v. CCE [2013-TIOL-1642-CESTAT-MUM]
CENVAT credit on input services received before commencement of production of goods
In this case, the taxpayer claimed CENVAT credit on purchase of the inputs and subsequently cleared the said inputs to their SEZ unit without payment of duty. Central Excise authorities demanded the reversal of CENVAT credit availed on such inputs, on the grounds that as per Rule 3(5) of the CENVAT Credit Rules, 2004 (hereinafter referred to as ‘Credit Rules’) the credit availed is required to be reversed in case of clearance of inputs ‘as such’ and no exemption has been provided even if the inputs are exported.
The Madras Tribunal held that, for the purpose of accounting for the goods on which CENVAT credit has been taken, the Credit Rules needs to be considered as a complete code in itself and since, the said Rules do not envisage export of inputs after taking credit, accordingly, the ‘inputs’ may be cleared to SEZ only after reversal of the credit availed.
It was further held that when manufactured goods are supplied to a SEZ unit by a manufacturer in accordance with the procedure notified under Rule 18 and 19 of the Central Excise Rules, the goods can be treated as exported. This will not apply to clearance of inputs ‘as such’.
CCE v. Sundaram Brake Linings Limited [2013-TIOL-1676-CESTAT-MAD]
Excise duty is not payable on certain charges recovered separately from customers
In this case, the taxpayer manufactured and cleared the Diesel Generating Sets (hereinafter referred to as DG sets) on payment of Excise duty on the value of the DG sets cleared. The taxpayer recovered the following charges from the customers through separate invoices and did not include the same in determining the assessable value of DG sets, accordingly no Excise duty was paid thereon:
• Freight from factory to the premises of customer
• Unloading charges at the premises of the customer
• Octroi cost incurred during the transportation from factory to the premises of customer
• Erection and commissioning charges.
The Excise authorities demanded duty on the aforesaid charges on the grounds that these amounts are not shown separately in the same invoice raised for the clearance of DG sets. Also, since the sale of the DG set is said to be completed only when it is installed at the buyer’s premises, the above charges are required to be included in the assessable value of DG sets.
The Madras Tribunal held that for the purpose of claiming exemption, it is sufficient if the aforesaid charges are collected through separate invoices and it is not necessary that it is required to be shown separately in the very same invoice through which DG sets were cleared.
It was further held that the Excise duty is chargeable at the stage of removal of goods and not after its attachment to the earth at the buyer’s premises and accordingly, such charges are not required to be included in the value of DG sets.
CCE v. Puissance DE DPK [2013-TIOL-1535-CESTAT-MAD]
Deduction cannot be claimed towards the loss incurred by the principal manufacturer
In this case, the taxpayer manufactured goods on a job work basis and Excise duty was paid based on the value determined vide the Cost Construction Certificate provided by the principal manufacturer. The assessable value, determined in terms of the said certificate, was reduced by the amount of loss incurred by the principal manufacturer on sale to the unrelated buyers. The Central Excise authorities contended that a job worker cannot claim deduction towards the loss incurred by the principal manufacturer.
The Madras Tribunal held that the assessable value for payment duty is the cost of raw materials plus the processing charges. The subsequent loss incurred by the principal manufacturer is not deductable from the assessable value, as the profit of the principal manufacturer is not includable in such assessable value.
CCE v. Ravishankar Industries Private Limited [2013-TIOL-1624-CESTAT-MAD]
Customs Duty - DecisionsCustoms Duty is not payable on the import of Software through internet
In the instant case, the Customs Authorities demanded Customs duty on the import of Software bought through the internet. In this regard, the Delhi Tribunal held that only the
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Whether disposal of vehicle for recovering the loan amount is subject to tax
The petitioner ICICI Bank is a banking company and Tata Motors Finance Ltd. is a non-banking finance company. They grant loans for the purpose of purchase of vehicles against hypothecation of the vehicles by way of security under loan-cum-hypothecation agreements. Under such agreements, the borrower is the owner of the vehicle and the lender does not become the owner at any time.
The Kolkata High Court relying on the Supreme Court judgment of Federal Bank held that in case of the banking company, they were covered by the main part of the definition of dealer, as the disputed sales were in the course of its banking business and were effected in exercise of its statutory right under the Banking Companies Regulations Act. Further, in the case of the non-banking finance company, it was held that it was also a dealer within the ambit of definition of dealer since it was arranging sales of hypothecated vehicles on the strength and authority derived from the hypothecation agreements and the irrevocable power of attorney executed by the borrowers. If the non-banking finance company was exercising hypothecates’ contractual right to sell pledged goods for realisation of unpaid loans then it fell within the scope of the main part of the definition of dealer.
It was opined that the provision had to be construed as a whole and not as piecemeal. The word dealer was not intended to cover only the owners of good. No such intention could be attributed to the legislature on a plain reading of the section. Further, it might be true that the banking or non-banking financial corporations did not charge any commission or remuneration for sale of the hypothecated goods, but the activity was not undertaken by them gratuitously. They undertook the activity of selling the hypothecated vehicles for the purpose of realizing the consideration which had already passed from them to the borrower. By selling the vehicles both the banking and non-banking financial corporation realised their dues, which naturally included profits. It was further observed that an agent who sells goods on behalf of somebody else cannot escape the liability to pay tax on sales made by him for and or behalf of others merely because he was selling goods on behalf of others. The charge under the Act has been imposed directly upon him by the broad definition of dealer.
Tata Motors Finance Ltd and others v. Asst. Commissioner of Sales Tax [W.P. 6 of 2011, W.P. 24 of 2010 and W.P. 4 of 2011, 8 October 2013]
Notifications/Circulars/Press ReleaseTamil Nadu
With effect from 1 November 2013, monthly VAT Return (Form I) has been amended requiring all registered dealers to disclose their closing inventory commodity -wise and the related Input Tax Credit (hereinafter referred to as ‘ITC’) details on a monthly basis in the specified format (Annexure V). However, details of closing stock are not required to be disclosed if no ITC (relevant to such stock) is being carried forward in a month.
Notification No G.O.(Ms).No.137 Dated 31st October, 2013
items covered under heading No.8523 of the Customs Tariff Act are taxable. This heading includes ‘discs, tapes, solid-state non-volatile storage devices, ‘smart cards’ and other media for the recording of sound or other phenomena, whether or not recorded’. The Software downloaded through the internet did not constitute tangible goods and hence, was not subject to Customs duty levy.
Platinum IT Solutions v. Commissioner of Customs [2013-TIOL-1661-CESTAT-DEL]
Foreign Trade Policy Circulars/Notifications/Press ReleasesRe-fixation of average annual export obligation for EPCG holders
In case exports in any sector/ product group decline by more than 5 percent, the Foreign Trade Policy permits re-fixation of Annual Average Export Obligation. In this regard, the Director General of Foreign Trade (DGFT) has issued the list of sectors/products group that witnessed such a decline in FY 2012-13 as compared to FY 2011 -12 and has instructed the Regional Offices to re-fix the annual average export obligation for Export Promotion Capital Goods (EPCG) Authorisations for the FY 2012-13 accordingly.
Policy Circular No. 07/2009-2014 (RE 2013), dated 23 October 2013
VAT - DecisionsCredit of input-tax credit to be allowed only when it is claimed in the return and supported by tax invoices
In this case, the taxpayer, a dealer in cement, had suppressed certain purchases from M/s Malabar Cements India Limited, a Government of Kerala undertaking. A notice was issued in connection thereto and the assessment was completed, making an addition of unaccounted purchases. The dealer filed an appeal to grant ITC with respect to suppressed purchases which were disposed off.
The first appellate authority directed the AO to grant the ITC since the purchases were made from a Government company. The State, being aggrieved by the order of the first appellate authority, filed an appeal before the Tribunal. The Tribunal reversed the order of the first appellate authority and restored the order of the AO disentitling the taxpayer to the claim of ITC.
On a revision petition, the Kerala High Court held that ITC should be claimed along with the return, supported by the invoices and the amount of eligible credit as determinable and reflected in the books of accounts. The dealer had admittedly not disclosed the transaction in his books of account or his return, nor had he filed any revised return. The fact that the purchases were made from a Government company would not automatically entitle the dealer to claim ITC.
M. Mohammed Hajji v. State of Kerala [2013 63 VST 317 Ker]
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With effect from 11 November 2013, the rate of reversal of ITC on stock transfers has been increased from 3 percent to 5 percent.
With effect from 11 November 2013, a new proviso has been inserted, whereby on inter-state sale against Form C, ITC shall be allowed to the dealers only in excess of 3 percent of tax. Accordingly, for all the inter-state sales against Form C, dealers would be required to reverse ITC to the extent of 3 percent.
Notification No GO No. 328 dated 8th November 2013
Karnataka
With effect from 6 November 2013, sale of sugar has been exempted from levy of VAT.
Notification No FD 216 CSL 2013 dated 5th November 2013
Gujarat
With effect from 2 November 2013, sales or purchases of toys including rubber balloons (except electronic and battery operated) have been exempted from VAT.
Notification No (GHN-27) VAT-2013-S.5 (2) (40)-TH, Dated 2 November 2013
West Bengal
West Bengal Government has notified a new scheme for extending certain financial support for large scale industrial units in the state of West Bengal named as ‘The West Bengal State Support for Industries Scheme, 2013’. The scheme shall remain valid from 1 September 2013 to 31 August 2018.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
