Monday, February 27, 2017

TPO couldn't apply 'benefit test' while determining ALP of royalty payments: HC


a) Assessee had entered into an agreement with its UAE based Associated Enterprise (AE) for payment ofroyalty equivalent to 3% of the net ex-factory sale price of the products on both domestic and export sales.

b) Transfer pricing (TP) study by the assessee in relation to this component was by adoption of Transaction Net Margin Method.

c) Transfer Pricing Officer (TPO) found that substantial expenditure had been incurred by the assessee on advertisement and marketing and it were these efforts which had yielded increased revenue and profit. Thus, he held that assessee had to satisfy the 'benefit test' to justify payment of royalty and as it had failed to do so, royalty payment was pegged at 2% instead of at 3%.

d) On appeal, the Tribunal rejected the application of the 'benefit test' adopted by the TPO. Revenue filed instant appeal before the High Court.

The High Court held in favour of assessee as under:-

1) TPO did not undertake any analysis in fixing the arm's length price of the royalty payment made by the assessee to the AE. TPO had also not adopted any of the methods prescribed under Section 92CA of the Act of 1961, read with Rule 10B of the Income Tax Rules, 1962.

2) TPO determined that the reason for the improvement in the net sales and profit of the assessee was increased marketing along with offer of discounts. Thus, there was no justification for payment of royalty at 3% to the AE by the assessee.

3) This reasoning was without legal basis of law as it was not for the TPO to decide the best business strategy. It was not for the TPO to determine as to what could be the other reasons for increase in the assessee's sales and profit.

4) Therefore, TP additions made on account of royalty payment by reducing rate of payment amounted to an arbitrary and unbridled exercise of power by TPO. - [2017] 78 230 (Andhra Pradesh)

No FTS when global telecom facility provided to shipping agents helped them to discharge their functions


a) The foreign shipping company had 3 agents in India who were acting as clearing agents.

b) In order to help agents, assessee had set up and was maintaining a global telecommunication facility called “Maersk Net”. Agents were paying for said facility on pro-rata basis to the assessee.

The issue before the Supreme Court was as under:

Whether the income from the use of Global Telecommunication Facility called 'Maersk Net' can be classified as fees for technical services?

The Supreme Court held in favour of assessee as under:-

1) “Maersk Net” was a facility which enables the agents to access several information like tracking of cargo of a customer, transportation schedule, customer information, documentation system and several other information.

2) Maersk Net System was an integral part of the shipping business which was allowed to be used by agents in order to enable them to discharge their role more effectively.

3) Neither the AO nor the CIT (A) had stated that there was any profit element embedded in the payments received by the assessee from its agents in India.

4) It was in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems.

5) Therefore, payments made by the agents for use of that Maersk Net System could not be treated as “Fees for Technical Services”. - [2017] 78 287 (SC)

No response for suspicious deposits may invite tax dept. at your doorstep – 10 things to know

The Income-Tax department had identified around 18 lakh taxpayers in its first phase who had made cash deposits during demonetization. These taxpayers were required to submit online response till 15th February 2017.

Now, the tax department has initiated verification of such accounts. It has issued the following Standard Operating Procedure for verification of cash transactions of taxpayers. 

1) In case of individuals, not having any business income, no verification shall be made by Assessing Officer ('AO') if the cash deposits do not exceed Rs 2,50,000.

2) In case of taxpayers above 70 years of age, the threshold limit shall be Rs 5,00,000. The source of such deposits can be either household savings or savings from the past. 

3) Wherein online response has not been submitted the tax authorities may initiate survey. During survey, tax dept. can check CCTV recording at cash counters of banks where there is suspicion of back dating transaction or fictitious cash transactions.

Thursday, February 23, 2017

No sec. 54F relief if newly acquired house is instantly demolished: Chennai ITAT


a) Assessee sold two shops and a residential building for certain amounts. These amounts were deposited in the capital gains scheme account in a nationalized bank. Later on, the assessee withdrew this amount and purchased a residential plot and claimed the benefit of section 54F.

b) Assessing Officer (AO) disallowed claim of the assessee on the ground that the new asset purchased was instantly demolished by the assessee and, further, he had proceeded to construct a shopping complex.

c) CIT (Appeals) affirmed the order of the AO. Aggrieved assessee filed the instant appeal before the Tribunal.

Tribunal held in favour of revenue as under:

1) The Parliament in its wisdom had enacted section 54F in the Finance Act, 1982 with a view to encourage housing construction. Thus, the intention of the legislation was not for destruction of residential building but for promoting the construction of the residential housing units.

2) If the benefit of section is extended where the new residential building is demolished without constructing another residential building within the time limit prescribed under the Act, then the purpose of the Act is defeated.

3) In the case CIT v. V. Pradeep Kumar [2006] 153 Taxman 138 (Madras), it had been categorically held that "the burden is on the assessee to prove that he had actually constructed a new residential house for the purpose of the exemption under section 54F. Section 54F emphasizes construction of residential house. The construction must be a real one. It should not be a symbolic construction. Mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated under section 54F."

4) Since assessee had demolished the newly acquired residential house instantly for the purpose of construction of a six floored shopping complex, exemption under section 54F was rightly disallowed. - [2017] 78 177 (Chennai - Trib.)

Limitation of Relief clause can’t be invoked to deny tax exemption to Singaporean Shipping Company


a) Singapore based company was engaged in the business of operation of ships in international waters. It had a shipping agent in India in the form of a wholly owned subsidiary ‘ALP India Pvt. Ltd.’

b) In return of income, assessee sought to claim benefit of article 8 of India-Singapore DTAA for its gross freight earnings collected from India.

c) Assessing Officer (AO) noted that the assessee could not produce ship registration certificates and copies of charter party agreements of few ships so he denied benefit of article 8 of DTAA in respect of such operating ships.

d) Further, CIT (Appeals) denied entire benefit by invoking the limitation clause of article24 of India-Singapore DTAA. Aggrieved-assessee filed the instant appeal before the Tribunal.

Tribunal held in favour of assessee as under:

1) As per the remittance basis of taxation under Singapore law, income arising outside the country is taxable only when that income is remitted to and received in the Singapore. However, any income accruing in or derived from Singapore is taxable on accrual basis under Singapore law.

2) For applicability of limitation of benefit clause, two conditions needs to be satisfy, firstly, income earned from the source state (here in this case, India) is exempt from tax or is taxed at a reduced rate; and secondly, under the laws in force of the resident State (Singapore), such income is subject to tax by reference to the amount thereof which is remitted to or received in the resident State and not by reference to the full amount  thereof. If both the conditions are satisfied, then only the exemption is allowed or the reduced rate of tax is levied on the amount so remitted.

3) In the instant case, the income of assessee-company from shipping operations was not taxable on remittance basis under the laws of Singapore, albeit it was liable to be taxed in-principle on accrual basis by virtue of the fact that this income under the income tax laws of Singapore is regarded as 'accruing in or derived from Singapore'.

4) Thus, the condition of article 24 couldn’t be satisfied in the present case. Therefore, CIT (Appeals) was not justified in denying the benefit of article 8 by invoking the limitation of benefit clause. - [2017] 78 240 (Mumbai - Trib.)

Key Takeaways from 10th Meeting of GST Council: State Compensation Law Approved

The GST Council failed to approve all GST related Bills in its 10th meeting at Udaipur, Rajasthan and it has only finalised legally vetted State Compensation law. The following are the key takeaways of the meeting:

a) State Compensation Law Approved: The Council has approved the legally vetted Draft of State Compensation Law. According to 101st Constitution Amendment Act, 2016 the Centre will compensate State for first five years of GST implementation in case any loss revenue accrues to State on account of GST Implementation. The Draft Law provides that base year for calculation of compensation would be financial year 2016 and growth in revenue would be taken as 14 percent calculated on compounding basis. The Draft bill will now laid before the Cabinet and after approval of same it will be presented before the Parliament.

b) Central GST, State GST and Integrated GST: The Finance Minister said that there were some contentions issues pending on Model GST Laws. Some of them are as under:

1) Composition of Tribunal members and their eligibility

2) Exemptions during transition phase to Industry (E.g. Extension of time for return filling, etc.)

3) Classification of Works Contract as goods or Services

4) Definition of Agriculture, etc.

Advocate’s laxity to obtain receipt from Police for transfer of bounced cheque isn’t misconduct

Client has filed a complaint before Bar Council of India alleging that cheque handed over to the appellant – Advocate to initiate criminal action against defaulter under Section 138 of the Negotiable Instrument Act was not returned to him. On the basis of complaint received, a disciplinary proceeding was initiated against Advocate and found him guilty of professional misconduct. Further, An Advocate has filed appeal to the Apex Court against the order of disciplinary committee.

The Apex Court held that it is only a case of negligence and not a case of 'gross negligence' and hence the Advocate is not guilty of professional misconduct as Advocate handed over the original bounced cheque to police given by his client and failed to obtain any acknowledgement from them. - [2017] 78 220 (SC)

Saturday, February 18, 2017

CST won't accrue to that State where BrahMos Missile was stored only for warhead integration

Assessee, a joint venture company between Russia and India, had been established for purpose of design, development, production and sale of Brahmos Cruise Missile weapon system. The Indian Armed Forces awarded contract to the assessee for manufacture and supply of Brahmos Cruise Missiles.

A manufacturing unit of the assessee had been set up at Hyderabad. The missiles manufactured at Hyderabad unit were sent to Nagpur unit for the purpose of integration of warhead. Subsequently such missiles were dispatched to the Indian Armed Forces from Nagpur as directed by the Hyderabad office.The assessee treated the said transactions as inter-state sales of Missiles affected from its Hyderabad unit and, accordingly, charged and collected CST and paid the same to its assessing authority at Hyderabad. The State of Maharashtra demanded tax from assessee on the ground that was a local sale affected from Nagpur and hence State VAT would be levied. 

The High Court held as under:

It denied the demand of Maharashtra VAT department and held that the sale of missile occur from the Hyderabad and not from the Nagpur. There was branch transfer of missile between Nagpur and Hyderabad for their War head integration. The Nagpur would not be treated as a place from where sale occasioned first for delivery.

Rs 30 lakhs black money seized by Punjab Police eligible for PMGKY scheme; High Court


a) Assessee was travelling in a cab from Delhi carrying Rs. 30 lakhs. Such cash amount was seized by Punjab police and handed over to the Income-tax Officers.b) Assessee filed writ petition seeking unconditional release of amount with a further prayer to avail of the remedy under 'Pradhan Mantri Garib Kalyan Yojana, 2016' (PMGKY) by depositing the aforesaid amount, tax, surcharge and penalty.

High Court held in favour of assessee as under:

1) A person having unaccounted cash can avail of the benefit of the PMGKY scheme by submitting the Form 1 at any time on or before 31-3-2017 provided he does not fall under the list of excluded cases.

2) In the exclusion, it is mentioned that the scheme shall not apply in relation to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, etc.

3) The use of the words "in relation of prosecution of any offence" instead of "in relation to investigating for any of the offence" clearly shows legislative intent that provisions would apply only if the chargesheet or complaint is filed for prosecuting any person under any of the aforementioned provisions of the Act and not merely when investigations are going on.

4) In the instant case, no complaint or chargesheet was pending against assessee. The alleged un-disclosed seized cash had been handed over to the Income-tax department and summons had already been served upon the petitioner.

5) Assessee was not trying to project undisclosed income as duly accounted for availing of the remedy. Since he was not amongst the persons who weren’t eligible for availing of the PMGKY Deposit Scheme, the Income-tax Officer could not deny the benefit of PMGKY. - [2017] 78 172 (Punjab & Haryana)

Harsh Punitive action will be taken against shell companies: FinMin

Departments to review the functioning of ‘Shell Companies’ in India, so as to prevent their misuse for money laundering and tax-evasion, especially in the context of unearthing black money post demonetization. In the initial analysis, it has been found that ‘Shell Companies’ are characterized by nominal paid-up capital, high reserves & surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover & operating income, nominal expenses, nominal statutory payments & stock in trade, minimum Fixed Asset

It has been found that 559 beneficiaries have laundered money to the extent of Rs.3900 Crore with the help of 54 Professionals who have been identified. These information has been shared with SIT, Income Tax Department, Enforcement Directorate, SEBI and the ICAI. Harsh punitive actions will be taken against the deviant shell companies which will include freezing of Bank Accounts, striking off the names of dormant companies, invocation of Benami Transactions (Prohibition) Amendment Act, 2016 – Press Release dated, 10-02-2017

TPO couldn't benchmark convertible debentures on basis of LIBOR when such debentures were issued in INR


a) Assessee-company issued Compulsorily Convertible Debentures (CCDs) convertible into one equity share for every debenture held. It had paid interest at the rate of 12 per cent on the CCDs.

b) Assessee benchmarked weighted average rate of Prime Lending Rate (PLR) as per the State Bank of India (SBI), which was at 12.26 per cent. Since the rate of interest paid by it was lesser than SBI PLR, assessee stated that its rate of interest paid was consistent with arm's length standard from the Indian TP Regulations perspective.

c) Transfer Pricing Officer (TPO) however, did not agree with assessee's contentions. He considered the CCDs as loan and benchmarked the interest rate at LIBOR plus 200 basis points. Accordingly, certain addition was made to assessee's ALP.

d) DRP upheld order of TPO. Aggrieved-assessee filed instant appeal before the Tribunal. Tribunal held in favour of assessee as under:

1) There was no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly, TPO had wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically categorised as equity in nature.

2) It was to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO had erred in considering LIBOR as benchmark rate which was in complete contradiction to the principles on the issue.

3) Thus, assessee's contentions, that the CCDs could not be categorised as a loan and LIBOR plus two hundred basis points benchmark couldn’t be accepted on the facts of the case, were accepted. [2017] 78 75 (Hyderabad - Trib.)

Certificate for lower TDS is ‘person specific’ and not ‘income specific’, says Kolkata ITAT


a) Assessee paid interest to two parties which was liable for TDS under section 194A. Both parties obtained a certificate from their respective Assessing Officers under section 197 for lower deductions of tax at source.

b) However, the amount mentioned in such certificate was lesser than the actual amount of interest paid and assessee had deducted tax at source at a lesser rate on the entire payment.

c) AO held that the lower deduction of tax was valid only in respect of amount specified in certificate and on the balance amount, assessee ought to have deducted tax at source at the normal applicable rate.

d) For the shortfall, AO treated assessee as an assessee-in-default and levied interest under section 201(1A).

e) Commissioner (Appeals) confirmed order of AO. Aggrieved-assessee filed instant appeal before the Tribunal.

Tribunal held in favour of assessee as under:

1) Deduction of tax at source at lower rate is 'person specific' and cannot be extended to amounts specified by recipient of payment while making an application for grant of certificate under section 197.

2) Section 197(2) along with relevant rule 28AA(2), clarifies that once certificate under section 197(2) is issued for lesser/no TDS deduction, person making payment is at liberty to deduct tax at rates specified in certificate and that it does not make any reference to any income specified in such certificate.

3) Thus, interest under section 201(1A) levied for alleged short deduction of TDS under section 194A on interest payments made by assessee was to be deleted. [2017] 78 152 (Kolkata - Trib.)

Payment made to Polish Co. for dismantling machinery couldn't be held as 'FTS'


a) The assessee-company made payment to foreign company with out deducting tax at source for work of dismantling and sea-worthy packing of paper mill machinery. 

b) Assessing Officer (AO)treated assessee as assessee-in-default as he was of view that payments were made for' fees for technical services' which were liable to tax in India as per section 9.

c) Commissioner (Appeals) reversed the order of AO. Aggrieved by the order of CIT, revenue filed the instant appeal before the Tribunal.

Tribunal held in favour of assessee as under:

1. There is a difference between 'Contract of work' and 'Contract of service'. The two words convey different ideas.

2. In the 'Contract of work', the activity is predominantly physical; it is tangible. In the activity referred as 'Contract of service', the dominant feature of the activity is intellectual, or at least, mental. In contrast, in the case of rendering any kind of 'service', intellectual aspect plays the dominant role.

3. In the instant case, the scope of work mentioned in the agreement entered by the assessee with the foreign company clearly explained that it was 'contract of work' to dismantle the machinery, therefore, it was not a 'contract of service'. 

4. Since dismantling of machinery did not require any technical services, therefore, payment by the assessee did not fall in the ambit of fees for technical services. - [2017] 78 49 (Kolkata - Trib.)

Harsh Punitive action will be taken against shell companies: FinMin

Departments to review the functioning of ‘Shell Companies’ in India, so as to prevent their misuse for money laundering and tax-evasion, especially in the context of unearthing black money post demonetization.

In the initial analysis, it has been found that ‘Shell Companies’ are characterized by nominal paid-up capital, high reserves & surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover & operating income, nominal expenses, nominal statutory payments & stock in trade, minimum Fixed Asset

It has been found that 559 beneficiaries have laundered money to the extent of Rs.3900 Crore with the help of 54 Professionals who have been identified. These information has been shared with SIT, Income Tax Department, Enforcement Directorate, SEBI and the ICAI. Harsh punitive actions will be taken against the deviant shell companies which will include freezing of Bank Accounts, striking off the names of dormant companies, invocation of Benami Transactions (Prohibition) Amendment Act, 2016 – Press Release dated, 10-02-2017

Friday, February 10, 2017

HC orders winding-up of United Breweries on its failure to discharge dues of Kingfisher Airlines

United Breweries Holding Limited (UBHL) has failed to discharge its admitted liability towards creditors of Kingfisher Airlines as UBHL had given corporate guarantee against financial obligation of Kingfisher Airlines. For recovering dues from Kingfisher Airlines, the lenders have filed winding up petition against UBHL. Since, UBHL has failed to discharge its contractual obligation executed under Guarantee agreement in favor of the petitioner, the Karnataka High Court orders winding up of UBHL Company. - [2017] 78 80 (Karnataka)

Apex Court attaches Aamby Valley properties of Sahara

The Supreme Court was convinced that Aamby Valley properties of Sahara would be sufficient for realization of dues to SEBI. Thus, it has ordered attachment of such property. Further, the Apex Court has directed Sahara to furnish a list of properties which would be free from litigation and mortgage so that they could be put to public auction. - [2017] 78 38 (SC)

Transfer of case on restructuring of dept. would be valid even if hearing chance isn't given to assessee


a) The assessee was intimated that jurisdiction of the assessee's case pending with the Income tax department had been transferred from Rourkella to Sambalpur.

b) Assessee challenged orders before the High Court on the ground that his jurisdiction was changed without providing an opportunity of being heard and without assigning any reason. High Court held in favour of revenue as under:

1) There is no denial of the fact that if any decision is taken, which is detrimental to the interest of the parties, a notice is required to be given on the principle that no man can be condemned without hearing him.

2) The underlying motive is to provide an opportunity to know the reasons behind taking the decision of transfer.

3) Restructuring of the department was done for equitable distribution of work and, as such, the order passed by the authorities was for administrative convenience.

4) In the given case, even if the assessee would have been provided an opportunity of being heard before taking the decision, no material change would have come.

5) Further, it was not that the case of the assessee herein had only been transferred but the cases of other assessees had also been transferred.

6) Therefore, transfer of case on restructuring of department would be valid even if hearing chance wasn't given to assessee - [2017] 77 321 (Orissa)

No sec. 43B disallowance on tenant due to non-payment of service-tax on rental payment


a) Assessee-company was running trading business from rented premises and it was paying gross rent (inclusive of service tax) to the landlord.

b) Assessing officer (AO) allowed assessee's claim of payment of rent as deduction. Later on, commissioner passed revisional order to invoke section 43B disallowance as there was default in payment of service tax portion on rental payments.

c) Aggrieved-assessee filed instant appeal before Tribunal.

Tribunal held in favour of assessee as under:

1) Liability to pay the service tax component to landlord was a contractual obligation between the assessee and landlord, whereas to remit the same to the government was a statutory on the part of the landlord.

2) It was the statutory liability of the landlord to pay the service tax to the state. The liability between the assessee (being tenant) and landlord was only a contractual liability for which section 43B would not be application at all.

3) Hence, if section 43B had to be invoked, it had to be invoked only against the landlord, and the non-payment of such component of service tax to the landlord by the assessee was immune from the operation of section 43B. - [2017] 77 324 (Kolkata - Trib.)

Rs. 31 lakhs incurred by Parthiv Patel is deductible if it has nexus with his cricketing income: ITAT

a) Parthiv Patel claimed various expenses under the head business development, office, salary, office rent, other interests, petrol expenses, etc., against income earned from playing cricket.

b) Assessing Officer (AO) declined above expenditure on the ground that since assessee had been deriving match fee and retainerships from various cricket bodies, such expenditure was not attributable to his business or profession.

c) AO was of the view that playing cricket is not akin to a trading or manufacturing or any service activity. Thus, he concluded that such expenditure was not attributable to any business or profession so as to be termed as business expenditure.

Tribunal held in favour of assessee as under:

1) Neither AO nor Commissioner (Appeals) had sought to establish a direct nexus between assessees professional income from playing cricket along with his expenditure in question claimed u/s 37 of the Act.

2) The learned CIT(A) has merely drawn his conclusions qua genuineness aspect instead of establishing the above stated nexus between each head of expenditure vis-à-vis assessee's taxable income.

3) The issue related to disallowance of expenses requires AO’s re-adjudication in accordance with law a􀁺er a􀁹ording adequate opportunity of hearing to the assessee so as to prove the direct nexus with income earned.

4) Therefore, expenses incurred by assessee is deductible against cricketing income if it has nexus with such income. - [2017] 78 4 (Ahmedabad - Trib.)

Fee for Delayed Filing of Return

Income Tax Act, 1961 specifies different due dates for furnishing of return of income by various assessees. If an assessee fails to file its return within the prescribed due date, it has to face the various consequences prescribed in the Income Tax Act, e.g., payment of interest under sections 234A, 234B, 234C, denial of carryover of loss and deductions, etc. One of the consequences is a penalty imposable under section 271F The Finance Bill, 2017 proposes that in case of delay in furnishing of return of income, assessee shall also be liable to pay fee for delay in furnishing of return of income along with the tax and interest payable, if any.

Download “Guide to Budget 2017”

The Finance Minister, Mr. Arun Jaitley, yesterday presented his 4th Union Budget in the parliament. As expected major announcements have been made in this Union Budget 2017. Post-demonetization, taxpayers waited with bated breath for this Union Budget 2017. ‘Taxmann’ has deciphered the fine prints of Union Budget 2017-18 in its e-booklet. All the key proposals in the Union Budget 2017-18 has been legally analyzed in e-booklet titled “Guide to Budget 2017”

18 lakh taxpayers identified by tax dept. to scrutinize huge cash deposits

The Income Tax Department (ITD) has initiated operation clean money. Initial phase of the operation involves e-verification of large cash deposits made during 9th November to 30th December 2016. In the first batch, around 18 lakh persons have been identified in whose case, cash transactions do not appear to be in line with the tax payer’s profile.

ITD has enabled online verification of these transactions to reduce compliance cost for the taxpayers while optimising its resources. The information in respect of these cases is being made available in the e-filing window of the PAN holder (after log in) at the portal The PAN holder can view the information using the link “Cash Transactions 2016” under “Compliance” section of the portal. The taxpayer will be able to submit online explanation without any need to visit Income Tax office.

Compensation paid for using pirated so􀁺ware isn't in nature of penalty; allowable as business exp


a) Assessee was using pirated version of Microsoft software. This resulted in violation of Copyright Act and loss of business of Microsoft Corporation. Microsoft filed civil suit against assessee.

b) The suit was settled in lieu of payment of compensation to Microsoft Corporation and assessee debited the compensation amount as business expenditure.

c) Assessing Officer (AO) rejected such claim stating that expenditure was incurred in violation of Copyright Act thus, explanation to section 37(1) would be attracted.

d) The Commissioner (Appeals) affirmed the order of the AO. Aggrieved-assessee filed instant appeal before Tribunal.

The Tribunal held in favour of assessee as Under:

1) Use of pirated software by the assessee which is the property of Microsoft Corporation admittedly, resulted in loss of business of Microsoft Corporation.

2) There was compromise entered into between the parties for payment of compensation for loss of business and also covering the cost of litigation.

3) The question which arises before the Tribunal was whether the payment made pursuant to the said compromise was for infraction of law or whether it was wholly and exclusively incurred for the purpose of business.

4) The amount which had been agreed to be paid to Microsoft Corporation was on account of contractual liability and was not the case of payment of any penalty.

5) Payment of penalty could not arise when there was an understanding between two private parties. As far as payment which is prohibited by law is concerned, then the same refers to speed money, hafta money, etc., but the same is not to be applied in cases where one party agreed to compensate the other party for loss of its business

6) Since, impugned amount paid to Microsoft was not penalty but it was on account of contractual liability, same would be allowed as business expenditure. [2017] 77 284 (Pune - Trib.)

Sachin Tendulkar gets favourable ruling from ITAT in capital gain tax case

a) During the course of assessment proceedings it was noted by the AO that the Sachin Tendulkar (assessee) had shown capital gains in its return of income.

b) It was noted by AO that Sachin had engaged the services of Portfolio Managers to carry out the transactions of the sale-purchase of shares for which huge amount of PMS charges of Rs.52 lacs were paid. According to the AO, it was not an ordinary thing for a normal investor.

c) Thus, AO issued show cause notice to the Sachin asking him to explain as to why profits on sale of shares/unit should not be treated as 'business income' as against the 'capital gains' as claimed by the Sachin in the return of income.

d) The AO treated such gains as business income. However, the CIT(A) reversed order of AO. The aggrieved-revenue filed the instant appeal before the Tribunal.

The Tribunal held as under:

1. The assessee had always disclosed amounts invested in shares under the head investments. Moreover, in view of CBDT Circular No. 6 of 2016 dated 29-2-2016 and Circular No.4 of 2007 dated 15-6-2007, the initial choice of characterization of share portfolio as investment or stock in trade was with assessee and the assessee had exercised its choice and kept the same as part of investments.

2. The Assessing Officer did not have liberty under the law to thrust his opinion upon the assessee, so long as the assessee followed his choice on consistent basis. Thus, income on sale of shares and mutual funds was to be taxable under head capital gains and not business income. - [2017] 77 305 (Mumbai - Trib.)

Investment can be made out of advance received under sale agreement for sec. 54EC relief


1) The assessee entered into an agreement to sell a property on 21-2-2006. The final sale took place under a sale deed dated 5-4-2007. The assessee had invested an amount of Rs. 50 lakhs from the advance received under the agreement to sale in the Rural Electrification Corporation Ltd. bonds on 2-2-2007.

2) The Assessing Officer as well as the Commissioner (Appeals) held that the assessee was not entitled to the benefit of section 54EC as the amount was invested in the bonds prior to the sale of the subject property on 5-4-2007.

3) The Tribunal, however, held that even when an assessee made investment in bonds as required under section 54EC on receipt of advance as per the agreement to sell, still it was entitled to claim the benefit of section 54EC.

The High Court held as under:

a) The sale deed dated 5-4-2007 records the fact that the agreement to sale had been entered into on 21-2-2006 in respect of the subject property and the amount being received by the assesse under that agreement to sale. Thus, these amounts when received as advance under an agreement to sale of a capital asset, is invested in specified bonds, the benefit of section 54EC is available.

b) The impugned order passed by the Tribunal does not give rise to any substantial question of law. Hence, exemption couldn’t be denied to assessee - [2017] 77 226 (Bombay)

Only capital gains will arise on sale of unlisted shares by certain AIFs: CBDT

SEBI has categorized alternative investment funds into 3 categories, viz., Category I AIF, Category II AIF and Category III AIF, which cover Venture Capital Fund/Venture Capital Company, Private equity funds, Debts funds, etc.

CBDT vide order dated 02.05.2016 in F.No. 225/12/2016/ITA.II had issued order in which it has been directed that the income arising from transfer of unlisted shares would be taxable under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation on characterization of income from sale of unlisted shares However, the said order provided exception in those case where transfer of unlisted shares is made along with the control and management of underlying business of AIFs. In this case, Assessing Officer (AO) has given power to take appropriate view to tax transfer of unlisted shares.

Now CBDT has issue direction to remove such exception primarily for SEBI registered Category I & II AIFs. Therefore, sale of unlisted shares by SEBI registered Category I & II AIFs shall only be subject to capital gain tax without any exception.

Payment made for administrative services couldn't be held as 'FTS' under India-UK treaty

a) The appellant, UK based company, was awarded a contract by IOCL for rendering construction support services, procurement services and engineering design services in connection with a refinery located in India.

b) It availed of various support services such as account receivable, human resources, and payroll management, tax support and administrative support, etc., from its sister concern FWEL.

c) Department took the stand that the payments for FWEL services were in the nature of fees for technical services (FTS) by relying on invoices issued to FWEL which describe the category of services as 'consulting engineering services'.

d) Department further pointed out that it was admitted by the applicant that the persons whose names appear in the time-sheets was in fact engineers which further buttresses the department's stand that the services rendered were in the nature of engineering services which would be technical in nature satisfying the 'make available' clause of the India-UK DTAA.

e) Aggrieved by the order of AO, applicant raised this issue before the Authority for Advance Rulings (AAR).

Authority for Advance Rulings held in favour of applicant as under:-

1) Affidavit given by the applicant clarified that the reference to time spent by engineers in the sample invoice were its own engineers deputed in India Project Office and not any engineers of FWEL, and hence no engineering services were rendered by FWEL.

2) Mere mention of 'engineering services' on the invoice cannot satisfy 'make available' clause.

3) Services rendered by third parties and FWEL were administrative support services rendered from abroad and were in the nature of 'managerial services'. Such services did not make available any technical skill, information or knowledge to the employees of applicant deputed in the India Project Office.[2017] 77 205 (AAR - New Delhi)