Issue 05           May , 2011                    DIRECT TAXES …...           1-9                    INDIRECT TAXES ……. 9 -...
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DIRECT TAXES                                                                                                          SNKJ...
DIRECT TAXES                                                                                                           SNK...
DIRECT TAXESJudicial pronouncements                                                                                       ...
DIRECT TAXES                                                                                                              ...
DIRECT TAXESJudicial pronouncements (International Taxation)                                                              ...
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INDIRECT TAXESCircular / Notifications                                                                                    ...
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TaxSum Newsletter- May 2011
TaxSum Newsletter- May 2011
TaxSum Newsletter- May 2011
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TaxSum Newsletter- May 2011

  1. 1. Issue 05 May , 2011 DIRECT TAXES …... 1-9 INDIRECT TAXES ……. 9 - 13 OTHER LAWS ………... 13 -16 SN K IMPORTANT DUE DATES… 16Website : Email: newsletter@snkca.comDIRECT TAXESJudicial pronouncements NewsletterDl. V. Raghuvanshi Charitable Trust [(197 Taxman 170)(Delhi)]Trust can be allowed to carry forward the deficit of currentyear and to set off against the income of subsequent years.Adjustment of deficit of current year against income of sub-sequent year would amount to application of income of trustfor charitable purposes in subsequent year within the mean-ing of Sec. 11(1)(a).CIT vs. Gujarat Power Corporation Ltd. (Gujarat HighCourt) (2011-TIOL-219-HC-AHM-IT)Disallowance u/s 14A is invalid when the assessee hasshown that there is no nexus between borrowed funds borrowing. The assessee had demonstrated that it had otherand tax free investment. sources of investment and that no part of the borrowed fund could be stated to have been diverted to earn tax free in-The assessee borrowed Rs. 3.83 crores on which it paid come. As borrowed funds were not used for earning tax-freeinterest of Rs. 17.31 lakhs. As the assessee had made in- income, applying s. 14A was not justified.vestments in tax-free bonds, the AO held that the entire in-terest paid on the borrowings had to be disallowed u/s 14A DCIT vs. M/s. Hewlett Packard India Sales P Ltd . (2011on the basis that the assessee had arranged its affairs so as TOIL-224 (ITAT) Bang)to reduce the tax liability. If the assessee had not invested its Purchased Goodwill is eligible for depreciation u/s 32(1)(ii).own fund for earning tax-free income, it would not have re- The true basis of depreciation allowance is the character ofquired to borrow interest bearing funds for its business and the asset and not its there was a nexus between the borrowed funds and the CIT v. Neelakanth Synthetics and Chemicals P. Ltd. [330tax free income. This was reversed by the CIT (A) and Tribu- ITR 463 (Bom.)]nal on the basis that the assessee was justified in arrangingits affairs so as to reduce the tax liability and that it was the Interest on loans borrowed to settle liability of sisterprerogative of the assessee to use its own fund in the man- concern to retain business premises of assessee is al-ner in which it considers proper and the Revenue cannot lowable business expendituredictate how the funds should be used. On appeal by the de- The assessee company had taken a business premises onpartment to the High Court, HELD dismissing the appeal: lease from its sister concern for a period of 12 years on aThe assessee has sufficiently explained that a majority of lease rent of Rs. 20,000 per month.the investment in the tax-free security was made before the 1
  2. 2. DIRECT TAXESJudicial pronouncements SNKThe assessee company had sub- was necessary to carry on the busi- AO stated that the services renderedleased the said business premises to a ness activities of the assessee. by the stock exchange are technical inbank for Rs. 2,26,800 per month, inclu- nature and therefore section 194J is (ii) The Assessing Officer acceptedsive of water charges and taxes. The applicable. the income received by the assesseesaid business premise was offered as from the leased premises as rental In appeal, CIT (A) deleted the additioncollateral security for raising finance income and assessed it as income applying the decision of Kotak Securi-from the bank by a sister concern. Due from other sources. In such circum- ties Private Limited and Angel Brokingto heavy losses incurred, the sister stances, the finding was that in order observing that transaction fees paid toconcern could not repay that loan and to safeguard the interest of the lease the stock exchange could not be saidaccordingly the premises was liable to premises and also to bail out its sister to be fees paid in consideration ofbe disposed off by the bank for realiza- concern, the loan was obtained from stock exchange rendering any techni-tion of the loan amount. In such cir- the bank. The findings were reason- cal services to the assessee. There-cumstances a settlement was reached able and could not be said to be per- fore, provisions of section 9(1)(vii) andbetween the assessee company and verse. section 40(a)(ia) are not applicable.the bank whereby a loan was ad-vanced by the bank in the name of the CIT v. Rockman Cycle Industries (P) CIT v. Siya Ram Garg (HUF) [237assessee company and the same was Ltd. [(2011) 331 ITR 401 (P & H) (FB)] CTR 321 (P&H)]used to settle the liability of the sister AO can lift veil & determine legal Disallowance u/s. 40A(2) of the In-concern. The assessee did not charge effect but cannot ignore legal effect come Tax Act, 1961 on the ground thatany interest from its sister concern. For on ground of “substance” the assessee paid higher rate to itsthe A.Y.1997-98, the Assessing Officer sister concerns is not warranted/ The AO or the appellate authoritiesdisallowed the amount of interest on Justified if the said sister concerns are and even the Courts can determine thethe said loan on the ground that the paying tax at the same rate as the as- true legal relation resulting from asaid loan was not utilized for the pur- sessee. transaction. If some device has beenposes of the business of the assessee used by the assessee to conceal true Praveen Gupta v. ACIT (ITAT, Newcompany. The Tribunal allowed the nature of the transaction, it is the duty Delhi)( ITA No. 2558/Del./2010assessee’s claim. of the taxing authority to unravel the The year of acquisition should beOn appeal by the Revenue, the Bom- device and determine its true charac- the year when the assessee enteredbay High Court upheld the decision of ter. However, the legal effect of the into agreement to purchase the flatthe Tribunal and held as under: transaction cannot be displaced by and not the year when the convey-(i) Both the authorities below concur- probing into the "substance of the ance deed was executed for calcu-rently proceeded on the footing that transaction". The taxing authority must lating indexed cost of acquisition.any expenditure incurred for protecting not look at the matter from their own viewpoint but that of a prudent busi- According to the Tribunal, the as-the business asset held by an as- nessman. Each case will depend on its sessee by entering into an agreementsessee for its business or any expendi- own facts. The exercise of jurisdiction to purchase a flat had identified a par-ture incurred for the protection and cannot be stretched to hold a roving ticular property which he was intendingmaintenance of business premises enquiry or deep probe. to buy from the builder and the builderwould be an allowable expenditure. It was also bound to provide the appli-was only to retain the business prem- Vinod K Nevatia (2011-TIOL-65- cant with that property. According toises that the assessee had to borrow ITAT-MUM) Tribunal, the assessee had acquiredthe funds from the bank and as such, While making the assessment, the AO right to get a particular flat from theinterest payable on the borrowing for made disallowance u/s 40(a)(ia) for builder and that right itself was capitalretaining the premises would be an non-deduction of tax on payment asset of the assessee. Therefore, itallowable deduction u/s.36(1)(iii) of the made to NSE for lease line charges, held that the benefit of indexation hadIncome tax Act, 1961, because the VSAT charges and transaction to be granted to the assessee from theloan was used for the purpose of re- charges. date he entered into agreement to pur-taining the business premises which chase the flat. 2
  3. 3. DIRECT TAXES SNKJudicial pronouncements Parbodh Investment & Trading A plain reading of the provisions of another UK company. Finsider, UK, Company Pvt. Ltd. v. ITO (ITAT, section 70(3) of the ITA shows that the held 51% shares of Sesa Goa Ltd, In- Mumbai)(ITA No. 6557/Mum./2008) first part of the provision refers to a dia. The AO took the view that the 51% loss as computed under sections 48 to shares in Sesa Goa held by Finsider, Capital Gains arising on transfer of 55 of the ITA in respect of any capital UK, constituted a capital asset u/s 2 a capital asset (Flat) on which de- asset. (14) and that the transfer of the shares preciation was allowed for two of Finsider amounted to a transfer of years but thereafter the assessee The second part of the provisions of the said 51% shares of Sesa Goa and stopped claiming deprecation and section 70(3) of the ITA refers to in- that the assessee was liable to deduct also gave the flat on rent is charge- come if any as arrived at under “similar tax at source u/s 195 when it bought able as long term capital gains after computation”. Thus, the second part the shares of Finsider, UK. He accord- allowing the benefit of indexation. refers only to the mode of computation ingly issued a show-cause notice u/s under sections 48 to 55 of the ITA and The Tribunal held that the moment the 201 seeking to treat the assessee as a that would be the correct interpretation. assessee stopped claiming depreca- defaulter. The assessee filed a Writ It cannot be said that the second part tion in respect of the flat and even let Petition to challenge the notice on the of the provisions by using the expres- out the same for rent, it ceased to be a ground that as one non-resident had sion “similar computation”, refers to a business asset. It noted that the princi- sold shares of a foreign company to similar computation under either the ple of the order, dated 31.01.2007 of another non-resident, there was no second proviso to section 48 relating to the Mumbai bench of ITAT in case of liability under Indian law. HELD not indexed capital gains or proviso to sec- glaxo Laboratories (I) Ltd., though laid accepting the assessee’s contention: tion 112(1) relating to non-indexed down in a different context, would sup- capital gains. What is under challenge is only the port the assessee in the sense that it is show-cause notice issued u/s 195 … it possible for a business asset to The Tribunal accordingly held that in- may be necessary for the fact finding change its character into that of a fixed dexed long term capital loss can be set authority to lift the corporate veil to asset or investment. The Tribunal di- off against non-indexed long term capi- look into the real nature of transaction rected that the capital gains be as- tal gains. to ascertain virtual facts. It is also to be sessed as long term capital gain after ascertained whether the assessee, as allowing the benefit of cost indexation a majority shareholder, enjoys the as claimed by the assessee. power by way of interest and capital Vipul A. Shah v. ACIT [(ITA No 3190/ gains in the assets of Sesa Goa and Mum/2010) Mumbai ITAT, dated 8 whether transfer of shares in the case April 2011] on hand includes indirect transfer of The provisions of section 48 to 55 of assets and interest in Sesa Goa. the Income-tax Act (“ITA”) refer to the ITO vs. Hemandas J. Pariyani [(ITAT mode of computation of capital gains. Mumbai) ITA No. 2508/Mum/2010 Richter Holding Ltd. Vs. ADIT The provisions of section 70(3) of the A.Y. 1997-98] (Karnataka High Court) ITA refers to setting of long term capi- No Tax on Redevelopment Gains for tal loss against the long term capital Corporate Veil can be lifted to tax Society and Members gains arrived at under a similar compu- sale of Foreign Co shares by one tation. The Tribunal observed that the Non-Resident to another Non- Issue in dispute was covered by the above provisions relating to set off of Resident if Foreign Co holds shares decision of ITAT in the case of Jethalal long term capital loss against the long in Indian Co Vs. DCIT wherein the ITAT held that term capital gains existed much prior “transferable development rights The assessee, a company based in to the mode of computation of capital granted by the Development Control Cyprus, bought shares (100% together gain without applying the benefit of Regulations for Greater Mumbai, 1991, with another company) of a UK com- indexation. qualifying for equivalent floor space pany called Finsider International, from index having no cost of acquisition, 3
  4. 4. DIRECT TAXES SNKJudicial pronouncementssale thereof does not give rise to tax- sale had been on the same day and two deeming fictions created in sectionable capital gains”. Since the facts of there is even one instance of forward 50 and section 50C. The first deemingthe case under consideration is identi- sales, (e) there were no details regard- fiction modifies the term ‘cost of acqui-cal to that of the decision of the ITAT in ing delivery of shares, (f) the assessee sition’ used in section 48 for the pur-the said case, ITAT respectfully fol- had not proved that the purchases pose of computing the capital gainslowed the same and in the light of that were not out of borrowed funds and (g) arising from transfer of depreciable as-ITAT uphold the order of the CIT(A) in there were no separate bank accounts. sets whereas the deeming fiction cre-directing the AO not to charge capital On appeal to the Tribunal allowing the ated in section 50C modifies the termgains tax on the compensation re- appeal held that though it is the case of “full value of the consideration receivedceived by the assessee even on pro- the revenue that due to volume, magni- or accruing as a result of transfer of thetective basis. Accordingly, the ground tude, frequency, continuity, regularity, capital asset” used in section 48 for theraised by the revenue on this count is the ratio between purchase and sale purpose of computing the capital gainshereby dismissed. clearly indicate that income on account arising from the transfer of capital asset of purchase and sale of shares should being land or building or both. TheShantilal M. Jain v. ACIT (ITAT Mum- be treated as income from business deeming fiction created in section 50-Cbai) [ITA No. 2690/Mum/2010 (Asst and not as income from STCG, the AO thus operates in a specific field which isYear 2006-07)] has, from AY 2003-04 to 2008-09 different from the field in which sectionDespite large volume etc of share (except for the impugned year 2006- 50 is applicable. It is thus not a casetransactions, AO bound by Rule of 07), consistently accepted the income where any supposition has beenConsistency to treat share gains as as being STCG. In these circum- sought to be imposed on other suppo-STCG. stances, the Rule of consistency as sition of law. On the other hand, thereThe assessee, engaged in the busi- propounded by the Bombay High Court are two different fictions created intoness of trading/investment in shares in Gopal Purohit 228 CTR 582 (Bom) is two different provisions and going byand securities offered STCG of Rs. squarely applicable and the income the legislative intentions to create the1.54 crores and LTCG of Rs. 2.91 has to be treated as STCG. said fictions, the same operate in differ-crores. The assessee also traded in ent fields. The harmonious interpreta- ITO v. United Marine Academy (ITATintra-day stocks without delivery and in tion of the relevant provisions makes it Mumbai)(ITA No. 968/Mum./2007)derivatives, the gain or loss from which clear that there is no exclusion of appli- There are two deeming fictions cre- cability of one fiction in a case wherewas offered as business income. While ated in s. 50 and s. 50C for comput- other fiction is applicable. As a matterthe LTCG was accepted, the AO & CIT ing capital gains on building. While of fact, there is no conflict between(A) held that the STCG was assessable s. 50 modifies the “cost of acquisi- these two legal fictions which operateas business profits on the ground that tion” for purposes of s. 48, s. 50C in different fields and their application(a) the purchases of Rs. 1098 lakhs modifies the term “full value of the in a given case simultaneously doesand sale of Rs. 1241 lakhs during the consideration received or accruing not result in imposition of suppositionyear showed that the transactions were as a result of transfer of the capital on other supposition of law. The As-on a regular basis and on a substan- asset”. The two deeming fictions sessing Officer thus was right in apply-tially high scale, (b) The assessee had operate in different fields and there ing the provision of section 50C to thetraded in as many as 85 scrips in 188 is no conflict between them. As s. transfer of depreciable capital assetstransactions and in as many as 50C was inserted to prevent as- covered by section 50 and in comput-1631852 shares during the year with sessee’s indulging in under- ing the capital gain arising from thefrequency and regularity, (c) only in 21 valuation, there is no logic why it said transfer by adopting the stampscrips there have been some opening should not be applied to a deprecia- duty valuation. ITAT, therefore, answerbalances. The rest of the scrips had all ble building; the question referred to this specialbeen purchased and sold during theyear, (d) the holding period in several On interpretation of the relevant provi- bench in the affirmative i.e. in favour ofshares has been merely a few days sions of sections 48, 50 and 50C, the the Revenue and against the as-and in a few cases the purchase and tribunal was of the view that there are sessee. 4
  5. 5. DIRECT TAXESJudicial pronouncements SNKChiranjeev Lal Khanna v. ITO (ITA has been registered through State tor and all expenditure was borne byNo. 6170/Mum/2008) Registration Authorities. Therefore, the contractor, the contract was for there is transfer of a capital asset i.e. “carriage of passengers” for which theITAT Mumbai held that considering the land and building, the capital gain on assessee paid a fixed amount. There-facts of the case and clauses in the which is chargeable to income tax. fore, the payment of vehicle hireagreement, the taxpayer has trans- Accordingly, provisions of Section 50C charges fell within the scope of Sectionferred land and building to the devel- of the Act are applicable to the facts of 194C and was not “rent” for Sectionoper would be chargeable to tax as the instant case. gains. Accordingly, Section 50Cof the Income-tax Act, 1961(the Act) Digital Electronics Ltd. v. Addl. CITwould be applicable. (ITA No. 1658 (Mum.) of 2009) [(2011) 135 TTJ 419 (Mumbai)]On perusal of the various clauses ofthe agreement and including the sub- Income earned by the assessee in themission of the taxpayer before the AO, relevant year on sale of factory build-the Tribunal held that there is transfer ing, plant and machinery, although notof land and building. Therefore, the taxable as profits and gains of busi-provisions of Section 50C of the Act ness or profession, is an income inare clearly applicable to the facts of the nature of income of business thoughpresent case. assessed as capital gain u/s. 50 and RMC Readymix India Pvt. Ltd. (2011- therefore assessee is entitled to set offThe Tribunal also distinguished the TIOL-81-ITAT-MUM) brought forward business lossesdecision in case of New Shailaja Co- against the said capital gain. The assessee claimed a deduction inop. Hsg. Soc. Ltd. relied on the tax- respect of TDS paid on foreign remit-payer, on the basis in that case the Tamilnadu Petroproducts Ltd. v. CIT tance.taxpayer transferred his entitlement for (328 CTR 454 (Mad.)consideration to the builder. In that The amount represented the demands Dealing with the scope of Sec. 80-IA(4)case the Mumbai tribunal held that the raised by the ITO under section 201, in (iv) of the Income tax Act, 1961, thetaxpayer has not incurred any cost of respect of alleged non deduction of tax Madras High Court held that the as-acquisition in respect of the right which at source from remittances made by sessee, which is in the business ofemanated from the 1991 rules making the assessee to Hansons Pacific (S) generation of electricity is entitled tothe taxpayer eligible for additional FSI. Pte Ltd, Singapore. deduction u/s. 80-IA in respect of no-Since there was no cost of acquisition tional income from generation of elec- The assessee claimed deduction offor additional FSI, the Tribunal, relying tricity which was captively consumed this amount, which was an additionalon a couple of decisions including de- by itself. payment by the assessee in respect ofcision of Supreme Court in case of CIT remittances to Hansons, as expensesv. B C Srinivasa Shetty [1981] 128 ITR Ahmedabad Urban Development in the AY 2004-05. The assessee294 held that no capital gain charge- Authority vs. ACIT (ITAT Ahmeda- claimed that “the aforesaid payment isable to tax has arisen. bad) [ITA No.1 837/Ahd./ 2010 (A. Y.: not a payment of tax liability of the ap- 2009-10)]However, in the instant case, there is a pellant but a payment to avail servicestransfer of existing land and building. Section 194C defines “work” to include from Hansons which, as per the under- “carriage of goods and passengers by standing with Hanson, the appellantConsidering the totality of the facts of any mode of transport other than rail- was liable to bear”the present case and certain clauses ways” while Section 194-I definesof the agreement and submission It is well settled law that a tax withhold- “rent” to mean payment for use ofmade by the taxpayer before the AO, ing liability raised under section 201, in “plant” (which is defined in Section 43in the instant case the taxpayer has respect of remittances made abroad, to include vehicles). As the cars weretransferred the land and building to the cannot be allowed as a deduction. owned and maintained by the contrac-developer through a document, which 5
  6. 6. DIRECT TAXES SNKJudicial pronouncements Reliance placed on the decision of the the assessee’s agreement to an addi- DIT v. Maersk Co Ltd as agent of Supreme Court in the case of India tion on the basis of valuation by the Mr. Henning Skov (Utt High Court— Aluminium Co Ltd Vs CIT (79 ITR Stamp Valuation Authority would not Full Bench) (ITA No. 26, 27, 28 & 29 514) where it was held that whether a be a conclusive proof that the sale of 2009) payment made under statutory obliga- consideration as per agreement was Employee not liable to pay s. 234B tion because assessee was in default incorrect and wrong. It held that the interest for failure to pay advance could not constitute expenditure laid addition because of the deeming pro- tax on salary out for purposes of its business and visions does not ipso facto attract the hence, same was not allowable under penalty u/s. 271(1)(c). In view of the The assessee, a foreign company, that section. decision of the Apex Court in the case entered into a contract with ONGC of CIT v. Reliance Petroproducts Pvt. pursuant to which it supplied techni- Dy. CIT v. Dr. Satish B. Gupta (ITA Ltd. (322 ITR 158)(SC), the penalty cians. The AO treated the assessee No. 1482 (Ahd.) of 2010) [(2010) 42 as an agent of the technician – em- SOT 48 (Ahd.)] ployees and assessed their income Penalty u/s. 271(1)(c) would arise only under the head “salaries”. Interest u/s when return of income is scrutinized 234B was levied on the ground that by the Assessing Officer and he finds the employees had not paid advance some more items of income or addi- tax. The CIT (A) & Tribunal upheld the tional income over and above what is claim of the assessee that the employ- declared in return. Merely carrying out ees were not liable to pay advance tax a survey u/s. 133A does not create as the tax was “deductible” at source any liability against the assessee u/s 192. On appeal by the department, which is created only through assess- the issue was referred to a Full Bench. ment proceeding or through penalty levied was held to be not sustainable. The bench held that u/s 208, an em- proceedings. Dy. Commissioner of Income Tax, ployee is not liable to pay advance tax Renu Hingorani v. ACIT (ITAT, Versus M/s Tecpro System Ltd., on salary because u/s 192 there is an Mumbai)(ITA No. 2210/Mum./2010 [(2011) TMI 203082, ITAT New Delhi] obligation on the employer to deduct tax at source. The employee Penalty u/s. 271(1)(c) of I. T. Act is No penalty u/s 271(1)(c) for disallow- cannot foresee that the tax deductible not leviable on addition arising u/s. ance of Rs. 5,00,000/- against the to- under a statutory duty imposed upon 50C. tal professional charges claim of Rs. the employer would not be so de- The Tribunal having noted that – (i) 90,74,652/- and additional deprecia- ducted. The employee proceeds on the AO had not questioned the actual tion on plant and machinery can be the assumption that the deduction of consideration received by the as- levied. Section 271(1)(c) mandates for tax at source has statutorily been sessee, but the addition was purely on levy of penalty for concealment or fur- made or would be made and a certifi- the basis of deeming provisions of nishing of inaccurate particulars, but cate to that effect would be issued to Sec. 50C of the Act; (ii) the AO had this is not the case that Assessing him. If the employer fails to deduct tax not given any finding that the actual Officer had found any mistake, but the at source, the employee becomes li- sale consideration was more than the case is that the assessee had himself able to pay the tax directly. However, sale consideration admitted and men- while preparing the details found the the liability to pay interest remains tioned in the sale agreement; and (iii) mistake and pointed out the same to upon the person responsible to deduct the assessee had furnished all the the Assessing Officer. Hence this can tax at source. The department is enti- relevant facts, documents/ material not be said to be a case of conceal- tled to proceed against the employer including the sale agreement, the ment or furnishing of inaccurate par- u/s 201(1A). (Sedco Forex 264 ITR genuineness and validity whereof was ticulars. The revenue’s appeal is dis- 320 (Utt) & other judgements fol- not doubted by the AO, observed that missed. lowed). 6
  7. 7. DIRECT TAXESJudicial pronouncements (International Taxation) SNKGoodyear Tire and Rubber Com- detailed project report as a consultant. “(4) For the purposes of this article,pany [2011] 11 43 The assessee had to investigate the `fees for included services’ means pay-(AAR) availability and viability of various ments of any kind to any person in modern technologies to ensure most consideration for the rendering of anyRecently, the Authority for Advance economical cost estimate without af- technical or consultancy servicesRuling (AAR) relying upon the principle fecting the quality of work. The scope (including through the provisionlaid down in Dana Corporation [2010] of services included preparation of the of services of technical or other per-186 Taxman 187 (AAR) and Amiantit detailed project report, which covered sonnel) if such services :International Holding Ltd [2010] 189 the entire design for rehabilitation andTaxman 149 (AAR)., held that capital (a) are ancillary and subsidiary to the strengthening of the existing carriagegains provisions are not attracted in application or enjoyment of the ways and required structures. It alsocase of transfer of shares without con- right, property or information for included the study of environmentalsideration. which a payment described in resettlement and rehabilitation needs paragraph (3) is received ; orFurther, the AAR held that the transfer as per the guidelines of the Govern-pricing provisions in an international ment of India. (b) make available techni-transaction can be applied only when cal knowledge, experience, skill, The assessee was receiving chargingincome is chargeable to tax in India know- how, or processes or con- fees for providing the aforesaid ser-and since in the present case no in- sist of the development and trans- vices. The contention of the assesseecome was chargeable to tax in India fer of a technical plan or technical was that the fee received from NHAI isthe question of applicability of Transfer design.” to be treated as “fees for included ser-Pricing provisions and withholding tax vices” as prescribed in article 12(4) of It is not in dispute that the assesseeunder Section 195 of the Income-tax the Double Taxation Avoidance Agree- has rendered technical or consultancyAct, 1961 (the Act) does not arise. ment (DTAA) between India and Can- services. However, in order to get cov-DIT v SNC Lavalin International Inc. ada. In terms of this article, the tax ered under this paragraph, it is also to[ITA NO 326/09, ITA NO 529/09, ITA chargeable is at 15 per cent. The As- be proved, that the services were suchNO 1026/09, ITA NO 1027/09] sessing Officer, however, was of the which would fall under clauses (a) and opinion that the fee charged for the (b) in the said paragraph. The case ofMere use of technical design or plan aforesaid project did not include “fee the assessee was that it falls in clausewithout absolute transfer of right of for included services”. He accordingly (b). As per clause (b) of paragraph (4),ownership is taxable as fees for in- was of the opinion, that the income the services had to be of the followingcluded services under Article 12 of which was derived as fee for technical nature, namely, (i) making availablethe Indo-Canadian Treaty and not as services was chargeable to tax as per technical knowledge, experience, skill,fees for technical services as per the provisions of section 9(1)(vii) read know-how or processes or; (ii) servicesthe provisions of s 9(1)(vii) read with section 115A of the Act. As per consisting of development and transferwith s 115A. this section, the tax chargeable is at 20 of a technical plan or technical design.The brief facts in this case are that the It cannot be disputed that these techni- per cent. The Tribunal has however,assessee is a non-resident company cal/consultancy services provided by accepted the contention of the as-engaged in the business of providing the assessee falls under the second sessee and has held that the tax pay-consultancy for infrastructure projects. category, i.e., development and trans- able by the assessee on the aforesaidIt had entered into an agreement with fer of technical plan or technical de- fee would be at 15 per cent.the National Highway Authority of India sign.(NHAI) and under the said agreement The question, in these circumstances, that, arises for consideration is as to The Tribunal has relied upon the afore-the assessee was to provide technical whether the services provided by the said Treaty in support of its conclusiondrawings and reports to NHAI to en- assessee would be covered by para- and rightly said so. The Delhi Highable them to use the said technology graph (4) of article 12. This provision Court, thus, hold that the termfor its infrastructure projects, reads as under ([1998] 229 ITR (St.) “transfer” as used in article 12(4) doeswhich was funded by the World Bank. 44, 58) : not refer to absolute transfer of right ofThe scope of the work was to carry out 7
  8. 8. DIRECT TAXESJudicial pronouncements (International Taxation) / / Circulars / Notification SNKownership. It refers to transfer of tech- in nature. Even interest assessablenical drawings or designs by the resi- under “other sources” can qualify.dent of one State to the resident of the Circulars / Notificationsother state, which is to be used by orfor the benefit of the resident of the Circular no. 1/2011 dated 6th April,other state. The said article 12(4)(b) 2011:-does not contemplate transfer of all Vide circular no. 1/2011 the CBDT hasrights totally or interest in such techni- provided the explanatory notes to thecal design or plan. Even where the provision of Finance Act, 2010technical design or plan is transferred Circular no. 2/2011 dated 27th April,for the purpose of mere use of such ACIT v. Clough Engineering Ltd. 2011:-design or plan by the person of the (ITAT Delhi - SB) [I.T.A No. 4771other contracting State and for which (Del)/2007 Assessment year: 2003- In supersession of the circular No.the payment is to be made, article 12 04; I.T.A No. 4986(Del)/2007 Assess- 285, dated 21-10-1980, the Board(4)(b) would be attracted. ment year: 2003-04] prescribed the procedure for regu- lating refund of amount paid in ex-Sapient Corporation Pvt. Ltd. V. The assessee, an Australian company, cess of tax deducted and/or de-DCIT (ITAT Delhi) (ITA No. 5263/ had a PE in India from which it carried ductible in respect of TDS on resi-Del./2010) on business in India. The assessee dents covered under sections 192 to received interest on income-tax refundThe assessee claimed that its interna- 194LA of the Income-tax Act, 1961. of TDS. While the assessee claimedtional transactions of software develop- that the interest was taxable on gross The excess payment to be refundedment was at arms length under TNMM basis at 15% under Article XI(2) of the would be the difference between:on the basis that its average operating DTAA, the AO & CIT(A) claimed thatprofit ratio (OP/TC) was higher than (i) the actual payment made by the the interest was “directly connectedthat of 10 comparable companies. The deductor to the credit of the Cen- with the PE” and so assessable underTPO & DRP rejected a few compara- tral Government; and Article VII. On appeal, the issue wasbles on the ground that they were loss- referred to the Special Bench. The (ii) the tax deductible at source.making and recomputed the OP/OC of Special Bench, deciding in favour of In case such excess payment is dis-the other comparables at a higher rate. the assessee and held that under Arti- covered by the deductor during theBefore the Tribunal, the assessee cle 11(4) of the DTAA, interest from financial year concerned, the presentclaimed that if loss making companies indebtedness “effectively connected” system permits credit of the excesswere excluded, a super profit earning with a PE of the recipient is taxable payment in the quarterly statement ofcompany should also be removed from under Article 7 and not under Article TDS of the next quarter during the fi-the comparables. The Tribunal uphold- 11. Though the interest was connected nancial year. However, in case, theing the plea held that when loss mak- with the PE in the sense that it has detection of such excess amount ising companies have been taken out arisen on account of TDS from the re- made beyond the financial year con-from the list of comparables by the ceipts of the PE, it was not “effectively cerned, such claim can be made to theTPO, Zenith Infotech Ltd. which connected” with the PE either on the Assessing Officer (TDS) concerned.showed super profits should also be basis of asset-test or activity-test. The However no claim of refund can beexcluded. The fact that assessee has payment of tax was the responsibility made after two years from the end ofhimself included in the list of compara- of the foreign company and the fact financial year in which tax was deducti-bles, initially cannot act of estoppel that it was discharged by way of TDS ble at source.particularly in light of the fact that the did not establish effective connectionAO had only chosen the companies However, to avoid double claim of TDS of the indebtedness with the PE. Inwhich are showing profits and had re- by the deductor as well as by the de- order to be “effectively connected”, it isjected the other companies which ductee, the applicant deductor shall not necessary that the interest incomeshowed loss (Quark System vs. DCIT establish before the Assessing Officer has to be necessarily business income38 SOT 307 (SB) followed). that: 8
  9. 9. DIRECT TAXES / INDRECT TAXESCirculars / Notification / Judicial Pronouncements SNK(i) it is a case of genuine error and INDIRECT TAXES Input services used outside factory that the error had occurred inad- eligible for Cenvat Credit if nexus Judicial Pronouncements vertently; with ‘manufacture’ is established. Union Of India v. Ind. Swift Labora-(ii) that the TDS certificate for the re- A manufacturer of cement claimed tories Ltd. [(2011) 265 ELT 3 (SC)] fund amount requested has not Cenvat credit on repairs and mainte- been issued to the deductee(s); Cenvat Credit taken wrongly and nance service of river pump used for and utilized attracts interest from the generation of electricity outside the date of availment and not from the factory. Such electricity was used in(iii) that the credit for the excess date of utilization. Rule 14 of Cen- the manufacture of final product. Cen- amount has not been claimed by vat Credit Rules being unambigu- vat Credit was denied on the basis that the deductee(s) in the return of ous does not require to be read the services are received outside the income or the deductee(s) under- down. factory premises and did not have takes not to claim such credit. Rule 14 specially provides for recovery nexus with the manufacture of finalFurther prior administrative approval of products. of interest where Cenvat Credit isthe Additional Commissioner or the taken or utilized wrongly by the manu- The definition of “Input Services” does facturer or the service provider or re- not deny credit if services are utilized funded erroneously to either of them. outside the factory premises. The The High Court misunderstood this nexus in this case with the manufac- provision and wrongly read it down as ture of final product is established indi- statutory provision in generally read rectly. In the case of the appellant for down only when the same is capable the similar issue, the Tribunal had al- of being declared unconstitutional or lowed Cenvat credit. Input services illegal. No harmonious construction is used outside factory premises were required to be given to the aforesaid eligible. provision which is unambiguous and Somaiya Organo Chemicals v. exits all by itself. It is not permissibleCommissioner (TDS) concerned shall Commr. Of C.Ex. & Cus. Auran- to import provisions of taxing statute sobe obtained, depending upon the gabad [2011 (21) STR 114 (Tri- as to supply any assumed deficiency.quantum of refund claimed in excess Mumbai)]of Rupees One Lakh and Rupees Ten JMC Educational Charitable Trust v. In case of export, Cenvat Credit ofLakh respectively. CC Ex., Trichy [(2011) 21 STR 421 input service used for outward (Tri – Chennai)Note: transportation is eligible. Distant education programme by anThis circular will not be applicable to The appellant paid service tax on the institution analogical to a parallelTDS on non-residents falling under insurance policy in respect of goods college is not in the nature of com-sections 192, 194E and 195 which are transported from the factory to the port mercial coaching or training ser-covered by circular No. 7/2007 issued of export. the Board. In case of export of goods, it has been Since the kerala High Court had heldNotification No. 18 dated 5th April, held that input service includes ser- that the provisions of service tax laws2011:- vices rendered for outward transporta- for levy of service tax on parallel col- tion upto place of removal of goodsVide notification No. 18, CBDT had leges are ultra virus Article 14 of the and service tax paid to facilitate goodsmade necessary changes in Income Constitution of India, the appeal was to reach the place of removal has to betax Rules, 1962 for incorporating new allowed. eligible for benefit of CENVAT credit.forms SAHAJ (ITR-1), ITR-2, ITR-3, CCEX., Nagpur v. Ultratech CementSUGAM (ITR-4S), ITR-4, ITR-5, ITR-6, Ltd. [(2011) 21 STR 297 (Tri. Mum-ITR-7 and ITR-V relevant to A.Y. 2011- bai)]12. 9
  10. 10. INDIRECT TAXESJudicial Pronouncements / Circular / Notifications SNKInsurance service was taken by the be used to deny the substantive con- ous period of less than three monthsfactory to the port of export. Thus, in- cession. when the declared tariff for providing ofput service was used for the business such accommodation is less than ru- Circulars / Notificationsactivity undertaken up to the place of pees 1,000/- per day from the whole ofremoval of goods. The Tribunal held Notification No. 26/2011-ST dated the service tax leviable thereon.that the appellant was entitled to take 25th April, 2011 Notification No. 32/2011-ST datedinput service credit. CBDT vide notification no. 26/2011 25th April, 2011 :- stCenvat credit is available on air- appointed 1 day of May, 2011 as the Vide the above notification, the exemp-ticket booking service for paying date on which the provisions of Fi- tion provided vide no. 25/2006 datedexcise duty on manufacture of final nance Act, 2011 shall come in force. 13th July, 2006 has been withdrawn.products. Thus all new services which were in- Thus the taxable service provide by a troduced in the Finance Act, 2011 willThe respondent was engaged in the practicing chartered accountant, a become taxable service from 1st day ofactivity of manufacture. Various air practicing cost accountant and a prac- May, 2011.journeys were undertaken by employ- ticing company secretary respectively,ees for business purpose. Notification No. 30/2011-ST dated in his professional capacity, to a client, 25th April, 2011:- relating to representing the client be-Revenue in appeal claimed that air- Vide the above notification 100% ex- fore any statutory authority in theticket booking service was not an input emption from service tax has been course of proceedings initiated underservice as there was on nexus be- provided to any hospital, nursing home any law for the time being in force, bytween air-ticket booking service and or multi-speciality clinic with effect from way of issue of notice would be liablemanufacturing activity. The respondent 01.05.2011 providing service to — to service tax with effect from 1st May,contended that ‘the object of CENVAT 2011.scheme is to allow credit on inputs (i) to an employee of any businessused in or in relation to manufacture of entity, in relation to health check- Notification No. 33/2011-ST datedfinal product and to allow credit on in- up or preventive care, where the 25th April, 2011 :-put services used in or in relation to payment for such check-up or pre- Vide the above notification, exemptionmanufacture of final product as well as ventive care is made by such busi- has been provided to -in relation to business of manufacture’. ness entity directly to such hospi-Business activity cannot be restricted (i) any preschool coaching and train- tal, nursing home or multi-specialtyto mere manufacturing activity and it ing; clinic; orcovers all activities that are related to (ii) any coaching or training leading to (ii) to a person covered by health in-business. The term ‘ in relation to busi- grant of a certificate or diploma or surance scheme, for any healthness’ cannot be given a restricted degree or any educational qualifi- check-up or treatment, where themeaning and expenses incurred as a cation which is recognized by any payment for such health check-upresult of commercial expediency are law for the time being in force; or treatment is made by the insur-covered by the said term. The appeal ance company directly to such when provided by any commercialwas allowed. hospital, nursing home or multi- coaching or training centre from theManubhai & Co. v. CST, Ahmedabad specialty clinic. whole of the service tax leviable[(2011) 21 STR 65 (Tri.Ahmd.)] thereon. Notification No. 31/2011-ST datedNon filing of prior declaration does 25th April, 2011:- Notification No. 34/2011-ST datednot lead to rejection of rebate claim. 25th April, 2011 :- Vide the above notification exemptionFailure to file declaration is not suffi- from Service tax has been provided in Vide the above notification, exemptioncient to hold that the assessee did not case of taxable service provided by a has been provided from so much of thepay service tax on input services. Non hotel, inn, guest house, club or camp- service tax leviable thereon, as is inobservance of a procedural condition site, by whatever name called, for pro- excess of the service tax calculated onwas of a technical nature and cannot viding of accommodation for a continu- a value which is equivalent to a 10
  11. 11. INDIRECT TAXESCircular / Notifications SNKpercentage as mentioned here under surance company to pay service tax Circular No. 134/2011-ST dated 8thof the gross amount charged by such either April, 2011 :-service provider. (i) on the gross premium charged to The said circular provides clarification Service % a policy holder after deducting the regarding applicability of service tax amount allocated for investment or exemption to Education Cess and Services provided or to 30 savings on behalf of the policy Secondary and Higher Education be provided, to any per- holder, if such amount has been Cess under notifications where ‘whole son, by a restaurant, by whatever name called, intimated to the policy holder; or of service tax stands exempted. having the facility of air- (ii) 1.5 % of the gross premium According to section 95(1) of Finance conditioning in any part of the establishment, at charged by the life insurance com- (No.2) Act, 2004 and section 140(1) of any time during the finan- pany to the policy holder. Finance Act, 2007, Education Cess cial year, which has li- and Secondary and Higher Education cence to serve alcoholic Note : beverages, in relation to Cess are leviable and collected as serving of food or bever- The said options will not be available service tax, and when whole of service age, including alcoholic where the entire premium paid by the tax is exempt, the same applies to beverages or both, in its policy holder to the life insurance com- premises; education cess as well. Since Educa- pany is towards only risk cover in life tion Cess is levied and collected as Services provided or to 50 insurance. percentage of service tax, when and be provided, to any per- Notification No. 36/2011-ST dated wherever service tax is nil by virtue of son, by a hotel, inn, guest house, club or th 25 April, 2011 :- exemption, Education Cess would also campsite, by whatever be nil. name called, in relation An amendment has been made in Ex- to providing of accommo- port of Service Rules, 2005 whereby Circular No. 136/2011-ST dated 20th dation for a continuous April, 2011 :- the taxable service provided by a res- period of less than three months; taurant having facility of air- The said circular provided the ac- conditioning and has license to serve counting Codes for the taxable ser-Provided that this notification shall not alcoholic beverages and accommoda- vices introduced vide the Finance Act,apply in cases where, - tion services provided by a hotel, inn, 2011. guest house etc, shall be treated as(i) the CENVAT credit of duty on in- export in case such restaurant or hotel Service Account- puts or capital goods or the CEN- is situated outside India. ing Code VAT credit of service tax on input Service provided by a services, used for providing such Notification No. 37/2011-ST dated restaurant having air- taxable service, has been taken 25th April, 2011 :- conditioning and li- under the provisions of the CEN- cense to serve alco- An amendment has been made in VAT Credit Rules, 2004; or holic beverages in rela- Taxation of Services (Provided from tion to serving of food(ii) the service provider has availed Outside India and Received in India) or beverage, including the benefit under the notification of Rules 2006 whereby the taxable ser- alcoholic beverages or the Government of India in the vice provided by a restaurant having both, in its premises Ministry of Finance (Department of facility of air-conditioning and has li- [Finance Act 1994, Revenue), No. 12/2003-Service cense to serve alcoholic beverages Section 65(105) Tax, dated the 20th June, 2003. and accommodation services provided (zzzzv)] by a hotel, inn, guest house etc, shall Tax Collection 00441067Notification No. 35/2011-ST dated th be treated as received in India in case25 April, 2011 :- Other Receipts 00441068 the restaurant or hotel is situated inAn option has been given to a life in- India. Deduct Refunds 00441069 11
  12. 12. INDIRECT TAXESCircular / Notifications SNK tive list. is an exempt service will have retro- Service Account- spective effect). ing Code • Credit of ineligible expenses Service provided by should be denied upfront to avoid Key Action Points a hotel, inn, guest any interest exposure. • Analyse whether this would neces- house, club or sitate reversal/re-instatement of Clarification – Scope of the term campsite in relation ‘inputs’ credit pertaining to the past period to providing of ac- (depending upon the position commodation for a In respect of ‘inputs’, it has been clari- continuous period of taken earlier with respect to credit fied that goods such as furniture and less than three reversal pertaining to trading activi- stationary used in an office within the months[Finance Act ties) factory would be construed to be 1994, Section 65 goods used in the factory. Thus, the • Formulate the strategy accordingly same would be deemed to be used in and consequently, revise the tax Tax Collection 00441070 relation to the manufacturing business returns. Other Receipts 00441071 and hence credit of the same shall be Clarification – Availability of credit on Deduct Refunds 00441072 allowed. services received before 1 April 2011 on which credit is not allowed now – thCircular No. 943/04/2011 dated 29 e.g. rent-a-cab serviceApril, 2011:- It has been clarified that the credit onThe purpose of the said circular is to such services shall be available if theirsummarize some of the key clarifica- provision had been completed before 1tions issued vide the Circular and pos- April 2011.sible action points on the part of the Key Action Pointscompanies pursuant to these clarifica- • Review the status of credit withtions. respect to services that have been Key Action PointsClarification – Negative list completed before 1 April 2011.The list of goods and services for • Re-evaluate expenses incurred in the factory from credit eligibility • Avail credit even if the booking/which credit has been disallowed (such perspective with special emphasis payment/ billing in respect of theseas catering, club services, etc.) is only on expenses with respect to which services have been done on orillustrative and not exhaustive. The credit has been forgone till now. after 1 April 2011.principle is that Cenvat credit is not • Ensure that goods in respect of • Analyse whether credit of Serviceallowed when any goods and services tax incurred on advance paymentsare used primarily for personal use or which credit is intended to be made before 1 April 2011 would beconsumption of employees. taken in terms of the amended pro- available.Key Action Points visions (e.g. furniture, stationary items, etc.) are purchased against Clarification – Manner of determining• Expense list needs to be analyzed Excise invoice. ‘value’ of trading activities not only to carve out those ex- Clarification – Treatment of credit of It has been clarified that for calculating penses which are specifically ex- common inputs and input services the value of trading: cluded in the definition but also used in trading before 1 April 2011 those expenses, which though not • As regards application of specific specifically covered, satisfy the It has been clarified that the same principle of LIFO, FIFO, etc. – the principle mentioned in the preced- could be availed subject to prescribed method normally followed by the ing para. restrictions as were applicable during concern for its accounting pur-• It needs to be analyzed whether the relevant period. This clarification poses as per generally accepted seems to suggest that trading was all expenses incurred by employees accounting principles should be along an ‘exempt service’ (i.e. the re- during business/ official visits used. cent amendment clarifying that trading would get covered under the nega- 12
  13. 13. INDIRECT TAXES / OTHERSCircular / Notifications SNK• With respect to the taxes and year Stamp Act, 1899 as applicable in The Supreme Court held that a gift of end discounts – generally ac- Delhi. immovable property made by a Muslim cepted accounting principles need is valid even if it is not registered un- The High Court observed that there is to be followed in this regard. All der the Transfer of Property Act or the no express provision for charging taxes for which set off or credit is Stamps and Registration Act. The stamp duty on the increase in author- available or are refundable/ re- apex court said though the TP Act ized share capital in Schedule IA of funded may not be included. Dis- mandates registration of a gift, the the Delhi Stamp Act. counts are to be included. same would not apply to a Muslim do- A statute authorizing the levy of stamp nor as the community has been ex-Key Action Points duty is in the nature of fiscal statute, empted from the provision.• Ascertain the accounting policy therefore Stamp duty cannot be levied A bench of justices R M Lodha and S adopted by the Company and except by the authority of law. The S Nijjar in a judgment quashed a ruling compute ‘sale price’ and ‘cost of provisions of a fiscal statute admit of of the Andhra Pradesh High Court that goods sold’ accordingly. strict construction. the property gifted by late Shaik Da-Further it has been clarified that as per The High Court also relied on the Su- wood to one of his sons MohammedRule 6(4) no credit can be availed on preme Court judgment in the case of Yakub was not valid as it was not reg-capital goods used exclusively in AV Fernandez v. State of Kerala (AIR istered under the law.manufacture of exempted goods or in 1957 SC 657) and Commissioner of The bench said the three essentials ofproviding exempted service. Goods in Wealth Tax v. Ellis Bridge Gymkhana a gift under Mohammadan Law are (i)respect of which the benefit of an ex- [1998] 1 SCC 384 (SC), where it was declaration of the gift by the donor (2)emption under notification No. 1/2011- held that the rule of construction of a acceptance of the gift by the doneeCE, dated the 1st March, 2011 is charging section is that before taxing and (3) delivery of possession.availed are exempted goods [Rule 2 any person, it must be shown that he “Though the rules of Mohammadan(d)]. Taxable services, whose part of falls within the ambit of the charging Law do not make writing essential tovalue is exempted on the condition section by clear words used in the the validity of a gift, an oral gift fulfillingthat no credit of inputs and input ser- section. No one can be taxed by impli- all the three essentials makes the giftvices, used for providing such taxable cation. complete and irrevocable. However,service, shall be taken, are exempted In the absence of any specific provi- the donor may record the transactionservices [Rule 2(e)]. Hence credit of sion in the Act for levy of stamp duty of gift in goods used exclusively in on the increase in authorized sharemanufacture of such goods or in pro- Circulars / Notifications capital it is not possible to legally sus-viding such service is not allowed. tain the demand raised by the Collec- RBIThe Circular should be seen as a tor of Stamps. Notification No. RBI/2010-11/511timely step on the part of the authori- A mere fact that the Petitioner earlier dated 04.05.2011ties to clarify various issues arising out paid stamp duty on increase in author-of the amendments. Further, most of As per the current instructions, mobile ized share capital cannot act as estop-these clarifications should be wel- banking transactions up to Rs. 1000/- pel against the Petitioner.comed by the industry. are permitted without insisting on end- However, court has clarified that the to-end encryption. As per the aboveOTHERS decision will not enable the Petitioner notification, RBI has decided to in-COMPANY LAW to claim refund of any stamp duty paid crease the limit of such transactions earlier. without end-to-end encryption to Rs.S.E. Investment Limited (CO. APPL. 5000/- with effect from the date of this(M) 38/2011 & CO. APPL. 293/2011) OTHER circular. Banks are instructed to en-Delhi High Court in the said case held Hafeeza Bibi & Ors. Versus Shaikh sure & place adequate security meas-that increase in authorised Capital is Farid (Dead) by LRs. & Ors. [Civil ures and velocity limits based on theirnot liable to stamp duty under Indian Appeal No. 1714 of 2005] own risk perception. 13