Margin of trading segment can’t be applied to indenting segment; no re-characterization unless facts justify

TPO cannot re-characterize assessee's indenting activity as trading activity unless it can be demonstrated by facts on record that the assessee though calling it a "service provider" was actually acting as a "trader". Absent facts justifying such re-characterization, there was no justification for TPO to apply trading margins to assessee's indenting activity under TNMM

In the instant case, the assessee had two segments-trading and indenting. Indenting was done by the assessee for its overseas AE and bulk of its turnover was from indenting.  Besides, indenting, assessee had small amount of trading with non-AEs. The gross profit margin (commission) for indenting on AE sales was 1.48% while GP margin on trading was 1.81%. TPO applied trading margin of 1.81% to indenting sales and made additions for difference between 1.81% and 1.48%. DRP upheld TPO's additions. Hence present appeal by assessee to ITAT

The Tribunal held as under:

1) As per the contracted terms and the unrebutted stand of the assessee it was merely providing indenting services. At no point of time the title in goods or possession of the merchandise was in assessee's hands. The contract was entered into by SCJ (AE) and Indian customers directly whether for export or import;

2) The negotiations were directly done by AE and the Indian customers, and the assessee merely functions as a facilitator. The assessee doesn’t need to incur cost either for maintaining or storing the inventory or for the transportation as the title in goods was never held by the assessee for its indenting activity as a service provider. Consequently, the assessee was not exposed to any credit risk in maintaining the inventory nor was the assessee exposed to price risk or the risk linked with offering credit sales;

3) It is an accepted economic principle that the trader acting as an entrepreneur is exposed to price risk, cost risk, credit risk, warranty risk etc, which would necessitate the contract being entered into and negotiated by assessee. In its indenting activity these facts were not evident;

4)  The performance of the critical functions, like decisions to enter into contract, to negotiate the terms of the contract, to decide the level and extent of exposure for price risk, credit risk, warranty risk etc are some of the risks to which a trader is exposed. The record shows that at no point of time the assessee was ever exposed to any of those risks as such, the two activities could not be treated at par and thus invited a similar treatment. There was no justification to apply the margins of trading activity to indenting activity in the facts of the present case - Sojitz India (P.) Ltd. v. Dy.CIT [2013] 33 taxmann.com 299 (Delhi - Trib.)

Ambiguous language in Bill can’t be compared with Act ratifying it; SB ruling in Merilyn Shipping’s case not acceptable

The provisions of section 40(a)(ia) of the Income Tax Act, 1961, are applicable not only to the amount which is shown as payable on the date  of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year.

In the instant case, following issue came for consideration of High Court:

“Whether Special Bench ruling in Merilyn Shipping’s case lays down the correct law in respect of interpretation of section 40(a)(ia)”?

The High Court declined to accept the proposition given by the ITAT Special Bench in the case of Merilyn Shipping’s with following observations:

1) The provisions of section 40(a)(ia) of the Income Tax Act, 1961, are applicable not only to the amount which is shown as payable on the date of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and is actually paid within the previous year;

2) Comparison between the pre-amendment and post amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. But the comparison between the draft and the enacted law isn’t permissible. Nor can the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It is the finally enacted law which is the will of the legislature;

3) The Learned Tribunal fell into an error in comparing the wordings of the provisions of Finance Bill and Finance Act for interpretation purposes;

4) The key words used in Section 40(a)(ia) are “on which tax is deductible at source under Chapter XVII –B”. If the question is “which expenses are sought to be disallowed?” The answer is bound to be “those expenses on which tax is deductible at source under Chapter XVII –B. Once this is realized nothing turns on the basis of the fact that the legislature used the word ‘payable’ and not ‘paid or credited’. Unless any amount is payable, it can neither be paid nor credited”;

5) The language used in the draft was unclear and susceptible to giving more than one meaning. By looking at the draft it could be said that the legislature wanted to treat the payments made or credited in favour of a contractor or sub-contractor differently than the payments on account of interest, commission or brokerage, fees for professional services or fees for technical services because the words “amounts credited or paid” were used only in relation to a contractor or sub-contractor. This differential treatment was not intended. But the language used by the legislature in the finally enacted law is clear and unambiguous whereas the language used in the bill was ambiguous. Majority views expressed in the case of Merilyn Shipping & Transports are not acceptable - CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250 (Kolkata)

Actual payment of tax isn’t a precondition to be a resident of partner country, as per India-UAE DTAA

As per Article 4(1) of India-UAE DTAA, to be a resident of contracting State, it isn’t necessary to pay tax there; mere right of contracting State to tax such person by reason of domicile, place of management or incorporation is sufficient

In the instant case, the assessee had challenged the section 40(a)(i) disallowance in respect of professional fee paid  to ‘V’, sole proprietor of KPMG, Dubai. Assessee, contended that these payments were made in pursuance of professional services carried out by KPMG, Dubai as understood in Article 14 of the India-UAE treaty dealing with independent personal services. It was stated that the income was not chargeable to tax in India since ‘V’ was not in India for more than 183 days during the previous year and, therefore, the question of deduction of tax at source didn’t not arise. The AO, on the other hand,  made disallowance on the footing that 'V' couldn’t take benefit of India-UAE treaty, as it couldn’t be treated as a resident of U.A.E. as per Article 4(1) of India-UAE DTAA, as he was not paying tax in U.A.E., which was confirmed by CIT(A). Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) Article 4(1) of India-UAE treaty provides that the term 'Resident' of a 'Contracting State' means any person, who, under the laws of that State (i.e. U.A.E.), is liable to tax therein by reason of his domicile, resident, place of management, place of incorporation, or any other criterion of similar nature. The term ‘liable to tax in the contracting State’ doesn’t necessarily imply that the person should actually pay the tax in that contracting State. Right to tax on such person is sufficient;

2) If a fiscal domicile of a person is in the contracting State, which in the present case has not been doubted was in U.A.E., then he was to be treated as resident of that contracting State irrespective of whether or not that person is actually liable to pay taxes in that country;

3) Liability to tax in the contracting State doesn’t imply that the person was actually liable to tax but would also cover the cases where the other contracting State has the right to tax such person. It is immaterial whether or not such right has been exercised. The basis for deducting the TDS under section 195 by the assessee for making the payment to 'V' was rejected. – KPMG v. JCIT [2013] 33 taxmann.com 23 (Mumbai - Trib.)

Rule of ‘force of attraction’ given in Article 7 of UN Model treaty can’t be imported into Article 7 of India-UK DTAA

Articles 7(1)(b) and 7(1)(c) of the UN Model Convention as well as of the UN Model Convention Commentary can’t be relied upon to come to a conclusion that the connotation of “profits indirectly attributable to permanent establishment” used in Article 7(1) of the Indo- UK treaty incorporated a force of attraction rule

In the instant case, the assessee- a U.K. partnership firm of Solicitors, was engaged in providing international legal services in certain areas and operated through its principal office in UK and branch offices in certain other countries. During the years under consideration, it rendered legal consultancy services in connection with different projects in India. It did not have an office in India. Assessee returned nil income relying on Art 15 of Indo-UK DTAA on the ground that the aggregate period or period of stay of its partners and employees during the said years did not exceed 90 days. Revenue rejected assessee’s claim on the footing that Article 7(1) of Indo-UK DTAA should be interpreted in the light of Article 7(1) of the UN Model Convention to read the force of attraction rule so as to deny assessee the benefit of Article 15 and tax the activities in India applying Article 7.

The Tribunal held in favour of assessee as under:

1) It would not be correct to say that the connotation of “profits indirectly attributable to permanent establishment” in Article 7(1) extend to the two categories of income as specified in clause (b) and clause (c) of Article 7(1) of the UN Model Convention and incorporate a force of attraction rule as held by the Division Bench of this Tribunal in the case of Linklaters LLP;

2) When the connotations of “profits indirectly attributable to permanent establishment” are defined specifically in Article 7(3) of the India-UK DTAA which clearly explains the scope and ambit of the profits indirectly attributable to the PE and the provisions of said article being unambiguous and capable of giving a definite meaning, there was no need to refer to the provisions of Article 7(1) of UN Model Convention which were materially different from the provisions of Article 7(1) of the India-UK DTAA read with Article 7(3) thereof - ADIT V. CLIFFORD CHANCE [2013] 33 taxmann.com 200 (Mumbai - Trib.) (SB)

Construction of hostels for educational institutes is deemed to be for non-commercial purpose; ST not leviable

Building constructed as hostel for residence of students studying in an educational institution is a non-commercial/non-industrial building and, therefore, such construction is not liable to service tax under Works Contract Services

The assessee had constructed a Boys and a Girls Hostel for students of educational institutions. It paid service tax thereon under Works Contract Services during April, 2008 to September, 2008 but thereafter it realized that as it was not constructing any building which was being used for commercial purpose therefore it was not liable to service tax, it stopped paying service tax. However, service tax was demanded from assessee.

The Tribunal set aside the service tax demand with the following observations:

1) The building was constructed as hostel for the residence of students studying in medical institute and there was no allegation that the building was used for any other purpose;

2) In above set of facts, the Board Circular No. 80/10/2004-ST, dated 17.9.2004 was applicable and the assessee was not liable to pay service tax. Accordingly, demand was set aside.- Anand Construction Co. v. Commissioner of Central Excise [2013] 33 taxmann.com 59 (Mumbai - CESTAT)

No exemption for ‘LTC’ spent on overseas journey even if part of journey is performed in India

LTC is exempt from tax only when employee has utilized LTC for travel within India. Nothing in Rule 2B provides assessee with a liberty to claim exemption where part of his package is spent on his overseas travel and part of his journey has been performed within India

In the instant case, the assessee had claimed exemption of LTC received from his employer under section 10(5) of the IT Act. The AO disallowed the LTC exemption claimed by assessee after noticing that leave travel package covered Singapore and Malaysia also, on the footing that section 10(5) doesn’t allow exemption for overseas travel. Further, the CIT(A) upheld the order of AO. Aggrieved assessee filed the instant appeal to Tribunal.

The Tribunal held in favour of revenue as under:

1) The provisions of the Act are in relation to LTC for proceeding on leave to any place in India;

2) LTC is exempt from tax only when employee has utilized LTC for travel within India;

3) Nothing in Rule 2B provides assessee with at liberty to claim exemption where part of his package is spent on his overseas travel and part of his journey has been performed within India. Thus, assessee’s exemption claim under section 10(5) was rejected - OM PARKASH GUPTA V. ITO [2013] 33 taxmann.com 169 (Chandigarh - Trib.)

Merilyn shipping’s case – Gujarat HC rejects interpretation made by ITAT’s special bench

Section 40(a)(ia) covers not only the amounts which are payable as on 31st March of a particular year but also amounts payable at any time during the year. The language used in such provision doesn’t convey that such amount must continue to remain payable till the end of the accounting year.

In the instant case, the AO disallowed the entire expenditure incurred by assessee under section 40(a)(ia) on the ground that the assessee had, admittedly, not deducted the tax at source. CIT(A) dismissed assessee's appeal against such disallowance. On further appeal, the Tribunal deleted the entire disallowance, relying on the decision of the Special Bench of the Tribunal (Visakhapatnam) in the case of  M/s. Merilyn Shipping & Transports v. ACIT [2012] 20 taxmann.com 244 (Viskhapatnam). Revenue filed the instant appeal against the order of Tribunal.

The HC held in favour of revenue as under:

1) The term used in section 40(a)(ia) is interest, commission, brokerage, etc., payable to a resident or amounts payable to a contractor or sub-contractor for carrying out any work. The language used doesn’t convey that such amount must continue to remain payable till the end of the accounting year. Any such interpretation would require reading into words which the Legislature has not used;

2) The Courts in India have been applying the principle of deliberate or conscious omission. Such principle is applied mainly when an existing provision is amended and a change is brought about;

3) The Tribunal committed an error in applying the principle of conscious omission in the present case. Firstly, there was serious doubt whether such principle could be applied by comparing the draft presented in the Parliament and ultimate legislation which might be passed. Secondly, the statutory provision was amply clear.

4) Section 40(a) (ia) covers not only the amounts which are payable as on 31st March of a particular year but also amounts payable at any time during the year, of course, as long as the other requirements of the said provision exist. Thus, revenue's appeal was allowed – CIT v. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 (Gujarat)

Distribution of channels and their pricing regulated by TRAI; making JV for such purpose isn’t anti-competitive

Where distribution of channels and their pricing by broadcasters/aggregators was totally regulated by TRAI Regulations and market share of joint venture (JV) formed by opposite parties (‘OPs’), i.e., channel owners, was only 10 per cent, conduct of OPs was not anti-competitive

In the instant case, informant-subscriber had filed information under Section 19 (1)(a) of the Competition Act, 2002 (“the Act”) against opposite parties (‘OPs’), i.e., Zee and Star channels, alleging that proposed JV of OPs in sale and distribution of channels would strengthen their position by adversely affecting competition in relevant market. According to informant, players in market would suffer due to undue advantage available to JV and consumer’s interest would suffer as consumers would be deprived of prices available in market and also would not be able to get competitive rates for channels subscribed to by them.

The Commission held as under:

1) Due to TRAI Regulations distribution of channels and their pricing by broadcasters/aggregators are totally regulated and, therefore, allegations that market power of JV would affect ability of Multi System Operators in bargaining were not substantiated ;

2) OPs could not be said to have violated section 3(3) of the Act in forming a JV. Since market share of JV formed by OPs was 10 per cent only and JV had not affected operations of other broadcasters or aggregators in any way, JV formed by OPs was not a dominant player in relevant market of services of aggregating and distribution of TV channels in case of Multi-system operators, Direct to Home Operators and Internet Protocol Television Operators in India and, therefore, there was no abuse of dominant position. Thus, opposite parties had not contravened provisions of sections 3(3) and 4 of the Act and proceedings in instant case were to be closed - Yogesh Ganeshlaji Somani v. Zee Turner Ltd. [2013] 33 taxmann.com 2 (CCI)

Support services provided by local authorities to business entity are liable to ST

Support services by way of off-street parking or other facilities provided by local authorities to any business entity would be liable to service tax

The local authorities operating off-street parking facilities were not subjected to VAT/service tax in Ireland whereas commercial operators engaged in that activity were liable to VAT/service tax. The Commission of European Communities brought a suit for declaration that said exemption to local authorities was violative of Council Directives.

European Court of Justice held as under:

1) Services provided by Government or local authorities were excluded from charge of service tax to extent specified in negative list under section 66D(a);

2) Such negative list entry, being an exception to charge, was to be strictly construed;

3) Exclusions from negative list provided in clauses (i) to (iv) of section 66D(a) have to be liberally construed, as they were intended to restore general principle of charge of service tax on all services;

4) Therefore, support services by way of off-street parking or other facilities provided by local authorities to any business entity would be liable to service tax - Commission of the European Communities v. Ireland [2013] 30 taxmann.com 234 (ECJ)

CA lost his membership for having two wives; ‘Bigamy’ comes within the meaning of moral turpitude

Moral turpitude means anything contrary to honesty, modesty or good morals. It means vileness and depravity. As the appellant married another woman, while the first marriage was subsisting, and acted contrary to the law and against expectation of his "estranged wife", the offence of bigamy had been committed within the meaning of "moral turpitude"

In the instant case, matrimonial dispute arose between the appellant, a qualified Chartered Accountant, and his wife, which had resulted in granting of divorce decree by the first Additional Family Court, Chennai. The said divorce decree was confirmed by Madras High Court. On a complaint by his estranged wife, under Section 21 of the Chartered Accountants Act, 1949, appellant's name was removed from the Register by the ICAI on the grounds of bigamy charges.   The appellant contended that the allegation of bigamous marriage would not come within the meaning of moral turpitude. Therefore, the disqualification attached to Section 8 of the Act would have no application to the facts of his case. Thus, appellant filed the instant writ to quash the order passed by the ICAI.

The HC dismissed appellant’s writ with following observations:

1. The appellant and his estranged wife were Hindus, governed under the provisions of the Hindu Marriage Act, 1955. Section 17 of the Act states that marriage between two Hindus is void if two conditions are satisfied, viz., (a) the marriage is solemnized after the commencement of the said Act, and (b) at the date of such marriage, either party has a husband or wife living and the provisions of Sections 494 and 495 shall apply accordingly. Thus, it is evident that if a Hindu marries with a person having a spouse living or he or she has a spouse alive and, marries any person, he would be liable for bigamy charges.
2. The expression "moral turpitude" isn’t defined anywhere. But it means anything done contrary to justice, honesty, modesty or good morals. It implies depravity and wickedness of character or disposition of the person charged with the particular conduct. If the individual charged with a certain conduct he owes a duty, either to another individual or to the society in general, to act in a specific manner. If he acts contrary to it and does so knowingly, his conduct might be held to be due to vileness and depravity.
3. In fact, the conviction of a person in a crime involving moral turpitude and impeaches upon his credibility as he would be deemed to have indulged in shameful, wicked and base activities. The offence of bigamy comes within the meaning of "moral turpitude". The appellant had married another woman, while the first wife was alive, he had acted contrary to the law and to expectation of his "estranged wife";
4. The appellant had attracted disqualification by operation of law, viz., Section 8 of the Chartered Accountants Act, 1949, due to his committing an offence involving moral turpitude. For the foregoing reasons, the writ appeal was dismissed - P. Mohanasundaram v. President, ICAI [2013] 33 taxmann.com 80 (Madras)