About Direct Tax Laws, Corporate Laws & Indirect Tax Laws

Thursday, December 11, 2014

"Umbrella" of combined entity level TNMM can't be used to benchmark separate transactions on combined basis

The Tribunal held as under:

1) Transfer pricing legislation contemplates determination of arm's length price ('ALP') of an international transaction, which means for each transaction separately. The term 'transaction' has been defined in Rule 10A(d) to mean 'a number of closely linked transactions.'

2) ALP is required to be determined in respect of each international transaction separately. If, however, there are a number of closely linked transactions, then such closely linked transactions can be considered as a single transaction for the purposes of benchmarking. To put it conversely, the transactions which are not closely linked, should be processed under the transfer pricing regime independently and not on a consolidated basis.

3) In the instant case, the clubbing of royalty payment with other international transactions for processing them in a combined TNMM approach, would defeat the mandate of the transfer pricing legislation.

4) When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be usurped by the income from the other international transaction giving higher income on transacted value. That was why the legislature provided for determining the ALP of each international transaction separately.

5) As the international transaction of royalty payment was separate transaction and not closely linked with the other transactions (i.e., import of raw materials, service spares and export of finished goods, etc.) with which the assessee had merged it, such merger could not be allowed for the purposes of the determination of its ALP on entity level under TNMM. - LG ELECTRONICS INDIA (P.) LTD. V. ACIT (2014) 52 taxmann.com 240 (Delhi - Trib.)

Wednesday, December 10, 2014

ITAT invokes MFN clause to import make available clause from India-Portugese DTAA into the India-Sweden DTAA

Swedish-company could claim Fee for Technical Services ('FTS') received from its Indian subsidiaries as tax-exempt if 'make available' condition was not satisfied, as India-Sweden DTAA contained Most Favoured Nation clause ('MFN' clause) as per which make available clause in India-Portugese could be imported into the India-Sweden DTAA.

The issue that arose for consideration of the ITAT was:

Whether the assessee, a Swedish-company could be given benefit of India-Portuguese DTAA on principle of MFN clause?

The ITAT held in favour of assessee as under:

1) An MFN clause can direct more favourable treatment available in other treaties only in regard to the same subject matter, same category of matter or same clause of the matter.

2) The MFN clause in the protocol attached to the treaty takes care of a situation wherein either of the contracting states enter into a DTAA with another sovereign state and where the same subject matter has been given more favourable treatment by way of a definition or mode of tax.

3) The parties can claim the benefit on the recognized principle of MFN clause. On the basis of protocol to India-Sweden DTAA, a Swedish-company could claim the benefit of 'make available' condition in India-Portugal treaty to claim tax-free status for FTS received from its Indian Subsidiaries.- Sandvik AB v. Dy. DIT (International Taxation) (2014) 52 taxmann.com 211 (Pune - Trib.)

Tuesday, December 9, 2014

Commission paid to affiliate on import of furnace oil was illegal as it was purchased in breach of law

Where purchases of furnace oil from sister concern, its storage and consequent sale were in complete breach of Solvent, Raffinate & Slop [Acquisition, Safe, Storage & Prevention of Use in Automobiles] Order, 2000, payment made by assessee to sister concern could not be allowed under section 37(1).

Facts:

1) The assessee entered into a contract with a foreign company for purchase of furnace oil. It failed to get licence for storage and sale of solvents, as required by the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000 (‘SRS order’).

2) After realizing that any import in absence of valid license would attract criminal/penal proceedings, it approached its sister concern who had said licence. It transferred the contract of import in the name of its sister concern and made payment for said purpose by claiming it as commission.

3) The AO disallowed the commission.

4) On appeal CIT(A) allowed said payment which was subsequently reversed by the Tribunal. Further the High Court upheld the order of Tribunal. The assessee filed the Special leave petition before Supreme court against impugned order of High Court.

The Supreme Court dismissed the Special Leave Petition against the order of High Court, wherein the High Court held as under:

1) When the SRS order prohibits importation of goods, its acquisition, storage and sale, without a valid licence, assessee could not import such furnace oil without issuance of requisite licence.

2) Even assuming that the sister concern had a licence for importing the furnace oil, the assessee diverted its contractual obligation for averting the payment of damages, yet nothing was brought on the record to explain as to how the sum termed as 'commission' for performing the contractual obligation was needed to be paid to the sister concern.

3) It also emerged from record that not only the assessee got contract executed through its sister concern even by a valid licence held by the sister concern, the subsequent purchases from the sister concern of the very furnace oil, its storage and consequent sale appeared to be in complete breach of the SRS Order.

4) Even the nomenclature used as 'Commission' was not taken into consideration and if the character of payment in substance was to be looked at, nowhere it emerged that there was any valid claim for allowing the impugned sum (paid as commission) which was a consideration for transfer of contractual obligation.

5) Even if there was no loss to the revenue because the revenue had recovered tax on the said amount from the sister concern, then also, when from the record itself, it showed that the transaction was in contravention of SRS order and entire modus was also apparent from the paper book produced by the assessee, disallowance by the Tribunal invoking its statutory power required to be sustained. - Overseas Trading & Shipping Co. (P.) Ltd. v. ACIT [2014] 51 taxmann.com 374 (SC)

Monday, December 8, 2014

No penalty for inadvertently filling 'no' response in column seeking info about tax audit

Where assessee-company at time of filing its e-return had inadvertently filled column regarding details of audit under section 44AB wrongly as 'No', penalty could not be levied under section 271B.

Facts:

a) The assessee-company e-filed its return of income. In the said return of income, the assessee was required to answer whether it was liable for audit under section 44AB and if yes, it was required to furnish certain information regarding same.

b) The Assessing Officer noticed that the assessee had answered the said question as 'No' and, consequently, it did not furnish the details relating to auditor. Hence, he took the view that the assessee did not get its accounts audited under section 44AB and, accordingly, he initiated penalty proceedings under section 271B.

c) On appeal, the CIT(A) also confirmed said penalty. The aggrieved assessee filed the instant appeal.

The ITAT held in favour of assessee as under :

1) The assessee had filed the return of income under e-filing procedure. 'Part A-01' of the return of income requires the assessees who would be liable for audit under section 44AB to furnish certain information. The same is optional for the assessees who are not liable for audit under section 44AB.

2) The information to be given in 'Part A-01' contains the details to be furnished in Form No. 3CD. It was seen from the copy of e-return filed by the assessee that the assessee had duly furnished all the details under 'Part A-01' of the return of income, meaning thereby, there appeared to be some truth in the submission of the assessee that it had obtained the tax audit report before the due date for filing return of income.

3) Hence, it was viewed that the assessee could have obtained the audit report under section 44AB before filing the return of income and it had inadvertently filled the relevant column wrongly as 'No'. Since the assessee could have obtained the tax audit report before the due date for filing return of income, there was no justification for levying penalty under section 271B. Accordingly, the order of CIT(A) was to be set aside and he was to be directed to delete the penalty levied in the hands of the assessee under section 271B. - Sujata Trading (P.) Ltd. v. Income-tax Officer, [2014] 50 taxmann.com 397 (Mumbai - Trib.)

Friday, December 5, 2014

Sale on principal-to-principal basis to be included in 'turnover' for purpose of tax audit under sec. 44AB

Sale of gas cylinders to consumers was to be included in turnover for purpose of Section 44AB when assessee was appointed as a distributor on principal-to-principal basis for sale of such cylinders.

Facts:

a) The assessee was a distributor of Indian Oil Cooking Gas and was also engaged in sale of gas stoves and spare parts.

b) The assessee did not include the turnover from sale of cylinders for computing the threshold limit prescribed under section 44AB. By including such sales, the turnover of assessee would exceed the threshold limit prescribed under section 44AB.

c) Thus, the Assessing Officer (AO) issued a show-cause notice to assessee on the ground that it did not get its accounts audited under section 44AB.

d) The assessee contended that it had sold gas cylinders on commission basis as the ownership of same remained with the Indian Oil Corporation. Therefore, sale of gas cylinders could not be included in its turnover to compute the threshold limit prescribed under section 44AB. The Assessing Officer did not agree with assessee's reply and imposed a penalty on it under section 271B.

e) The appellate authorities affirmed the order of AO. Aggrieved assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

1) The agreement clearly indicated that the assessee was appointed as a distributor on principal-to-principal basis for sale of gas cylinders to consumers and it was not selling gas cylinders on commission basis.

2) Consequently, the sale of gas cylinders was liable to be included in the turnover of the assessee. Since the turnover exceeded the threshold limit prescribed under Section 44AB, the books of account were liable to be audited.

3) Since the books of account were not audited, penalty proceedings were rightly initiated. The explanation given by the assessee for non-compliance with the provision of section 44AB was neither sound nor justifiable. - Attara Gas Service v. CIT (2014) 50 taxmann.com 445 (Allahabad)

Thursday, December 4, 2014

Though income of Chamber of Commerce held as business receipt, yet Sec. 11 relief available as profit motive absent

The Tribunal held in favour of assessee as under:

1) The concept behind Section 28(iii) is to overcome the mutuality principle being relied upon in support of a claim for exemption, when the assessee was actually deriving income or making profits as a result of rendering specific services to its members in a commercial way.

2) The reason for the introduction of Section 28(iii) of Act was to ignore the principle of mutuality and reach the surplus arising to the mutual association. It was clear from the fact that these provisions were confirmed to services performed by the association "for its members". Such income would either be charged as business income or under the residual head, depending upon whether the activities of the association with the non-members amounted to a business or otherwise.

3) Section 28(iii) constitutes certain income of the association to be business income without affecting the scope of the exemption under Section 11.

4) Section 2(15) incorporates the definition of "charitable purposes" and shows that several mutual associations may also fall within the definition.

5) The receipts derived by a chamber of commerce and industry for performing specific services to its members, though treated as business income under Section 28(iii), would still be entitled to the exemption under Section 11 read with Section 2(15) of the Act, provided there is no profit motive.

6) Thus, assessee being a charitable Institution carrying on the object of promotion and development of trade and commerce and not involved in the carrying on of any activity in the nature of "business", the said section 28(iii) of the Act would not apply.

7) Hon'ble Apex Court in the earliest case of Andhra Chamber of Commerce had clearly laid out the principle that if the primary purpose of an Institution was advancement of objects of general public utility, it would remain charitable in nature even if an incidental or ancillary activity or purpose, for achieving the main purpose, was profitable in nature. The basic principle underlying the definition of "charitable purpose" remained unaltered even on amendment in the section 2(15) of the Act w.e.f. 01/04/2009, though the restrictive first proviso was inserted therein- Indian Chamber of Commerce v. ITO (Exemption) (2014) 52 taxmann.com 52 (Kolkata - Trib.)

Monday, December 1, 2014

I-T returns and info provided to tax authorities are exempt from disclosure under RTI Act

Issue

Whether the Income-tax returns and other information provided to Income Tax Authorities by a taxpayer are personal and confidential in nature and, therefore, cannot be placed in public domain through RTI Act?

The High Court held as under-

1) Income-tax returns and other information provided to Income Tax Authorities by individuals and unincorporated assessees are confidential in nature and cannot be placed in public domain, as it would be exempt under section 8(1)(j) of Right to Information Act, 2005 (RTI Act).

2) In cases of widely held companies, most information relating to their income and expenditure would be in public domain and, therefore, it is only confidential information that would be exempt from disclosure under section 8(1)(d) of RTI Act.

3) Information furnished by an assessee in income-tax return can be disclosed only where it is necessary thing to do so in public interest and where such interest outweighs in importance any possible harm or injury to assessee or any other third party. However, information furnished by corporate assessees that neither relates to another party nor is exempt under section 8(1)(d) RTI Act can be disclosed- Naresh Trehan v. Rakesh Kumar Gupta [2014] 51 taxmann.com 548 (Delhi)

Lumpsum amount paid for transfer of know-how wasn’t royalty if payment wasn’t made for any particular period

Assessee had entered into an agreement with UK based company for supply and installation of machinery, which involved transfer of technical know-how. It had paid lumpsum amount in connection with transfer of technical know-how. Such payment could not be treated as royalty as it was not made for any particular period.

Facts:

a) Assessee entered into an agreement with UK based Co. to supply and install certain machinery, which involved transfer of technical know-how.

b) The AO treated the payment inconnection with transfer of technical know-how as royalty. The assessee pleaded that the such payment couldn’t be treated as royalty on following grounds:

i) It was paid in lumpsum and not year after year for the use of patent or any facility;

ii) The transfer of technical know-how or patent was for the limited purpose of installation and fixing the machinery.

c) On appeal, the CIT(A) dismissed the appeal of assessee. Further, the Tribunal set aside the order of AO by holding that amount paid to UK Co. couldn’t be treated as royalty.Aggrieved by the order of tribunal, the revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) Though the royalty is required to be paid periodically during the subsistence of the arrangement, it is quite possible for the parties to agree for payment of a lumpsum amount. However, a lumpsum payment would be deemed as royalty, only when it is for a fixed period for which the facility can be utilised.

2) A lumpsum payment without mentioning the period is prone to take away such amount from the definition of royalty.

3) Royalty, by its very nature, is a sum payable to the owner of a design, invention or trademark by another for using it. It is clearly opposed to an outright transfer.

4) In the instant case, the amount paid in lumpsum was not for any particular period. It was paid for transfer of technical know-how for limited purpose of installation and fixing of machinery. Thus, such lumpsum payment could not be treated as royalty- CIT v. The Andhra Petrochemicals Ltd. [2014] 51 taxmann.com 451(AP)

Tuesday, November 25, 2014

Sum received by international news agency on distribution of news and related photos in India is royalty

Facts:

a)The assessee, an International News Agency, was having its headquarter in France. It had been distributing its news and photos connected with news in India through various Indian News agencies.

b)There were two categories of payments received by assessee from India - one for transmission of news and the other for transmission of related photos.

c)The Assessing Officer (‘AO’) as well as the CIT(A) held that copyright subsisted in news-reports and photographs circulated by the assessee in terms of Copyright Act, 1957. Hence, the payments received by the assessee would qualify as 'royalties' under section 9(1)(vi) and Article 13(3) of the India-France Treaty (‘DTAA’).

d)The assessee submitted that no copyright subsisted in the work of the assessee as news reports as well as photographs provided by the assessee lacked originality and were devoid of any creativity.

The Tribunal held in favour of revenue as under:

1)On a perusal of Article 13 of DTAA, it was evident that 'royalty' cover within its fold payments pertaining to copyright of literary, artistic work, etc. Since these terms had neither been defined nor illustrated under Income-tax Act nor under DTAA, reliance was to be placed on relevant provisions of the Indian Copyright Act, 1957 to understand their true meaning and context.

2)To appreciate the distinction between mere reporting of facts from news stories, it would be worthwhile to analyse the recent reporting about Malaysia Airlines Flight 370 flight that disappeared on 8 March, 2014. In one of the newspapers i.e. 'Strait Times', the catchline read as Malaysia's MH 370 report shows delayed response, offers no new clues' while, another newspaper 'The New York Times' reported this incident with the catchline Questions Over Absence of Cellphone Calls From Missing Flight's Passengers'. It was to be pointed out that, the piece reported by the first newspaper consisted of news inputs as well as photographs from AFP while as the latter one consisted of news inputs from 'New York Times News Service'.

3)From a reading of the above news-item, it is evident that, even though the factum or news remains to be imbedded in a fact its reporting or form of an expression makes it unique. Thus, such news-reports as well as archived data being in the nature of 'original literary works' meet the statutory requirements for copyright outlined under section 13(1)(a) of the Indian Copyright Act, 1957. Hence, copyright subsisted in such news item/news story.

4)Section 2(c)(i) of the Indian Copyright Act, 1957 categorically includes photographs as artistic work. As per terms of usage of assessee's photos for news items or non-news items, it could not be denied that it had an intrinsic value of its own and when used for 'news items'; it helped to assist in conveying the message in the news story. Hence, copyright subsisted in such photographs/ image under consideration. Therefore, sum received by international news agency on distribution of its news and related photos in India was taxable as royalty. – Agence France Presse v. ADIT, International Taxation, New Delhi [2014] 51 taxmann.com 186 (Delhi - Trib.)

HC can’t review orders of SetCom; powers are confined to reviewing its decision making process rather decision itself

IT: High Court cannot assume the role of an appellate authority to review orders passed by the SetCom. Its role is confined to judicial review of the decision making process adopted by the SetCom and not the decision itself.

The High Court held as under:

1)The High Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, cannot assume the role of an appellate authority to conduct a review of orders passed by the Settlement Commission (‘SetCom’).

2)Its role is confined to reviewing decision making process adopted by the SetCom and not the decision itself.

3)The scope of enquiry of the Court, in matters involving a challenge to orders passed by the SetCom, is only to see whether its order complied with the statutory provisions of Chapter XIX-A of the I-T Act.

4)The Karnataka High Court in N.Krishnan v. Settlement Commission [1989] 47 TAXMANN 294 (KAR.) observed that a decision of the SetCom could be interfered with only:

i)If grave procedural defects, such as violation of the mandatory procedural requirements of the provisions in Chapter XIXA of the Income-tax Act, 1961, and/or violation of the rules of natural justice were made out; or

ii)If it was found that there was no nexus between the reasons given and the decision taken by the SetCom..

5)The Supreme Court in Union of India v.Ind-Swift Laboratories Limited [2011] 4 SCC 635 held that an order passed by the SetCom could be interfered with only if the said order was found to be contrary to any provisions of the Act. So far as the findings of fact recorded by the SetCom or question of facts were concerned, the same were not open for examination either by the High Court or by the Supreme Court.

6)Hence, it was well-settled that the power of judicial review was not to be exercised to decide the issue on facts or on an interpretation of the documents available before the Court. Thus, in the instant case, the enquiry by Court could only be whether or not the SetCom had exercised a jurisdiction that it did not have or, alternatively, if it did have the jurisdiction, whether it had erred in the exercise of that jurisdiction. In the latter event, the Court would also have to bear in mind the nature of the jurisdiction exercised by the SetCom, which was akin to a statutory arbitration. – CIT v. Settlement Commission (IT & WT) [2014] 51 taxmann.com 351 (Kerala)