snk newsletter december 2013

8/13/2019 SNK Newsletter December 2013

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Issue 091111

September, 2013

SNKNewsletter

Website: www.snkca.com Email: [email protected]

DIRECT TAXES ... 1 - 12

DIRECT TAXESJudicial pronouncements

INDIRECT TAXES . 13 - 15

IMPORTANT DUE DATES 15

Issue 12 December, 2013

Rajshri Production Pvt. Ltd. Vs. Addl CIT [TS-570-ITAT-

2013(Mum), ITAT Mumbai Bench, dtd. 22.10.2013, in fa-vour of assessee]

Cogent reasons recording AO's dissatisfaction manda-

tory for invoking Sec 14A disallowance

For invoking Sec 14A, AO should indicate cogent reasons

that he is not satisfied about the claim of the assessee; The

AO did not record any reason that he was not satisfied with

the explanation by the assessee; Mere mention of AO's dis-

satisfaction not sufficient; Matter remitted to the AO with di-

rection to pass a reasoned and speaking order; Relied onDelhi HC ruling in Maxopp Investment

Varsha R. Taurani Vs. ACIT [TS-552-ITAT-2013(Mum),

ITAT Mumbai Bench, dtd. 30.10.2013, in favour of reve-

nue]

Disallows 'interest' expense u/s 14A though actual divi-

dend income not received

Upholds CIT(A)s order disallowing deduction for interest ex-

penditure u/s 14A; Assessee utilised borrowings to acquire

preference shares, dividend income from which was exempt;

Marginal note to Sec. 14A clearly states that expenditure in-

curred in relation to income not includible in total income,

actually earned or not, shall be disallowed; Interest not allow-

able as deduction against 'income from other source', though

no dividend income was earned; Relies on Delhi ITAT ruling

in Ever Plus Securities & Finance Ltd.; Distinguishes SC rul-

ing in Rajendra Moody

Prakash Vasantlal Golwala Vs. ACIT [Corrigendum in ITA

No. 558/Ahd./2013, ITAT Ahmedabad bench, dtd.

29.10.2013, in favour of revenue]

Law of jurisdictional High Court is not binding if there is

a later contrary judgement of non-jurisdictional High

Court.

Sec. 22: Property used by firm in which assessee-owneris partner is not used for assessees business & not enti-

tled for exemption

The assessee, a partner in a firm, was the owner of a house

property. He claimed that the house property was used by

the employees of a firm in which he was a partner and that it

should be considered to have been used for a business car-

ried on by him. The assessee relied on CIT v/s. Rasiklal

Balabhai 119 ITR 303 (Guj) where it was held that the annual

letting value (ALV) of a godown owned by the assessee and

used for the business carried on by him in partnership was

not liable to be included in his total income u/s 22. However,

the AO & CIT(A) relied on the contrary judgement in Prodip

Kumar Bothra 244 CTR 366 (Cal) where it was held that

house property income is not taxable only if the property is

used for the assessees ones own business and is not ex-

empt if used for the business of the firm in which the as-

sessee is a partner. On appeal by the assessee to the Tribu-

nal, dismissing the appeal, ITAT held that -

1. Though the jurisdictional High Court in Rasiklal Balab-hai 119 ITR 303 held that the annual letting value of

house property owned by the assessee and used for the

business carried on by him in partnership was not liable

to be included in his total income u/s. 22, the Calcutta


2/152

SNKDIRECT TAXESJudicial pronouncements

High Court has dissented from this

view in Prodip Kumar Bothra244

CTR 366 and held that the exemp-

tion in respect of house property

cannot be allowed to assessee if the

property is used by the partnershipfirm because the owner of the

house property and the occupier of

the property must be the same per-

son. The Karnataka High Court

in K.N. Guruswamy 146 ITR 34

(Kar) and the Allahabad High Court

in Shiv Mohan Lal 202 ITR 60 (All)

& Mustafa Khan 276 ITR 602 (All)

has taken the same view as the Cal-

cutta High Court that user by a part-nership firm/ HUF is not user by the

assessee-owner for business pur-

poses. In view of the divergent

views expressed by the High

Courts, the thumb rule that the lat-

est decision of the High Court is

required to be followed to maintain

judicial discipline. As the judgement

of the (jurisdictional) Gujarat High

Court is earlier in point of time andthe judgement of the (non-

jurisdictional) Calcutta and other

High Courts is later in point of time,

the view expressed by the Revenue

Authorities has to be affirmed and

the assessees ground dismissed;

2. Also, a litigant, especially the

learned counsel, who is an expert,

is expected to place before the

Court all decisions either in favour

or against him. We are constrained

to note that this fair approach was

not adopted in this case.

Oracle India P. Ltd. Vs. CIT [ITA no.

25/2012, 287/2008, 417/2009,

447/2009, 461/2009, 683/2009, Delhi

High Court, dtd. 25.11.2013, in favour

of assessee]

Sec. 37(1): Expenditure on acquiring

master copy of software subject to

obsolescence is deductible as reve-

nue expenditure

The assessee entered into a license

agreement with Oracle Corp under

which it acquired a non-exclusive & non-

assignable right to duplicate software

products which were owned by Oracle

Corp and to sub-license the same toparties in India. The assessee paid re-

curring royalty of 30% for the said right.

In addition to the royalty, the assessee

periodically paid an amount towards

expenditure on import of software mas-

ter copy. The said master copy was

used to replicate the software. The as-

sessee claimed that the said master

copies were versions of Oracles new

product offerings which had very accel-erated obsolescence and that at any

point of time it was not possible to say

whether the version will be current for

one day or one month. The AO allowed

a deduction for the recurring royalty but

held that the expenditure for acquiring

the software master copy was capital

expenditure. On appeal, the CIT(A) re-

versed the AO on the ground that owing

to obsolescence, there was no enduringbenefit as there were frequent correc-

tions and up-gradation of the software.

On appeal by the department, the Tribu-

nal reversed the CIT(A) and held that

the expenditure was capital in nature on

the ground that the master copy was an

asset of enduring benefit. On appeal by

the assessee, reversing the Tribunal,

Delhi high Court held that the as-

sessees claim that the master copieshad high accelerated obsolescence and

that even at the point of time of import it

was difficult to say whether the version

would be replaced by a new or updated

version after one day or a month had

not been disproved. Also the facts

showed that there were periodical im-

ports of the master copies and that the

average price per copy was minimal.

This was not a case where the master

copies contained operating or system

software, which normally did not require

frequent up-gradation or changes. It is

also not the case of an assessee which

is the end user of software. It is a case

where the assessee is required to re-

peatedly pay for the master copy media

in view of frequent newer or updated

versions of the application software fromtime to time. Once newer or better ver-

sion of the application software is avail-

able, the earlier version is not saleable

and does not have any market value for

the seller i.e. the assessee. Also, as per

the matching concept in accountancy,

while determining whether expenditure

is capital or revenue in nature, the ques-

tion whether the expenditure would cre-

ate an asset which is of value in furtherassessment periods and should be am-

ortised (i.e. depreciated) as long as it

has value (subject to the statutory provi-

sions) requires to be considered. If the

expenditure does lead to creation of an

asset but of a limited or short life, it has

to be treated as a liability and not as a

fixed asset. The said expenditure can-

not be valued for price for future finan-

cial years (Oracle Software 320 ITR 546(SC),Ashahi India Safety Glass 346 ITR

329 (Del), G.E. Capital Services 300

ITR 420 (Del), O.K. Play 346 ITR 57

(P&H), IAEC Pumps 232 ITR 316 (SC)

referred)

London Star Diamond Company (I) P.

L.td. Vs. DCIT [ITA No. 6169/M/2012,

ITAT Mumbai bench, dtd. 11.10.2013,

in favour of assessee]

Loss on foreign exchange forward

contracts is incidental to the exports

business and not a speculation

loss. However, if the contract is pre-

maturely cancelled, the assessee has

to justify the loss

The assessee, an exporter of diamonds,

entered into forward contracts with

Banks to hedge the exchange loss, if

any, in respect of the outstanding re-

ceivable in foreign currency. The as-

sessee suffered a loss of Rs. 4.69 crore

on account of the maturity & premature


3/153


cancellation of the said forward con-

tracts. The AO & CIT(A) held that the

forward contracts constituted a

speculative transaction u/s 43(5) and

that the loss suffered thereon was a

speculation loss which could not be

set-off against the other income. On

appeal by the assessee to the Tribunal,

ITAT held that-

1. Though a forward contract for pur-

chase or sale of foreign currency

falls in the definition of speculation

transaction u/s 43(5) as it is settled

otherwise than by the actual delivery

or transfer of the commodity, it can-

not be regarded as constituting a

speculation business under Expla-nation 2 to s. 28. A forward contract,

entered into with banks for hedging

losses due to foreign exchange fluc-

tuations on the export proceeds, is

in the nature of a hedging contract

and is integral or incidental to the

export activity of the assessee and

cannot be considered as an inde-

pendent business activity. There-

fore, the losses or gains constitutebusiness loss or gains and do not

arise from speculation activities. The

fact that there is a premature can-

cellation of the forward contract

does not alter the nature of the

transaction. There is also no re-

quirement in the law that there

should be a 1:1 correlation between

the forward contracts and the export

invoices. So long as the total valueof the forward contracts does not

exceed the value of the invoices, the

loss has to be treated as a business

loss (Sooraj Mull Magarmull 129 ITR

169 (Cal), Badridas Gauridu 261

ITR 256 (Bom), Panchamahal

Steel 215 Taxman 140 (Guj)

and Friends and Friends Ship-

ping (Guj) followed; contrary view

in S. Vinodkumar Diamonds (ITAT

Mum) referred);

2. On facts, the loss arising on cancel-

lation of matured forward contracts

is allowable as it is attributable to

the genuine failure of the trade debt-

ors to comply with the credit terms

and conditions. As regards the loss

arising on account of premature

cancellation of the forward con-tracts, the assessee requires to ex-

plain the reason for the premature

cancellation. The explanation that

the maturity of date of some of such

premature cancelled forward con-

tracts fell during the week-end and

therefore they were cancelled three

days prior to the due date is accept-

able and the loss is allowable. The

explanation that some other forwardcontracts were prematurely can-

celled due to business reasons and

to avoid higher loss requires to be

examined by the AO. The corre-

spondence with the banks and the

RBI guidelines on the issue as well

as the accounting treatment by the

banks also requires to be examined.

The assessees alternative argu-

ment that the said loss is damagespayable to the banks for breach of

contracts or settlement of the con-

tracts also requires examination by

the AO.

CIT Vs. Riyaz A. Sheikh [ITA No.

1969 of 2011, Bombay High Court,

dtd. 26.02.2013, in favour of as-

sessee]

Amount received by partner on hisretirement is not chargeable to tax

as capital gains

The assessee, a partner in a firm, re-

ceived Rs. 66 lakhs over and above his

capital contribution on his retirement

from the firm. The assessee claimed

that the said sum was a capital receipt

not chargeable to tax. However, the

AO held that the retirement had re-

sulted in a relinquishment of his pre-

existing rights in the partnership firm

and, therefore, the same was in the

nature of capital gain on transfer of

goodwill and liable to tax under sec. 45

read with sec. 2(47)(i) & (ii) of the Act.

The CIT(A) and Tribunal reversed the

AO on the ground that when a partner

retires from the firm and receives his

share of an amount calculated on the

value of the net partnership assets in-

cluding goodwill of the firm, there is no

transfer of interest of the partner in the

goodwill, and no part of the amount

received is assessable as capital gain

u/s 45 of the Act. It was also held that

the decision of the Bombay High Court

in Tribhuvandas G Patil 115 ITR 95

followed in N A Mody 162 ITR 420 has

been reversed by the Supreme Court

in Tribhuvandas G Patel 236 ITR 515

(SC) and that this legal position had

been noted in Prashant S Joshi 324

ITR 154 (Bom). On appeal by the de-

partment to the High Court, dismissing

the appeal, High Court held that the

Tribunal has correctly referred to the

fact that N.A. Mody 162 ITR 420 (Bom)

followed Tribhuvandas G. Patel 115

ITR 95 and that the same has been

reversed by the Apex Court

in Tribhuvandas G. Patel263 ITR 515.

This Court in Prashant S. Joshi 324

ITR 154 (Bom) has also referred to the

d e c i s i o n o f T r i b u v a n d a s G .

Patel rendered by this Court and its

reversal by the Apex Court. Moreover,

the decision of this Court in Prashant

S. Joshi placed reliance upon the deci-

sion of the Supreme Court in CIT v/s.

R. Lingamallu Rajkumar 247 ITR 801

wherein it has been held that amounts

received on retirement by a partner is

not subject to capital gains tax.


4/154


CIT Vs. M/s. Dynamic Enterprises

[ITA No. 1414/2006, Karnataka High

Court, dtd. 16.09.2013, in favour of

assessee]

Sec. 45(4) does not apply if the retir-

ing partner takes only money to-

wards the value of his share and

there is no distribution of capital as-

sets among the partners

The assessee partnership firm was con-

stituted on 09.01.1985 with Anurag Jain

and Nirmal Kumar Dugar as its part-

ners. On 13.04.1987, Nirmal Kumar

Dugar retired from partnership and L.P.

Jain entered the partnership and con-tributed capital for purchase of land to

construct a housing complex. The as-

sessee-firm purchased land for a con-

sideration of Rs.2.5 lakhs. Another re-

constitution took place on 1.7.1991 by

which L.P. Jain retired from the firm and

Pushpa Jain and Shree Jain were in-

ducted as partners. Later, on

28.04.1993, five partners belonging to

the Khemka Group were inducted. Prior

to the induction of the Khemka Group,

the assets of the firm were revalued.

The three old partners retired through

deed of retirement dated 01.04.1994

and received the enhanced value of the

property in FY 1994-95. The AO held

that the introduction of the Khemka

Group and the retirement of the old

partners was a device adopted to trans-

fer the immovable property and to

evade capital gains tax and stamp duty.

He assessed the firm on capital gains.

This was upheld by the CIT(A) though

reversed the Tribunal. The Tribunal held

that as the land continued to remain

with the assessee-firm, there was no

transfer u/s 2(47) and that the retiring

partners had merely withdrawn the

amounts standing to their credit in the

capital account. On appeal by the de-

partment to the High Court, it was felt

that there was a confl ict be-

tween Mangalore Ganesh Beedi

Works 265 ITR 658 and Gurunath Talk-

ies 328 ITR 59 and the issue was re-

ferred to the Full Bench. The Full Bench

held that:

1. Sec. 45(4) deals with a distribution of

capital assets on the dissolution of a

firm or other AOP or BOI or other-

wise and provides that if in the

course of such distribution of capital

asset there is a transfer of a capital

asset by the firm, the firm shall be

chargeable to tax on capital gains. In

order to attract sec. 45(4), the condi-

tions precedent are (1) there should

be a distribution of capital assets of a

firm; (2) such distribution should re-

sult in transfer of a capital asset by

firm in favour of the partner; (3) on

account of the transfer there should

be a profit or gain derived by the firm

and (4) such distribution should be

on dissolution of the firm or other-

wise. In other words, the capital as-

set of the firm should be transferred

in favour of a partner, resulting infirm ceasing to have any interest in

the capital asset transferred and the

partners should acquire exclusive

interest in the capital asset. On facts,

the partnership firm purchased the

property and it was not in the name

of any partner. No partner brought

that capital asset as capital contribu-

tion into the firm. Also, there was no

dissolution of the firm because thefirm continued to exist even after the

retirement of some partners. What

was given to the retiring partners is

cash representing the value of their

share in the partnership. No capital

asset was transferred on the date of

retirement. In the absence of distri-

bution of a capital asset and in the

absence of transfer of capital asset

in favour of the retiring partners, noprofit or gain arose in the hands of

the partnership firm and so the ques-

tion of the firm being assessed u/s

45(4) would not arise;

2. The departments argument that the

transaction by which the five incom-

ing partners brought money into the

firm and the three erstwhile partners

retired by taking money (leaving the

capital asset in the firm) is a device

adopted to evade payment of profits

or gains is not acceptable because it

proceeds on the premise that the

immovable property belongs to the

erstwhile partners and that after the

retirement the erstwhile partners

have taken cash and given the prop-

erty to the incoming partners. The

property belongs to the partnership

firm and not to the partners. The

partners only had a share in the part-

nership asset when they retired and

took their share in cash, they were

not relinquishing their interest in the

immovable property. What they relin-

quished is their share in the partner-

ship. Therefore, there is no transfer

of a capital asset and no capitalgains or profit arises (Ganesh Beedi

W o r k s 2 6 5 I T R 6 5 8 a p -

proved;Gurunath Talkies 328 ITR

59 reversed; Narayanappa vs.

Bhaskara Krishnappa AIR 1966 SC

1300, Malbar Fisheries Co 120 ITR

49 (SC), Sunil Siddharthbhai 156

ITR 509 (SC), A.N. Naik Associ-

ate 265 ITR 346 (Bom) referred).

Siddhivinayak Kohinoor Venture Vs.

ACIT [TS-590-ITAT-2013(PUN), ITAT

Pune Bench, dtd. 31.10.2013, in fa-

vour of assessee]

Part of municipality approved hous-

ing project also eligible for Sec 80IB

deduction

Part project (comprising of row houses)

treated as independent housing project

and Sec 80-IB deduction allowed;

Housing project not defined in Income

Tax Act nor in local authoritys Develop-

ment Control Rules; Rejects Revenues


5/155


stand that project should mean as ap-

proved by local authority (comprising

of row houses as well as flats); Applica-

tion for completion filed with municipal

authority before cut-off date; Delay in

issuing completion certificate could notbe attributed to assessee and deduction

cannot not be denied.

CIT Vs. NR Portfolio Pvt. Ltd. [TS-593

-HC-2013(DEL), Delhi High Court,

dtd. 22.11.2013, in favour of revenue]

HC reverses Tribunal ruling, taxes

unexplained share application

money pre 2012

HC reverses CIT (A) and ITAT ruling

and confirms income addition u/s 68 on

account of share application money

received without establishing genuine-

ness of investor; Highly implausible that

an unknown person made substantial

investment in a private limited company

without adequately protecting invest-

ment and ensuring appropriate returns;

Assessee adopted prevaricate and non-

cooperative attitude before AO during

assessment; Identity, creditworthiness

or genuineness of transaction not es-

tablished by merely showing that trans-

action was through banking channels.

ITO Vs. Zinger Investments (P.) Ltd.

[(2013) 38 taxmann.com 388

(Hyderabad - Trib.), ITAT Hyderabad

Bench, dtd. 21.08.2013, in favour of

assessee]

Where no monetary consideration

was involved in transfer of manufac-

turing division along with all its as-

sets and liabilities under amalgama-

tion scheme, same could not be con-

sidered as slump sale under section

50B.

The assessee transferred its manufac-

turing division to NIL under a scheme of

amalgamation as per which all the as-

sets and liabilities of the assessee were

vested in NIL. The assessee in return

received certain investments held by

NIL besides allotment of equity shares

to the shareholders of the assessee.

The Assessing Officer held that the

transfer of the manufacturing division to

NIL would tantamount to a 'slump sale'

attracting liability of capital gains undersection 50B. On appeal, the CIT(A)

deleted the order of Assessing Officer.

The aggrieved revenue filed the instant

appeal.The Tribunal held in favour of

assessee as under:

1. To qualify as slump sale two condi-

tions have to be satisfied, viz., (A)

there must be transfer of one or

more undertakings as a result of

sale, and (B) the sale should be for a

lump sum consideration without val-

ues being assigned to the individual

assets and liabilities;

2. In the instant case it was not dis-

puted that there was no monetary

consideration involved for transfer of

the assets and liabilities of the manu-

facturing division to NIL, though

there might have been transfer of anundertaking;

3. Since there was no monetary consid-

eration involved in transferring the

manufacturing division under

scheme of amalgamation approved

by the High Court, it couldnt be con-

sidered to be a slump sale so as to

attract the liability of the capital gain

under section 50B.

ACIT Vs. Prathima Educational Soci-

ety [TS-561-ITAT-2013(Hyd), ITAT

Hyderabad Bench, dtd. 08.11.2013, in

favour of assessee]

Uncorroborated excel sheets seized

during search, not sufficient evi-

dence

Unsigned Excel sheets recovered from

the computer during search & seizure

cannot be considered as sufficient evi-

dence to confirm collection of capitation

fee; Unsigned Excel sheets whose au-

thor is not identified was not further sup-

ported by independent corroboration;

Not sufficient evidence to reflect that

capitation fees was actually collected;

CIT is empowered to grant or refuse the

registration only on the two conditions

laid down under Sec. 12AA(3); Sheetswere dumb documents and cannot form

reason to cancel registration; Relied

upon Madras HC ruling in Sarvodaya

Ilakkiya Pannai

Kathiroor Service Co Operative bank

Ltd. Vs. CIT [Civil Appeal No. 7460 of

2013, The Supreme Court of India,


Sec. 133(6): AO empowered tolaunch fishing and roving enquiry

with a view to detect tax evasion

The ITO issued a issued a notice u/s

133(6) to the assessee-bank u/s 133(6)

of the Act calling for general information

regarding details of all persons who

have made cash transactions and time

deposits of Rs. 1,00,000/- and above for

the period of three years between

01.04.2005 and 31.03.2008. The as-

sessee claimed that sec. 133(6) does

not empower the ITO to conduct a rov-

ing or fishing enquiry into the affairs of

the assessee or regarding the deposits

made by its customers. It was also con-

tended that the AO can only seek case

specific or area specific information u/

s 133(6). The High Court dismissed the

Writ Petition. On appeal by the as-

sessee to the Supreme Court, dismiss-

ing the appeal, The Supreme Court held

that the legislative intention behind sec.

133(6) was to give wide powers to the

income-tax department to gather gen-

eral particulars in the nature of survey

and store those details in the computer

so that the data so collected can be

made use of for checking evasion of tax

effectively. It would not fall under the

restricted domains of being area spe-

cific or case specific. S. 133(6) does

not refer to any enquiry about any par-

ticular person or assessee, but pertains

to information in relation to such points


6/156


or matters which the assessing author-

ty issuing notices requires. This clearly

llustrates that the information of general

nature can be called for and names and

addresses of depositors who hold de-

posits above a particular sum is cer-tainly permissible (Karnataka Bank Ltd

vs. Government of India (2002) 9 SCC

106 followed; M.V. Rajendran vs.

ITO 260 ITR 442 (Ker) approved).

Maharashtra Housing & Area Devel-

opment Authority Vs. ADIT [Stay Ap-

plication No. 293/Mum/2013, ITAT

Mumbai Bench, dtd. 25.11.2013, in

favour of assessee]

AOs action of recovering out-

standing taxes without affording rea-

sonable time to take remedial steps

is a misuse of powers and a gross

violation of the directions laid down

by the Courts. AO has to refund the

taxes recovered

The assessee received the order of the

CIT(A) on 16.11.2013. It filed an appeal

before the Tribunal on 18.11.2013 whichwas the next working day. The as-

sessee also filed an application before

the Tribunal requesting stay of demand.

The said application was fixed for hear-

ng on 22.11.2013. However, the AO,

without awaiting the outcome of the stay

application, attached the assessees

bank account u/s 226(3) on 18.11.2013

and withdrew Rs. 159.84 crore. The as-

sessee argued before the Tribunal that

the coercive action of the AO was wrong

because (i) the AO had taken coercive

action before the expiry of time of filing

the appeal against the order of the CIT

(A), (ii) the action was taken even prior

to the disposal of the stay application by

the Tribunal and (iii) no prior notice was

given to the assessee before taking the

recovery action u/s 226(3). The Tribunal

held that the action of the AO in recov-

ering the outstanding without affording

the assessee minimum reasonable time

to take remedial steps is a misuse of

powers and a gross violation of the di-

rections laid down by the Courts as well

as the basic rule of law and principles of

natural justice. Accordingly, we direct

the Revenue to refund the entire

amount of Rs. 159.84 crore to the as-sessee within 10 days from the receipt

of this order (Mahindra & Mahindra Ltd

UOI 59 ELT 505, Mahindra & Mahin-

dra W.P. 2164/2007, UTI Mutual Fund

345 ITR 71 (Bom), RPG Enter-

prises 251 ITR 20 (Mum) & MSEB 81

ITD 299 (Mum) followed).

CIT Vs. Great Value Food [TS-580-HC

-2013(P&H), Punjab and Haryana

High Court, dtd. 29.10.2013, in favour

of assessee]

Default in payment of 234B/ C inter-

est does not trigger penalty u/s 221

No penalty u/s 221 can be levied for

default in payment of interest u/s 234B

and 234C; Penalty u/s 221 leviable only

when assessee is in default for making

payment of "tax"; Definition of 'tax' u/s 2

(43) does not include penalty or interest;Tax, penalty and interest are different

concepts under the Act; Relied on Cal-

cutta HC ruling in Shreeniwas & Sons;

Distinguished Kerala HC ruling in

E.K.Varghese

DIT Vs. Alcatel Lucent USA Inc. [ITA

No. 327/2012, 330/2012, 338/2012 &

339/2012, Delhi High Court, dtd.


Sec. 234B: A non-resident assessee

which does not admit income charge-

able to tax must be inferred to have

induced the Indian payer not to de-

duct TDS and so it is liable for ad-

vance-tax interest

The assessee, a USA company, sup-

plied telecom equipments to customers

in India. It claimed that it did not have a

PE in India and that the income was not

chargeable to tax. The AO rejected the

claim and attributed 2.5% of the sale

proceeds of the hardware as profit at-

tributable to the PE in India. He also

levied interest u/s 234B for failure to pay

advance-tax. Before the CIT(A), the as-

sessee accepted that the income was

chargeable to tax but argued, relying on

Jacabs Civil Incorporated 330 ITR 578(Del), that as it was a foreign company

and the income was liable for TDS, it

was not liable to pay advance-tax. The

CIT(A) and Tribunal accepted the as-

sessees contention. On appeal by the

department to the High Court, allowing

the appeal, High Court held that:

1. There is a distinction between a case

where the assessee admits that it

has income chargeable to tax in India

but does not pay advance tax on the

basis that the Indian payer ought to

have deducted tax at source u/s 195.

In such a case (as was the fact situa-

tion in Jacabs), the assessee is enti-

tled to take credit for the tax which

was deductible by the Indian payer

while computing its advance tax li-

ability even though no tax was in fact

deducted. However, in a case where

the assessee does not admit any

income in the return, this benefit is

not available. An inference or pre-

sumption can be drawn that the as-

sessee had represented to its Indian

telecom dealers not to deduct tax

from the remittances made to it even

though there is no positive or direct

evidence to that effect;

2. The argument that the Indian partiesshould have discharged their TDS

obligations u/s 195 despite the pre-

sumed request of the assessee is

one of convenience or despair and


7/157


not acceptable because in a practical

view of the matter, the Indian payers

could not have resisted the as-

sessees request given future busi-

ness prospects and the need to keep

the assessee in good humour;

3. Also, having denied its tax liability

and leading the Indian payers to be-

lieve that no tax was deductible it is

inequitable & unfair on the as-

sessees part to shift the responsibil-

ity to the Indian payers & expect

them to deduct tax from the remit-

tances. The assessee must take re-

sponsibility for its volte face. Onceliability to tax is accepted, all conse-

quences follow; they cannot be

avoided;

4. Also, applying equitable principles,

as the assessee deprived the reve-

nue of the advance tax, it must pay

compensation by way of interest.

Dattani & Co. Vs. ITO [Tax Appeal

No. 847 to 849 of 2013, Gujarat HighCourt, dtd. 21.10.2013, in favour of

assessee]

ITAT duty-bound to deal with all

judgements cited during hearing of

appeal

The assessee filed an appeal against

an addition for alleged bogus pur-

chases/sales which was dismissed by

the Tribunal. The assessee filed an ap-peal before the High Court claiming that

he had relied on the judgement in CIT

vs. President Industries 258 ITR 654 in

the verbal and written submissions and

that the Tribunal had not considered it.

The High Court remanding the case to

the Tribunal for fresh consideration,

held that whenever any decision has

been relied upon and / or cited by the

assessee and / or any party, the author-ity / tribunal is bound to consider and /

or deal with the same and opine

whether in the facts and circumstances

of the particular case, the same will be

applicable or not. In the instant case,

the Tribunal has failed to consider and /

or deal with the aforesaid decision cited

and relied upon by the assessee. Under

the circumstances, all these appeals

are required to be remanded to the Tri-

bunal to consider the addition made by

the AO towards alleged bogus pur-

chases/sales and to take appropriate

decision in accordance with law and on

merits and after considering the deci-

sion of this Court in the case of CIT vs.

President Industries 258 ITR 654.

Paresh S. Shah Vs. ITO [M.A. 721 &722/Mum/2012 arising out of ITA No.

7149 & 7150/Mum/2008, ITAT Mumbai

Bench, dtd. 20.09.2013, in favour of

revenue]

Failure to comply with the criterion

necessary to represent the matter

before the Tribunal, in time, renders

appeal liable for dismissal

The assessee filed an appeal before theTribunal but repeatedly sought adjourn-

ments. He also did not file a letter of

authority authorizing his CAs to appear

in the appeal. The Tribunal dismissed

the appeal on the ground that the as-

sessee is not interested in pursuing the

appeal. Thereafter, the assessee filed a

Miscellaneous Application seeking res-

toration of the appeal. The Tribunal re-

stored the appeal even though nopower of attorney was filed even at this

stage. Even after recalling the appeals

the assessee continued to seek ad-

journments on one pretext or the other.

The Tribunal dismissed the appeals and

also awarded costs. The assessee

again filed a Miscellaneous Application

seeking restoration of the appeal. At the

hearing of the MA, the power of attor-

ney of the Counsel was not filed. TheTribunal, dismissing the MA held that-

1. It deserves to be noticed here that in

Mumbai, despite repeatedly pointing

out in each and every case, learned

counsels rarely follow the practice of

filing the power of attorney and many

Members of the Tribunal, who do not

believe it be their obligation to verify

the availability of power of attorney,

may not point out the same to the

counsels and it results in counsels

appearing without filing a power of

attorney. There are equal numbers of

occasions where several other Mem-

bers, including Members of this

Bench, have had occasion to point

out that there was no power of attor-

ney and counsels filed xerox copies

or take further time to file power of

attorney. In fact some would go to

the extent of stating that they as-

sumed that the power of attorney is

on record and when we verify the file

(though it is their duty to file power of

attorney) and inform the counsel that

there is no power of attorney then

fresh power of attorney is filed. Par-

ticularly in the bench which is pre-

sided over by the Vice President, the

registry notes on the file that the

power of attorney of a person, who is

representing the matter, is not on

record and then the power of attor-

ney is filed, notwithstanding the fact

that before filing the power of attor-

ney the same counsel or Chartered

Accountant must have already taken

adjournments on several occasions.

2. On facts, there is no sufficient cause

for restoration of the appeal under

the proviso to Rule 24. The power of

attorney has not been filed. The ap-

peals were dismissed twice as ad-

journments were sought on spurious

grounds. The assessee and his

counsels have done lackluster at-

tempt to represent the matters by not

fulfilling the entire criterion necessary

to represent the matter before the

Tribunal, in time.


8/158

SNKDIRECT TAXESJudicial pronouncements (International Taxation)

Cadbury India Ltd. Vs. ACIT [ITA No.

7408/Mum/2010, ITAT Mumbai bench,

dtd. 13.11.2013, partly in favour of

assessee]

Transfer Pricing: ALP of royalty for

trademark usage and technical know-

how fee can be determined as per

TNMM. Approval of RBI & Govt.

means payment is as at arms length

The assessee entered into an agree-

ment with its parent company, Cadbury

Schweppes, pursuant to which it agreed

to pay royalty for the use of trademarks

and royalty for the use of technical know

-how at 1.25% each of the net sales.

This was approved by the RBI and the

SIA (Government). The assessee

adopted the Transaction Net Margin

Method (TNMM) for computing the

ALP of the international transactions by

comparing the net margin of the com-

pany at entity level with that of compa-

nies engaged in food products, bever-

ages and tobacco business. The TPO

held that the transactions pertaining topayment of royalty for trademarks and

technical know-how fee had to be sepa-

rately and independently bench-marked

using the Comparable Uncontrolled

Prices (CUP) method. He held that the

ALP of royalty and technical know-how

fee should be computed at 1% of sales

the instead of at 1.25% of the sales.

This was reversed by the CIT(A) who

held that the royalty and technical know-how fee paid by the assessee were at

ALP. On appeal by the department to

the Tribunal HELD dismissing the ap-

peal:

The assessee has been paying royalty

on technical know-how to its parent AE

since 1993. Other group companies

across the Globe are also paying the

same royalty. Also, the payment is as

per the approval given by the RBI and

the SIA. Hence there cannot be any

scope of doubt that the royalty payment

on technical know-how is at arms

length. As regards the royalty on trade-

mark usage, the assessee is in fact pay-

ing a lesser amount if the payment is

compared with the payment towards

trademark usage by other group compa-

nies using the brand Cadbury in other

parts of the world. Accordingly, the roy-alty payment on trademark usage is

also within the arms length and does

not call for any adjustment (Lumax In-

dustries (ITAT Del) (attached) followed).

The Departments request for a remand

to the TPO to examine the AMP ex-

penses in the light of Maruti Suzuki 328

ITR 210 (Del) (and L. G. Electronics 140

ITD 41 (Del)(SB)) rejected

Verizon Communications Singapore

Pte Ltd. Vs. ITO [(2013) 39 tax-

mann.com 70 (Madras), Madras High

Court, dtd. 07.11.2013, in favour of

revenue]

In view of FA 2012 retro amend-

ments, IPLC charges from Indian

party is taxable as "royalty" under

section 9(1)(vi) & DTAA

In view of retrospective amendmentsmade to the definition of "royalty" in sec-

tion 9(1)(vi) by the Finance Act,2012 by

inserting Explanations 4 and 5 with ef-

fect from 1-6-1976, bandwidth payments

made by Indian party to non-resident for

International Private Leased Circuit

(IPLC) for providing endto-end internet

connectivity outside India (where con-

nectivity for Indian leg provided by

VSNL due to Indian regulatory require-

ments) is taxable as 'royalty' under sec-

tion 9(1)(vi) of the Act as well as under

article 12(3) of Indo-Singapore DTAA.

DIT Vs. Infrasoft Ltd. [ITA No.

1034/2009, Delhi High Court, dtd.

22.11.2013, in favour of assessee]

Non-exclusive & non-transferable

license to use customized software

not taxable as royalty under Article12 of India-USA DTAA

The assessee, a USA company, set up

a branch office in India for the supply of

software called MX. The software was

customized for the requirements of the

customer (not shrink wrap). The Indian

branch imported the software package

in the form of floppy disks or CDs and

delivered it to the customer. It also in-

stalled the software and trained the cus-tomers. The AO & CIT(A) held that the

software was a copyright and the in-

come from its license was assessable

as royalty under Article 12 of the India-

USA DTAA. On appeal by the as-

sessee, the Tribunal held, follow-

ing Motorola 270 ITR (AT) (SB) 62, that

the income from license of software was

not taxable as royalty. Before the High

Court, the Department argued that inview of CIT vs. Samsung Electron-

ics 345 ITR 494 (Kar), the right to make

a copy of the software and storing it

amounted to copyright work u/s 14(1) of

the Copyright Act and payment made

for the grant of a license for the said

purpose would constitute royalty. HELD

by the High Court dismissing the ap-

peal:

In order to qualify as a royalty payment

under Article 12(3) of the India-USA

DTAA, it is necessary to establish that

there is a transfer of all or any rights

(including the granting of any licence) in

respect of a copyright of a literary, artis-

tic or scientific work. There is a clear

distinction between royalty paid on

transfer of copyright rights and consid-

eration for transfer of copyrighted arti-

cles. Right to use a copyrighted article

or product with the owner retaining his

copyright, is not the same thing as

transferring or assigning rights in rela-

tion to the copyright. The enjoyment of

some or all the rights which the copy-

right owner has, is necessary to invoke

the royalty definition. Viewed from this

angle, a non-exclusive and non-

transferable licence enabling the use of

a copyrighted product cannot be con-

strued as an authority to enjoy any or all

of the enumerated rights ingrained in

Article 12 of DTAA. Where the purpose


9/159


of the licence or the transaction is only

to restrict use of the copyrighted product

for internal business purpose, it would

not be legally correct to state that the

copyright itself or right to use copyright

has been transferred to any extent. The

parting of intellectual property rights in-

herent in and attached to the software

product in favour of the licensee/

customer is what is contemplated by the

Treaty. Merely authorizing or enabling a

customer to have the benefit of data or

instructions contained therein without

any further right to deal with them inde-

pendently does not, amount to transfer

of rights in relation to copyright or con-

ferment of the right of using the copy-

right. The transfer of rights in or over

copyright or the conferment of the right

of use of copyright implies that the

transferee/licensee should acquire

rights either in entirety or partially co-

extensive with the owner/ transferor who

divests himself of the rights he pos-

sesses pro tanto. The license granted to

the licensee permitting him to download

the computer programme and storing it

in the computer for his own use is only

incidental to the facility extended to the

licensee to make use of the copyrighted

product for his internal business pur-

pose. The said process is necessary to

make the programme functional and to

have access to it and is qualitatively

different from the right contemplated by

Article 12 because it is only integral to

the use of copyrighted product. Apart

from such incidental facility, the licensee

has no right to deal with the product just

as the owner would be in a position to

do. Consequently there is no transfer of

any right in respect of copyright by the

assessee and it is a case of mere trans-

fer of a copyrighted article. The payment

is for a copyrighted article and repre-

sents the purchase price of an article

and cannot be considered as royalty

either under the Income-tax Act or un-

der the DTAA (Ericson AB 343 ITR 370

(Del) & Nokia Networks OY 25 tax-

mann.com 225 followed; Samsung Elec-

tronics 345 ITR 494 (Kar) not followed).

Metro & Metro Vs. ACIT [ITA No. 393/

Agra/2012, ITAT Agra bench, dtd.


Law on taxation of fees for technicalservices u/s 9(1)(vii) & Article 12 and

disallowance u/s 40(a)(i) for failure to

deduct TDS explained

The assessee paid Rs 52 lakhs towards

leather testing charges to TUV Product

Und Umwelt GmbH, a tax resident of

Germany, without deduction of tax at

source. The AO & CIT(A) disallowed the

expenditure u/s 40(a)(i) on the ground

that the assessee had failed to deduct

tax at source. Before the Tribunal, the

assessee argued that (a) as Article 12

of the India-Germany DTAA does not

provide that India shall tax fees and

royalties, the same cannot be taxed in

India; (b) as the services were not ren-

dered by the foreign company in India,

the income was not chargeable to tax in

India u/s 9(1)(vii); (c) as the services

were rendered by an automated proc-

ess and there was no human interven-

tion, it did not constitute fees for techni-

cal services as defined in sec. 9(1)(vii);

(d) as the services were used for a

100% EOU whose products were sold

outside India, the source of the income

was outside India and so the exception

in sec. 9(1)(vii) (b) applied; (e) disallow-

ance u/s 40(a)(i) was confined toamounts payable as at the end of the

year as held by the jurisdictional High

Court in Vector Shipping in the context

of sec. 40(a)(ia) and (f) as the taxability

of the services was brought in by a ret-

rospective amendment, the disallow-

ance u/s 40(a)(i) could not be made.

The Tribunal held that:

1. The argument that as Article 12(1) of

the India-German DTAA provides

that the source State (India)

may (and not shall) tax fees for

technical services, the income is not

chargeable to tax in India is not ac-

ceptable because the DTAA does not

provide for taxation of any income. It

allocates the right to tax income

amongst the Contracting States.

Once it enables the Contracting State

to levy tax (by the use of the word

may), the domestic law of the State

come into play. Article 12 of the

DTAA permits India to levy tax on

fees for technical services and roy-

alty though the rate of tax cannot

exceed 10% (Pooja Bhatt 2008 TIOL

558 ITAT Mum referred);

2. the argument that as the services

have been rendered outside India,

the fees thereof cannot be assessed

u/s 9(1)(vii) is not acceptable in view

of the retrospective amendment to

sec. 9(1) by the Finance Act 2010

(Ashapura Minichem 131 TTJ

291, GVK Industries 332 ITR 130

& Clifford Chance 154 TTJ 537

(Mum) (SB) referred;

3. the argument that sec. 9(1)(vii) does

not apply because the entire testing

process is automated and does not

involve human skills and interplay is

not acceptable. While in principle it is

correct that if there is no human inter-

vention in a technical service, it can-

not be treated as a technical service

u/s 9(1)(vii), there is nothing on re-

cord to demonstrate the precise proc-

ess of leather testing adopted by theGerman company. Further, the wider

observations in Siemens (ITAT Mum)

that if there is not much human in-

volvement, it cannot be termed as


10/1510


rendering of technical services is not

correct. It is a question of presence

of or absence of human involvement

and not a question of more of, or less

of, human involvement (Right Flo-

rists 154 TTJ 142, SiemensLtd, Bharti Cellular 319 ITR 139 (Del)

& 330 ITR 239 (SC) referred);

4. the argument that as the assessee is

a 100% EOU, the fees should be

considered to have been used for a

source of income outside India and

therefore not taxable u/s 9(1)(vii)(b)

is not acceptable because even

though the business is a 100% EOU,

it is still a business carried on in In-

dia. Even if the entire products are

sold outside India, the fact of such

export sales by itself does not make

the business having been carried

outside India. A customer is not the

source of income. But if the manu-

facturing facilities are outside India

and the customers are also outside

India, the source will be outside India

and the exception in sec. 9(1)(vii)(b)

will apply;

5. the argument that sec. 40(a)(i) ap-

plies only to amounts payable as at

the end of the year and not to

amounts already paid as held

in Merlyin Shipping 136 ITD SB 23

(Vizag) as approved (by the jurisdic-

tional High Court) inVector Shipping

Services is not acceptable becausethat was in the context of sec. 40(a)

(ia) and not sec. 40(a)(i). Sec. 40(a)

(i) cannot be interpreted in such a

manner so as to restrict the scope of

section to only amounts remaining

payable at the end of the year;

6. However, the argument that disallow-

ance u/s 40(a)(i) cannot be made as

the amount has been made taxable

by the retrospective amendment to

sec. 9 is acceptable. An assessee

cannot be penalized for not perform-

ing the impossible task of deducting

TDS in accordance with the law

which was brought in subsequently

(Channe l Gu ide139 ITD 49

& Sterling Abrasives (Ahd) followed).

CIT Vs. Siemens Public Communica-

tion Networks Ltd. [TS-591-HC-2013

(KAR), Karnataka High Court, dtd.


Karnataka HC holds subvention re-

ceipt taxable, breaks ranks with

other Courts

Subvention payment received from Sie-

mens AG (Principal shareholder)

treated as 'revenue' receipt; Amounts

paid by shareholder, not only to make

good losses, but also to help assessee

run more profitably; After receiving sub-

vention from Siemens AG, assessee

turned business from loss to profit; Ap-

plies 'purpose' test to hold that payment

made as recurring expenses/working

capital; HC reverses ITAT ruling; If fi-

nancial assistance extended for repay-

ment of loan for setting up new unit or

expansion, such aid could be treated as

capital receipt; Reliance placed on SC

rulings in Ponni Sugars & Chemicals

Ltd and Sahney Steel and Press Works.

Vodafone India Services Pvt. Ltd. Vs.

UOI [Writ petition no. 1877 of 2013,

Bombay high Court, dtd. 29.11.2013,

partly in favour of assessee]

Existence of income is a jurisdic-

tional requirement for the applicabil-

ity of T. P. provisions. AO must deal

with it after giving personal hearing

before making reference to TPO. The

dept should not treat the assessee

as an adversary who has to be taxed,

no matter what

The assessee, an Indian company, is-

sued equity shares at the premium of

Rs.8591 per share aggregating

Rs.246.38 crores to its holding com-

pany. Though the transaction was re-

ported as an international transaction

in Form 3 CEB, the assessee claimed

that the transfer pricing provisions did

not apply as there was no income aris-

ing to it. The AO referred the issue to

the TPO without dealing with the pre-

liminary objection. The TPO held that

he could not go into the issue whetherincome had arisen or not because his

jurisdiction was limited to determine the

ALP. He held that the assessee ought

to have charged the NAV of the share

(Rs. 53,775) and that the difference

between the NAV and the issue price

was a deemed loan from the assessee

to the holding company for which the

assessee ought to have received 13.5%

interest. He accordingly computed theadjustment for the shares premium at

Rs. 1308 crore and the interest thereon

at Rs. 88 crore. The AO passed a draft

assessment order u/s 144C(1) in which

he held that he was bound u/s 92-CA(4)

with the TPOs determination and could

not consider the contention whether the

transfer pricing provisions applied. The

assessee filed a Writ Petition challeng-

ing the jurisdiction of the TPO/AO tomake the adjustment. On the merits of

the adjustment, the assessee filed ob-

jections before the DRP. Before the

High Court the assessee argued that (i)

it was a precondition before the transfer

pricing provisions apply that there has

to be income arising to the assessee.

As the allotment of shares at a premium

does not give rise to income, the trans-

fer pricing provisions do not apply, (ii)

there was a breach of natural justice

because neither the TPO nor the AO

had heard the assessee on, or decided,

the fundamental issue as to whether the

transfer pricing provisions applied at all,

(iii) the DRP does not offer an alterna-

tive remedy because the DRP has no

power to quash the draft assessment

order even if it is satisfied that the same

is without jurisdiction & (iv) the DRP

cannot take an unbiased view because

one of its members is the DIT (TP). The

High Court held that:


11/1511


1. The assessees contention that the

DRP does not offer an alternative

remedy because it does not have the

power to quash the assessment or-

der even if it is satisfied that the

same is without jurisdiction is notacceptable because in Vodafone 37

taxmann.com 250 it was held that

the DRPs power to confirm would

include the power not to confirm and

to annul the draft assessment order;

2. It is clear from sec. 92(1) that there

must be income arising/ potentially

arising by an international transac-

tion for the application of the transfer

pricing provisions. This is a jurisdic-

tional requirement and has to be

dealt with by the AO when specifi-

cally raised by the assessee before

making reference to the AO. Grant of

personal hearing before referring the

matter to the TPO has to be read into

s. 92CA(1) in cases where the very

jurisdiction to tax under Chapter X is

challenged by the assessee (Veer

Gems 351 ITR 35 (Guj) disagreed

with to the extent it holds that no

hearing is required at the stage of

reference to the TPO even on juris-

dictional issues). If, after the hearing

the assessee, the AO holds that

there is an international transaction,

that would be binding on the TPO;

3. The departments contention, based

on CBDT Instruction No.3 dated20.05.2003, that the action of the AO

in referring the international transac-

tion is a mere administrative act is

not acceptable. The AO is bound to

hear the assessee in respect of juris-

dictional issues before making the

reference. The failure to do so is an

illegality;

4. The assessees contention that the

DRP would not give a fair hearing as

one of its members is the DIT (TP) is

not acceptable because it overlooks

the fact that these are not appeal

proceedings but to finalize the draft

assessment order. Also, the DIT(TP)

who approved the TPOs order is not

on the panel;

5. The Revenue should keep in mind

t h e s a g e a d v i c e o f N a n i

Palkhivala that the department

should not cause misery and harass-

ment to the taxpayer and the gnaw-

ing feeling that he is made the victim

of palpable injustice. In this case it

would be natural for the assessee to

feel harassed as neither the AO nor

the TPO gave a hearing or dealt with

the preliminary objection. It is hoped

that the revenue will be more sensi-

tive to the just demands of the as-

sessee and not treat the assessee

as an adversary who has to be

taxed, no matter what;

6. The DRP should decide the as-

sessees objection regarding charge-

ability of alleged shortfall in share

premium as a preliminary issue. In

case the DRPs decision on the pre-liminary issue is adverse, the as-

sessee shall be entitled to challenge

it in a writ petition if it can show that

the DRPs decision on the prelimi-

nary issue is patently illegal notwith-

standing the availability of alternate

remedy before the ITAT.

English Indian Clays Ltd. Vs. ACIT

[(2013) 39 taxmann.com 50 (Cochin -

Trib.), ITAT Cochin Bench, dtd.


Payment made to a foreign company

for marketing survey and identifying

potential foreign customers for as-

sessee's product was only for con-

sultancy services and it was taxable

in India as FTS

The assessee engaged a foreign com-

pany SR as marketing agent for South

East Asian countries. SR had to study

the market situation in South East Asia

for the products manufactured by the

assessee and it had to market the prod-

ucts of the assessee in those countries.

The CIT(A) found that payment made to

SR was consultancy charge, therefore,

tax had to be deducted. Accordingly, it

confirmed the disallowance made by

the Assessing Officer. Aggrieved-

assessee filed the instant appeal. The

Tribunal held in favour of revenue as

under:

1. The work of SR was to identify the

potential customers and file a report

regarding the market strategy and

developmental studies;

2. The agreement did not enable SR to

market the products of the assessee

in South East Asian countries. The

company SR only had to do survey

and file a report so that the assessee

could market its products after con-

sidering the report filed by the foreign

party;

3. Therefore, the payment made to SR

was only consultancy charge. It was

not a case of marketing the products

in the foreign country. The CIT (A)

had rightly confirmed the order of the

Assessing Officer. Thus, the order of

the lower authority holding assessee

liable for TDS was to be confirmed.

US Technology Resources (P.) Ltd.

Vs. ACIT [(2013) 39 taxmann.com 23

(Cochin Trib), ITAT Cochin Bench,


Where assessee-company was mak-

ing use of advice, input, experience

and assistance rendered by US

based company in its decision mak-

ing process of financial and risk

management, etc., services so ren-

dered would be technical services

under India-US DTAA.

The assessee-company, engaged in

providing software development ser-vices to the customers in India, claimed

deduction of payment made to US

based company (foreign company) to-

wards management services rendered


12/1512


by it. In course of assessment, the As-

sessing Officer opined that the payment

made by the assessee to foreign com-

pany would come within the ambit of

consultancy fees and, therefore, the it

was liable to deduct tax on these pay-ments under section 195.

Since assessee failed to deduct tax at

source, the Assessing Officer disal-

lowed payments made by assessee by

invoking provisions of section 40(a)(ia).

Further, the CIT (A) confirmed said dis-

allowance. The aggrieved-assessee

filed the instant appeal. The Tribunal

held in favour of revenue as under:

1. The assessee was making use of the

advice, input, experience and assis-

tance rendered by the foreign com-

pany in its decision making process

of financial and risk management,

etc;

2. The foreign company was also giving

training to the assessee's employees

in making use of the inputs, experi-

ence, experimentation, assistance

and advice rendered by them for tak-

ing a better possible decision in or-

der to achieve the desired objec-

tives;

3. Decision making process is a highly

complicated and technical one,

unless the assessee gets a technical

input and advice from financial and

risk management experts it may bedifficult to select a right process for

the growth of the company;

4. It was not the case of the assessee

that in given set of facts/problem, the

foreign company gave its solution or

advice. The solution or decision was,

admittedly, taken by the assessee on

the basis of the advice/service ren-

dered by the foreign company;

5. Therefore, the technical knowledge,

experience, skill possessed by the

foreign company with regard to fi-

nancial and risk management was

made available in the form of advice

or service which was used by the

assessee in the decision making

process not only in management

affairs but also in financial matters;

6. Therefore, such service rendered by

the foreign company was technical in

nature as per India-USA treaty.

Poompuhar Shipping Corporation

Ltd. Vs. ITO [T.C. (A) Nos. 2206 to

2208 of 2006, Madras High Court,

dtd. 09.10.2013, in favour of as-

sessee]

Sec. 9(1)(vi) / Article 12 : Equipment

rental is taxable as royalty even if

payer does not have control. The ret-

rospective insertion of Explanation 5

to sec. 9(1)(vi) is purely clarificatory

The High Court had to consider the fol-

lowing issues in the context of a bare-

boat charter of a shipping vessel from a

foreign party, the income whereof was

held assessable as royalty u/s 9(1)(vi)

& Article 12 in the hands of the foreignparty: (i) whether the expression use or

right to use in clause (iva) of Explana-

tion 2 to s. 9(1)(vi) & Article 12 of the

DTAA requires that there should be a

transfer of effective control for use in

favour of the lessee?, (ii) what is the

impact of the retrospective insertion of

Explanation 5 to s. 9(1)(vi) on the tax-

ability of equipment royalty?, (ii)

whether a ship can be regarded asequipment?, (iii) whether if the ship is

used for plying between coastal waters,

it can be said to be used for

international traffic?, (iv) whether the

two berths reserved for the ships char-

tered by the assessee can be said to be

a permanent establishment of the for-

eign owner? & (v) whether a person

who is treated as an agent u/s 163

can also be proceeded against u/s 201for failure to deduct TDS? The High

Court held that:

1. The assessees argument that in a

case where physical possession is

not with the transferee or the lessee

or the hirer, the payment made for

the use of or right to use of equip-

ment would not constitute royalty is

not acceptable. Under clause (iva)of Explanation 2 to s. 9(1)(vi)

royalty means the consideration

paid for the use or right to use.

Irrespective of whether there is any

transfer or not, the consideration

paid for use or right to use simplic-

iter is sufficient for the consideration

being called as royalty. The pres-

ence or absence of possession,

effective/general control and cus-tody with the assessee, even

though may be matters of agree-

ment, are not of any relevance to

decide the character of payment.

The same result applies under Arti-

cle 12 of the DTAA (Gosalia Ship-

ping 113 ITR 307 (SC), OECD

Commentary referred);

2. Explanation 5, inserted by Finance

Act, 2012, w.r.e.f. 01.06.1976 clari-

fies that irrespective of control or

possession or use or location in

India such right, property or infor-

mation with the payer; the payment

is taxable as royalty. The Revenue

does not need the assistance of

Explanation 5 because even if the

possession of the ship is with the

owner, he has parted with the rightto use the ship and the considera-

tion thereof constitutes royalty

even without Explanation 5;

3. The assessees argument that ship

is not an equipment for purposes

of s. 9(1)(vi) is not acceptable. The

word any preceding an equipment

clearly points out the need for con-

struing equipment widely so as to

embrace every article employed by

the employer for the purposes of his

business. A ship is plant u/s 43(3).

Plant includes all equipment used

by a business man for carrying on


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SNKDIRECT TAXESJudicial pronouncements (International Taxation) / Circulars / Notifications / Instructions

his business. As a ship is used to

carry on business, it is equipment;

4. The argument that a ship used for

plying between coastal lines on the

Indian shore is used in international

traffic is not acceptable in view of

the OECD Commentary;

5. On the question of permanent estab-

lishment, a moving ship is a place of

business in the place where the ship

is docked. The fact that the ship

moved from one point to another is

the result of the nature of business

contract and the movement is an in-

tegrated one having business and

geographical coherence. Accord-ingly, the foreign enterprise has a

permanent establishment in India

when its ships are in India and the

berths are reserved for it. However,

the royalties paid are not effectively

connected or attributable to such

permanent establishment. Accord-

ingly, the payment falls for considera-

tion only under Article 12 and not

under Article 7;

6. The assessees argument that a per-

son who is treated as an agent u/s

163 cannot be proceeded against u/s

201 for failure to deduct TDS is not

correct because the two provisions

operate in different spheres. S. 195

casts an obligation on TDS on any

person responsible for paying,

whereas s. 163 is for assessment

purposes. Proceedings u/s 201 has

nothing to do with the status of the

assessee as an agent u/s 160 and

163 which would assume signifi-

cance only for assessment purposes

(Premier Tyres 134 ITR 17 (Bom)

noted)

Diageo India (P.) Ltd. Vs. DCIT [(2013)

34 taxmann.com 284 (Trib. Mumbai),

ITAT Mumbai bench, dtd. 19.06.2013,

in favour of revenue]

Advertisement, marketing and sales

promotion expenses incurred by as-

sessee, resulting in brand promotion

of foreign AE is an international

transaction, triggering transfer pric-

ing mechanism

The main issue for adjudication is

whether the amount spent on advertise-

ment and brand promotion expenses,

can be held to be giving rise to benefit

to the A.E., treating it as an international

transaction within the ambit of section

92B. With regard to the issue that such

a nature of transaction is an interna-

tional transaction within the ambit of

section 92B read with section 92F, it

has been settled by the Special Bench

in case of L.G. Electronics India (P.)

Ltd. v. Asstt. CIT [2013] 140 ITD 41/29

taxmann.com 300 (Delhi-Trib), that it

does fall within the realm of international

transaction and, hence, transfer pricing

mechanism is triggered.

Cost/value of the international transac-

tion of brand promotion through adver-

tisement, marketing and promotion ex-

penses incurred by the Indian A.E. forthe brand owned by the foreign entity

has to be determined on the basis of

principle laid down by the Special Bench

in LG Electronics India (P.) Ltd. wherein

detailed guidelines and factors have

been laid down for determining the cost/

value of such international transactions.

Therefore, this issue needs to be re-

manded back to the file of the TPO/

Assessing Officer. However, while ap-plying the ratio of the decision in L.G.

Electronics India (P.) Ltd., the TPO

should keep in mind following aspects

which are relevant in the present case-

1. Income from bottling arrangement

will form part of the sales for the pur-

pose of computing ratio of advertise-

ment expenses and net sales;

2. Sales related expenditure should be

excluded while determining the cost/

value of international transactions, as

held by the Special Bench that the

expenditure in connection with the

sales, which do not lead to brand

promotion cannot be brought within

the ambit of advertisement, market-

ing and promotion expenses for de-

termining the cost/value of such

transactions with the A.E

3. Insofar as applicability of methodol-

ogy is concerned, the DRP has ap-

plied CUP method and, therefore, the

TPO will apply CUP method after

selecting the comparables which are

involved in similar type of business,

and if required, fresh comparables

should also be looked into from the

same genus of comparables and

other relevant factors such as prod-ucts, market share, assets employed,

functions performed and other similar

attributes. Suitable adjustment if re-

quired should also be made in natu-

ralising the effect of difference, if any;

and lastly,

4. In assessee's case, CUP method has

been applied for making adjustment

on account of advertisement and

brand promotion expenses and no

mark-up has been applied either by

the TPO or by the DRP. Thus, the

TPO will consider this aspect while

applying the ratio of Special Bench

in L.G. Electronics India (P.) Ltd.

Circulars / Notifications /

Instructions

Notification No. 86/2013, dtd.

01.11.2013

Vide the above notification, Cyprus has

been notified as notified jurisdictional

area under Sec. 94A.


14/15


15/15

SNKINDIRECT TAXESJudicial pronouncements / Circulars / Notifications / Instructions

Due Dates of key compliances pertaining to the month of December 2013:

5thDecember Payment of Service Tax & Excise duty for the month of November

6thDecember Payment of Service tax & Excise duty paid electronically through internet banking for the monthof November

7thDecember TDS/ TCS Payment of November10thDecember Excise Return ER1/ER2/ER6

15thDecember PF Contribution for the month of November

15thDecember Due date for payment of 3rdinstallment for corporate and 2ndinstallment for non corporate as-sessee of advance Tax.

21stDecember ESIC payment of for the month of November

The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any individ-ual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information presentedherein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business decisions.This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.

Further, the Notification states that

Form A-3 pertaining to the period July,

2013 to September 2013 shall be fur-

nished by December 15, 2013.

Notification No. 16/2013-ST dtd.

22.11.2013

At present, it is mandatory to make e-

payment of service tax in case of as-

sesses who have paid service tax of

Rs. 10,00,000 or more in the preceding

financial year.

But vide the above notification, the said

threshold limit of Rs. 10 lakhs has been

change to Rs. 1 lakh w.e.f. 01.01.2014.

Notification No. 15/2013-Central Ex-

cise (NT), dtd. 22.11.2013

Vide the above notification, the thresh-

old limit of Rs. 10 lakhs for e-payment

has been change to Rs. 1 lakh w.e.f.

01.01.2014.

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snk newsletter december 2013

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