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KPMG India Tax Konnect - January 2014


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KPMG India Tax Konnect - January 2014 informs of the developments on the tax and regulatory front and its implications on the way you do business in India.

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KPMG India Tax Konnect - January 2014

  1. 1. JANUARY 2014 India Tax Konnect Editorial Contents International tax 2 Corporate Tax 3 Mergers and acquisitions 5 Transfer Pricing 6 Indirect tax 7 In a recent monetary policy review, the Reserve Bank of India (RBI) maintained a status-quo on the policy rates. The RBI has re-iterated that inflation remains the concern and if headline and core inflation doesn’t subside in future RBI will act accordingly. The RBI also highlighted that headline inflation, both retail and wholesale, have increased, mainly on account of food prices. While CPI and wholesale price index (WPI) inflation excluding food and fuel have been stable, despite a steady and necessary increase in administered prices towards market levels, the high level of CPI inflation excluding food and fuel leaves no room for complacency. On the international tax front, the Delhi High Court in the case of Infrasoft Ltd., dealt with issue of taxability of consideration for grant of licences for the use of software. The High Court held that in the present case what was transferred was neither the copyright in the software nor the use of the copyright in the software, but the right to use the copyrighted material or article which was clearly distinct from the rights in a copyright. Accordingly, the High Court held that the consideration received for the transfer of licences for the use of software does not amount to royalty under the India-USA tax treaty. The Karnataka High Court in the case of Siemens Public Communication Networks Ltd. held that financial aid/subvention received from the parent company to recoup the losses of the subsidiary is taxable as revenue receipt, since the subvention was extended to run the subsidiary’s business more profitably. Further, the purpose of the subvention was to meet the working capital needs/ recurring expenditure and hence the payments were on revenue account. The High Court has observed that the purpose of the subsidy/subvention determines the character of the payment (i.e. revenue or capital). It was also observed that the point of time at which the subsidy was paid, the source, or the form of subsidy is not relevant. On the transfer pricing front, the Chennai Tribunal, in the case of VIHI LLC held that Discounted Cash Flow (DCF) method is preferable over the Yield method or Net Asset Value method prescribed in guidelines of the Comptroller of Capital Issues (CCI Guidelines) for determining the arm’s length price for sale of shares. Relying on the ruling in the case of Ascendas (India) Private Limited, the Tribunal held that the valuation of shares based on the erstwhile CCI Guidelines, as required under the then prevalent Foreign Exchange Management Act (FEMA) Regulations, were for a different purpose and cannot be applied for arm’s length price determination. On the indirect-tax front, threshold limit for mandatory e-payment of Excise duty and Service tax has been reduced from INR 1million to INR 0.1million. With effect from 1 January 2014, the tax payer who have paid a total Excise duty or Service tax of INR 0.1million or more in the preceding financial year are required to pay Service tax electronically through internet banking. We at KPMG in India 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.
  2. 2. 2 International tax Decisions No royalty income on payment for transfer of software which is a ‘copyrighted article’ and not a ‘copyright right’ The taxpayer, a US tax resident company engaged in the business of developing and manufacturing civil engineering software developed and licenced customised software to Indian customers and provided installation and training services in respect of the said software through its branch office in India. The Assessing Officer (AO) and the Commissioner of Incometax (Appeals) [CIT(A)] held that the consideration received by the taxpayer for grant of license for the use of customised software was in the nature of ‘royalty’ under the provisions of the Income-tax Act, 1961 (the Act) as well as the India-USA tax treaty. However, the Tribunal held that the consideration received by the taxpayer was not in the nature of royalty. The question before the Delhi High Court was whether the consideration received by the taxpayer was in the nature of royalty under the provisions of the tax treaty. Based on the facts of the case, the High Court, inter-alia, observed and held as follows: • For a consideration to qualify as royalty, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. • Distinction has to be made between the acquisition of a ‘copyright right’ and a ‘copyrighted article’. • 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 relation to the copyright. The enjoyment of some or all rights which the copyright owner has, is necessary to invoke the royalty definition. • Copying the program onto the computer’s hard drive or random access memory or making an archival copy is an essential step in utilising the program. Therefore, rights in relation to these acts or copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analysing the character of transaction for tax purposes. • A non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the rights in the copyright. • The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright. • The High Court expressed its disagreement with the decision of the Karnataka High Court in the case of Samsung Electronics Companies Ltd. v. ITO [2005] 276 ITR 1 (Bang) and thereby held that the payments received by the taxpayer in the instant case are not in the nature of ‘royalty’ under the provisions of the Tax Treaty. DIT v. Infrasoft Ltd. (ITA No. 1034/2009) [Delhi HC] Notifications/Circulars/Press releases Protocol amending the India-Spain tax treaty India and Spain had signed a Protocol on 26 October 2012 amending the existing tax treaty. The salient features of the protocol are as follows: • Limitation of Benefits (LOB) clause has been introduced in the tax treaty. The LOB clause provides that the: -- Domestic rules and procedures regarding abuse of law (including tax treaties) are applicable; -- Tax Treaty benefits do not apply to non-beneficial owners; -- The Tax Treaty does not prevent both the states from applying their domestic Controlled Foreign Company rules; and -- Benefits derived from the tax treaty will not apply to a resident of one of the states, or in respect of a transaction made by such resident, if the main purpose or one of the main purposes of the creation, existence, set up, registry or presence of the resident, or the transaction made by him, is to obtain treaty benefits that would not otherwise be available. • A new paragraph to Article 10 (Associated enterprises) is included to provide for a corresponding adjustment to profits to be made in a counter party’s jurisdiction where an adjustment has been made under this article. • The existing article on exchange of information has been amended to bring the same in line with Article 26 of the OECD Model Convention. • Article on Assistance in collection of taxes has also been incorporated in the tax treaty. Source:
  3. 3. 3 Corporate tax Decisions Subvention receipts from the parent company to recoup losses of the subsidiary is taxable as revenue receipt The taxpayer was engaged in the business of manufacturing digital electronic switching systems, computer software and rendering software services. The taxpayer incurred loss in, AY 1999-2000 and subsequent two years. In relation to these three years, the taxpayer received subvention payment from the parent company, since the taxpayer was potentially a sick company, and its capacity to borrow had reduced substantially leading to shortage of working capital. The taxpayer claimed that the subvention payment was a capital receipt and hence, not taxable. However, the AO treated the subvention payment as a revenue receipt. The CIT(A) and the Tribunal ruled in favour of the taxpayer. The High Court observed that the Supreme Court had ruled in the case of Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392 (SC) that the character of the receipt in the hands of the taxpayer has to be determined with respect to the purpose for which the subsidy is given. The point of time at which the subsidy was paid, the source, or the form of subsidy is not relevant. Therefore, the object for which the subsidy/ assistance is given, determines the nature of the incentive subsidy. The High Court also observed that the Supreme Court had ruled in the case of Sahney Steel & Press Works Ltd. [1997] 228 ITR 253 (SC) that the subsidy payments not made for the purpose of setting up of the industries, but to run the industries more profitably were held as a revenue subsidies and not capital subsidies. In the present case, the amount paid by the parent company to the taxpayer was not only to set-off loss, but also to run the business more profitably. The payments were neither utilised for repayment of the loan taken for setting up their unit nor for expansion of existing unit/business. After getting the financial aid from the parent company, the taxpayer turned its business from loss to profit, which is evident from the facts reflected in the return of income filed for all the three assessment years. Also, the amount was not paid for acquiring or bringing into existence some new asset. In the view of above, the High Court held that the payment was received by the taxpayer on revenue account. CIT v. Siemens Public Communication Networks Ltd. (ITA No. 489/2007 59/2007 & ITA No. 488/2007) (Kar HC) , High Court has unfettered powers to frame additional questions of law during hearing: Supreme Court The revenue had filed an appeal under Section 260A of the Act before the High Court, raising several questions of law. The High Court had admitted the appeal and two substantial questions of law were framed by the High Court for consideration. The revenue felt aggrieved on the ground that the other questions raised in the memo of appeal before the High Court were rejected, by necessary implication therefore the revenue filed a Special Leave Petition before Supreme Court. The Supreme Court observed that the revenue seemed to be under some misconception that other substantial questions of law were rejected by necessary implication. The Supreme Court observed that Section 260A(4) of the Act stated that appeal could be heard only on questions of law formulated by the High Court, however as per the proviso to Section 260A(4) of the Act, the High Court had the power to hear the appeal on additional questions framed by it during the hearing of appeal with only to two conditions, first being that the High Court must be satisfied that appeal involves such questions, and second being that the High Court has to record reasons for the same. In view of the same the Supreme Court dismissed the Special Leave Petition filed by the revenue. CIT v. Mastek Ltd. (Supreme Court SLP (Civil) CC 3075/2013) TDS under Section 194-I of the Act applies on vehicle hire The taxpayer is engaged in mechanized manufacturing and sale of granites. It entered into an agreement with a contractor for loading - unloading and transportation of granite within its mining area and outside. During AY 2007-08, taxpayer deducted tax at the rate of 2 percent under Section 194C of the Act towards the payment to contractors for their work. As per the AO, TDS should have been deducted under Section 194I of the Act towards the payment of hire charge hence the AO disallowed the payments under Section 40(a) (ia) of the Act. The CIT(A) and the Tribunal ruled against the taxpayer and held that Section 194I of the Act was applicable. The High Court observed that there was a composite agreement for hire of vehicles which were to be used for loading and unloading and transport of products. It was further observed that taxpayer made use of vehicles and equipment and paid hire charges on the basis of number of hours of use. Section 194C of the Act defined ‘work’ to include carriage of goods or passengers by any mode of transport other than by railways. The taxpayer contended before the High Court that as it was material which was being carried in vehicles, it was carrying out ‘work’ as per Section 194C of the Act. However the High Court rejected the taxpayer’s contention and observed that the Tribunal had returned a finding that what is involved is hire charges paid for the goods (vehicles) taken on hire. The High Court also observed that the agreement does not require the owner of the vehicle to do any work at all
  4. 4. 4 and it is the taxpayer who makes use of the vehicles and the equipment and pays hire charges. The High Court referred to the definition of ‘rent’ as provided in Explanation to Section 194I of the Act wherein ‘rent’ meant to include any payment, under any lease or sub-lease or any other agreement or arrangement for the use of (either separately or together) machinery or equipment, whether or not owned by the payee. The High Court held that as the Legislative intent was clear to deduct tax in respect of machinery or equipment and there was no reason to dilute the width of the words ‘any machinery’ contained in sub-section (i) with the aid of the Explanation defining the word ‘rent’ as only machinery which is immovable property. Thus, High Court ruled that TDS under Section 194I of the Act shall be applicable in the present case. Three Star Granites Pvt. Ltd. vs. ACIT (ITA No. 85 of 2012) (Kerala HC Helicopter hire charges paid for transportation of goods/ passengers is not ‘rent’ under Section 194-I of the Act The taxpayer for AY 2009-10, made a payment to Global Vectra Helicorp Ltd. (GVHL) for hiring of helicopter service nd deducted tax at source at 2 percent under Section 194C of the Act. The AO held that tax deducted at source under Section 194-I of the Act was applicable since payment was a rent for the use of equipment. The AO noted that GVHL had applied for certificate under Section 197 read with Section 194-I of the Act for lower deduction which was granted on 9 July 2008 and which authorized deduction at 2 percent. Therefore, the AO held that tax at source at 10 percent was deductible till the date certificate was granted, i.e., till 9 July 2008. The taxpayer submitted that Helicopter services were in relation to air logistic support for crew and personnel of the taxpayer and/or any of its consultants and/or suppliers etc. as well as supply of essential cargo to and from offshore. The taxpayer submitted that though the AO has invoked Section 194I of the Act vide certificate dated 9 July 2008, CBDT Circular No. 715 dated August 8, 1995 stated that where plane or other mode of transport is chartered, the rate of tax would be 2 percent as this would be falling within Section 194C of the Act. The CIT(A) ruled in favour of the Revenue, holding that transaction was for hiring of helicopter and not for transportation. The Tribunal observed that the taxpayer had executed a service contract with GVHL for availing helicopter services. The taxpayer had not taken possession of helicopters from GVHL and responsibility of operating and maintaining of the helicopters was of GVHL only. The Tribunal placed reliance on the Gujarat High Court ruling in the case of Reliance Engineering Associates P Ltd [ITA No. 2286 of 2010, order . dated 6 March 2012], wherein it was held that payment for transportation of goods/passengers by buses, cars, etc attracted tax deduction at source under Section 194C of the Act. The High Court had remarked that since the agreement for carriage by vehicles other than railways came within the purview of explanation of ‘work’ within the meaning of Section 194C of the Act, it followed that the Legislature had never intended to include the amount taken for hiring of such vehicles within the meaning of the word ‘rent’. The Tribunal therefore, ruled in favour of the taxpayer stating that the revenue was not justified in applying Section 194I of the Act for deduction of tax at source. Gujarat State Petroleum Corporation Ltd. v. ITO (ITA No. 2884/Ahd/2010) Reassessment to examine expense allocation between tax holiday and non tax holiday unit beyond 4 years invalid The taxpayer is engaged in the business of manufacturing of chemicals. It has two manufacturing units, one at Tarapur and another at Silvasa. During AY 2006-07 the taxpayer , claimed deduction under Section 80IB of the Act in respect of its Silvasa unit for INR 3.199 million. However, in scrutiny assessment, the AO restricted the deduction to INR 2.767 million. On 28 March 2013, notice for re-assessment under Section 148 of the Act was issued to the taxpayer wherein AO claimed that based on allocations of expenses between two units, there will be no profit left for Silvasa unit, to claim deduction under Section 80IB of the Act. The AO, thus, had reasons to believe that income of INR 2.767 million (amount eligible for Sec 80IB deduction) had escaped assessment. The taxpayer filed its objections against the reopening of assessment with the AO which were rejected by him vide his order dated 1 August 2013. The High Court noted that as the assessment sought to be reopened was beyond the expiry of 4 years from the end of the relevant AY i.e. 2006-07 two conditions precedent , have to be satisfied. The first condition is that the AO must have reason to believe that income chargeable to tax has escaped assessment on the basis of tangible material. The second condition is that there must be a failure to disclose truly and fully all facts necessary for assessment when the original assessment proceedings took place. The High Court observed that the material that formed the basis of reasons to believe that income chargeable to tax has escaped assessment was allocation of expenditure between two units leading to higher deduction under Section 80IB of the Act in respect of Silvasa unit. The High Court further observed that such allocation was very much present before the AO while considering claim for deduction under Section 80IB of the Act. The High Court thus held that as there is no tangible material to lead to a reason to believe that income has escaped assessment but only change of opinion on the part of the AO on the material available cannot be a subject matter of reassessment as the taxpayer had disclosed fully and truly all material facts necessary for assessment. The High Court quashed and set aside the notice under Section 148 dated 28 March 2013 and order dated 1 August 2013. Lalitha Chem Industries Pvt. Ltd. v. DCIT And Ors. (Writ Petition (L) No.2741 Of 2013)
  5. 5. 5 Mergers and acquisitions Decisions Going concern condition under demerger [Section 2(19AA) of the Act] applies to transfer, not to demerged unit The taxpayer is engaged in the business of manufacturing Liquors. Maruti Organic Limited (MOL), a sick company was in the business of spirit. However, its operations were stand still from 23 December 1999. During the year, MOL demerged its undertaking to the taxpayer with appointed date of 1 January 2006, along with business losses of INR 70 million and the taxpayer claimed set off of such brought forward loss. In spite of the fact that the undertaking was not in any operation since 5 years prior to the demerger, the court approved the scheme and provided that the demerged undertaking be transferred on a going concern basis. The AO disallowed the set off of loss. The AO contended that as per Section 2(19AA) of the Act, the transfer of an undertaking should be on a going concern basis and since the undertaking did not carry out any operations at the time of demerger, it cannot be construed that it is transferred on a going concern basis and disallowed the set-off of losses. The CIT(A) upheld the stand of AO. The taxpayer contended that Section 2(19AA) of the Act requires that the transfer of undertaking should be on a ‘Going Concern’ basis and not that the undertaking should be a ‘Going Concern’. The facts that all assets, liabilities, employees, contracts etc. are transferred, establishes that the undertaking is transferred on a going concern basis which is also confirmed by the High Courts. The Tribunal held that the Act does not state that the undertaking being demerged ought to be a going concern at the time of demerger. It only states that the undertaking being demerged should stand transferred in a manner similar to the manner in which a ‘Going Concern’ is transferred. Since the undertaking was transferred on a going concern basis, the Tribunal allowed the set-off of losses. KBD Sugars & Distilleries Ltd. v. ACIT (ITA Nos.1362 & 1363/ Bang/2011) Disallowance under Section 14A of the Act applicable even in case of shares held as stock in trade The taxpayer is a dealer in shares and securities. Shares and securities were held as a stock in trade by the taxpayer. The taxpayer had sou moto disallowed INR 0.122 million as expenditure incurred in earning exempt income. However, the AO did not accept this disallowance and worked out the disallowance as provided under Rule 8D of the Income Tax Rules, 1962 (‘Rules’) read with Section 14A of the Act. The Tribunal held that Section 14A of the Act is a code in itself and is independent of head of income. Dividend income in any case is specifically to be included under the head Income from other sources irrespective of the fact that the same is held as investment or as stock-in-trade. The Tribunal upheld the applicability of Section 14A of the Act read with Rule 8D of the Rules even to shares held as stock-in-trade. However, the Tribunal also noted that the taxpayer is in business of dealing in shares and is primarily interested in share trading profit and not only in earning dividend, therefore, to disallow entire result of computation under Rule 8D will mean share trading income is taxed on gross basis. Therefore, it is necessary to bifurcate such result between two sources of incomes. Based on the facts of the case the Tribunal suggested that 20 percent of computation under Rule 8D be disallowed. In view of the disagreement between the two members, the matter was referred to the Third Member who concurred with above decision of the Accountant Member. DCIT v. D.H. Securities Pvt. Ltd. (ITA no. 5724/Mum/2011)
  6. 6. 6 Transfer Pricing Decisions Chennai Tribunal held that DCF method is most appropriate for determining arm’s length value of shares The taxpayer held 91 percent shares in Visteon Powertrain Control Systems India Pvt. Ltd. (Visteon India). The entire stake in Visteon India was transferred by the taxpayer to its AEs. The taxpayer had arrived at the transfer price of INR 10.32 per share against the face value of INR 10 per share. Relying on the CCI Guidelines, the valuation was done using the Net Asset Value (NAV) method and the Profit Earning Capacity Value (PECV) method. The taxpayer adopted the average of the two values arrived at by adopting the two methods and further discounting it by 15 percent, since the shares were unlisted. Transfer Pricing Officer (TPO) performed a DCF analysis and valued the share at INR 36.31 per share and made a transfer pricing adjustment. This was upheld by the Dispute Resolution Panel (DRP). Taxpayer contended that during the year under consideration, the five methods prescribed were not applicable to the transaction. Hence, computation provisions with reference to Arm’s Length Price (ALP) failed and Section 92C of the Act cannot be applied. Taxpayer contended that the objective of CCI Guidelines and Transfer Pricing are the same and the fact that the DCF method was introduced prospectively cannot be used to disregard the existing provisions which allowed yield method. Tax department contended that valuation based on CCI Guidelines provided by the taxpayer cannot be equated with determination of ALP The DCF method was accepted in . the taxpayer’s own case in the subsequent Assessment Year (AY) 2008-09 and hence, consistency needs to be adopted. Relying on the Tribunal ruling in the case of Ascendas (India) Pvt. Ltd. (ITA No. 1736/Mds/2011), the Tribunal held that it is not necessary to ignore the methods because the methods are not water-tight compartments and reflect the acceptability of permissible methods. The Tribunal held that DCF method is preferable over the Yield method or NAV method prescribed in CCI Guidelines for determining the ALP for sale of shares. Relying on the ruling in the case of Ascendas (India) Pvt. Ltd., the Tribunal held that the valuation of shares based on the erstwhile CCI Guidelines were for a different purpose and cannot be applied for ALP determination. The Tribunal also upheld the principle of consistency, ruling that DCF method should be applied, since the same was accepted in the subsequent AY. However, the Tribunal accepted the taxpayer’s argument that a fresh DCF analysis be presented before the TPO and restored the matter to the TPO for arriving at the value afresh as per the principles and parameters adopted in AY 2008-09 VIHI LLC v. ADIT (ITA No. 17(Mds.)/2012) Mumbai Tribunal upheld guarantee commission charged on loans and letter of credit facility at 0.53 percent and 1.47 percent respectively as arm’s length The Taxpayer had charged guarantee commission of 0.53 percent and 1.47 percent in respect of guarantee provided in connection with bank loans and LC facilities availed by its Associated Enterprises (AEs). The TPO determined arm’s length guarantee commission at 3 percent of the guaranteed amount based on guarantee commission rates charged by various banks, i.e. Allahabad Bank (3 percent per annum); Dutch State, FMO (2.5 percent per annum); HSBC Ltd (0.15 percent to 3 percent per annum); and EXIM Bank of USA (3 percent per annum). CIT(A) upheld the adjustment made by the TPO. The taxpayer distinguished each of the comparables selected by the TPO on various grounds and contended that bank guarantees are not comparable to the corporate guarantee provided by the taxpayer. The Tribunal held that there are conceptual differences between a bank guarantee and a corporate guarantee and explained the difference between corporate guarantee and bank guarantee. Tribunal held that a bank guarantee comparable may not clear the Functions, Assets and Risks (FAR) analysis test in case of a corporate guarantee. Tribunal further held that bank guarantee rates cannot be applied mechanically and need to be adjusted for various factors, such as (i) risk profiles of the respondents for the guarantee, (ii) financial position of the loan applicants, (iii) terms of the guarantee, (iv) securities involved,(v) quantum of guarantee,(vi) amount involved, (vii) period of guarantee, (viii) past history of the customers, etc. Tribunal analysed various rulings like Asian Paints Ltd. (ITA No. 1937/Mum/2010), Everest Kanto Cylinder Ltd. (ITA No. 542/Mum/2012) and Reliance Industries Limited (ITA No. 4475/ Mum/2011) on guarantee commission and concluded that the guarantee commission rates of 0.53 percent and 1.47 percent on loans and LC facility are at arm’s length. Glenmark Pharmaceuticals Ltd v. ACIT (ITA No. 5031/ Mum/2012)
  7. 7. 7 Indirect Tax Service Tax - Decisions Service tax paid on outward transportation of goods not admissible as CENVAT credit In the instant case, the issue was whether Service tax paid on outward transportation of the goods upto the point of delivery to customer can be claimed as CENVAT credit. The Kolkata High Court distinguishing the judgment of Karnataka High Court in the case of ABB Limited [2011 (23) STR 97 (Kar)] (wherein it was held that Service tax paid on outward transportation of goods up to the point of delivery to customer was allowable as credit as sale and transfer of property in goods took place at that point), has held that CENVAT credit of Service tax paid on outward transportation of goods up to the point of delivery is not admissible. The Court made the following observations: • The amendment made with effect from 1 April 2008 in the definition of ‘input service’ under CENVAT Credit Rules, 2004, by substituting the phrase ‘from the place of removal’ by ‘up to the place of removal’, was brought to clarify the intention to allow CENVAT credit only in the cases of transport of goods from one place of removal to another place of removal. • The Central Board of Excise and Customs (CBEC) Circular clarifying the issues regarding admissibility of CENVAT credit on output freight and allowing the credit under certain scenarios (such as, where place of removal is customer’s premises), cannot amend the definition of ‘input service’ and hence, was erroneous in nature. CCE v. Vesuvious India Limited [2013-TIOL -1038-HC-KOL-ST] Order rejecting VCES application is appealable The Punjab & Haryana High Court has held that any Order passed by the authorities rejecting a VCES application is appealable. The CBEC Circular, which earlier clarified that such an Order for rejection of declaration is not appealable, has been held to be incorrect. Barnala Builders & Property Consultants v. Dy CCE&ST, Dera Bassi and others [2013-12-TMI-568-P&H HC] Transactions in lottery tickets are not liable to Service tax In the instant case, the issue was whether the activity of promoting, organizing or assisting in arranging the sale of lottery tickets of the Government of Sikkim is a taxable service under the Negative list regime (i.e. for the period with effect from 1 July 2012). The Sikkim High Court held that the transactions in lottery tickets are not liable to Service tax on the basis of the following observations: • The appellant was engaged in buying and selling of lottery tickets on a principal to principal basis; • Actionable claims (which would include lottery tickets) are specifically excluded from the definition of ‘service’ under the Service tax law; • Lottery is specifically included under the Negative list; and • There being no levy of Service tax under the Constitution or Finance Act 1994 (‘the Act’), the imposition of tax on the basis of a Notification and the Service tax Rules is ultra vires the very provisions of the Act, being in excess of the powers vested therein. Future Gaming Solutions India Pvt Ltd v. Union of India and others [2013-TIOL-904-HC-SIKKIM-ST] Circulars/Notifications/Press Releases Submission of quarterly statement by SEZ units and developers The date for submission of Form A-3 (a quarterly statement for furnishing the details of specified services received by SEZ units or the developer without payment of Service tax) has been prescribed as 30th of the month following the each quarter. Notification No. 15/2013-ST, dated 21 November 2013 Threshold limit for mandatory e-payment of Service tax reduced from INR 1 million to INR 0.1 million With effect from 1 January 2014, the taxpayers who have paid a total Service tax of INR 0.1 million or more in the preceding financial year are required to pay Service tax electronically through internet banking. Notification No 16 /2013-ST, dated 22 November 2013
  8. 8. 8 Central Excise - Decisions The value payable after factoring in liquidated damages contractually stipulated for delayed supply would be the transaction value Circulars/Notifications/Press Releases Central Excise valuation rules amended The issue before the larger bench was whether any deduction claimed by the buyer of excisable goods as compensation for the delay in the supply of the goods by its manufacturer (taxpayer) under the contract between them, during any period after 1 July 2000, is liable to be included in the assessable value of the goods under Section 4 of the Central Excise Act. Rule 8, Rule 9 and Rule 10 of the Central Excise Rules, 2002, (Excise Rules) which was dealing with determination of assessable value in case of captive consumption, in case of sale to related person and in case of sale to inter-connected undertakings, respectively, have been amended vide Notification no 14/2013 – CE (NT). The larger bench of the CESTAT has held that as per the terms of the contract, on account of delay in delivery of manufactured goods, the buyer is liable to pay a lesser amount than the generically agreed price, irrespective of whether the clause in the contract is titled as ‘penalty’ or ‘liquidated damages’. The resultant price would be the ‘transaction value’ and such value shall be liable to levy of excise duty, at the applicable rate. The literal interpretation of the erstwhile Excise Rules lead to a conclusion that the valuation methodology prescribed would be applicable only if all the goods are sold to / through ‘related person’ or exclusively sold only to/through ‘inter-connected undertaking’, as the case may be. CCE v. Victory Electricals Limited [2013-TIOL -1794-CESTATMAD-LB] Value of accessories not cleared along with the goods, but supplied separately are not required to be included in the assessable value of the goods In this case, the taxpayer has manufactured the vehicles (three wheelers) and cleared it to the dealers. However the taxpayer did not supply the accessories namely rear visual barrier, jack assembly and carpet from the unit manufacturing the vehicles. However, these accessories were supplied from the spare parts division situated outside the factory to the dealers directly and the dealers while selling the vehicles supplied these accessories to the buyers. The Central Excise authorities demanded duty on the accessories also, by way of including the same in the assessable value of vehicles, on the ground that, as per the Motor Vehicle Rules, the driver is mandatorily required to ensure that these accessories are available in the vehicle. The Mumbai Tribunal has held that the Motor Vehicle Rules, no doubt, specify that while plying the vehicle the driver should ensure that these accessories are available in the vehicle, however, this is a condition which needs to be met at the time of using the vehicle on the road. Therefore, it does not emerge from the Motor Vehicle Rules that the manufacturers are mandatorily required to supply the tool kits or jack assembly along with the vehicle. Hence, duty is not payable on such accessories, especially when these were not supplied along with the vehicle at the time of clearance of the vehicles from the factory of production. Piaggio Vehicles Private Limited v. CCE [2013-TIOL -1831CESTAT-MUM] It was held in the case of Aquamall Water Solutions Ltd. v. Commissioner of Central Excise Bangalore (2003 (153) E.L.T. 428 Bang) (approved by SC), that in case the goods are partly sold to unrelated buyers and partly to ‘related person’, or ‘inter-connected undertaking’, as the case may be, the valuation prescribed under the provisions of Rule 9/Rule 10 is not applicable and accordingly, the valuation is required to be done under the residuary provisions of Rule 11 – by adopting the price charged to the independent buyers for the sale made to related buyers. The current amendment provides a dual valuation methodology. i.e. when the goods are partly sold to related parties/ interconnected undertakings and partly to unrelated buyers, two separate valuation methodologies need to be adopted – to the extent of transaction with related parties / interconnected undertakings Rule 9/10 are to be followed and to the extent sold to unrelated buyers, valuation is to be in terms section 4. Incidentally this was the scheme of valuation proposed in the Circular No.643/34/2002-CX dated July 1, 2002. Notification No. 14/2013-CX (NT) dated 22 November 2013 read with Circular No. 975/09/2013-CX dated 25 November 2013 Threshold limit for mandatory E-payment reduced from INR 1 million to INR 0.1 million Rule 8 of the Excise Rules amended with effect from 1 January 2014, provides that the taxpayers who have paid total duty of INR 0.1 million or more (including the amount of duty paid by utilization of CENVAT credit) in the preceding financial year are required to deposit the duty electronically through internet banking. Accordingly, the threshold limit for mandatory e-payment of Central Excise duty is reduced to INR 0.1 million from the original limit of INR 1 million. Notification No. 15/2013-CX (NT) dated 22 November 2013
  9. 9. 9 Foreign Trade Policy Circulars/Notifications/Press Releases Definition of ‘Group Company’ in Foreign Trade Policy has been amended to include LLPs As per the few incentive/export promotion schemes notified under the Foreign Trade Policy 2009-14, the group companies may also claim benefits or have their exports counted for benefits to be claimed by another member of group. In this regard Para 9.28 of the Foreign Trade Policy 2009-14 defines the term ‘Group Company’. The said definition is now amended to include Limited Liability Partnerships (LLPs) in the definition of “Group Company” However neither partnership nor . proprietorship firm are included in the said definition. Notification No. 58 (RE-2013)/ 2009-14 dated December 18, 2013 VAT - Decisions Value of free issue materials received from customer not includible in gross turnover for sales tax payment The issue involved was whether the value of free issue materials supplied by the customer and used in the manufacture of railway sleepers would form part of the turnover for the purpose of calculating sales tax. The taxpayer manufactured mono block pre-stressed concrete sleepers for broad gauge as per the drawings and specifications issued by the South Central Railways. The customer had supplied fastenings, cast iron inserts and HTS wires free of cost to the taxpayer which were used by the taxpayer for manufacturing the concrete sleepers. The contention of the revenue was that the activity of manufacture and supply of concrete sleepers was a sale and not works contract. Hence, the taxpayer is liable to pay tax on the value of materials supplied by South Central Railways. The demand was also confirmed by the Tribunal. On a revision petition, it was held that the sale price is the actual consideration received and sales tax can be levied only on sale price. The Andhra Pradesh High Court had observed that the cost price that is being paid to the taxpayer does not include the value of the free issue material and the taxpayer had not collected any sales tax and the railways had not paid any amount on the value representing the free issue material. Hence, value of free issue materials used in manufacture would not form the part of turnover of the manufacturer and would not be liable to sales tax. V.S. Engineering (P) Ltd [TS-224-HC-2013(AP)-VAT] Transfer of independent business constitute sale of business as a whole and exempt from VAT The issue was whether the taxpayer was eligible to claim exemption from VAT in respect of transfer of two independent units. The taxpayer was engaged in the business of Agro Engine, Light Engineering Components, in Power Genset as well as in two-wheeler. The taxpayer entered into business transfer agreement with M/s Greaves Ltd. for sale and transfer of its Agro Engine and Light Engineering business, as a going concern. The taxpayer while filing its revised returns claimed exemption on the consideration received for transfer of business. The Assessing Officer rejected the claim of the taxpayer on the ground that as per the agreement, separate values were agreed upon for the immovable assets and movable assets. Therefore, such sales of movable properties were not exempt. The Commissioner (Appeals) and the Tribunal upheld the demand for tax and penalty. On a revision petition, the High Court observed that the terms of the agreement clearly indicate that the intention of the parties was to sell units and Tribunal committed serious error in holding that there was separate sale of immovable and movable assets. The Madras High Court further observed that since the transfer of these units included every assets and liability, all employees, pending contracts, licenses, plant and machinery, furniture, fixtures, etc. and the manufacturing activity was already in progress, given the time gap between the effective date of transfer and the agreement, parties agreed to the pricing of certain items and in such framework, the agreement was executed in such manner. Therefore, what was sold was undertakings in entirety by the taxpayer to the purchaser with non-compete clause available in the agreement. Thus, the High Court concluded that, the taxpayer was entitled to claim exclusion of consideration received from turnover. The High Court allowed the Tax Revision case of the taxpayer and set aside the demand and penalty. Eicher Motors Limited [TS-219-HC-2013(MAD)-VAT]
  10. 10. 10 Notifications/Circulars/Press Release Punjab Karnataka • The Punjab Value Added Tax (Second Amendment) Act, 2013 interalia includes following amendments: On the request of trade bodies for extension of time period, the last date for filing application under the Karasamadhana Scheme 2013 has been extended from 30 November 2013 to 28 February 2014. Further, the last date for payment of arrears of tax and 10 percent of amount of penalty and interest under the Karasamadhana Scheme 2013 has been extended from 31 December 2013 to 31 March 2014. Order No. FD 184 CSL 2013, DATED 4th December, 2013 Delhi A circular has been issued prescribing the following procedure for voluntary disclosure of Tax Deficiency: • The dealer can admit the amount of cash variation, stock variation and other discrepancies during the course of the proceedings and disclose the same as “Un-vouched / unaccounted retail cash sale” for one or more tax periods prior to the tax period during which the proceedings is being carried out. • The dealer shall make payment of the admitted tax deficiency within 3 working days of the conclusion of the proceedings and file revised return for the earlier tax periods in which the un-vouched / unaccounted sale is admitted. • It has been further provided that, the requirement for default assessment of the dealer consequent to survey will not exist if the Assessing Officer (Enforcement) is satisfied with the revised return Circular No.28 of 2013-14 No.F .7(420)/VAT/Policy/2011/PF/10521058 Dated 3 December, 2013 Maharashtra • It has been clarified that the provisions of Rule 55B pertaining to set-off in respect of purchases to SEZ units and Developers of SEZ shall be applicable only to the Developers and units in processing area of the SEZ and Co-Developers are not covered by the scope of this rule. Trade Circular No. 8T of 2013 Dated 29th November, 2013 • A circular has been issued in relation to procedures to be followed for corrections of mistakes in making e-payment of taxes so that appropriate credit of taxes deposited is granted to the payer. Trade Circular No. 7T of 2013 Dated 22nd November, 2013 -- New section 8C has been introduced which has authorized the State Government to levy VAT in respect of any goods covered under the Standard of Weight and Measures (Packaged Commodities) Rules, 1977 on the maximum retail price of such goods as printed on such goods. However, such payment of tax on the MRP is optional and is applicable on the manufacturer or the first importer of goods at their option. -- Section 13 of the Punjab Value Added Tax Act, 2005 (‘the Act’) pertaining to input tax credit has been amended to provide that the input tax credit would not be available unless the goods are sold within the state or in the course of inter-state trade or commerce or in the course of export or used in the manufacture or processing or packing of taxable goods for sale. -- Section 13(9) of the Act has been amended to provide that a person shall reverse input tax credit availed by him on goods which remained in stock at the time of closure of business. -- The limit for assessment under Section 29 of the Act has been increased from 3 years to 6 years. -- A new section 46-A of the Act has also been introduced which gives power to designated officer to purchase the under-priced notified goods with the prior approval of the Commissioner or any other officer as the Commissioner may authorise, if he has reason to believe that any notified goods in stock or in transit are under priced as shown in the document or books of account. The officer may make an offer to purchase such goods at the price shown in the document or books of account, increased by 10 percent plus freight and other expenses. If the owner accepts such offer the goods will be delivered by him on such date, time and place as directed by the officer, however if rejects such offer or fails to deliver such goods, then it shall be construed as conclusive proof that the owner has under priced the goods and the price of goods determined by the Designated officer to the best of his judgment shall be considered as the actual price of the goods. Notification No. 49-Leg/2013 Dated 15th November, 2013
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