Friday, May 26, 2017

Mauritius Apex Court disallows common expenditure on exempt capital gains


a) The Mauritius Company derives income from dividends paid by the Indian investee companies. It had disposed off certain investment and earned capital gains, which is not an income as per Mauritius Income Tax Act (MITA).

b) It paid fees to custodians and sub custodians for the holding of the investment and same was claimed as deduction from gross total income.

c) Mauritius Revenue Authority (MRA) disallowed the expenditure to the extent that it was not exclusively incurred in the production of gross income by invoking section 18 of the MITA. However apportionment was done as per the following formula given under section 26 of the MITA:

Capital Gains x Allowable expenditure

Income + Capital Gains

d) Appellant contended that revenue authority could not resort section 26 which applies to ‘exempt income’ having characteristics different than capital gain.

e) It was also contended that only expenses directly attributable to capital gain such as commission payable to brokers were not allowable. However, custodian fees and sub-custodian fees which did not relate to the capital gains, were capital in nature and, therefore, to be allowed.

The Mauritius Supreme Court held as under: 

1) Section 26 of the MITA provides for disallowance of any expenditure to the extent to which it is incurred in the production of income which is ‘exempt income’. It also provides formula to calculate such disallowance.

2) Section 18 of the MITA provides that expenditure is allowable to the extent that it is exclusively incurred in the production of gross income. Exempt income is not chargeable to tax and capital gains on the other hand is not an income for tax purposes. Accordingly, both exempt income and capital gain are excluded from gross income.

3) If an expenditure produces both gross income and other income (which does not amount to gross income) then as rightly viewed by the MRA, only the part which produces gross income, is an allowable deduction.

4) Since both capital gains and exempt income are excluded from the definition of gross income. Therefore, capital expenditure and expenditure attributable to exempt income, although different in the nature, share the same characteristic of being not allowable under sections 18 and 26.

5) The activities of Mauritius Company are those of any investment company. The expenditure sought to be deducted, i.e., custodian and sub-custodian fees, therefore produced two types of income, revenue income during such time the company holds the securities and capital gain when the company decides that the time is right for disposal of securities. The total custodian and sub-custodian fees cannot therefore be exclusively or
solely incurred for the production of gross income and are not allowable under Section 18. Thus, we could not accept the submission that the expenses were incurred with the intention of producing revenue income and that the capital gain was only an indirect outcome and on that basis expenses should be totally deductible.

6) Further, section 18 and 26 are not mutually exclusive sections and, hence, recourse can be made to section 26 if section 18 is silent on any issue. Therefore, MRA had rightly disallowed expenditure incurred to earn capital gains. - [2017] 81 386 (SCM)

Mere loan confirmation letters from lenders couldn’t prove sanctity of loan transaction: ITAT


a) Assessee was owner of a proprietorship concern and claimed to have received unsecured loans of Rs 10 lakhs each from Natasha Enterprises (NE) and Mohit International (MI).

b) Assessment was initially completed but subsequently the Assessing Officer (AO) came to know that NE and MI were shell entities. He accordingly reopened assessment.

c) During reassessment proceedings, assessee filed the loan confirmations, copies of ledger account and other supporting evidences to justify the transactions but same were rejected by the AO. Accordingly, loan amount was added to income as unexplained cash credit u/s 68.

d) CIT(A) confirmed the additions, Aggrieved-assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of revenue as under:

1) Merely because loan transactions were though cheques, which were duly evidenced from the bank statements of the lenders, copies of loan confirmations and statements of accounts could not prove that the initial onus of demonstrating the bonafides of loan transactions was duly discharged by the assesse.

2) It was pointed out that the lenders were shell entities and this fact was duly brought to the notice of the assessee but the assessee did not have anything to say on this point. He was neither able to produce any of the lenders nor gave sufficient information about the nature of relationship with them.

3) In order to demonstrate valid transaction, it was not the completion of paper work but genuineness of transactions which was crucial. Thus, onus had not been discharged by the assessee. Accordingly, loan transaction was rightly treated as unexplained credit as per section 68. - [2017] 81 308 (Ahmedabad - Trib.)

25 Key Takeaways of Final GST Rules passed by GST Council

In its 14th meeting in Srinagar on 18th and 19th May,2017 the all-powerful GST council cleared seven rules pertaining to different aspects of GST. These rules relate to Registration, Input Tax Credit, Payment, Refund, Invoice, Valuation and Composition and have paved the way for the rollout of GST from July 1, 2017.

The key highlights of these final GST Rules are as follows:

1) PAN is mandatory for taking registration under GST. PAN will be validated by CBDT. After successful validation, registration will be granted.

2) Physical verification of place of business will not be conducted to grant registration under GST. But officer can do physical verification after granting of registration, if he is satisfied that it is necessary to do the same. He must upload verification report on GST Portal within 15 working days after verification.

3) Tax invoice in case of supply of taxable services must be issued within 30 days of date of supply of services. However, time limit for banking company, insurance company or financial institutions is 45 days.

4) Electronic Liability Register shall be maintained for each person liable to pay tax on the GST Portal.

5) A separate formula is prescribed for Maximum Refund in case of inverted duty structure, i.e., GST rate is higher on Inputs than on Output Supply.

6) The person eligible to take credit in respect of input of goods held in stock after registration is required to file a declaration on GST Portal that he is eligible for input tax credit within 30 days.

F1 Circuit—A Fixed Place PE!

Thanks to the burgeoning fan base of various sporting events globally. Now several sporting bodies are organising various series across borders. However, tax policies of the nations are not so sweet for the taxpayers. This is more so because of the current global wave of preventing the unintended application of the tax provisions. The Supreme Court of India's decision in the case of Formula One World Championship Ltd. v. CIT1 is a perfect illustration wherein the Apex Court has given a new dimension to the concept of permanent establishment ("PE").

Exposure of a foreign company (F Co.) having PE in the source country has always been a contentious issue. India follows "source based taxation". Under source based taxation principle, income earned by a non-resident is taxed in the country in which such income has accrued or arisen, even by way of a deeming fiction.

In this article we will dwell upon the Supreme Court's ruling and also other rulings on similar issue on the existence of Fixed Place PE in India, more particularly as to whether F Co.'s presence for a short duration in a source State/country can be considered to its PE?

Sale of business without transfer of trademark held as slump sale as buyer was in same line of business

The issue before the Tribunal was as under:

Whether sale of manufacturing unit by assessee without transferring his trademark could be held as slump sale?

The Tribunal held in favour of assessee as under:

1) The definition of slump sale' u/s 2(42C) read with the explanation (1) to sec. 2(19AA) of the Income-tax Act makes it clear that 'slump sale' means transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale.

2) In the instant case, assessee sold its manufacturing unit of edible oil as a going concern on slump sale basis to the buyer who was already in same line of business. Consideration was decided without assigning value to individual assets and liabilities.

3) Buyer of the manufacturing unit of the edible oil was already in the same business and wanted to sell the products manufactured from manufacturing unit in their own name and brand. They were not keen to buy the name/trade name/logos/trademark/ product name, etc., of the assessee, so, the assessee excluded the same from the transaction.

4) Therefore, mere exclusion of the said intangible assets could not in any way affect the slump sale of the manufacturing unit of assessee. - [2017] 81 305 (Kolkata - Trib.)

28% GST on cinema halls, race clubs and 5% on economy class air travel

On May 18, 2017 the GST Council had finalised seven GST rules and GST rates on goods (1211 items approx). Today, the GST Council has finalised the GST rates on services. The key takeaways of 14th GST Council meeting are given hereunder:

1. GST rate will be 28% for race clubs, betting and cinema halls. Transport and Financial services will be taxed at 18%.

2. Economy class air travel and rail travel will attract 5% GST rate, but the business class air travel will attract higher rate of 12%.

3. No GST will be levied on hotels charging tariff below Rs 1,000 whereas the GST rate will be 18% for hotels with tariff in the range of Rs 2,500-5,000.

4. GST rate will be 5% for Cab operators like Ola and Uber.

5. Healthcare and Education Services have been exempted from GST. Services that are currently exempt would continue to be exempted under GST.

6. The tax rates for gold, bidis and cigarettes will be decided in next meeting to be held on June 3, 2017.

Mergers and acquisitions: The evolving Indian landscape

Just recently, the largest ever FDI transaction in India was announced, with the Russian government owned Rosneft and its partners acquiring Essar Oil for 13 billion USD. This is indeed a watershed moment for India and a re-validation of global faith in the potential and attractiveness of its economy. With FDI inflows into India already hitting a high in the last fiscal year, this marquee transaction will only provide a fillip to India’s already burgeoning M&A landscape.

There has been a spate of high-profile transactions in India in the last few years, whether domestic or international, and both inbound and outbound. With the government continually working towards reforms on all fronts, be it in its regulatory policies to attract foreign investors, providing an impetus to the manufacturing sector with Make in India, improving India’s Ease of Doing Business rankings, or providing solace to the much beleaguered infrastructure sector by paving the path for real estate investment trusts (REITs)/infrastructure investment trusts (InvITs), there is no looking back.

Ever since the Vodafone tax litigation took the Indian M&A landscape by storm in 2007, tax aspects surrounding any M&As in India came to the forefront—so much so that corporate have now started taking tax insurance to insulate themselves from the uncertainties and vagaries of interpretation of Indian tax laws. Of course, while the government is making strides in trying to deliver the comfort of certainty to the investor
community (such as by issuing clarifications on various aspects of indirect transfers), it is also tightening the screws on various fronts—the renegotiation of India’s tax treaties, the looming advent of General Anti- Avoidance Rules (GAAR) in 2017 and the adoption of Base Erosion and Profit Shifting (BEPS) action plans.

Click here to download PwC India’s Report on 'M&A'

Benefit of IDS wasn’t available even if search proceedings was initiated after launch of IDS


a) The Central Government had come with an Income Declaration Scheme, 2016 (IDS) which was made effective from 1-6-2016 to 30-9-2016.

b) Assessee had faced proceedings under section 132, search warrant was issued and search was also carried out from 30-6-2016 to 2-7-2016. In the meantime before 30-9-2016, he applied for benefit of IDS.

c) Assessee contended that he was entitled to benefit of IDS since raid and search proceedings under section 132 were initiated after the launch of scheme.

d) Assessing Officer rejected the claim of assessee, aggreived-assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

1) Clause 196(e)(ii) to IDS provides that the provisions of this scheme shall not apply where a search has been conducted under section 132 or requisition has been made under section 132A or a survey has been carried out under Section 133A of the Incometax Act in a previous year.

2) It was a case where the Central Government had granted benefit of IDS only to the persons who were not covered under section 132 and other proceedings. If a particulars class had been debarred to opt for IDS, such person cannot avail the benefit in any circumstances even if search had been conducted after the launch of scheme.

3) The IDS will not override the provisions of the Income Tax Act and the scheme which has come by way of limited purpose cannot prevail over the Income Tax Act 

4) Therefore, even though search proceedings was inititated after the lauch of IDS, assessee won‘t be entitled for benefit of IDS. - [2017] 81 213 (Rajasthan)