Foreign cos may escape double taxation

Foreign companies may soon be spared of getting taxed twice on their operations in India. The revenue department is planning negotiations with its counterparts in major trading partner countries so that firms could be given credit in their home country for tax paid here. Currently, Indian tax authorities at times ask these companies to pay tax on an income higher than what they have shown initially. This is on the basis of the extra incomes which the authorities think have been made by these MNCs from their Indian operations. The extra income is also called attributable income. Since India's Double Taxation Avoidance Agreements (DTAAs) with other countries don't offset the tax on attributable income paid by the MNCs in India, these companies have no option but to bear the burden.

Source : Financial Express

Banks like ICICI, HDFC and Axis scrap personal surety clause in MFI debt-recast

ICICI Bank, HDFC Bank and Axis Bank are among lenders that have scrapped personal guarantee clause to bail out four microfinance companies, but they could be on the hook in the Rs 7,000-crore debt restructuring if business prospects do not improve dramatically. The lenders have agreed to waive the personal guarantee since the deadline to finalise a rescue package was fast approaching, people familiar with the development said. The deadline to complete the corporate debt restructuring expires on September 30. "We have decided to end the stalemate and waive the personal guarantee clause for Spandana Spoorthy Financial, Asmitha Microfin, Share Microfin and Trident Microfin," a senior banker involved with the negotiations said. The terms of the CDR proposal for each institution will be finalised by next week. Banks have also convinced MFI promoters to infuse capital during the period of loan recast. "Future Financial had agreed to grant personal guarantee, so that stays," he said.

Source : Economic Times

Stocks like TCS, Infosys, HCL Tech, Wipro, NIIT Tech jump; Rupee slides further

For a change, traders across markets chose to pick the good news on Tuesday, no matter how flaky they may turn out to be later. They banked on Greece's pledge to cut down its bloated public sector, Spain's ability to stay afloat, and speculation about Fed coming out with new measures on Wednesday. Cutting down bearish bets ahead of the Fed meeting, they chose to ignore Italy's downgrade by S&P, dip in US housing numbers, and a lower global growth forecast by the IMF. Select Asian stock markets rose, with India being the biggest gainer, while there was a stock rally in Europe after Greece temporarily averted a default by repaying bond interest. The Dow too opened higher. It's widely perceived that the US Federal Reserve may carry out "Operation Twist" to soften long-term interest rates - a move that could lower loan defaults from home buyers and stabilise the mortgage market.

Source : The Economic Times

Service tax: Negative list approach not a revenue raising measure

The Finance Ministry has said that the exercise of introducing a negative list for taxation of services was not primarily being done to mobilise more revenues or tax people to a greater extent. With service tax mop up expected to grow by 20-25 per cent on implementation of negative list, many stakeholders see this proposed introduction as a “revenue raising measure”. “A large part of the tax you might collect as service tax (under the negative list approach) would be available as credit with another section of services sector or in the manufacturing sector. It's not that simply because the figures are going up, that is the net amount Government will be getting. That's not true,” Mr V.K. Garg, Joint Secretary, CBEC, said at a Phdcci conference on ‘Negative List of Services and its implications' here today.

Source : The Hindu Business Line

Search and seizure

The material on the basis of which the warrant of authorisation under s 132 was issued and the search and seizure operations were carried out, should be disclosed to the assessee unless privilege is claimed, as held by AllHC in Dr Roop v CIT, Meerut — In favour of: The assessee (partly).

Where the major portion of the quantum has been decided by the Tribunal against the assessee, the revenue cannot be allowed to retain the seized assets on the ground that the department does not have the power to divide the assets in the proportion of the ITAT order and also that the department is filing an appeal against the ITAT order for the part relief granted to the assessee.

In the instant case, the Court has also directed that in case the petitioner furnishes the security of Rs 15 lakhs, which will be other than a cash and bank guarantee, the entire articles, including hard disk, documents, jewellery, cash and FDRs seized and lying in the custody of the Income Tax Department shall be released within 15 days from the date the security is furnished to the satisfaction of the AO.

Decided on: 12 August 2011.

Capital gains

Unless the provisions of s 53A of the Transfer of Property Act are satisfied on the facts of a case, a transaction relating to a Development Agreement of a property cannot fall within the scope of deemed transfer under s 2(47)(v) of the IT Act, as held by HydTrib in K Radhika v DCIT — In favour of: The assessee (partly).

The assessee had received only a “meager amount” out of the total consideration, the transferee was avoiding adhering to the agreement and there was no evidence brought on record by the revenue authorities to show that actual construction had taken place at the impugned property in the assessment year under consideration and, also, there was no evidence to show that the right to receive the sale consideration was actually accrued to the assessee. Without accrual of the consideration to the assessee, the assessee was not expected to pay capital gains on the entire agreed sales consideration. When time is the essence of the contract, and the time schedule is not adhered to, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal under s 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in s 53A of the Transfer of Property Act. The provisions of s 2(47)(v) will not apply to the assessees in the assessment year under consideration.

Capital gains vis-à-vis business income — When the assessee was not engaged in the regular activity of purchasing and selling agricultural land and the land was held as an investment, even if the land was developed and sold after converting the same into plots with a view to secure a better price, it cannot come within the purview of adventure in the nature of trade and business.

Decided on: 9 September 2011.

Survey

Undisclosed income — The retraction of the statement made in the survey after six months of disclosing undisclosed income, on the ground of the use of force, held to be an afterthought since the assessee failed to complain to higher authorities immediately after the survey, as held by MumTrib in Synthetic Colour Chem Industries v Dy CIT — In favour of: The revenue.

Accounts — In case parts of the entries in the books of accounts were found to be correct, the remaining part could not be rejected as incorrect.

Decided on: 11 May 2011.

CBDT wing formed to track poll expenditure, financing , 20 September 2011

The finance ministry has set up a special investigation unit under the Central Board of Direct Taxes (CBDT) to investigate funding and donations made to political parties. The new unit will function under the CBDT and will also deal with highly sensitive matters, such as those related to armed units of criminal investigation of the income tax department and the work of the marine and air snoop units for special anti-tax evasion operations.

Official sources have confirmed that the unit will be headed by a commissioner rank officer of the I-T department and will “monitor election-related expenditure, regulate political funding and enforce compliance to tax laws by political parties and groups, including checking exemptions granted to parties”. The unit will report to the CBDT chairman, who is handling the investigation charge himself in view of the intensive activity underway to unearth black money in the country.

The unit will also keep tabs on “very high net worth individuals” and “high net worth individuals” to “deepen the tax base in these groups of taxpayers”.

Source: The Economic Times.

Notification No. 51/2011, Dated: 14-9-2011 [F.No.203/71/2010/ITA-II]

Section 35(1)(iii) of the Income-tax Act, 1961 – Scientific Research Expenditure –

Approval of Mangalore University, Mangalore as an organization in the category of

'University' partly engaged in research activities for purpose of section 35(1)(iii)

It is hereby notified for general information that the organization Mangalore University,

Mangalore has been approved by the Central Government for the purpose of clause (iii) of

sub-section (1) of section 35 of the Income-tax Act, 1961, said Act, read with Rules 5C and

5E of the Income-tax Rules, 1962 (said Rules), from Assessment year 2011-12 onwards in

the category of 'University', partly engaged in research activities subject to the following

conditions, namely:-

i) The sums paid to the approved organization shall be utilized for research in social

sciences;

ii) The approved organization shall carry out research in social science or statistical

research through its faculty members or its enrolled students.

iii) The approved organization shall maintain separate books of accounts in respect of

the sums received by it for scientific research, reflect therein the amounts used for

carrying our research, get such books audited by an accountant as defined in the

explanation to sub-section (2) of section 288 of the said Act and furnish the report of

such audit duly signed the verified by such accountant to the Commissioner of

Income-tax or the Director of Income-tax having jurisdiction over the case, by the due

date of furnishing the return of income under sub-section (1) of section 139 of the said

Act;

iv) The approved organization shall maintain a separate statement of donations

received and amounts applied for research in social science and a copy of such

statement duly certified by the auditor shall accompany the report of audit referred to

above.

2. The Central Government shall withdraw the approval if the approved organization:-

a. fails to maintain separate books of accounts referred to in sub-paragraph (iii) of

paragraph 1; or

b. fails to furnish its audit report referred to in sub-paragraph (iii) of paragraph 1; or

c. fails to furnish its statement of the donations received and sums applied for research

in social science or statistical research referred in sub-paragraph (iv) of paragraph 1;

or

d. ceases to carry on its research activities or its research activities are not found to be

genuine; or

e. ceases to confirm to and comply with the provisions of clause (iii) of sub-section

(1) of section 35 of the said Act read with rules 5C and 5E of the said Rules.

 

Exemption under s 11

The generation of surplus out of the fees collected would not indicate a profit motive and the activity of the assessee cannot be said to be tainted with an element of commerciality to disentitle the trust from claiming the exemption under s 11, as held by CuttackTrib in ITO v Human Resource Development and Management Trust (ASBM Trust) — In favour of: The assessee.

Once it is held that the trust exists for the purpose for which it received registration under s 12AA, and there is no violation under s 13, the capital expenditure has to be allowed as an application of the funds under s 11(1) to work out the surplus or deficit.

The AO is not entitled to disturb the book result in the case of a trust during the currency of registration under s 12AA to derive his own conclusion.

The CIT(A) was justified in holding that the training of development and eloquence is incidental to the AICTE recommended course of management where the students are admitted on the basis of CAT/MAT scores.

Fees collected by the assessee during the year could not be considered as excessive to ascribe the same as “capitation fee” disentitling the institution from the benefits of s 11(iv).

The activity of the trust in running a “finishing school” cannot be treated as a distinct business activity, as distinguished from charitable activity, but a part of the activity of imparting education by the trust. The provisions contained in s 11(4A) do not apply.

The provisions contained in s 13(1)(c) do not bar payment of a reasonable salary for services rendered by an interested person. It is only when such payment is found unreasonable or excessive that stipulation of cl (c) of s 13(2) would be attracted.

Decided on: 29 July 2011.

 

Income of shipping companies

Tonnage income from the business of operating qualifying ships — Receipts emanating from the activities, which do not have a direct and necessary nexus with the shipping/dredging activities of the assessee-company, cannot be exempted under the tonnage tax scheme, as held by VisakhapatnamTrib in Dredging Corpn of India Ltd v ACIT — In favour of: The revenue (partly).

Thus, the income received by the assessee on the sale of scraps and assets, and gains realised on foreign exchange fluctuation, are entitled to the exemption, whereas the recovery of rent for leased quarters, interest on housing loans and other advances, recovery towards late attendance, sale of tender documents, training fees, fees for the supply of information under the RTI Act, liquidated damages collected from various contractee parties as compensatory payment for the failure to execute contract works within the stipulated time are not entitled to the exemption.

Interest on excess refund — Reassessment proceedings under s 147 after the completion of the assessment under s 143(3) are excluded from the purview of a “regular” assessment for the purpose of s 234D.

Decided on: 25 July 2011.

 

Gift tax

Once, in the income-tax proceedings, it is accepted that the transactions are genuine and bona fide, the additions made in the proceedings under the Gift Tax Act on the ground that the transaction was a colourable device cannot be accepted, as held by MumHC in CGT v Ajay Bajaj — In favour of: The assessee.

The Tribunal, in its judgment relating to the income tax proceedings, has held that in the absence of any material evidence brought on record to suggest that the partnership between the assessee and her son related as far back as to the year 1946, the addition in the hands of the assessee on the mere suspicion that there was a deemed gift cannot be sustained. The Tribunal has held that the sales transaction was at arm’s length. There is nothing on record to suggest that the above findings recorded in the income tax proceedings have been reversed or varied.

Once, in the income-tax proceedings, it is accepted that the transactions are genuine and bona fide, the additions made in the proceedings under the Gift Tax Act on the ground that the transaction was a colourable device cannot be accepted. Therefore, the payments made to the son being in his capacity as a partner of the firm, the said amount could not be treated as a deemed gift given by the assessee to her son.

Decided on: 18 August 2011.

Capital gains vis-à-vis business income

Profit on the sale of investment shares held as capital assets are assessable under the head “capital gain” and the period of holding of such assets cannot determine its status or change it from investment (capital) to trading (stock-in-trade), as held by KolTrib in DCIT v Reliance Trading Enterprises Ltd — In favour of: The assessee (partly).

Profit arising from the sale of shares and securities which were held as investments in its books of accounts and where no borrowed funds were utilised for the same is assessable under the head “capital gain” and not as business income.

The intention of the assessee at the time of acquiring the shares is relevant and important for deciding the nature of the transaction as trading or investment.

Merely because the assessee has held some of the shares for a period of less than 12 months along with the other shares under the head “investment”, there cannot be a subdivision of the transaction and to hold that those shares, which had been held by the assessee for a period of less than 12 months, should not be considered under the head “investment” and to hold them as trading in nature.

Decided on: 28 July 2011.

 

Income deemed to accrue or arise in India

Profits earned by M/s ANR, who acted as a dependent agent for the non-resident assessee, are taxable in India, as held by DelHC in Rolls Royce Singapore Pvt Ltd v ADIT — In favour of: The revenue (partly).

To constitute a “Dependent Agent Permanent Establishment” under Art 5(9) of the India–Singapore DTAA, it has to be seen whether the activities of the agent are “devoted wholly or almost wholly on behalf of the assessee”.

Transfer pricing — Arm’s length principle — Since the assessee non-resident was in a position to dictate the terms, and in the absence of any Transfer Pricing Analysis by the Transfer Pricing Officer in the instant case, it cannot be said that such commission could fit the description of “reasonable profits” within the meaning of Art 7(2) of the DTAA.

To find out whether the agent is remunerative at arm’s length, it is necessary to take into account all the risk taking functions of the multinational enterprise.

Decided on: 30 August 2011.

 

Cash credits

While making an addition under s 68, the AO has to advert to each and every entry and not pick up a couple of entries, as in the present case, and label the entire set of deposits made during the assessment year as undisclosed income of the assessee, as held by DelHC in CIT v Kinetic Capital Finance Ltd — In favour of: The assessee.

Once the assessee has discharged that initial onus, he is not required thereafter to prove the genuineness of the transactions as between its creditors and that of the creditors’ source of income, ie the sub-creditors.

Decided on: 2 September 2011.

Transfer pricing

Associated enterprises — Whether one enterprise controls the decision-making of the other or whether the decision-making of two or more enterprises are controlled by the same interests, these enterprises are required to be treated as “associated enterprises”, as held by MumTrib in Diageo India (P) Ltd v DCIT — In favour of: The assessee (partly).

Merely because an assessee has made a high profit or high loss, that cannot be sufficient ground for its exclusion from comparables.

Where the pre-1st October 2009 position is concerned, the adjustment of 5 per cent is to be allowed even in cases where the difference in the value of international transactions and its ALP is more than 5 per cent.

The reference to the TPO is transaction-specific and not enterprise-specific, the TPO has no powers to go into a matter which has not been referred to him by the AO.

Business expenditure — Expenditure incurred by the appellant on account of software is assessable as capital expenditure.

Decided on: 5 September 2011.

 

Settlement Commission

The order of the Settlement Commission is conclusive. No power is vested in the Assessing Officer to issue a notice in respect of the period and income covered by the order of the Settlement Commission, as held by AllHC in CIT v Diksha Singh — In favour of: The assessee.

Once the matter falls within the jurisdiction of the Settlement Commission, then with regard to such matter, only the Settlement Commission will have the jurisdiction to impose tax and not the assessing authority.

In the absence of any right conferred by the Act, the mere observation of the Settlement Commission will not empower the assessing or appellate authority to reassess the matter on any ground whatsoever for the same financial year with regard to which the Settlement Commission had exercised jurisdiction and given a finding.

Once power has been conferred on the Settlement Commission itself to deal with a contingency, then such power cannot be delegated directly or indirectly to any authority of the Income-tax Department.

There is no statutory provision which may empower the Settlement Commission to restore back the matter in respect of certain items to the Assessing Officer and also finally settle the income of the assessee.

Decided on: 24 August 2011.

Notification No 49/2011, dated 6 September 2011 & Notification No 48/2011, dated 2 September 2011.

Notification No 49/2011, dated 6 September 2011.

Section 10(45) of the Income-tax Act, 1961 — Incomes not included in total income — Notified allowances and perquisites paid to the Chairman or a retired Chairman or any other member or retired member of the Union Public Service Commission.

Notification No 48/2011, dated 2 September 2011.

Section 90A of the Income-tax Act, 1961 — Double Taxation Agreement between India–Taipei — Adoption by the Central Government of an agreement between specified associations for double taxation relief — Specified territory and specified association.

 

Business expenditure

Revenue or capital expenditure — Expenditure incurred on the buy-back of shares is assessable as revenue expenditure and not as capital expenditure, as held by KolTrib in ACIT v Britannia Industries Ltd — In favour of: The assessee.

Payments made at different check posts by the transporters are allowable as business expenditure, the same being compensatory in nature to avoid delays in the delivery of goods and not for the infraction of law.

Club membership fees paid for the membership of the directors and executives are an allowable business expenditure



Bad debt — Merely because the assessee was not in the business of financing or moneylending, that fact alone does not lead to the conclusion that monies were not advanced in the course of or for the purpose of the assessee’s business.

Loss incurred upon the assignment of a loan to a third party was allowable as revenue deduction.

Depreciation — The assessee is entitled to depreciation on assets used in R & D.

Loss — Capital loss — In order to apply s 94(7), it is incumbent upon the AO to prove that the assessee sold the shares or units within three months after the date on which the dividend was declared.


The word “month”, for the purposes of s 94(7), means the period starting from the day subsequent to the “record date” and ending one day preceding the corresponding day in next month.

Decided on: 31 August 2010.

Income

The CIT(A) was justified in deleting the addition in computing the wealth tax of the assessee made on account of rental income from properties since the same was used primarily for the purpose of assessee’s business and they were neither created nor let out for earning rental income, as held by GujHC in CIT v Gujarat State Petroleum Corpn Ltd — In favour of: The assessee.

The CIT(A) as well as the Tribunal have both concurrently come to the conclusion that the said two immoveable properties were utilised by the assessee for the purpose of its own business. The assessee, a government-owned company, had pointed that the property at Udyog Bhavan was permitted to be used by the Government Officer for a short period and usage charges were collected. It has come on record that only a small portion of the properties, ie less than 10% of the premises, were thus used by the Office of the Directorate of Petroleum, Department of Energy and Petrochemicals. This was done by the direction of the Government.

The main purpose of this arrangement was to have close liaison with the Directorate of Petroleum. It has also come on record that the guest house at Hazira was located at a distance of 30 km from Surat and it was in the vicinity of the exploration site of the assessee. In the said guest house, as per the needs of the business, the officer of the joint venture and subsidiary companies and other officers were permitted to reside, and in the process, usage charges were collected. Principally, the guest house was constructed for the assessee’s own business. Thus, the CIT(A) and the Tribunal committed no error in holding that both the properties were used by the assessee’s own business and not for creating rental income.

Decided on: 16 August 2011.

 

Cash credits

Unsecured loans from directors and shareholders — The AO was not justified in making the addition under s 68 merely because creditors have not appeared before the AO and when the assessee-company has proven the creditworthiness of creditors and genuineness of transaction, as all transactions were routed through bank accounts and monies were paid by the assessee through cross-cheques, as held by DelHC in Mod Creations Pvt Ltd v ITO — In favour of: The assessee.

Section 68 of the ITA only sets up a presumption against the assessee whenever unexplained credits are found in the books of accounts of the assessee, but this presumption is rebuttable.

Decided on: 29 August 2011.

Permanent establishment

When a project office (PO) was opened by a non-resident Korean company in India for the coordination and execution of a project in India/abroad and no restriction had been imposed by the RBI on the workings of the project office, the fixed place PE had come into existence in the shape of a project office and such project office is a PE within the meaning of Art 5.1 of the India and Korea DTAA as the assessee had wholly or partly carried out its business activity through it, as held by DelTrib in Samsung Heavy Industries Co Ltd v ADIT (International Taxation) — In favour of: The revenue (partly).

However, the AO was not justified in attributing 25% of the outside India revenue to the PE of the assessee in India, since there was a lack of material made available on record to ascertain as to what extent the activities of business were carried on by the assessee through its Mumbai project office and that such fact had to be determined before deciding the percentage of attribution of the outside India activity of the assessee to its PE in India. Thus, the matter was remitted to the AO.

Decided on: 30 August 2011.

Gift tax

Once, in the income-tax proceedings, it is accepted that the transactions are genuine and bona fide, the additions made in the proceedings under the Gift Tax Act on the ground that the transaction was a colourable device cannot be accepted, as held by MumHC in CGT v Ajay Bajaj — In favour of: The assessee.

The Tribunal, in its judgment relating to the income tax proceedings, has held that in the absence of any material evidence brought on record to suggest that the partnership between the assessee and her son related as far back as to the year 1946, the addition in the hands of the assessee on the mere suspicion that there was a deemed gift cannot be sustained. The Tribunal has held that the sales transaction was at arm’s length. There is nothing on record to suggest that the above findings recorded in the income tax proceedings have been reversed or varied.

Once, in the income-tax proceedings, it is accepted that the transactions are genuine and bona fide, the additions made in the proceedings under the Gift Tax Act on the ground that the transaction was a colourable device cannot be accepted. Therefore, the payments made to the son being in his capacity as a partner of the firm, the said amount could not be treated as a deemed gift given by the assessee to her son.

Decided on: 18 August 2011.

Income of shipping companies

Tonnage income from the business of operating qualifying ships — Receipts emanating from the activities, which do not have a direct and necessary nexus with the shipping/dredging activities of the assessee-company, cannot be exempted under the tonnage tax scheme, as held by VisakhapatnamTrib in Dredging Corpn of India Ltd v ACIT — In favour of: The revenue (partly).

Thus, the income received by the assessee on the sale of scraps and assets, and gains realised on foreign exchange fluctuation, are entitled to the exemption, whereas the recovery of rent for leased quarters, interest on housing loans and other advances, recovery towards late attendance, sale of tender documents, training fees, fees for the supply of information under the RTI Act, liquidated damages collected from various contractee parties as compensatory payment for the failure to execute contract works within the stipulated time are not entitled to the exemption.

Interest on excess refund — Reassessment proceedings under s 147 after the completion of the assessment under s 143(3) are excluded from the purview of a “regular” assessment for the purpose of s 234D.

Decided on: 25 July 2011.

Business expenditure — Bad debt

Brokerage/commission income arising to the share broker (assessee) constitutes trading debt, and when amount of such brokerage/commission has been taken into account in the computation of income of the relevant previous year or any earlier year, the assessee is entitled to a deduction under s 36(1)(vii) by way of bad debts after having written off the said debts from his books of accounts as irrecoverable, as held by MumTrib in BS Vasa v DCIT — In favour of: The assessee (partly).

The matter is remitted to the AO to decide the assessee’s (share broker) claim of deduction under s 36(1)(vii), where the assessee had written off a certain amount of brokerage/commission received from his clients and claimed a deduction under s 36(1)(vii), since it was not examined as to whether the commission income accruing to the assessee as a result of transactions done on behalf of the clients was offered to tax or not.

After 1 April 1989, it is not necessary for the assessee to establish that the debt had, in fact, become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

Decided on: 29 July 2011.

Disallowance under s 40(a)(ia)

The AO was not justified in making a disallowance on the hire charge expenses under s 40(a)(ia) in spite of the non-filing of Form No 15-J, as required under third proviso to cl (i) of sub-s (3) of s 194C, since the assessee-transporter has received Form 15-I from the vehicle owners for the non-deduction of tax, as held by KolTrib in ITO v Rajesh Kr Garg — In favour of: The assessee.

Disallowance under s 40A(3) — Payment to agent — No disallowance under s 40A(3) can be made if all cash payments in a day during one occasion did not exceed the prescribed limit of Rs 20,000 during AY 2006–2007.

Decided on: 5 August 2011.

Contempt

An attempt by the CIT-DRs to interfere with the due course of judicial proceedings or to obstruct the administration of justice by raising “false and frivolous” submissions constitutes “criminal contempt” and directions could be issued in such cases for the recovery of costs from salary, as held by MumTrib inCIT v Simoni Gems — In favour of: The assessee.

Decided on: 30 August 2011.