A policy can’t be taken as ‘Keyman Insurance Policy’ unless it is a pure life insurance policy on life of an employee

Where assessee purchased Insurance Policies, in view of fact that only a fraction of total premium was meant for risk premium and balance was meant for deployment of purchase of units, i.e., investment in units, such policies could not be regarded as 'Keyman Insurance Policies'.

Facts:

a)The assessee took three insurance policies, namely, ICICI Prudential (Life time), ICICI Prudential (Premium life) and Jeevan Shree (LIC) on the life of its employees.

b)The policies taken by the assessee were investment Plan & Guaranteed Return/Addition Plan. The assessee claimed that it was eligible for deduction of premium paid on Keyman Insurance Policies.

c)The Assessing Officer (‘AO’) opined that the assessee had invested in Unit Linked Insurance Plan and it was not Keyman Insurance Policy. Accordingly, the assessee's claim for deduction was rejected. The CIT(A) confirmed the order of the AO. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)The meaning of Keyman Insurance Policy was to be taken from the Explanation to the clause (c) of section 10(10D). As per definition of 'Keyman Insurance Policy', a person purchasing life insurance can only do so to the extent of his insurable interest in the assured.

2)In the instant case the policies had been taken from Unit Linked Investment Plan premium of which had been put into growth fund and it was not a Pure Life Insurance Policy on the life of another person.

3)The CIT(A) had rightly confirmed the action of the AO that the assessee had taken policy, which was, in fact, Unit Linked Insurance Plan, an Investment Plan, the purpose of which was to guarantee returns on the premium amount, which was not allowable as an expenditure.

4)Only a fraction of the total premium was meant for risk premium and balance was meant for the deployment of purchase of units, i.e., Investment in Units which, in fact, could not be claimed as business expenditure. Accordingly, premium paid on such policies was not eligible for deduction as business expenditure. - F.C. SONDHI & COMPANY (INDIA) (P.) LTD. V. DY. CIT [2014] 49 taxmann.com 180 (Amritsar - Trib.)

CBDT directs AO to enquiry into only AIR data or 26AS mismatch issues if scrutiny is made on this basis

It has been brought to the notice of CBDT that during assessment proceedings, the Assessing Officers were routinely calling for information, which was not relevant for inquiry into the issues. This practice of AOs is causing undue harassment to taxpayers. Many times the core issues, which formed the basis of selection of the case for scrutiny, were not examined properly.

Therefore, the CBDT directs that the scope of enquiry of AO should be restricted to verification of either AIR data or Credit Information Bureau (CIB) information or 26AS mismatch issues if:

a)Cases has been selected for scrutiny during the Financial Year 2014-15 under Computer Aided Scrutiny Selection (‘CASS’);and

b)Selection has been made on the basis of either AIR data or CIB information or for non-reconciliation with 26AS data.

However, the cases may be taken up for comprehensive scrutiny with the approval of concerned Principal CIT or Principal DIT if following conditions are satisfied:

a)If it is found that there is potential escapement of income exceeding Rs 10 lakhs (for non-metro cities (sic), the monetary limit shall be Rs 5 lakhs); and

b)Escapement of income is found on any other issue(s) apart from the AIR/CIB/26AS information based on which the cases were selected under CASS requiring substantial verification.

HC follows SC’s ruling in Sandvik’s case; directs revenue to pay compensation if payment of interest was delayed

If tax, interest, penalty, etc., had been collected in excess and these were withheld beyond permissible period, Revenue had to compensate for same.

Facts:

a)The assessee was eligible for refund along with interest. It claimed payment of compensation as interest on the interest for the period of delay from date of assessment till date of payment.

b)Its claim for interest was rejected by Dy. CIT on the ground that there was no provision in the Income-tax Act (‘the Act’) to grant interest on interest.

The High Court held in favour of assessee as under:

1)On perusal of the judgment of the Supreme Court in Sandvik Asia Ltd. v. CIT [2006] 150 Taxman 591, the issue involved in this case was not more res integra. The Apex Court held that under the Act, the Revenue was entitled to collect only tax, interest, penalty, etc., within the four corners. For any other amount which had been collected in excess and withheld beyond the period permissible under the statute, the taxpayer was to be compensated for the deprivation of the said amount.

2)In that context, the Apex Court had considered the meaning that was required to be given to the word compensation extensively and finally the department was directed to pay interest within a period of one month from the date of receipt of copy of the order.

3)Thus, following the judgment of the Apex Court (supra), the writ petition was to be allowed and revenue was to be directed to pay the simple interest at the rate of 9 per cent p.a. to the petitioner within a period of two months from the date of receipt of copy of this order. - SIRPUR PAPER MILLS LTD. V. JOINT COMMISSIONER OF INCOME-TAX, HYDERABAD [2014] 49 taxmann.com 142 (Andhra Pradesh)

Imparting of training in seminary was 'education'; assessee was entitled to registration as a trust

Where assessee was imparting training to students in 'Seminary', training programme undertaken by assessee was also education and, therefore, it was entitled to registration under section 12A.

Facts:

a)The assessee was imparting training to students in 'Seminary'. In the return of income, it claimed exemption under section 10(23C)(iiiad). The Assessing Officer disallowed the claim of exemption.
b)On appeal, the assessee contended that it was entitled to registration under section 12A, as the training imparted in the 'Seminary' amounted to education, therefore, it had to be treated as trust running educational institution.

c)The CIT(A) opined that the training programme undertaken by the assessee could not be treated as an educational programme in order to give it status of an educational institution. On second appeal, the Tribunal held that the assessee was an educational institution.

On appeal, the High Court held as under:

It was a settled position by virtue of a judgment of the Kerala High Court rendered in the case of CIT v. St. Mary's Malankara Seminary [2012] 206 Taxman 429 that imparting training to students in 'Seminary' was also education. In the light of settled position, one needed not to ponder much over the issue or the controversy regarding the registration under section 12A to be given to the assessee. - CIT V. ST. MARY'S MALANKARA SEMINARY [2014] 48 taxmann.com 387 (Kerala)

Editor’s Comments:

In case of St. Mary’s Malankara (Supra), the question that arose for consideration of the High Court was whether assessee engaged in 'Seminary' teaching for priesthood was an educational institution entitled to exemption from tax under section 10(23C )(iiiad)?.

The High Court held that the term 'education' should enjoy a wide connotation covering all kinds of coaching and training carried on in a systematic manner leading to personality development of an individual. In the case of seminary, students on completion of their studies were made priests who headed the churches as religious leaders. The religious teaching in the seminary was also an education and, therefore, an 'educational institution' entitled to exemption under section 10(23C )(iiiad).

No denial of TDS credit on its non-appearance in ITD system of department if Form No. 16A was issued by payer

Where deductor had issued Form No. 16A after deducting tax at source, its credit could not be denied to deductee solely on ground that such credit does not appear on ITD system of department and/or same does not match with ITD system of department.

The issue that arose before the High Court was as under:

Whether deductee could claim credit of TDS on the basis of Form No. 16A issued by the deductor even if such credit did not appear or did not match with the ITD system of the department?

The High Court held in favour of assessee as under:

1)Section 204 of income tax Act (‘the Act’) imposed liability to deduct tax at source upon the employer/deductor. It is clearly stated under section 205 of the Act that the assessee (i.e., deductee) shall not be called upon to pay the tax himself to the extent to which tax has been deducted by the deductor.

2)Considering the Sections 204 and 205 of the Act, it can be said that deductee shall be entitled to claim credit of TDS when the deductor who was liable to deduct the tax at source deducted it and issued Form No.16A to the deductee.

3)Credit of TDS could not be denied to the deductee even if after deducting the tax at source, the same had not been deposited in the account of the government by the deductor. In such a case the department had to recover the said amount from the deductor instead of denying credit to the deductee.

4)Hence, a deductee was not supposed to do anything in the whole transaction except that he had to accept the payment of the reduced amount after TDS. It was observed that on the amount being deducted the deductee got a certificate to that effect from the person responsible to deduct the tax and credit for the same could not be denied solely on the ground that such credit did not appear or did not match with ITD system of department.- SUMIT DEVENDRA RAJANI V. ASSISTANT CIT [2014] 49 taxmann.com 31 (Gujarat)

Charterer of ship can't be alleged as conduit if relevant docs prove its position; treaty benefits allowed

Where Cypriot shipping company was not merely a paper company and played its role, Indian agent could not be taxed for its income and treaty benefit of Article 8 of Indo-Cyprus DTAA would be available to it.

Facts:

a)A Cyprus based company, ‘G’, appointed the assessee as an agent in India and it was in the shipping business. An Arabian company required a ship to transport ore from India to Sharjah. For this purpose, an agreement was entered into with ‘G’ for making available the ship for transporting Ore.

b)The assessee, as an agent of G, filed the return under section 172 and declared nil income claiming benefit of Article 8 of India-Cyprus treaty (‘DTAA’).

c)However, the AO denied the benefit of Article 8 of DTAA on ground that G was one person company having no staff, no office, etc., thus, the effective management of G was not in Cyprus, accordingly he made assessment under section 172. The CIT(A) confirmed the order of the AO. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)It was undisputed fact that G was a one-person company registered in Cyprus and it had no staff or big office establishment. It had no branches anywhere in the world; it was a resident of Cyprus for the tax purpose and it was incorporated in Cyprus.

2)Its only office establishment was in Cyprus. Arabian-company had made a contract with G as a charterer of the ship. The bill of lading recognized G as the ship charterer in the instant case. G had played definite role in transporting the ore by ship from India to Sharjah, which was evident from the fact that all contracts and the bill of lading had been made in the name of G. Thus, all these documents and the contracts had acknowledged the role of G as a ship charterer.

3)The other reasoning given by authorities below to deny benefit of Article 8 of DTAA was that the effective management of G was not in Cyprus because it had no staff, big office establishment in Cyprus and it was a one-person company. The authorities had relied on the OECD Commentary, which explained the words 'Effective Management'.

4)The Article 8 of DTAA defined the words 'Effective Management'. It was clearly mentioned therein that if the enterprise was registered and was having the head quarters in a country, its effective management would be in that country.

5)While other treaties like the ones with Mauritius, Poland, Netherlands do not define the words 'Effective Management'. Thus, for interpreting, the word ‘Effective management’ in these treaties, reliance might be placed on the OECD Commentary but so far as the Cypriot Treaty was concerned, its Article 8 explained the word 'Effective Management', thus, there was no need to refer to OECD Commentary. The CIT(A) had erred in holding that the income of G was taxable under section 172(4) in the hands of assessee as an agent and the treaty benefits were not available to G. - SHAAN MARINE SERVICES (P.) LTD. V. DY DIT (INTL. TAXN.-I), PUNE [2014] 48 taxmann.com 388 (Pune - Trib.)

Acquirer-Co. not liable to pay non-compete fee to public shareholders if it was paid to promoters of target-Co.

Facts:

a)Appellant-Co. had entered into an agreement to acquire shares of Bangur group (target-Co.). Further, by virtue of another agreement, the appellant had agreed to pay non-compete fee to target-Co.

b)On consideration of information provided by merchant bank of Appellant, the SEBI informed the appellants through their merchant banker to revise the offer price to the public shareholders.

c)SEBI directed the appellant-Co. to include non-compete fee in the price of shares offered to public shareholders. It held that non-compete fee was, in fact, part of negotiated price payable by appellants to the target-Co.

d)On appeal, the SAT concluded that the non-compete agreement was a sham which resulted in depriving other shareholders of the target company of their rightful claim to get a just price for their shares. Consequently, the Tribunal dismissed the appeal preferred by the appellant.

The Supreme Court held as under:

1)Ordinarily when there was a gap of 25 per cent between consideration paid to outgoing promoters and non-compete fee, SEBI ought not to have conducted any inquiry.

2)However, if it appeared to SEBI that difference between offer price and the non-compete fee was less than 25 per cent but that was nevertheless a disguise or a camouflage for reducing cost of acquisition through a public offer, then SEBI could certainly delve further into the matter.

3)In absence of any disguise, the SEBI had erred in carrying out an enquiry into payment of non-compete fee by appellant-acquirer to outgoing promoters of target-company.

4)The appellant-acquirers were not liable to pay a non-compete fee to public shareholders of target-company as was being paid to outgoing promoters of target-company which was being taken over by appellants – I. P. HOLDING ASIA SINGAPORE P. LTD. V SEBI [2014] 49 TAXMANN.COM 370 (SC)

No disallowance of exp. incurred by trust on international conference/training for advancing objects of trust

Expenditure incurred by a charitable trust on international conference or training could not be disallowed on ground that it was not notified in a circular issued by CBDT.

Facts:

The issues that arose for consideration before the Tribunal was as under:

Whether expenditure incurred by a charitable trust on international conference or training could be disallowed on ground that it was not a charitable activity because it was not supported by special or general order of CBDT?

The Tribunal held in favour of assessee as under:

1)The expenditure was incurred by the trust for attending international conferences/seminars by its secretary, which had the purpose of advancing the objects of trust. It was not for the personal benefit of the Secretary, therefore, it could not be said that such expenditure was not incurred for charitable purposes.

2)It was neither necessary nor required as per the statute that for availing of exemption under section 11, a particular charitable activity had to be notified in a circular issued by the CBDT.

3)Hence, disallowance made by AO by simply observing that attendance made in international conference or training could not be said to be a charitable activity as it was not supported by special or general order of CBDT, was totally contrary to the statutory provisions. - DEPUTY DIT (EXEMPTION) V. SOCIETY FOR INTEGRATED DEVELOPMENT IN URBAN & RURAL AREAS (SIDDUR) [2014] 48 taxmann.com 330 (Hyderabad - Trib.)

CBEC issues clarification to facilitate implementation of new provision mandating pre-deposit

The Finance (No. 2) Act, 2014 has made amendments to Section 35F of the Central Excise Act, 1944 and Section 129E of the Customs Act, 1962 to prescribe mandatory pre-deposit as a percentage (10% notified) of the duty demanded where duty demanded is in dispute or where duty demanded and penalty levied are in dispute.

The Finance (No. 2) Act, 2014 has also made amendments to Section 355FF and Section 129EE of the Central Excise Act, 1944 and Customs Act, 1962, respectively, to provide for payment of refund along with interest at the prescribed rate (6% notified). Some of the clarifications issued by CBEC on the aforesaid sections are as under:

1)Quantum of pre-deposit:

a)New provisions stipulate payment of pre-deposit [i.e., 10% of the duty or penalty payable in pursuance of the order of Commissioner (Appeals)]. Thus, it has been clarified that in the event of appeal against the order of Commissioner (Appeal), 10% is to be paid on the amount of duty demanded or penalty imposed by the Commissioner (Appeals).

b)In a case where penalty alone is in dispute and penalties have been imposed under different provisions of the Act, the pre-deposit would be calculated based on the aggregate of all penalties imposed in the order against which appeal is proposed to be filed.

2)Payments made during investigation: Payment made during the course of investigation or audit, prior to the date on which appeal is filed (to the extent of 7.5% or 10%, subject to the limit of Rs 10 crores) can be considered as pre-deposit. Further, the date of filing of appeal shall be deemed as date of pre-deposit.

3)Refund of pre-deposit: Pre-deposit cannot be deemed as payment of duty. Hence, process of refund as stipulated under Section 11B of the Excise Act or Section 27 of the Customs Act will not be applicable for refund of pre-deposit. Therefore, where the appellate authority has decided the matter in favour of the appellant, refund alongwith interest should be paid to the appellant within 15 days of the receipt of the letter of the appellant seeking refund.

SC discusses on evils of retro law; proviso to sec. 113 levying surcharge in block assessment cases held prospective

SC discusses on the evils of retrospective law while upholding the principle "that unless a contrary intention appears, a law is presumed to be prospective”.

Facts:

The question of law that arose for consideration before the Supreme Court was as to whether the proviso to Section 113 inserted by the Finance Act, 2002 was to operate prospectively or was clarificatory and curative in nature and, therefore, had retrospective operation?

The Supreme Court held as under:

1)Of the various rules guiding how legislation had to be interpreted, one established rule was that unless a contrary intention appeared, legislation was presumed not to be intended to have a retrospective operation. The idea behind the rule was that a current law should govern current activities. Law passed now could not apply to the events of the past.

2)If we do something today, we do it keeping in view the law in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law was founded on the bed rock that every human being was entitled to arrange his affairs by relying on the existing law and would not find that his plans had been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward.

3)The basis of the principle against retrospectivity is the principle of 'fairness‟, which must be the basis of every legal rule. There could not be imposition of any tax without the authority of law. Such a law had to be unambiguous and had to prescribe the liability to pay taxes in clear terms.

4)If the concerned provision of the taxing statute was ambiguous and vague and was susceptible to two interpretations, the interpretation which favoured the subjects, as against there the revenue, had to be preferred. This was established principle of statutory interpretation, to help finding out as to whether particular category of assessee was to pay a particular tax or not?.

5)No doubt, with the application of this principle, Courts made endeavour to find out the intention of the Legislature. At the same time, this very principle was based on "fairness" doctrine as it laid down that if it was not very clear from the provisions of the Act as to whether the particular tax was to be levied to a particular class of persons or not; the subject should not be fastened with any liability to pay tax. Thus, the proviso to Section 113 imposing a surcharge was held to be prospective with effect from 01.06.2002 – CIT v. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249 (SC)

CCI orders investigation against 'ICAI' as it was creating entry barriers to outsiders providing CPE seminars

Investigation was to be conducted against Institute of Chartered Accountants of India for abusing its dominant position in creating entry barrier to outsiders in providing CPE seminars.

Facts:

a)The informant was a qualified Chartered Accountant while opposite party was the Institute of Chartered Accountants of India (ICAI).

b)The Informant alleged that ICAI introduced CPE Scheme for its existing members, however, it did not allow any outside organization to provide CPE seminars other than program organizing units (‘POUs’)recognized by it.

c)The informant contended that ICAI had created an entry barrier for the others using its dominant position in the relevant market of organizing CPE seminars. Thus, informant had challenged the CPE policy of ICAI, being discriminatory and abusive in terms of section 4 of Competition Act, 2002 (‘the Act).

On appeal, the Competition Commission of India held as under:

1)There seemed to be force in the allegations of the informant that the restriction put in by ICAI in not allowing any other organization to conduct the CPE seminars for CPE credits, created an entry barrier for the other players in the relevant market.

2)Further, the choice of the members of ICAI in this case was limited. The members of ICAI had no option, but to attend the seminars organized by ICAI (whatever be the quality of seminars) to get the requisite CPE credits.

3)The restriction put on by ICAI did not meet the objectives sought to be achieved by its policy. There are hundreds of seminars and conferences organized every month across India by reputed chambers of commerce like CCI, FICCI, ASSOCHAM, NASSCOM, etc.

4)However, these seminars/conferences were not recognized by ICAI for CPE credits. Prima facie, it appeared to be an unreasonable restraint and the members of ICAI were left with no option but to compulsorily attend seminars organized by ICAI and its organs.

5)While ICAI, as a regulator of the accounting profession, had all the powers to prescribe a policy for continuous upgradation of its member through the CPE policy and recognition of POUs, however, on its non-regulatory function of organizing CPE seminars, restricting the same only to itself and its organs, prima facie appeared to be an arbitrary exercise of its powers and thus in contravention of the provisions of section 4 of the Act.

6)Therefore, the Director General was to be directed to investigate into allegation of misusing dominant position by ICAI.– ARUN ANANDAGIRI V. INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA [2014] 48 TAXMANN.COM 298 (CCI)

High Court interprets word ‘substantially’; lays down 50% threshold limit for indirect transfer of capital assets

Gains arising from sale of a shares of a company incorporated overseas, which derives less than 50 per cent of its value from assets situatedd in India would not be taxable under section 9(1)(i), read with Explanation 5 thereto.

Facts:

The issue that arose for consideration of the High Court was: Whether the sale of shares of an overseas company which derives only a minor part of its value from the assets located in India could be deemed to be situated in India by virtue of Explanation 5 to section 9(1)(i)?

The High Court held in favour of assessee as under:

1)A plain reading of Explanation 5 to section 9(1)(i) suggests that it was always the intention of the Legislature that an asset, which derived its value from assets in India, had to be considered as one, which was situated in India. The clear object of section 9(1)(i) was, inter alia, to cast the net of tax also on income which arose from transfer of assets in India, irrespective of the residential status of the recipient of the income. Explanation 5 introduced a legal fiction for the limited purpose of imputing that assets which substantially derive their value from assets situatedd in India would also be deemed to be situated in India;

2)It is trite law that a legal fiction would be restricted to the purpose for which it was enacted. The object of Explanation 5 was not to extend the scope of section 9(1)(i) to income, which had no territorial nexus with India, but to tax income that had a nexus with India, irrespective of whether the same was reflected in a sale of an asset situated outside India. There would be no justification to read Explanation 5 to provide recourse to section 9(1)(i) for taxing income which arises from transfer of assets overseas and which do not derive bulk of their value from assets in India.

3)In this view, the expression 'substantially' occurring in Explanation 5 would necessarily have to be read as synonymous with 'principally', 'mainly" or at least 'majority'. The 'United Nations Model Double Taxation Convention between Developed and Developing Countries' and the 'OECD Model Tax Convention provide that the taxation rights in case of sale of shares are ceded to the country where the underlying assets are situated only if more than 50 per cent of the value of such shares is derived from such property.

4)In view of the above, gains arising from sale of a share of a company incorporated overseas, which derives less than 50% of its value from assets situated in India would certainly not be taxable under section 9(1)(i), read with Explanation 5 thereto.

5)Thus, in the instant case, even if the transaction had been structured in the manner as suggested on behalf of the Revenue, the gains arising to the shareholders would not be taxable under Section 9(1)(i), as their value could not be stated to be derived substantially from assets in India. – DIT (International Taxation) v. Copal Research Ltd., Mauritius [2014] 49 taxmann.com 125 (Delhi)

All directors other than promoters can't be deemed as willful defaulters; RBI's master circular is arbitrary-HC

Facts:

a)The notices were issued by the respective banks, calling upon the all the petitioners-directors of Company to show-cause as to why they should not be declared as willful defaulters in terms of the RBI’s Master Circular DBOD No. CID-BC 1/20.16.2003/2011-12, dated 2-7-2012.

b)Thus, the instant writ was filed to challenge the legality and validity of a Master Circular dated July 2, 2012 issued by the RBI in respect of 'willful defaulter'.

The High Court held as under:

1)Having regard to object with which RBI had issued Master Circular to declare promoters of company as wilful defaulters, it could not be said that same was an unreasonable restriction violating Article 19(1)(g) of Constitution of India.

2)All directors could not be held liable due to default in repayment of loan by a company which might have been for varied reasons even beyond the control of such directors. Therefore, some element of arbitrariness was found in policy of RBI.

3)A director of a company (other than promoter or a direct borrower of loan from bank) could also be a director who had a limited role to play and he was not directly or indirectly responsible for company going in a debt. Such directors could not be restrained from approaching a bank for financial assistance, if they wanted to start a business or a new venture.

4)Apart from a social stigma, it was a direct infringement on right of such a director to carry on trade or business under Article 19(1)(g) of Constitution of India. Thus, Master Circular, so far as it was sought to be made applicable to all directors of company, was arbitrary and unreasonable.

5)Thus, that part of Master Circular was declared as ultra vires powers of RBI and was violative of Article 19(1)(g) of Constitution of India. Master Circular sought to paint all directors with same brush.

6)Provisions in circular shattered concept of identity of a company being different and distinct from its directors without providing any safeguards. Therefore, Show cause notice issued by bank to petitioner-directors for declaring them as wilful defaulters on basis of RBI’s Master Circular was bad – IONIC METALLIKS V. UNION OF INDIA [2014] 49 TAXMANN.COM 222 (GUJARAT)

Erecting bus queue shelters by advertising Co. isn’t preoperative exp. even if they aren’t yet ready for advertisement

Facts:

a)The assessee was incorporated to carry on the business of advertisement, consisting of street furniture (such as advertising on bus shelters, public utilities, parking lots, etc.). The first contract was awarded to it by NDMC in March, 2006 for construction of Bus Queue Shelters (BQSs) on Build-Operate-Transfer basis.

b)In consideration, the assessee was allowed to commercially exploit the space allotted in these BQSs by means of display of advertisement, etc., for a period of 15 years. In assessment year 2007-08, the assessee had claimed deduction of certain revenue expenditure incurred on construction of BQSs. The AO refused to allow deduction on the ground that the business of the assessee had not commenced.

c)The AO further held that the business would commence only when the BQSs would be ready for providing space for advertisement to the assessee, being the very reason for which the assessee company entered into an agreement with the NDMC. On appeal, the CIT (A) upheld the order of AO. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)In the instant case, the assessee had started the execution of contract in the preceding year itself (i.e., previous year 2005-06) by taking steps such as, entering into manufacturing agreement with a third person for manufacture and installation of BQSs.

2)Thus, it could be said that the project of NDMC for construction of BQSs was not set-up, yet the assessee had commenced its business with the execution of contract awarded by NDMC. The authorities had tagged the setting-up of business with the provision of space for advertisement by NDMC. This was certainly a post-commencement business stage of the assessee.

3)Such an event would mark the generation of actual income on commencement of business and it could not be construed as the setting-up of business. Thus, the assessee's business was set up when it prepared itself for undertaking the activity of building BQSs on receipt of contract from NDMC. It could not be related to the completion of construction of BQSs.

4)Thus, it was to be held that the business was set up in the preceding year. Hence, deduction of impugned expenditure was to be allowed to the assessee.- JCDECAUX ADVERTISING INDIA (P.) LTD. V. DY.CIT [2014] 49 taxmann.com 149 (Delhi - Trib.)

Banks can treat guarantors as willful defaulters on their refusal to honour claim even if they have ability to pay

The RBI has issued following clarification with regard to guidelines on ‘willful defaulters’ as provided under master circular DBOD No.CID.BC.3/20.16.003/2014-15, dated 01.07.2014:

1)Inclusion of name of guarantors in the list of willful defaulters: It has been clarified that where a banker has made a claim on the guarantor on account of the default made by the principal-debtor, the liability of the guarantor is immediate. Thus, if said guarantor refuses to comply with the demand made by the banker despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter.

However, this clarification would apply only prospectively and not to cases where guarantees were taken prior issuance of this clarification. Thus, Banks/Financial institutions (FIs) have been advised to ensure that this position is made known to all prospective guarantors at the time of accepting guarantees.

2)Terms ‘Unit’ and ‘Lender’ have been defined: Paragraph 2.1 of the master circular lists out various events when a “willful default” would be deemed to have occurred. Thus, in order to define the scope of definition of willful defaults, the terms Unit and Lender have been defined as under:

a)Lender: The term ‘lender’ includes banks/FIs to which any amount is due, provided that the due amount should have arisen on account of banking transaction, which includes off balance sheet transaction such as derivatives, guarantee and letter of credit.

b)Unit: The term ‘unit’ includes – individuals, juristic persons and all other forms of business enterprises (whether incorporated or not).

Value of derivative transactions in commodities at MCX won’t be included in turnover for tax audit purposes

Value of sale transactions of commodity through MCX without delivery could not be considered as turnover for purpose of section 44AB.

Facts:

In the instant case, the controversy revolved around as to whether online transactions of future commodities made at MCX would form a part of turnover for purpose of tax audit under section 44AB?

The Tribunal held in favour of assessee as under:

1)In the case of CIT v. Growmore Exports Ltd. (IT Appeal Nos. 18 to 20) instant Tribunal’s co-ordinate had dealt with requirement to get the accounts audited under section 44AB. In that case, the assessee was engaged in the speculative transaction of sale and purchase of units without taking delivery and the account was settled by crediting the difference. The Tribunal held as under:

i)After considering section 18 of the Sale of Goods Act, 1930 it was observed that no property in the said units was passed on to the assessee as the assessee never acquired the property in the units as the units contracted to be bought were future unascertained goods.

ii)Similarly, it could not pass on the property to the party to whom the units were contracted and, therefore, there was no 'sale' or 'turnover' effected by the assessee in the legal sense for the purposes of getting the accounts audited under section 44AB.

2)In the instant case also, the transaction of buying and selling of commodities was a speculative activity where no physical delivery was taken or given. Thus, following the case of Growmore Exports Ltd. (supra), it was to be held that the value of the sale transactions of commodity through MCX without delivery could not be considered as turnover for the purpose of section 44AB.

3)Accordingly, the penalty levied under section 271B was to be deleted, as the transactions carried out by the assessee would not fall under the ambit of turnover for the purpose of section 44AB.- OM STOCK & COMMODITIES (P.) LTD. V. DY. CIT [2014] 48 taxmann.com 186 (Mumbai - Trib.)

Distinction between renting and hiring of cab is illusory; both are liable to service-tax

Supplying cars/vehicles under a rate contract basis, depending upon distance, time and usage of vehicles amounts to 'rent-a-cab service' and is liable to service tax and for this purpose difference between renting and hiring of a cab is an illusory distinction.

Facts:

a)The assessee obtained registration as a rent-a-cab scheme operator and was supplying cars/vehicles to BSNL on a rate contract basis, depending upon distance, time and usage of vehicles supplied to BSNL. Fuel and drivers were provided by assessee and vehicles were to be used at discretion of BSNL.

b)In some cases the assessee hired vehicles from other owners and provided these vehicles to BSNL under the terms of agreements between the parties.

c)The assessee argued that impugned services were not liable to service tax under 'rent-a-cab services', as domain, possession and control of vehicles always remained with assessee. Since he was under the bona fide belief that it had not provided rent-cab-service, no penalty had to be imposed.

The CESTAT held in favour of revenue as under:

1)The scope of the taxable rent-a-cab service was considered in detail by this Tribunal in Ajai Kumar Agnihotri v. CCE [2013] 37 taxmann.com 355/[2014] 43 GST 164 (New Delhi – CESTAT). It was concluded that activities substantially similar to those of the assessee herein constituted the taxable rent-a-cab service and the contrary contention of there being a substantial difference between renting and hiring of a cab was an illusory distinction.

2)Assessee's services constituted taxable rent-a-cab service. Hence, demand was to be confirmed invoking extended period with penalty.– ANIL ENGINEERING V. C.C.E. [2014] 47 taxmann.com 305 (New Delhi - CESTAT)

Sum paid to Singaporean-Co. for logistic services wasn’t ‘FTS’ as it didn’t satisfy make available clause of DTAA

Where a Singaporean company rendered logistic services to assessee, without making available its technical knowledge, experience or skill, there was no liability to deduct tax at source from impugned payments under India-Singapore DTAA.

Facts:

a)The assessee entered into a logistics services agreement with its Singaporean associated enterprise ('S'). In terms of agreement, 'S' was required to provide distribution management and logistics services to the assessee.

b)The Tribunal held that, as 'S' was not having any permanent establishment in India and that it had not made available the technical knowledge, experience or skill to the assessee, the payments made by assessee to 'S' were not taxable in view of Articles 7 and 12 of India-Singapore DTAA.

c)The aggrieved revenue filed the instant appeal

The High Court held in favour of assessee as under:

1)This Court had an occasion to consider relevant DTAA in the case of CIT v. De Beers India Minerals (P.) Ltd. [2012] 21 taxmann.com 214 (Kar.), wherein it was held that:

a)If along with technical services rendered, the service provider also made available the technology, which it had used in rendering services, then payment for said services would fall within the definition of "fees for technical services" as contained in DTAA.

b)However, if technology was not made available along with technical services, what was rendered was only technical services; the technical knowledge was withheld, then such a technical service would not fall within the definition of "technical services" in DTAA.

2)From the facts of the instant case, it was clear that S had not made available to the assessee the technology or the technological services, as it was required to provide the distribution, management and logistic services.

3)When once it was held the technical services had not been made available, then in view of the law declared in case of De Beers India Minerals (supra), there was no liability of assessee to deduct tax at source. Therefore, payment made to Singaporean-Co. for logistic services was not ‘Fee for Technical Services’ as it didn’t satisfy make available clause of India-Singapore DTAA.- DIT.(INTERNATIONAL TAXATION) V. SUN MICROSYSTEMS INDIA (P.) LTD [2014] 48 taxmann.com 93 (Karnataka)

Fees paid to consultant-doctors under contract for service would attract sec. 194J TDS and not sec. 192 TDS

Facts:

a)The assessee-company was engaged in the business of running a super specialty hospital. A survey was carried out to ascertain the deduction of tax at source on the amounts paid to doctors engaged as consultants.

b)The assessee-company had been deducting tax at source under section 194J on payment made to doctors by treating them as professionals. The AO applied the provisions of section 192 on payments made to doctors, and raised a demand for an amount under section 201(1) and interest under section 201(1A).

c)On appeal, the CIT(A) set aside the order passed by the AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)In the instant case, the terms of appointment of doctors clearly indicated the appointment of professionals for providing consulting services and not their appointment as an employees. The doctors were not precluded from pursuing the professional pursuits elsewhere as long as there was no conflict of interest;

2)Once the doctors achieved some seniority and standing, their remuneration was a percentage of fees collected from patients consulting them. These terms clearly indicated a contract for service and not contract of service.

3)Normally the services rendered by a doctor should be considered as a professional service unless the contracts of service categorically states and the conditions are clearly and indubitably that of employment.

4)The doctors or professional consultants working under contract for rendering professional services and the payments made by the assessee-company to the professional doctors does not constitute salary and, hence, the assessee would not be responsible for deducting tax at source on the said payments treating them as (salaries) in terms of section 192(1).

5)Thus, on perusal of the terms of contract for services entered into with the Doctors, it was to be opined that the services rendered by the them were classifiable as professional services and, therefore, assessee had correctly deducted tax at source from payment to Doctors under section 194J. – DY. CIT V. QUALITY CARE INDIA LTD [2014] 48 taxmann.com 88 (Hyderabad - Trib.)

MCA abolished concept of maximum useful life of asset; allows flexible life supported by technical advice

Ministry of Corporate Affairs has made amendment to Schedule II of the Companies Act, 2013. The Schedule II stipulates useful life of various assets for computation of depreciation. The amendment provides as under:

i)An option to adopt flexible useful life of assets: The existing schedule II provided that useful life of an asset shall not be longer than useful life specified in part C. Further, that if a company opts a useful life longer than that provided in Part C, then in that case it is required to make disclosure in its financial statements. The amended Schedule II provides that if a company adopts useful life different from Part C, the financial statements shall disclose such difference and provide justification supported by technical advice.

ii)Determination of useful life of significant part of assets separately, mandatorily with effect from April 1, 2014: The Schedule II also requires that where cost of part of asset is significant to total asset and useful life of such part is different from useful life of remaining parts of asset then, in such cases useful life of significant part shall be determined separately.

The amended schedule provides that such requirement shall be adhered to voluntarily by companies for financial year commencing on or after April 1, 2014 and it has to be mandatorily adhered to by companies for financial years commencing on or after April 1, 2015.