Cutting Edge

February 2014, Issue 19

http://www.pwc.in

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Editorial

Dear Readers,

I am pleased to present the 19th edition of PwC India’s Aerospace and Defence (A&D) newsletter,“Cutting Edge” that provides information on deals, news, regulatory and tax updates.

The Finance Minister of India (FM) presented the interim Budget 2014-15 on 17 February, 2014. TheFinance Minister has estimated the GDP growth rate for the current fiscal year, i.e., 2013-14 at 4.9%.Further, fiscal deficit for 2013-14 is estimated at 4.6% of the GDP as compared to the budgeted levelof 4.8% of GDP, thereby indicating that the government has been able to contain the fiscal deficitand possibly signifying that the economy has begun to pick up.

The Budget has raised the defence outlay to USD 37.33 bn. This represents a growth rate of 9.98% innominal terms over the previous year’s allocation of USD 33.94 bn, thereby representing a growthrate of 14.95% in revenue expenditure and a marginal increase of 3.28% in capital expenditure incomparison to the budget estimates for 2013-14. Though the growth in the interim budget is higherthan the growth in previous year’s budget (5.31%), it is mainly on account of increase in the revenuebudget of Ministry of Defence. Accordingly, it is likely to have a little bearing on the modernizationfront.

DefExpo India 2014 - 8th Land, Naval and Internal Homeland Security Systems Exhibition in NewDelhi from 6th to 9th February 2014 was very successful. 624 companies from 30 countriesparticipated in the DefExpo. Amidst a slow down in the world economy, the response was very goodclearly showing that India continues to be an attractive market in the defence sector.

PwC hosted a briefing session with the USIBC Executive Mission and provided an update onimportant business areas such as the Defence Procurement Procedure, offset policy, the politicaleconomy and tax and regulatory policy. A copy of the presentation is on our website.

This quarter brought good news for the Armed and Naval forces as MoD recently gave its go aheadfor four major acquisitions worth nearly USD 2.67 bn. The projects approved for the forces include

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two deep sea rescue vessels, an indigenous anti-submarine craft programme, procurement ofmore Israeli Barak missiles and 41 advanced light helicopters. Boosting surveillance capabilitiesof the Indian Army along the borders, the government has also cleared the procurement ofaround 15 unmanned aerial vehicles (UAVs) from Israel at a cost of around USD 200 mn.

The Department of Offsets Management Wing (DOMW) has become active and started reviewingoffset banking proposals filed with them. The DOMW review is rigorous and it is imperative forthe OEMs to ensure that all the documentation is complete and regulatory compliant.

With these highlights, I invite you to review our 19th newsletter dedicated to A&D.

Your feedback is important and we look forward to it.

Sincerely,

Dhiraj Mathur

Executive Director and Leader, Aerospace and Defence

PwC

In this Issue

Glossary 5

Select News Items 7

Regulatory 8

Direct Taxes 9

Personal Tax 13

Indirect Tax 17

Upcoming A&D events 22

Contact Us 23

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Glossary

A&D Aerospace & Defence

AAR Authority for Advance Rulings

BSF Border Security Force

CBDT Central Board of Direct Taxes

CBEC Central Board of Excise and Customs

CENVAT Central Value Added Tax

CISF Central Industrial Security Forces

CRPF Central Reserve Police Force

DPP Defence Procurement Procedure

DRP or the Panel Dispute Resolution Panel

DTC Direct Taxes Code

ECB External Commercial Borrowings

FAQ. Frequently Asked Questions

FBT Fringe Benefit Tax

FDI Foreign Direct Investment

FIPB Foreign Investment Promotion Board

FTP Foreign Trade Policy

GST Goods and Services Tax

HC High Court

IPO Initial Public Offer

JV Joint Ventures

MAT Minimum Alternative Tax

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MHA Ministry of Home Affairs

MTA Multirole Transport Aircraft

NBFC Non Banking Financial Company

NFE Net Foreign Exchange Earnings

NSG National Security Guard

OEM Original Equipment Manufacturer

RBI Reserve Bank of India

RFI Request for Information

RFP Request for Proposal

RIC Resident Indian Citizen

Rules Income Tax Rules, 1962

SEZ Special Economic Zone

SQR Services Qualitative Requirement

the Act The Income-tax Act, 1961

the Tribunal Income Tax Appellate Tribunal

TO Tax Officer

ToT Transfer of Technology

TV Transaction Value

ULFA United Liberation Front of Assam

VAT Value Added Tax

Glossary

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Select News ItemsForeign vendors showcase their wares at DEFEXPO 2014Foreign vendors showcased their latest technology at the DEFEXPO 2014 in New Delhi, with aview on securing higher sales prospects with the Indian armed forces.Several companies fromover 30 countries displayed their latest weapon systems for the Army and Navy in this biennialDefence Exposition.

Government clears proposal for buying 15 Israeli-made Heron UAVsBoosting surveillance capabilities of the Indian Army along the borders with China and Pakistan,the government has cleared the procurement of around 15 unmanned aerial vehicles (UAVs) fromIsrael at a cost of around Rs.1,200 crore. The Indian Air Force (IAF) flies the Israeli-madeSearcher II and Heron UAVs for reconnaissance and surveillance purposes and about 100Searchers are in operation on Indian borders in western, northern and eastern regions.

India, US ink $1billion deal for six Super Hercules aircraftIndia and the US have inked another mega contract, the $1.01 billion one for six additional C-130J"Super Hercules" aircraft, while some others are being finalized. IAF already has six C-130Jstactical airlift aircraft, ordered for $962 million in 2007, which are based at the Hindon airbase onthe outskirts of Delhi. The six new C-130Js, also configured for "special operations" as the first six,will be based at Panagarh in West Bengal.

Four major acquisitions for the Navy and the Army approvedThe Defence Acquisition Council (DAC) of the Ministry of Defence recently gave the go ahead forfour major acquisitions worth nearly Rs. 16,000 crore for the Indian Navy and the Army. Theshopping list approved for the forces includes two deep sea rescue vessels, an indigenous anti-submarine craft programme, procurement of more Israeli Barak missiles and 41 advanced lighthelicopters.

Agni-III missile test-fired successfullyAgni-III, the nuclear capable, ballistic missile was successfully test fired from the Wheeler Islandoff the coast of Odisha around 1700 hrs recently. It was a user trial carried out by the StrategicForces Command of the Indian Army under the technical supervision and logistic support of theDefence Research and Development Organization (DRDO).

Defence Ministry Defers Decision on 4 Major PurchasesDefence Ministry deferred decisions on four major deals expected to be worth over Rs 40,000crore even as it approved another set of proposals worth over Rs 13,000 crore for procuringweapon systems for the armed forces.

Agni-5 to be ready for induction in armed forces by next yearThe Agni-5 intercontinental ballistic missile, which has a strike range of more than 5,500 km, isexpected to be ready for induction into the armed forces by next year after completion ofdevelopment trials. The indigenously developed missile Agni-V is capable of striking a range ofmore than 5000 km. It is about 17 meter long and 2 metres wide with launch weight of around 50tonnes.

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RegulatoryDefence Budget 2014-15

The Union Budget 2014-15 has raised the defence outlay to Rs. 2,24,000 Crore. This represents agrowth rate of 9.98%% in nominal terms over the previous year’s allocation of Rs. 2,03,672 Crore.

Key Statistics of Defence Budgets - 2013-14 and 2014-15

2013-14 (BE) 2014-15 (BE)

Defence Budget (Rs. in Crore) 2,03,672 2,24,000

Growth of Defence Budget (%) 5.31 9.98

Revenue Expenditure (Rs in Crore) 1,16,931 1,34,412

Growth of Revenue Expenditure (%) 2.73 14.95

Share of Revenue Expenditure in Defence Budget (%) 57.41 60.01

Capital Expenditure (Rs. in Crore) 86,741 89,588

Growth of Capital Expenditure (%) 9.00 3.28

Share of Capital Expenditure in Defence Budget (%) 42.59 39.99

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Direct TaxesPilot training services as per the requirements of DGCA Rules do not satisfy the ‘makeavailable’ test

The taxpayer, an Indian company, is engaged in the business of charter hire of helicopters. Thetaxpayer made payments to Bell Helicopter Textron Inc, a tax resident of the USA, towards training ofits pilots and engineers outside India, without withholding taxes. The tax officer alleged that thepayments made by the taxpayer qualified as fees for technical services (FTS) in view of theretrospective amendment brought in section 9 of the Income tax Act, 1961 (the Act) by the Finance Act2010. Accordingly, the officer held that the training expenses need to be disallowed under section40(a)(ia) of the Income tax Act, 1961 (Act) since the taxpayer failed to withhold the applicable taxes.The Commissioner (Appeals) upheld the disallowance.

The significant issue before the Tribunal was whether payments in respect of training expenses weretaxable in India.

The Tribunal noted that the retrospective amendment was not in existence when the taxpayer madethe payments. Therefore, the Tribunal asserted that the taxpayer cannot be expected to do somethingwhich was impossible to perform.

Further, the Tribunal noted that the tax officer has not considered the provisions of India-USA taxtreaty while determining the taxability of the payments. The Tribunal observed that under theprovisions of the India-USA tax treaty, payments qualify as fees for included services if such servicesmake available the technical knowledge, experience, skill, know-how, or processes, or consists of thedevelopment and transfer of a technical plan or design. The Tribunal noted that the training in thecase under consideration was given to pilots and other staff as per the requirement of the DirectorateGeneral of Civil Aviation of India Rules. Therefore, the Tribunal concluded that the training was only apart of the eligibility of the pilots and other staff for working in the industry of aviation and suchtraining would not fall under the term ‘services made available’.

In view of the above, the Tribunal deleted the disallowance under section 40(a)(ia) of the Act.

M/s United Helicharters Pvt Ltd vs. ACIT [TS-409-ITAT-2013(Mum)]

Income from ground handling and technical handling services not taxable as per theprovisions of Article 8 of India-Netherlands tax treaty

The taxpayer, a tax resident of Netherlands, has earned income on account of ground handling andtechnical handling services rendered to other airlines in India. The taxpayer considered such incomeas part of the business from operations of aircraft in international traffic. Accordingly, the taxpayerclaimed that such income is not taxable in India in accordance with the provisions of Article 8 of theIndia-Netherlands tax treaty. The tax officer alleged that such income is not covered under theprovisions of Article 8 of the India-Netherlands tax treaty and are taxable under Article 7 of the taxtreaty.

The sole issue before the Tribunal was whether ground handling and technical handling servicesrendered by the taxpayer in India are taxable in India.

The Tribunal noted that the issue under consideration is covered by the decision of the Tribunal in thetaxpayer’s own case for earlier years. In the decisions pertaining to earlier years, the issue wasadjudicated in favour of the taxpayer by concluding that any receipt received by the taxpayer due toparticipation in the pool as provided in the International Airlines Technical Pool (IATP) manual

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Direct Taxeswill not be taxable in India*. The Tribunal observed that the facts of the case in the year underconsideration are identical to the earlier years.

In view of the above, the Tribunal concluded that the income from ground handling and technicalhandling services is not taxable in India in accordance with the provisions of Article 8 of the India-Netherlands tax treaty.

*The Tribunal had placed reliance on the decision of Lufthansa German Airlines (90 ITD 310) whereinthe bye-laws of International Airlines Technical Pool (IATP) were considered while explaining themeaning of profit from operation of ships or aircrafts in international traffic. Further, the Tribunal hadnoted that the position in India-Netherlands tax treaty is similar to the position in India-German taxtreaty with respect to Article 8.

M/s KLM Royal Dutch Airlines vs. DDIT [ITA No. 4637/Del/2011]

Aircrafts used for own business constitutes "commercial purpose" - Exempt fromWealth-tax

The taxpayer owned two aircrafts which were used by its executives and directors for its businesspurposes. The taxpayer did not treat the aircraft as an asset as per section 2(ea)(iv) of the Wealth taxAct, 1951 (WTA) and accordingly did not include their value for the purpose of computation of wealthtax. The tax officer alleged that an aircraft used for transportation of goods of taxpayer’s own businessor aircrafts used by the directors or any company executive were not to be treated as used for‘commercial purposes’ and therefore are chargeable to wealth tax as per section 2(ea)(iv) of WTA. TheCommissioner (Appeals) and the Tribunal ruled in favour of the taxpayer.

The issue before the High Court was that whether the aircraft owned by the taxpayer and used for itsbusiness was exempt from wealth tax.

The High Court noted that the term ‘commercial purposes’ in the context of exclusion from thepurview of the definition of assets under section 2(ea)(iv), had not been defined in the WTA. Thus, theHigh Court observed that the words ‘used by the taxpayer for commercial purposes’ have to beunderstood to mean, used by the taxpayer for the purposes connected with its business. Therefore,when the taxpayer was using the aircrafts in connection with its own business and not forpersonal/non-business purposes, the same would be a ‘use by the taxpayer for commercial purposes’.The High Court further clarified that if the taxpayer would have been using the aircrafts fortransporting the directors for excursions or their personal purposes, then the same would not havebeen exempt from wealth tax. Accordingly, the High Court held that the taxpayer’s aircrafts would beexempt from wealth tax.

Jay Pee Ventures Ltd. [TS-398-HC-2013 (DEL)]

Mere agreement to lease aircraft without possession not entitled to tax exemption

The taxpayer, an Indian airline carrier, executed an agreement with a US based company on 27 March2006 to take an aircraft on lease with the scheduled date of delivery in May 2007. The taxpayer filedan application with the Central Board of Direct Taxes (CBDT) for grant of exemption under section10(15A)** of the Act in respect of the payments to be made pursuant to the agreement for lease ofaircraft. The CBDT held that the agreement for lease of aircraft was not in existence on the date ofsigning of the agreement. Accordingly, the CBDT rejected the taxpayer’s application. The taxpayer fileda writ petition challenging the rejection of the application.

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Direct TaxesThe issue before the High Court was that whether the lease agreements satisfied the requirementsof section 10(15A) of the Act, as the aircraft was to be manufactured to be leased in future after 1April 2007.

The High Court observed that the taxpayer had entered into an agreement for lease of aircraftsprior to 1 April 2007, but the aircraft was scheduled to be delivered later. Further, the aircraftswere not in existence at the time of agreement and the lease period was to commence from thedate of delivery of the aircraft. The High Court noted that a lease could not be created in favour ofa third person, unless the goods/property was transferred to the lessee and the lessee was in aposition to utilize the goods or property.

The High Court asserted that there is a distinction between sale/lease and agreement to sale/leaseby inter alia highlighting the provisions of Transfer of Property Act and Sale of Goods Act. TheHigh Court noted that ‘future goods’, which were not in existence at the time of agreement, couldbe subject matter of contract of sale/ lease.

The High Court observed that the use of the word ‘lease’ in section 10(15A) of the Act signifiestransfer of rights by the lessor in praesenti i.e. on or before 1 April 2007, which is not possibleunless the aircraft is in existence. Accordingly, the High Court observed that for availingexemption under section 10(15) of the Act, the following twin conditions are to be satisfied:

• the agreement should have been entered into on or before 1 April 2007, and• there should be acquisition of aircraft under the lease before the said date.

In view of the above, the High Court concluded that in the taxpayer’s case there was no lease, butonly a possibility or expectancy of lease as the aircraft was not in existence at the time of theagreement. Accordingly, High Court dismissed the writ petitions in case of the taxpayer holdingthat the benefit under section 10(15A) of the Act was not available, when the aircraft was not inexistence on 1 April 2007.

** Section 10(15A) of the Act inter alia provides that any payment made, by an Indian companyengaged in the business of operation of aircraft, to acquire an aircraft on lease from theGovernment of a foreign State or a foreign enterprise under an agreement approved by the CentralGovernment in this behalf would be exempt. The section further provides that this exemption willnot be available to any agreement entered into on or after 1 April 2007.

Go Airlines Pvt Ltd [TS-497-HC-2012(DEL)]

Passenger fees paid to airport authorities not liable to TDS

The taxpayer, an Indian airline carrier, was subjected to proceedings under section 201(1)/(1A) ofthe Income tax Act, 1961 (“the Act”). During the course of such proceedings the assessing officer(“AO”) observed that the taxpayer had paid Passenger Service Fees (“PSF”) to the AirportAuthority of India. According to the AO, the taxpayer ought to have deducted tax at source as perthe provisions of Section 194-I of the Act. However, the taxpayer contended that there was noliability to deduct tax at source under section 194I of the Act since it was only collecting the PSF, astatutory levy collected to be eventually turned over to the government, from the passengers onbehalf of the airport operators and has paid to the airport operators. Further, the taxpayer has notclaimed such payment as expenses in its books of accounts. The Commissioner of Income tax(Appeals) [“CIT(A)”] ruled in favour of taxpayer holding that PSF did not come under the ambit of‘rent’ under section 194I of the Act.

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Direct TaxesThe issue before the Income tax Appellate Tribunal (“Tribunal”) was whether the taxpayer was liable todeduct tax at source on the passenger fees paid to the airport authorities.

The Tribunal, given the facts under consideration, observed that the PSF is a statutory liability withoutdemarcating the area taken on rent nor it is a case of systematic use of land specified for considerationunder an arrangement which carries the characteristics of lease or tenancy. A mere use of the land andpayment charged which is not for the use of the land but for the maintenance of the various servicesincluding technical services would not technically bring the transaction and the charges within themeaning of either lease or sub-lease or tenancy or any other agreement or arrangement or any natureof lease or tenancy and rent. Reliance was placed on the decision of the Hon’ble Madras High Court inthe case of CIT vs. Singapore Airlines Ltd., Office Memorandum dated June 30, 2008 and Circular No.715 dated August 08, 1995 issued by the Central Board of Direct Taxes.

In view of the above, Tribunal concluded that no TDS was deductible under section 194I of the Act forPSF paid by taxpayer to airport authorities.

Jet Airways (India) Ltd. [TS-534-ITAT-2013(Mum)]

Helicopter hire charges not 'rent' under section 194I of the Income tax Act, 1961

The taxpayer, a State Government owned oil and gas company, made certain payments against hiringof helicopter services to Global Vectra Helicopter Ltd (“GVHL”). According to the assessing officer(“AO”), the taxpayer ought to have deducted tax at source as per the provisions of Section 194-I of theIncome tax Act, 1961 (“the Act”) since the payments were in the nature of rent for use of equipment.The taxpayer submitted that Helicopter services were in relation to air logistic support for crew andpersonnel of the taxpayer and/or any of its consultants and/or suppliers etc. as well as supply ofessential cargo to and from offshore. The taxpayer submitted that though the Tax Deducted at Source(“TDS”) authority has invoked Sec. 194I of the Act vide certificate dated July 09, 2008, CBDT CircularNo. 715 dated August 08, 1995 stated that where plane or other mode of transport is chartered, theprovisions of section 194C of the Act would apply. However, the Commissioner of Income tax(Appeals) [“CIT(A)”] ruled against the taxpayer holding that the transaction was for hiring ofhelicopter and not for transportation. Nevertheless, referring to taxpayer’s contention that GVHL hadpaid taxes on amount received from taxpayer and thus no further liability could be attributed totaxpayer in view of Supreme Court ruling in Hindustan Coca-Cola Ltd. [TS-22-SC-2007], CIT(A)ordered AO(TDS) to verify the claim and drop the impugned demand under section 201(1) of the Act.Aggrieved, the taxpayer preferred an appeal before Ahmedabad Income tax Appellate Tribunal(“Tribunal”).

The Tribunal observed that the taxpayer had not taken possession of the helicopters from GVHL andresponsibility of operating and maintaining of the helicopters continued to remain with GVHL. ITATplaced reliance on Gujarat High Court ruling in Reliance Engineering Associates P. Ltd [ITA No. 2286of 2010, order dated March 6, 2012] wherein it was held that payment for transportation ofgoods/passengers by buses, cars, etc attracted TDS under section 194C of the Act. High Court hadremarked that since the agreement for carriage by vehicles other than railways came within thepurview of explanation of ‘work’ within the meaning of section 194C of the Act, it followed that theLegislature had never intended to include the amount taken for hiring of such vehicles within themeaning of the word ‘rent’.

In view of the above, the Tribunal held in favour of the taxpayer holding that the taxpayer was justifiedin withholding taxes as per the provisions of section 194C of the Act.

Gujarat State Petroleum Corporation Ltd. [TS-608-ITAT-2013(Ahd)]

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Personal TaxCircular

Central Board of Direct Taxes has decided that wherever in terms of the agreement/contractbetween the payer and the payee, the service tax component comprised in the amount payable to aresident is indicated separately, tax shall be deducted at source on the amount paid/payable withoutincluding such service tax component. This Circular provides that wherever the service taxcomponent comprised in the amount payable to a resident payee is indicated separately in theagreement/ contract, tax shall be deducted at source on the amount paid/ payable without includingsuch service tax component.

[Circular No. 1/2014, Dated 13 January, 2014]

Additional comments provided on amendment relating to wealth tax exemption to agricultural landin urban area and other amendments provided in Finance Act 2013.

[Circular No.3/2014, Dated 24 January, 2014]

Press Release

A change was proposed in the procedure for PAN allotment process w.e.f. 03.02.2014 where everyPAN applicant has to submit self- attested copies of Proof of Identity (POI), Proof of Address (POA)and Date of Birth (DOB) documents and also produce original documents of such POI/POA/DOBdocuments, for verification at the counter of PAN Facilitation Centres vide press release dated 27January, 2014 (Also refer Notification No.96/2013(F. No. 142/15/2013-TPL) . However, The CBDThas decided to keep in abeyance the decision to change the procedure for PAN allotment till furtherorders vide Press Release dated 30 January, 2014. In the meantime the old procedure of PANapplication and allotment shall continue.

Notification

Rajiv Gandhi Equity Savings Scheme, 2013 has been notified wef 18 December 2013. Eligiblesecurities for investment have been defined for availing deduction u/s 80CCG for AY 2014-15. TheGross Total Income limit has been increased upto 12,00,000 from 10,00,000 for eligible new retailinvestors.

Notification no. 94/2013 (F. No. 142/35/2012 –TPL)

Case Laws

Sec 54F exemption available on transfer of 'residential-plot', not being a 'residential-house'

During AY 2009-10, the assessee, Suman Bindal sold a plot of land situated in the residentialcolony. She invested the entire sale consideration on sale of plot in a new residential house andclaimed exemption u/s 54F of the Act. The assessee also owned another business/commercialproperty which was leased out for commercial purposes.

As per Sec 54F, the capital gain arising from transfer of any long term capital asset (‘LTCA’), notbeing a residential house, shall be exempt if such gains are invested in purchase of a ‘residentialhouse’, subject to other conditions prescribed. One of the conditions is that the assessee should notbe owning more than one ‘residential house’ at the time of such transfer.

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Personal TaxThe AO treated the plot as well as rented house as residential house. Therefore, the AO rejectedassessee’s claim for exemption u/s 54F as the conditions mentioned therein were not fulfilled.However, the CIT(A) ruled in favour of the assessee and allowed exemption u/s 54F of the Act.Aggrieved, the Revenue preferred an appeal before the Delhi bench of ITAT.

ITAT accepted CIT(A)’s reliance on SC ruling, where the word "residence" has been interpreted tomean a place where one resides and the word “residential” meant to be used or designed as aresidence or for occupation as a residence. Relying on the same, ITAT noted that CIT(A) rejectedAO’s contention and held that the residential plot cannot be considered as a “residential house” as itcannot be used for residence. Further, the CIT(A) also rejected the AO’s contention that the assesseeowned more than one ‘residential house’ and held the property let out by the assessee was not a‘residential house’.

ITAT, upholding the order of the CIT(A), held that “a plot in a residential colony can be a residentialplot but cannot be said to be a residential house. Similarly, a plot of land which is let out by theassessee to a private limited company and used for commercial purposes by them cannot bepresumed to be a residential house.” Noting that other conditions of exemption u/s 54F werefulfilled by the assessee, ITAT allowed exemption u/s 54F.

Suman Bindal [TS-1-ITAT-2014(DEL)]

Only simple interest, not compound interest allowable as house property deductionu/s 24

The assessee, Mrs. Manju Kumar, filed her return of income ('ROI') declaring certain income fromproperty. Subsequently, with respect to AY 1987-88 to 1991-92, it was noticed that assessee washaving 25% share of rental income of property as against 20% declared in the returns of income.Further, AO noticed that assessee was claiming compound interest on loan/capital raised forconstruction of property, whereas as per AO, only simple interest was permissible as deduction u/s24(b). Therefore, a notice u/s 148 was issued to assessee, in response to which returns werefurnished.

The assessee challenged notice u/s.148 contending that the allowability of interest as simple interestor compound interest was not a circumstance sufficient enough to conclude escapement of incomeand that it was a mere “change of opinion”. However, the CIT(A) and ITAT rejected the plea of theassessee.

Aggrieved, the assessee preferred an appeal before the P&H HC. HC observed that in the returnsfurnished for AY 1987-88 to 1991-92 in response to notice u/s 148, the rental income was declareddisclosing a share of 25% in rental income as against 20% in the original return of income. Thisinstant adjudication was approved by the CIT(A) as well as ITAT. HC stated that “Clearly enough itwas not at all a case of 'change of opinion' but was a clear case of 'escapement of income fromassessment' ...”

Thus, HC ruled in favour of Revenue on this account and upheld the validity of notice u/s 148. Withregard to issue of allowabilty of compound interest against simple interest, HC analysed provisionsand legislative history of Sec 24 of the Income Tax Act, 1961 having regard to corresponding Sec.9(1) (iv) of Income tax Act, 1922. HC compared both these provisions and observed that they wereparimateria with each other. HC observed that Sec 24(b) stipulated that only the amount of interestpayable on capital borrowed, for construction of the property yielding income, was an admissible

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Personal Taxdeduction. HC, thus, held that interest paid on interest levied by the bank, because of non-paymentof installments of borrowed capital, did not qualify for an admissible deduction.

In this regard, HC relied on SC ruling in Shew Kissen Bhatter Vs. CIT [1973 ITR 61 (SC)] whereinonly the simple interest was held allowable, and not compound interest. SC observed that interestpaid on borrowed amount was deductible only w.r.t. the amount loaned by the bank and not w.r.t.the amount added to such amount loaned by the bank for the non-payment of loan amount. It wasobserved that the interest to the extent of increased liability in terms of interest included evencompound interest. SC had observed that only regular interest on capital borrowed was deductible,and not additional interest levied due to non-payment of regular interest.

Ruling in favour of Revenue, HC held that ITAT was correct in allowing only simple interest asdeduction, and disallowing interest on interest which had been claimed by assessee.

Manju Kumar [TS-673-HC-2013(P & H)]

Sec.54F exemption granted despite subsequent 'commercial' use of residentialproperty

The assessee, Shyamlal Tondon, along-with his father purchased a plot of land in 1978. They hadentered into a development agreement (‘the agreement’) with Palace Constructions (‘the developer’)for construction of a residential complex on the land. According to the agreement they were entitledto share the built up area on 50:50 basis in exchange of transfer of the land. As per the developer,the possession of the built-up area was handed over to the assessee on April 29, 2002. The AOobserved that, for AY 2003-04, neither the assessee nor his father had declared any long termcapital gains on transfer of the land in exchange of 50% of the built up area. Since the assessee hadnot declared any capital gains, the AO concluded that the income had escaped assessment andpassed order u/s 143(3) r.w.s 147 assessing taxable gains at Rs. 27.87 lakhs.

Before CIT(A), the assessee argued that he was entitled to exemption u/s 54F as it had purchased‘residential property’ against transfer of land. However, the CIT(A) verified the address of propertyfrom internet search on website ‘Google Earth’ and observed that the property purchased by theassessee was “one of the most prominent commercial buildings in Hyderabad city and by no stretchof imagination, it canbe termed as a residential house. Thus, CIT(A) also rejected assessee’s claim ofSec. 54F exemption. Aggrieved, the assessee approached the Hyderabad bench of ITAT.

Section 54F provides for exemption of long term capital gains where consideration from transfer oflong term capital asset is invested in either construction or purchase of ‘a residential house’, subjectto fulfilment of other conditions.

Before ITAT, the assessee submitted that he had transferred land for development and got in returnconstructed residential property, which was eligible for relief u/s 54F of the Act. Further it wassubmitted that CIT(A)’s reliance on the information gathered from the internet, such as ‘GoogleEarth’ was not justified as it was not an authentic proof to hold that the property in question was acommercial property. Referring to the development agreement, ITAT observed that the intention ofthe parties was to construct a residential property. It was also observed that municipal permissionwas obtained only for construction of a residential complex. Further, ITAT observed that though theassessee received possession of the residential property, it was subsequently put to commercial use.

Ruling in favour of the assessee, ITAT held that, “Merely because of change in the use of suchproperty for non-residential purposes, it cannot be said that what was acquired by the assessee was

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Personal Taxnot a residential property, but a commercial one.” Relying on co-ordinate bench ruling in M.V.Subramanyeswra Reddy HUF [ITA No.1014/Hyd/2009], ITAT held that “Subsequent change in theuse of the property does not disentitle the assessee to relief under S.54F of the Act”.

ITAT concluded that assessee was entitled to relief u/s. 54F of the Act, if what was sought to beacquired and originally acquired was a residential property. Setting aside CIT(A)’s order, ITATdirected AO to consider the assessee’s claim for exemption u/s. 54F of the Act, subject to fulfillmentof other conditions.

Shyamlal Tandon [TS-34-ITAT-2014(HYD)]

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Indirect TaxesCENVAT:

Case Laws

• In CCE v Puissance De DPK (2013 (297) ELT 443), (297) ELT 443), the Chennai Tribunal held thaterection & commissioning charges were in the nature of service and covered by service tax law andthat such charges could not form part of the assessable value for the purpose of excise duty.

• In Techno Force (I) Pvt. Ltd V CCE (2013-TIOL-1871-CESTAT-Mum), the Mumbai Tribunal heldthat charges collected from a customer for trial of equipment, being optional and at the request ofcustomers, was not includible in the assessable value.

• In Sukalp Agencies v CCE (2013 (298) ELT 38), the Allahabad High Court held that installationand testing charges form part of the assessable value when such charges are not shown separatelyin the tender/invoices.

• In Sunbell Alloys Co of India Ltd v CCE (2014-TIOL-38-CESTAT-MUM), the Mumbai Tribunalheld that principal manufacturer cannot distribute service tax credit to job worker since CENVATRules does not envisage distribution of credit to manufacturing unit belonging to others.

• In CCE v Navodhaya Plastic Industries Ltd (2013 (298) ELT 541), the Larger Bench of ChennaiTribunal held that when capital goods are removed after use, there is no requirement to reversethe entire credit taken at the time of receipt of such goods.

• In National Aluminium Co Ltd v CCE (2013-TIOL-1691-CESTAT-KOL), the Kolkata Tribunal heldthat interest is payable for irregularly availment of credit in view of Supreme Court decisions in thecase of Ind-Swift Laboratories even if the appellant has sufficient balance in credit account.

• In Radiant Indus Chem Pvt Ltd v CCE (2014-TIOL-47-CESTAT-MUM), the Mumbai Tribunal heldthat there shall be no delay in filing of appeal if the due date was Saturday and appeal was filed onthe next working day i.e. Monday.

SERVICE TAX:

Notifications and Circulars

• Effective from 1 January, 2014, the mandatory e-payment threshold limit of service tax has beenreduced from INR 1 Mn to INR 0.1 Mn.

(Notification No 16/2013 dated 22 November, 2013)

• The SEZ units and developers are required to furnish a quarterly statement in form A-3 with thejurisdictional Superintendent of Central Excise, providing details of specified services received byit without payment of service tax latest by 30th of the month following the particular quarter.However, for the quarter ending on September, 2013 the said statement shall be submitted latestby 15 December, 2013.

• The CBEC has clarified that the discharge certificate under the VCES scheme would be issuedwithin 7 working days from the date of furnishing of details of payment of ‘tax dues’ in full. It hasfurther clarified that the availability of CENVAT credit in lieu of payments under the VCES scheme

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Indirect Taxes• will be governed by the applicable CENVAT Credit Rules.

Circular No. 176/02/2014 dated 20 January, 2014)

• In Sai Labour Contract v CCE (2014-TIOL-18-CESTAT-MUM), the Mumbai Tribunal held that incase of manpower supply services, service tax shall be discharged by the service provider on thegross amount received which would include the labour wages and other incidental expensesreceived from the service receiver.

The Tribunal distinguished the High Court ruling in Intercontinental Consultants & TechnocratsPvt Ltd v UOI (2012-TIOL-966-HC-DELST) on the ground that in the instant case the valuationis governed by the section 67 itself and not by the rule 5(1) of service tax rules.

It was further held that the TDS retained by the recipient of service from the payment would alsoform part of the gross amount chargeable to service tax.

VAT:

Haryana

• Effective 6 December, 2013, sale of goods to Government at concessional rate of tax againstcertificate VAT-C3 has been discontinued.

(The Haryana Value Added Tax (Amendment) Ordinance, 2013)

• Form VAT-D2A has been prescribed in respect of intra-State sales to SEZ units.

(Notification No. S.O.132/H.A.6/2003/ S.60/2013 dated 31 December, 2013)

Karnataka

• The due date for submission of application under “Karasamdhana Scheme 2013” (amnestyscheme) has been extended to 28 February, 2014. Further, the due date for payment of tax underthe scheme has also been extended to 31 March, 2014.

(Government Order No. FD184CSL 2013, dated 4 December, 2013)

Andhra Pradesh

• The mandatory usage of e-waybills has been deferred till further orders to be issued in thisregard.

(Circular No. CCT'sRef.No.CS(1)/39 /2013 dated 25 November, 2013)

Himachal Pradesh

• Effective 1 July, 2014, electronic filing of returns has been made mandatory for all dealers.

(Notification No. EXN-F(10)-7/2011-Vol.-I dated 30 December, 2013)

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Indirect TaxesSales Tax:

Case laws

• The Calcutta High Court, in Cipla Ltd v Commissioner, Commercial Tax (2013-NTN-Vol 53-208), held that declaration in form F covering transactions of stock transfer for more than onemonth cannot be rejected by the authorities on the ground that CST laws require dealers toissue form F for transactions of stock transfer only for a period of one calendar month. TheCourt observed that there is nothing in the rules which can be construed to vitiate a declarationform only on the ground that it covers transactions exceeding a period of over one month.

• The Rajasthan High Court, in Assistant Commercial Tax Officer v Electrolux Kelvinator Ltd(2013-NTN-Vol 53-210), held that optional service charges recovered from the buyers whointend to avail the benefit of extended warranty period, shall not be included in the sale price.The Court observed that the definition of sale price clearly envisages that only that amountwhich is paid or payable to a dealer as a consideration for sale of goods (including the samecharged for anything done by the dealer in respect of goods at the time of or before the deliveryof goods) will be included in the sale price. The optional service charges have been recoveredfor future act and not for goods delivered and thus cannot be included in the sale price.

• The Allahabad High Court, in Commissioner of Commercial Tax v Seagram India Pvt Ltd(2013-NTN-Vol 53-283), held that no VAT shall be levied on grant of permission to use a trademark on a non-exclusive basis. The transaction of permitting to use trade mark will be treatedas a mere license of trade mark and not deemed sale as transfer of right to use the trade make.The High Court has relied on the landmark decision of the Supreme Court in the matter ofBharat Sanchar Nigam Ltd v Union of India and others (2006-3-SCC-1).

• The Andhra Pradesh High Court, in Sri Venkateshwar Trading Company v The DeputyCommercial Tax officer (2014-VIL-08-AP), held that notice sent by registered post which isreturned with a postal endorsement ‘refused’ or ‘not available in the house’ is considered as avalid service of the notice.

Customs:

Notifications and Circulars

• The Central Government has notified revised All Industry Rates (AIR) of Duty Drawback forspecified products effective from 25 January, 2014. Some of the products for which thedrawback rates have changed are specified fibres, tractors, commercial vehicles, motor cars andparts thereof.

(Notification No. 05/2014-Customs (NT) dated 21 January, 2014)

• The Central Government has clarified that Special Additional Duty of Customs (SAD) is payableon clearances from Special Economic Zone (SEZ)/Free Trade and Warehousing Zone (FTWZ)unit to Domestic Tariff Area (DTA) in the nature of stock transfer as no sales tax/Value AddedTax (VAT) is leviable on such transaction. Previously, the Unit Approval Committee of NoidaSEZ in its meeting and minutes of 1 April, 2013 had given a view that SAD is exempt on stocktransfer from SEZ/FTWZ, subject to fulfilment of conditions.

(Circular No. 30/2013-Customs dated 30 December, 2013)

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Indirect TaxesNews

• The Central Government is in the process of designing a mechanism for importers to pass on thecenvat credit of Countervailing Duty in lieu of excise (CVD) to a manufacturer.

Case Law - Classification

• In ICICI Bank v CC (2013 (200) ECR 0473), the Chennai Tribunal held that classification ofgoods cannot be determined on the basis of advertising or marketing techniques as theclassification is determined on the principal function of the product in terms of General Rules ofInterpretation of Import Tariff.

Case Law - Valuation

• In Sempertrans Nirlon Pvt Ltd v CC (2014 (299) ELT 363), the Mumbai Tribunal held that whereamount is paid for royalty, technical assistance and trademark in respect of goods to bemanufactured in India which are distinct from imported goods then payment of such fees cannotbe added to the value of imports from related parties as these are separate transactions.

Case Law - Others

• In CC v NTPC (2013 (298) ELT 134), the Delhi Tribunal held that the provisions of thenotifications are to be construed strictly and in case of ambiguity, the benefit goes to theimporter.

• The Delhi Tribunal, in Marathon India Ltd v CC (2013-TIOL-1832-CESTAT-DEL), held that thebenefit of notification cannot be denied on account of exemption certificate not issued bydesignated authority, as it is merely a procedural lapse.

Foreign Trade Policy:

Notifications/Circulars

• The Central Government has amended the definition of a ‘Group Company’ under FTP to includeLimited Liability Partnerships (LLPs). However, neither partnership nor proprietorship firmwould come within the ambit of definition of a ‘Group Company’.

(Notification No. 58(RE-2013)/2009-14 dated 18 December, 2013)

• The Central Government has provided that scrips issued under Status Holders Incentive Scrip(SHIS), Served From India Scheme (SFIS) and Agri-Infrastructure Incentive Scrip (AIIS) cannotbe used for payment of custom duty in case of shortfall in export obligation in AdvanceAuthorisation (AA) or Duty Free Import Authorisation (DFIA) Schemes.

(Notification No. 64(RE-2013)/2009-14 dated 6 January, 2014)

Case Laws

• The Delhi Tribunal, in Samsung India Electronics Ltd v CC (2013-TIOL-1846-CESTAT-DEL),held that duty can be demanded where goods are imported under DEPB scrips, which have beenfraudulently obtained by making mis-declaration.

• In Eastron Overseas Inc v CC (2013 (200) ECR 0236), the Delhi Tribunal held that where importof goods covered by Hazardous Waste Rule, 2008, is done without prior permission from

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Indirect TaxesMinistry of Environment and Forests, the said goods are liable for confiscation.

• In Reliance Gas Transportation Infrastructure Ltd v CC (2014 (299) ELT 212), the MumbaiTribunal held that refund of SAD paid at the time of exit from EPCG scheme after use of goodsfor a particular period will not be available even if such goods are sold on payment of applicableVAT/Sales tax as these goods will not satisfy condition of the relevant exemption notificationthat goods are sold ‘as such’.

• The Chennai Tribunal, in Torrent Pharmaceutical Ltd v CC (2014 (298) ELT 554), held that dutydrawback not allowable in case identity of the imported and export goods cannot be established.

Foreign Trade Agreements:

• The Central Government has increased the benefit of customs duty exemption on specifiedgoods imported from 1 January, 2014 onwards under the following FTAs:

- India-ASEAN FTA

- India-Korea Comprehensive Economic Partnership Agreement (CEPA)

- India-Malaysia Comprehensive Economic Cooperation Agreement (CECA)

- India-Japan CEPA

(Customs Notification No. 54/2013, 55/2013, 56/2013 and 57/2013 all dated 31 December, 2013)

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The report has been prepared by us solely for purpose of Toyota MotorAsia Pacific Pte. Ltd., Singapore and parties listed under Schedule I ofthe Engagement Letter and should not be shared with any third party.The report is based on the information available in the Public domain.Further, the information based on our interaction with the Governmentofficials is subject to change upon further deliberations anddiscussions. It is recommended that cognizance of this information betaken by Toyota Motor Asia Pacific Pte. Ltd., Singapore only after theissue of official notification by the Government.

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