C.A.T. Geodata Gmbh, Austria - A.A.R. No. 1119 dt. 31/07/2012(AAR)

S.9(1)(vii) : Income deemed to accrue or arise in India - Fees for technical services - Business of exploration, etc. of mineral oil- Gathering of seismic data for contractor - FTS and not as undertaking the mining project - Exemption under Explanation 2 to section 9(1)(vii) is not available - covered under section 44D and not section 44BB.(S.44BB, 44DA )

The applicant, an Austrian company, was awarded work of acquisition & processing of 3D land seismic data in a block by an Indian consortium. It contended that the activity rendered by it is a mining activity and the fees received were not covered within the definition of FTS by virtue of the exception enacted by Expln. 2 to section 9(1)(vii) of the Act which provides for specific exclusion for any consideration received for any construction, assembly, mining or like project undertaken by the recipient. It further relied on the ruling in Geofizvka Torun Sp. zo.o (AAR No. 813 of 2009) and contended that it would be assessable only under section 44BB(1).

The Authority observed that a person who has merely gathered seismic data for a contractor who has undertaken a mining or like project cannot be said to have undertaken a mining project. Hence, it cannot claim benefit of exception contained in Expln. (2) of section 9(1)(vii) and hence consideration is in nature of Fees for Technical Services. Further, section 44DA was introduced w.e.f. 1.4.2011 after the ruling in Geofizvka was given. Subsequent to such amendment, the instant case cannot be brought under section 44BB if section 44DA or section 115A is applicable to it. Hence, it ruled that the said consideration is not covered under section 44BB but is liable to be taxed as fees for technical services under section 9(1)(vii).

Satyam/PwC - A.A.R. No.1045,1060,1078,1087 & 1088 dt. 27/08/2012 (AAR)

S.5(2) : Scope of total income – Compensation – Fraud - Taxability of Compensation for misrepresentation, fraud compensation on settlement of suits for misstatements, cause of action in India is taxable in India as IFOS and liable to withholding tax. (S. 56, 195)

Shares of an Indian company were listed on BSE and NSE while its American Depository Receipt (ADS) were listed on New York Stock Exchange. Price of its shares fell suddenly as a result of admission by its former Chairman from India that its accounts as on 30.09.2008 contained misstatements. A number of suits were filed against the company and its auditors in US claiming damages. The suits were based on tort, misrepresentation, deceit, fraud. The suits were consolidated and Lead plaintiffs through the lead counsel filed consolidated Class Action Complaint. The parties arrived at a negotiated settlement of disputes subject to approval of court. Company agreed to pay $125 million and auditors agreed to pay $25 million to Qualified Settlement Fund (QSF) to be administered by Lead Counsel for distribution amongst those qualified to participate in class action. The amounts were transferred by company and auditors to QSF after taking RBI approval. US Court passed final judgment confirming the settlement as fair, reasonable and adequate.

Issue that came up before AAR was whether the compensation was taxable in India and liable to withholding tax under section 195 of the Act.

The Authority observed that right of action is different from cause of action. Even though the plaintiffs had a right of action in US, their cause of action arose or accrued in India by reason of the alleged misrepresentation, tort, etc. practiced by the company and its auditors in India. Therefore it ruled that compensation accrued or arose in India within the meaning of section 5(2). It further ruled that the compensation was neither capital receipt nor capital gains but a revenue receipt and that the compensation or damages are taxable as income from other sources under section 56(1).

Satyam/PwC - A.A.R. No.1045,1060,1078,1087 & 1088 dt. 27/08/2012 (AAR)

eBay International AG v. ADIT (Mum.)(Trib)

S. 9(1)(viii) : Income deemed to accrue or arise in India – Managerial, technical or consultancy services – What constitutes a “Dependent Agent Permanent Establishment” & “Place of Management”.

(i) The fees received by the assessee, a Swiss company, from enabling sellers registered on its offshore website to sell goods to buyers in India is not assessable as “fees for technical services” u/s 9(1)(viii) as the assessee does not render any “managerial, technical or consultancy services” to the payers. The assessee’s websites are analogous to a market place where the buyers and sellers assemble to transact. By providing a platform for doing business the assessee is not rendering services either to the buyer or to the seller which can be assessed as “fees for technical services“;

(ii) In order to constitute a “Dependent Agent Permanent Establishment” of the assessee under Article 5(5) of the DTAA, it is essential that the agent should “habitually exercise an authority to negotiate and enter into contracts for or on behalf of’ the assessee”. On facts, though eBay India & eBay Motors conducted activities exclusively on behalf of the assessee and thus became its dependent agents, they did not constitute a “Dependent Agent Permanent Establishment” because they did not conduct any of the activities set out in the three clauses of Article 5(5) of the DTAA. By simply providing marketing services to the assessee or making collection from the customers and forwarding the same to the assessee, it cannot be said that eBay India entered into contracts on behalf of the assessee. There are also no examples of any contract entered into by eBay India or eBay Motors for or on behalf of the assessee. Thus the test laid down in Article 5(5)(i) of the DTAA is not satisfied.

(iii) eBay India & eBay Motors also do not constitute a “place of management” so as to be a PE under Article 5(2)(a) of the DTAA. A “place of management” ordinarily refers to a place where overall managerial decisions of the enterprise are taken. eBay India & eBay Motors are not taking any managerial decision. They are simply rendering marketing services to the assessee in the form of collection of amount from the customers and remitting the same to the assessee, apart from creating awareness amongst the Indian sellers about the availability of the assessee’s websites in India. All business decisions and deals are settled through the assessee’s websites. eBay India & eBay Motors have no role to play either in the maintenance or the operation of the websites. They have absolutely no say in the matter of entering into online business agreements between the sellers and the assessee or the finalisation of transactions between the buyers and sellers resulting into the accrual of the assessee’s revenue. Consequently, they are not a “place of management” of the assessee’s overall business. (A. Y. 2006-2007)

NS Global Services Pvt. Ltd v. ITO ( Mum.)(Trib.)

S.10A : Newly established undertakings – Free trade zone –Section 10A (9) applied prospectively but its omission has retrospective effect.

Till A.Y. 2003-04, the assessee’s shares were held by British Airways and Warburg Pincus. In A.Y. 2003-04, there was a change in the beneficial interest in the shareholding. For A.Y. 2004-05, the assessee claimed S. 10A deduction of ` 19 crores in respect of its STPs which were set up pre-2000. The CIT took the view that the S. 10A deduction was not allowable for

A.Y. 2003-04 & 2004-05 in view of s. 10A(9) which was introduced in A.Y. 2001-02 to provide that if the “beneficial interest” in the undertaking was transferred, s. 10A deduction would not be allowed. For A.Y. 2003-04, the CIT’s stand was upheld by the Tribunal. However, for A.Y. 2004-05, Held by the Tribunal, reversing the CIT:

(i) Circular No.8 of 2002 dated 27.8.2002 states that s. 10A(9) was inserted in A.Y. 2001-02 to “to curb trading in incentives by shell companies and to discourage unscrupulous shopping of EOUs and STPs and not to discourage genuine business re–organizations”. On facts, the change in the assessee’s shareholding was by way of global re–organization of the business and cannot be said to be non-genuine;

(ii) When s.10A(9) was omitted in A.Y. 2004-05, the Finance Minister said in the budget speech that the provision was “illogical” and had to be removed. Given the object & purpose of the omission, it can be held that the omission has retrospective effect and applies to change in the ownership in A.Y. 2003–04. Further, sub–section (9) was omitted without any saving clause and it is not a case of repeal. If a provision in a statute is unconditionally omitted without any saving clause in favour of the pending proceedings, all actions must stop where such an omission is found. As S.10A(9) has been omitted, it is as if the sub-section never existed in the statute (G. E. Thermo Matrix (ITAT Bengeluru followed);

(iii) Though for A.Y. 2003–04, the Tribunal upheld the CIT’s stand, this cannot be followed as a precedent because (a) while in A.Y. 2003-04, s. 10A(9) was on the statue and there was a change in shareholding, in A.Y. 2004-05, it was not, (b) In Zycus Infotech (2011) 331 ITR 72 (Bom.) it was held that s. 10A(9) does not have retrospective effect and is applicable only to undertakings set up after 1.4.2001. As the assessee’s STP undertakings were set up before that date, s. 10A(9) had no application. (A.Y. 2004-05)

NS Global Services Pvt. Ltd v. ITO ( Mum.)(Trib.)

DIT v. National Association of Software and Services Companies (2012) 345 ITR 362 / 208 Taxman 178 (Delhi) (High Court)

S.11 : Charitable or religious purposes – Application of income – Commercial principles – Annual subscription – One time admission fees – Accumulation of income – Provision for doubtful debts- Taxes paid was treated as application of income – Amount spent in Germany could not be considered as application of income of the Trust in India for charitable purposes. Annual subscription fee paid to keep the membership alive cannot be assessable as business income. One time admission fee paid by members is corpus donation hence not assessable as income. Option to accumulate the income has to be applied before expiry of time allowed under section 139(1) there is no provision to condone the delay.

[S. 28(iii), 36(i)(vii), 36(2)(i),139(1)]

The assessee is a trust registered under section 12A of the Act. Assessee had filed declaration on income and paid the taxes under Voluntary Disclosure of Income Scheme, 1997. The assessee claimed the payment of taxes as application of income. The assessee also incurred the expenses outside India (Hanover, Germany), the assessee claimed the said expenses as application of income. The Assessing Officer held that the expenditure incurred outside India cannot be considered as application of income in India for charitable purpose. The view of Assessing Officer was confirmed by the Commissioner of income –tax (Appeals). On appeal to the Tribunal, the Tribunal held that, the payment of taxes under VDIS should be treated as application of income of the trust. As regards the expenditure incurred in Germany is concerned, the Tribunal was of the view that the words “is applied to such purpose in India” appearing in section 11(1)(a) of the Act only mean that the purpose of the Trust should be in India and that application of the Trust need not be in India. The Tribunal has accepted the contention of assessee. On appeal by revenue, the court after referring the Circular no 5 dated June 19, 1968 held that taxes paid under the VDIS 1997 was to be deducted before arriving at the commercial income of the Trust available for application of income. As regards the amount spent at Germany the Court held that the requirement of provision is that the income of the trust should be applied not only to charitable purposes, but also applied in India to such purposes. Therefore, on a proper interpretation of section 11(1)(a) of the Act, the amount spent by assessee – trust in Germany could not be considered as application of income of the Trust for charitable purpose. 
As regards the option to accumulate the income for future application to charitable purpose has to be exercised by the trust in writing before the expiry of the time allowed under section 139(1) for furnishing the return of income, as provided in Explanation (iib) below section 11(1) of the Act. In respect all years under consideration the time has expired and there was no provision to condone the delay. As the assessee has not made the application within time the assessee could not be granted time to make good the shortfall in the application of the income of the  trust by permitting the assessee to apply for accumulation of the amount in shortfall for future application.

As regards the receipt of annual subscription fees, the assessee trust had not been shown to have performed any specific services to the members. Whereas the annual subscription fee were recurring receipt, receivable by the assessee –trust by mere efflux of time irrespective of whether any services were rendered or not to the members, what is contemplated in section 28(iii) is the receipt of fees from particular members to whom specific services have been rendered by trust. The annual subscription fee was paid merely to keep the membership alive on yearly basis. The distinction between the two being clear, and in the absence of any evidence to show that the assessee received fees from members as “quid pro quo” for specific services rendered to them, the tribunal was right in holding that the annual subscriptions fees were not assessable under the section. 
As regards the one-time admission fee paid by members they were aware that it could be spent by the assessee only for the purpose of acquiring a capital asset therefore the amount must be held to be a corpus donation, not taxable as income .Income of the trust available for application to charitable purposes in India should be computed not in accordance with the strict provisions of the Act but should be computed in accordance with commercial principles. Under commercial principle it has always been reognised that a provision reasonably made for a loss or an outgoing, can be deducted from the income if there is apprehension that the debt might became bad. As there was nothing on record to show that the provision was not made bonafide, therefore while computing the income available to the trust for application to charitable purpose in India in accordance with section 11(1)(a) the provision for doubtful debts must be deducted. (A. Ys. 1988-89, 2002-03 to 2006-07)

DIT v. Nokia Networks OY and others (2012) 78 DTR 41 (Delhi) (High Court) & DIT v. CIT Alcatek New Delhi (2012 78 DTR 41 (Delhi) (High Court) & Nokia Net works OY v. ADIT (2012) 78 DTR 41 (Delhi) (High Court)

S.9(1)(vi) : Income deemed to accrue or arise in India – Software – Royalty – DTAA – India-Finland – Off-shore supply profits not taxable. (Art.13 )

The assessee, a French company, sold GSM equipment manufactured in Finland to Indian telecom operators from outside India on a principal to principal basis, under independent buyer-seller arrangements. Installation activities were undertaken by the assessee’s subsidiary. The Assessing Officer and Commissioner (Appeals) held that the assessee’s liaison office and subsidiary constituted a Permanent Establishment (PE) and a portion of revenue was attributable to the PE and the whole of software revenue was held as assessable as “royalty” under section 9(1)(vii) and Article 13. The Tribunal decided the issue in favour of assessee. On appeal by revenue, the court held that as regards the profits on supply of equipment, the legal position is that the places of negotiation, the place of signing of agreement or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. The only relevant factor is as to where the property in the goods passes. As the goods were manufactured outside India and the sale has taken place outside India, even in a “composite contract”, the supply has to be segregated from the installation and only then would question of apportionment arise to determine the extent to which it arises in section 9(1)(i). The departmental argument that composite contracts cannot be  split so as to exempt supply profit is not acceptable.

As regards the profits on supply of software, there is a distinction between the supply of a “copy right” and supply of a “copyrighted article”. Though the Explanation 4 was added to section 9(1)(vi) by the Finance Act, 2012 with retrospective effect from 1-6-1976 to provide that all consideration for user of software shall be assessable as “royalty” the definition in the DTAA has been left unchanged. In CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom.)(High Court), it was held that amendments cannot be read in the treaty. As the assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as “royalty” despite the retrospective amendments to the Act. (A.Ys. 1997-98 and 1998-99( ITA 512 of 2007. 1137 of 2006 /1138 of 2006/ 505 of 2007/506 of 2007/359 of 2005/ 1324 of 2007/30 of 2008 dated 7-9-2012)

DIT v. Nokia Networks OY and others (2012) 78 DTR 41 (Delhi) (High Court)

DIT v. CIT Alcatek New Delhi (2012 78 DTR 41 (Delhi) (High Court)

Nokia Net works OY v. ADIT (2012) 78 DTR 41 (Delhi) (High Court)

Institute of Chartered Accountants of India (ICAI) v. Director General of IT (E) (2012) 347 ITR 99 (Delhi)(High Court)

S.2(15) : Definitions – Charitable purpose – Institute conducting coaching classes and charging fees, denial of exemption is held to be not valid. [S. 10(23C)(vi)]

The Institute of Chartered Accountants of India was denied exemption u/s. 10(23C)(vi) for the A.Y. 2006-07 onwards on the grounds that

(i) the Institute was holding coaching classes and, therefore, was not an educational institution as per the interpretation placed on the word “education” used in sec. 2(15); (ii) the Institute was covered under the last limb of charitable purpose, i.e, advancement of any other object of general public utility. In view of the amendment made in sec. 2(15) of the Act with effect from April 1, 2009, for the asst. year 2009-10 onwards, the Institute was not entitled to exemption as it was an institution which conducted an activity in the nature of business and also charged fee or consideration.

Held, that the fundamental or dominant function of the Institute was to exercise overall control and regulate the activities of the members/enrolled chartered accountants. A very narrow view had been taken that the Institute was holding coaching classes and that this amounted to business. The Institute had framed the Chartered Accountants Regulations, 1988, and the Regulations provided for training of students, their examination, award of degrees and membership of the Institute. There was a clear distinction between coaching classes conducted by private coaching institutions and the courses and examinations which were held by the Institute. The question whether the Institute carried on business had not been examined with proper perspective. The Institute maintained that it never granted any loan and/or advance to the Institute of Chartered Accountants of India Accounting Research Foundation. The facts regarding this question had not been considered. The order denying the exemption was not valid. (A.Y. 2006-07, 2007-08, 2008-09, 2009-10)

ACIT v. Gebilal Kanhaialal HUF (2012) 252 CTR 345 / 76 DTR 345 (SC)

S. 271(1)(c) : Penalty – Concealment – Immunity – Explanation 5 immunity available even if tax not paid by due date of filing of return – [S. 132(4)]

In a s. 132 search and seizure operation, on July 29, 1987 the assessee was found with unaccounted income of ` 42 lakhs. The assessee made a declaration u/s 132(4) and offered the said amount to tax. However, neither the return of income was filed, nor was the tax due on the surrendered income paid, on the due date  (31-7-1987). The tax was paid during the assessment proceedings. The AO took the view that the assessee was not entitled to immunity from penalty under Explanation 5 to s. 271(1)(c) as it had not paid the tax due on the surrendered income by the due date. The CIT(A) reversed the AO. The Tribunal reversed the finding of CIT(A) High Court reversed the finding of Tribunal and decided in favour of assessee. On appeal by the department the Supreme Court, held dismissing the appeal: Explanation 5 to s. 271(1)(c) is a deeming provision which provides that if, in the course of search u/s 132, the assessee is found to be the owner of unaccounted assets and he claims that such assets have been acquired by him by utilizing, wholly or partly, his income for any previous year which has ended before the date of search or which is to end on or after the date of search, then, in such a situation, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall be deemed to have concealed the particulars of his income for the purposes of imposition of penalty u/s 271(1)(c). Sub-clause (2) confers an immunity from penalty if three conditions are fulfilled, namely, (i) the assessee must make a statement u/s 132(4) in the course of search stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in s. 139(1), (ii) the assessee should specify in the s. 132(4) statement the manner in which such income stood derived and (iii) the tax together with the interest has to be paid. There is no time limit prescribed in the third condition for the payment of the tax & interest. As the assessee had fulfilled the first two conditions and paid the tax & interest (before the completion of the assessment), it was entitled to immunity under Explanation 5 to s. 271(1)(c).

(A. Y. 1987-88)

DIT v. Citibank N.A. (2012) 210 Taxman 258 (SC)

S. 261 : Appeal – Supreme Court – Delay – Supreme Court flays department for “peculiar phenomenon” of delay in filing high stakes appeals

For the reasons given in the Orders passed by this Court on 2nd July, 2012, and 13th August, 2012, on account of huge delay in filing the special leave petitions as also in filing the appeal before the High Court, we had asked the Department to file an affidavit explaining the delay in filing the above proceedings. The affidavit has been filed. It is reiteration of the same affidavit which has been filed earlier in the High Court and the Supreme Court. Further, the affidavit has not been filed by the concerned officer. The amount involved in this matter is approximately Rupees ninety crores. Since the affidavit in this Court pursuant to our Orders, as above, is not satisfactory, we want to know from the learned Additional Solicitor General as to whether the Department intends to hold a departmental inquiry for the above delay.

In large number of cases, we find a peculiar phenomenon. In cases, where huge revenue/demand from the Department is involved, invariably, there is inordinate delay in filing appeals before the High Court under Section 260A of the Income Tax Act, 1961, and in filing special leave petitions before this Court. We do not know the reason why such inordinate delays take place only in matters of high stakes. This aspect needs to be looked into. This aspect has been brought to the notice of the learned Attorney General as well as the Ministry of Law in the past. This is one such case. Even in the past, this Court has raised a similar query. Moreover, once a matter is dismissed on the ground of delay, it has a ricocheting effect.

In the above circumstances, we direct the Registry to forward a copy of this Order to the Hon’ble Finance Minister and Hon’ble Law Minister for doing the needful at the departmental level so that such cases of revenue leakages do not recur. (SLP No. 19986/2011 dated 14-9-2012)

CIT v. Gujarat Flouro Chemicals (2012) 348 ITR 314 (SC)

S. 214 : Advance tax – Interest payable by government – Tax deducted at source – Aggregate of advance tax/ TDS paid exceeds the assessed tax, advance tax or tax deducted at source loses its identity as soon as it is adjusted against the liability created by the assessment order and becomes tax paid pursuant to the assessment order hence the Judgment of Sandvik Asia requires reconsideration

Issue under consideration before the Apex Court was whether interest is payable by the Revenue to the assessee if the aggregate of installments of Advance Tax/TDS paid exceeds the assessed tax. The assessee relied upon Sandvik Asia Limited v. CIT (2006) 280 ITR 643 (SC) where it was held that the assessee was entitled to be compensated by the Revenue for delay in paying to it the amounts admittedly due. The apex court doubting the correctness of Sandvik Asia (supra) held that the judgement in Modi Industries Ltd. and Others v. CIT (1995) 216 ITR 759 (SC) correctly laid down that advance Tax or TDS loses its identity as soon as it is adjusted against the liability created by the assessment order and becomes tax paid pursuant to the assessment order. If Advance Tax or TDS loses its identity and becomes tax paid on the passing of the Assessment Order, then, is the assessee not entitled to interest under the relevant provisions of the Act? The Apex Court thus held that the view taken in Sandvik Asia was not correct and thus, directed the Registry to place this matter before Hon’ble the Chief Justice on the administrative side for appropriate orders.

Morinda Co-operative Sugar Mills Ltd v. CIT (2012) 253 CTR 225/210 Taxman 233 (SC)

S. 80P(2)(a)(iii) : Deduction – Co-operative societies – Marketing of agricultural produce grown by its members – Manufacture – Sugar in to sucrose – To decide what is manufacture the department should have a panel of experts

The assessee is a co-operative sugar mill. The assessee buys sugarcane from its members. It undertakes a particular operation whose final outcome is final product in the form of sugar. The assessee claimed the deduction under section 80P(2)(iii) of the Act. The question before the Apex Court was whether the final product (sugar) would make the assessee (s) entitled to claim the benefit of section 80P(2)(iii) of the Income tax Act 1961, in respect of marketing of the agricultural produce grown by it members.? Whether the operation undertaken by the assessee(s) constitute manufacture.?. The assessee contended that the process undertaken by the assessee is not a ‘manufacture’. Broadly, according to the assessee sugar (also called ‘sucrose’) hence the process is not manufacture. According to department process constitute ‘manufacture’. The Department referred the judgment of Apex court in CIT v. Oracle Software India Ltd. (____) 340 ITR 546 (SC), wherein it has been observed that, the terms ‘manufacture’ implies a change, but every change is not a manufacture, despite the fact that every change in article is that the result of a treatment of labour and manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation/process renders a commodity or article for its use for which it is otherwise not fit, the operation /process falls within the meaning of the word ‘manufacture’. The court said the question whether conversion of sugar in to sucrose is ‘manufacture’ should be decided by experts. The Court remitted the matter to the file of Commissioner (Appeals) to decide the issue after getting the opinion of experts and giving an reasonable opportunity to the assessee. (C.A. No. 2445 of 2005 dated 26-9-2012 and others)

CIT v. Bannari Amman Sugars Ltd (2012) 210 Taxman 271 (SC)

S. 145 : Assessment – Method of valuation of stock – Valuation of closing stock – To implement the incentive scheme, sugar was rightly valued at levy price which was less than the cost of manufacture of sugar.

The assessee company engaged in the business of manufacture and sale of sugar. The assessee valued the closing stock of sugar at levy price which is less than the cost price. Department valued the same at cost price. The question raised before the Apex Court was “whether on the facts and in the circumstances of the case, ITAT was right in holding that closing stock of incentive sugar has to be valued at levy price and not cost price”.

The court observed that, valuation of opening and closing stock is very important for true profits. An improper valuation could result in rejection of books of account though all that is needed for rectifying it, is to make an addition or necessary adjustment based on proper valuation. Valuation of stock, whatever may be the method, should be consistently followed. Method of valuation is generally at cost or the market value whichever of the two, is lower. As the incentive scheme was held to be a capital receipt in CIT v. Ponni Sugars and chemicals Ltd. (2008) 306 ITR 392(SC), the assessee is right in valuing the closing stock of incentive sugar at levy price which was less than the cost of manufacture of sugar (Cost price). The court also observed that “If we were to accept the case of the Department that the excess amount realised by manufacturer(s) over the levy price was a revenue receipt taxable under the Act, then the very purpose of the incentive scheme formulated by Sampat Committee would have been defeated. One cannot have a stock valuation which converts a capital receipt in to revenue income”. Appeals filed by the Department were dismissed. (A.Ys. 1992-93 to 1997-98 )(C.A. No. 7014 of 2012 arising out of SLP no 9263 of 2009 dated 
26-9-2012 and others)

DCIT vs. Dr. Reddy's Laboratories Limited [ITA No. 867 & 868/Hyd/03] (Hyderabad Tribunal) dated 24 May, 2013

Facts

The taxpayer was engaged in the business of manufacturing, trading and exporting of bulk drugs and pharmaceuticals. It was also engaged in research and development of bulk drugs and pharmaceuticals.

In order to market its products in USA and Canada, the taxpayer was required to get approval from the respective regulatory authorities. In USA, the authority is called as US Federal Drug Authority (USFDA) and in Canada, the authority is called as Therapeutic Product Programme Authority (TPPA).

For this purpose, the taxpayer was required to get its products tested through certain specialised organisations in USA/Canada which were called as Contract Research Organisations (CRO).

The testing process was called 'bio-equivalence study'. During the bio-equivalence study, the CROs do clinical research and analyse the impact of the drug on human beings.

Issue

Whether payments for bio-equivalent studies are taxable under India-USA and India-Canada tax treaty?

Held

Even though the AO considered that the payments were made by way of FIS as per Article 12 of the tax treaty, the same is taxable in the source country only if such services make available any technical knowledge, expertise, etc. or there is transfer of technical plan or design.

The Tribunal held that the CIT(A) was correct in holding that the taxpayer was conducting clinical trials through the CROs to comply with the regulations therein and the CROs who were experts in this field were only conducting studies and submitting the reports in relation thereto.

There was neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to the taxpayer.

The taxpayer did not get any benefit out of the said services in USA and the taxpayer was only getting a report in respect of field study on its behalf, which would help it in getting registered with the regulatory authority.

Since there was no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the taxpayer do not fall under Article 12, but come within the purview of Article 7 of the tax treaty.

Therefore, the amounts paid are to be considered as business receipts of the said CROs and in absence of CRO's PE in India, there was no need to deduct tax at source.

The Tribunal relied on the decision of Anapharm INC, where it was held that the taxpayer, tax resident of Canada, only providing final results to its Indian clients by using highly sophisticated bio-analytical know-how, without providing any access whatsoever to the clients to such know-how. Therefore, fee received by the taxpayer was business income and not fee for technical/included services or royalty and applicant having no PE in India, such income would not be taxable in India.

In view of above it was held that the amounts paid by the taxpayer to the CROs are not taxable in India.

CIT v. Smifs Securities Ltd. (SC) (2012) 348 ITR 302 (SC)

S. 32 : Depreciation – Goodwill –Intangible – “Goodwill” is an intangible asset eligible for depreciation

Pursuant to an amalgamation of another company with the assessee, the difference between the consideration paid by the assessee and the net value of assets of the amalgamating company was treated by the assessee as “goodwill” and depreciation of ` 54 lakhs was claimed thereon u/s 32(1)(ii). The AO rejected the claim on the ground that (i) “goodwill” was not an “intangible asset” as defined in Explanation 3 to s. 32(1) and (ii) the assessee had not paid anything for the same. The Tribunal and High Court upheld the assessee’s claim. On appeal by the department to the Supreme Court, Held dismissing the appeal:

Explanation 3 to s. 32 states that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. The words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3 indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature“. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Consequently, “Goodwill” is an asset under Explanation 3(b) to s. 32(1) and eligible for depreciation. Though the AO held that the assessee had not “paid” anything for the goodwill, this cannot be accepted because (a) the CIT(A) and Tribunal correctly held that the difference between the cost of an asset and the amount paid in the process of amalgamation constituted “goodwill” and (b) this aspect was not challenged by the department before the High Court. (A.Y.)

St. Jude Medical (Hong Kong) Ltd. vs. DDIT (ITA Nos.4626 & 4627/Mum/2005) (Mumbai ITAT) dated 5 June, 2013

 

Facts

The taxpayer is a Hong Kong based company and a wholly owned subsidiary of St. Jude Medical Inc. (SJMI), a US based company. The taxpayer had set up a Liaison Office (LO) in India with the permission of the Reserve Bank of India (RBI). Subsequently, the taxpayer decided to close the LO and set up a branch office with the permission of RBI. Accordingly, LO was closed on 31st December, 1999 and the branch office started functioning on

1st January, 2000.

The taxpayer declared nil taxable income on the ground that its operations in India were restricted to act as a LO which has not earned any income in India.

Later, a survey was conducted on the taxpayer, and on the basis of documents impounded in the course of survey, the Assessing Officer (AO) held that the taxpayer was involved in the business activity and had a 'business connection' in India.

Accordingly, the AO treated the taxpayer's Liaison Office in India as PE of SJMI and estimated the profits on the sales made by SJMI as well as the taxpayer and determined the tax and interest thereon in one assessment order.

The Commissioner of Income Tax (Appeals) held that the taxpayer has business connection and there exists a PE in India. Further, he affirmed the profits estimation on sale of both SJMI and the taxpayer. However, the CIT(A) held that income of US company cannot be estimated in taxpayer's hands.

Issues

Whether the income attributable to the PE of the US company in India can be taxed in the hands of a Hong Kong company on account of the Hong Kong company's Liaison Office in India?

Held

The procedure adopted by the AO, to attribute the income of SJMI in the hands of the taxpayer, was not correct since there should be separate proceedings for two separate companies established in different countries. Further, this aspect was considered by the CIT(A) in later years and accepted the taxpayer's contentions in later years.

It is legally not possible to consider the profits attributable to SJMI in the hands of the taxpayer and therefore, the profit of SJMI was excluded from the income of the taxpayer.

The entire basis for arriving at the findings of the tax department that the taxpayer had done business activities in the guise of LO was based on the statement recorded during the survey when the LO was already closed and the branch office was functioning for more than a year. Consequently, the documents collected after the survey cannot be relied for the prior period.

The documents submitted by the tax department do not indicate that the taxpayer was involved in direct sales activity except co-ordinating and liaisoning with various distributors and doctors who are to use the products. Further, these documents do not establish that the taxpayer was involved in business activity before it became a branch office.

There was a clear distinction between the liaison activities and the branch activity and the taxpayer was not involved in business activity when they were only permitted to do liaison activity by the RBI.

The taxpayer was involved in liaison activities up to 31st March, 1999 and not in sales activity. The attribution of income and estimation of gross profits in relation to A.Y. 1999-2000 cannot be done since the taxpayer did not have any business connection or business activity though its LO.

In relation to the A.Y. 2000-01, there is business activity for a period of three months in the year after the taxpayer established the branch. Therefore, the profits attributable to the branch office for the sales made in the three month period from January 2000 to March 2000 are to be confirmed. Accordingly, the AO was directed to examine the sales made and the expenditure incurred during that period to arrive at the taxable profits.

Accordingly, the addition of business profits of SJMI as income of the taxpayer was deleted in total for both the years. Also, the profit attributable to the liaison period was deleted.

Abacus International (P.) Ltd. vs. DDIT [2013] 34 taxmann.com 21 (Mumbai ITAT) dated 31 May, 2013

Facts

The taxpayer is a company resident of Singapore engaged in the business of Computerised Reservation System (CRS). Its primary business is to make airline reservations for and on behalf of the participating airlines and for this purpose, it uses the CRS.

During the year under consideration the taxpayer was granted refund by the Income-tax department which included interest on such refund. The taxpayer offered such interest for tax at the rate of 15 per cent as per Article 11 of the tax treaty.

The Assessing Officer (the AO) denied the concessional tax rate under the tax treaty since the taxpayer did not furnish any proof of remittance to Singapore. Therefore, such interest income has to be taxed at the rate of 20 per cent in accordance with Section 115A of the Act.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the order of the AO.

Issue

Whether the interest received on income-tax refund can be taxed at concessional rate provided under the tax treaty if such interest is not received in Singapore?

Held

The taxpayer could not lead any direct evidence to show that such amount was received in Singapore.

As per Article 24(1) of the tax treaty, where the tax treaty provides that income from source in India shall be taxed at a reduced rate in India and shall also be taxed in Singapore, then the said income shall be taxed at the reduced rate prescribed in the tax treaty provided the income is 'remitted to or received in' Singapore.

Article 24 of the tax treaty limits the relief granted by other relevant Articles, including Article 11 of the tax treaty, subject to the fulfilment of the conditions enshrined therein.

Accordingly, if the income is not remitted to or received in Singapore, then the benefit of Article 11 of the tax treaty providing for a reduced rate of tax of 15 per cent cannot be extended to the taxpayer. In that situation, the income will be taxed as per the Act.

The requirement of Article 24 of the tax treaty is that the taxpayer must have received the interest income in Singapore. The relevant facts for proving this are available in the domain of the taxpayer alone. Simply not having a bank account in India does not mean that the amount was received in Singapore. The requirement of Article 24 is to receive the amount of interest in Singapore, which can't be established by proving that the amount was not received in India.

The burden is on the taxpayer to prove that the amount of income was remitted to or received in Singapore. However, the taxpayer has not shown any supporting evidence to prove the fulfilment of the requisite condition.

Accordingly, the interest on income-tax refund shall not be taxed at the concessional tax rate under the tax treaty and it shall be taxed at the rate of 20 per cent as per Section 115A of the Act.

Penalty - Case Laws

The penalty had been imposed under Rule 15(2) of CCR Rules, 2004 read with section 11AC of Central Excise Act, 1944. Rule 15(2) covered only input and capital goods during the relevant period. The appropriate section is rule 15(3) which covered input services and there is no mechanism to invoke section 11AC nor section 78 under this rule. The levy of penalty of ` 10,000/ was justified under the circumstances of the case. [Balrampur Chini Mills Ltd. vs. CCE (2013)30 STR 384 (Tri.-Del.)]

If the asseesee pays the service tax and interest before service of SCN, no SCN can be served on him. Penalty u/s. 76 is set aside. [MD Engineers vs. CCE (2013) 30 STR 389 (Tri.-Ahmd.)] [Section 73(3) & Para 9.1 of Master Circular No. 97/8/2007-ST, dated 23-8-2007]

The appellant having not registered with the service tax department paid the service tax along with interest on being pointed out by the department. The appellant being a small taxpayer was not aware of the provisions of the service tax law, the service tax being a new levy of tax, after taking a lenient view and giving the benefit of section 80 penalty demand has been waived. [Prince Thermal India Pvt. Ltd. vs. CCE (2013) 30 STR 394 (Tri.- Mum.)]

As soon as the assessee was informed that the credit taken in respect of services provided prior to 10-9-2004 is not admissible, they paid the service tax along with interest even prior to the issuance of SCN. There was no suppression or fraud or misdeclaration of facts since there is no dispute about the payment of service tax by the service provider and receiver and credit was take on proper documents. [Astral Pharma Ltd. vs. CCE, Vadodara (2013) 30 STR 397 (Tri.-Ahmd.)]

The service tax levy on GTA service was introduced from 1-1-2005 and the appellant was not aware of their service tax liability. Moreover the appellants paid the service tax and interest on being pointed out by the department. Section 73(3) of the Finance Act is applicable as there is no suppression, collusion, wilful misstatement or fraud on the part of the appellant and in that circumstances benefit of section 80 is to be given to the appellant. [Phoenix Engineering vs. CCE (2013) 30 STR 399 (Tri.-Chennai)]

Once penalty under section 78 is imposed there is no justification for imposing separate penalty under section 76 [CCE vs. Merino Industries Ltd. (2013) 30 STR 413(Tri.-Del.) relying on CCE vs. City Motors 2010(19) STR 486]

The appellant could not take registration and pay the Service Tax under bona fide belief that due to changes introduced in the Management, Maintenance and Repair Service and Erection, Commissioning and Installation service from time to time. However on being pointed out appellants obtained the Service Tax Registration and paid the dues. Penalty u/s. 76 is not imposable in view of the provisions of section 80. [NI Associates vs. CST (2013) 30 STR 416(Tri.-Mum.)]

The appellants were providing Manpower Recruitment or Supply Agency service and had not paid service tax during the period June 2005 to June 2009. The service tax liability on the Manpower Supply services was introduced w.e.f. 16/6/2005. The definition of Manpower Supply service has undergone change twice. All these confusions may have created a situation wherein the assesee may not be aware of exact service tax liability. Hence it is a fit case for invoking section 80. Penalty set aside. [Jashbhai vs. CCE (2013) (30) STR 444(Tri.-Ahmd.)]