Transactions between head office and foreign branch aren't international transactions under TP provisions

Transactions between head office and its foreign branch could not be deemed as international transactions under Section 92B since branch office was not a separate entity distinct from assessee-company.

Facts:

a)Assessee, an Indian company,had entered into international transactions with its branch office located in Canada.

b)In computation of the arm’s length price, the assessee inadvertently considered transactions with its branch in Canada as international transactions. The TPO selected some comparable cases and determined their average operating profit rate.

c)Assessee raised objection before Tribunal that transactions with branch office were not in the nature of transactions with AEs and, hence, same should have been excluded.

Tribunal held in favour of assessee as under:

1)Section 92B(1) provides that an "international transaction" means a transaction between two or more associated enterprises….”. A bare perusal of the definition of 'international transaction' brings to light that for treating any transaction as an international transaction, it is essential that there should be two or more separate AEs.

2)By considering the definition of 'International transaction' provided under section 92B along with the meaning of the AE given in section 92A, it would clearly emergethat there have to be two or more separate entities in order to describe a transaction as an 'international transaction'.

3)When the assessee was only one entity dealings with the head office and its branch office, such inter se dealings ceased to be commercial transactions in the primary sense, as the pre-requisite condition for an 'international transaction' isthat transaction has to be between two or more associated enterprises.

4)Since the branch office in Canada was not a separate entity, distinct from the assessee, the transactions between the head office and its branch could not be considered as an international transaction under Section 92B. - AITHENT TECHNOLOGIES (P.) LTD. V. ITO- [2015] 54 taxmann.com 261 (Delhi - Trib.)

Fee charged for late filing of TDS return isn't a tax; HC upholds constitutional validity of sec. 234E

The fee sought to be levied under section 234E is not a tax that is sought to be levied on the deductor. The provisions of section 234E is not onerous on the ground that the section does not empower the AO to condone the delay in late filing of the TDS return, or that no appeal is provided for from an arbitrary order passed under section 234E

Facts:

a)Petitioner, a practicing Chartered Accountant, challenged the constitutional validity of section 234E. Section 234E seeks to levy a fee of Rs.200/- per day (subject to certain other conditions) inter-alia on a person who deducts Tax at Source and then fails to deliver or cause to be delivered the TDS return to the authorities within the prescribed period.

b)He argued that legislature had categorically termed the levy under section 234E of the Act as a "fee", it necessarily could be levied only in the event the Government was providing any service. In the absence thereof, the said section seeks to collect tax in the guise of a fee. This, according to the learned counsel, was impermissible either in common law or under the taxing statute, and encroached on the rights of life and liberty of the citizens.

c)He further submitted that the provisions of section 234E were extremely onerous as the AO was not vested with any power to condone the delay in filing the TDS return and there was also no provision of appeal against order of AO.

The High Court upheld the constitutional validity of Section 234E and made following observations:

1)There is an obligation on the Income Tax Department to process the income tax returns within the specified period. Department cannot accurately process the return until information of TDS is furnished by the deductor within the prescribed time.

2)If the income tax returns having refund claims were not processed in a timely manner, it would result in delay in issuing refunds or raising of infructuous demands. Late payment of refund also affects the government financially as the Government has to pay interest for delay in granting the refunds.

3)The Legislature took note of the fact that a substantial number of deductors were not furnishing their TDS returns within the prescribed time frame which was absolutely essential. This led to an additional work burden upon the Department due to the fault of the deductor by not furnishing the TDS returns in time. It was in this backdrop, and to compensate for the additional work burdened upon the Department, that a fee was sought to be levied under section 234E. Thus, section 234E is not punitive in nature but a fee which is a fixed charge for the extra service which the Department has to provide due to the late filing of the TDS statements.

4)A right of appeal is not a matter of right but is a creature of the statute, and if the Legislature deems it fit not to provide a remedy of appeal, so be it. Even in such a scenario it was not as if the aggrieved party was left remediless. Such aggrieved person could always approach this Court in its extra ordinary equitable jurisdiction under Article 226 / 227 of the Constitution of India, as the case may be. Therefore,we do not agree with the argument of the Petitioners that simply because no remedy of appeal was provided for, the provisions of section 234E were onerous. - RASHMIKANTKUNDALIA V. UNION OF INDIA[2015] 54 taxmann.com 200 (Bombay)

Now Govt. focuses more on prosecuting persons evading taxes on a large scale

Focus of investigation in the Income Tax Department had so far been on civil consequences, i.e., revenue augmentation. With a view to have credible deterrence against generation of black money, the Government has shifted the focus to prosecute the persons involved in tax evasion in shortest possible time.During the current year 628 prosecution complaints have been filed upto December, 2014 56 of such prosecution complaints relate to offences concerning undisclosed foreign income.

Receipts from capacity 'sale' of telecom cable link with transfer of ownership isn't taxable as 'royalty': ITAT

What is envisaged in section 9(1)(vi) read with Explanation thereto, is consideration for use or rights to use of any equipment. If consideration was received by foreign company for sale of capacity involving transfer of ownership of cable system to Indian Companyas distinguished from a mere payment for simply user of capacity,the consideration would not be taxable as royalty.

Facts:

a)The assessee-company was incorporated in Bermuda, from where it was managed and controlled. Since, India does not have any tax treaty with Bermuda, therefore, the Income Tax Act was applicable.

b)It was set up to build fibre optic cable system to increase the telecommunication traffic between and among Western Europe, Middle East, South Asia, South East Asia and Far East.

c)Assessee had entered into Memorandum of understanding (MOU) with 13 parties for the purpose of planning and implementation of the said Fibreoptic Cable System.Videsh Sanchar Nigam Limited (‘VSNL’) was one of the original landing party to the MOU. For the purpose of selling the capacity in the cable system, Cable Sales Agreement (CSA) was entered into amongst the parties.

d)The assessee had sold the capacity to VSNL for USD 28,940,000. The CSA provided for the ownership rights in the Cable System with all the rights and obligations in the capacity cable.

The issue that arose for consideration of Tribunal was:

Whether the amount of US $ 28,940,000 was taxable in the hands of assessee as royaltyincome-tax Act?

The Tribunal held in favour of assessee as under:

1)The entire agreement was for the period of 25 years which coincided with the life of the cable. In the agreement there were clear cut clauses for the ownership.

2)One of the clauses of agreement clearly envisaged that the net proceeds on disposition of the cable system would be shared amongst the signatories in proportion to their ownership rights.

3)Not only that, there was right to assign the capacity, which was borne out from the fact that purchaser of the capacity could sell or grant right to use the capacity in the cable system to some other party.

4)All this clearly indicated that the signatory would become the owner of the capacity in the cable system after the purchase, that is, the VSNL in the instant case.

5)This fact further establishes that there was no payment for simply user of the capacity. In case of a 'royalty', agreement, the complete ownership is never transferred to the other party.What is envisaged in section 9(1)(vi) read with Explanation thereto, is that there should be transfer of rights of any kind of the property as defined therein; or imparting of any information in respect of various kinds of property; or use of rights to use of any equipments,etc

6)If the consideration was received for transferring the ownership with all rights and obligations then such a consideration could not be taxed as 'royalty'. -Flag Telecom Group Ltd. v. DCIT - [2015] 54 taxmann.com 154 (Mumbai - Trib.)

CIT can’t consider violation of provisions of sec. 13 while granting registration to a trust

Provisions of section 13 couldn't be applied to deny registration to a trust or an Institution under section 12A - It shall be applied to decide deduction to be allowable to a trust or an Institution while completing assessment proceedings.

Facts:

a) In the instant case, one of the objects of the trust was limited to the benefit of Jain community;

b) The CIT contended that trust had violated provisions of section 13(1)(b) since benefits of sections 11 and 12 could not be extended to the charitable trust or institution which was established for the benefit of any specific religious community. Hence, he denied registration to trust under section 12A.

Issue:

• The issue that arose for consideration before the Tribunal was:

• "Whether the CIT has erred in denying the trust registration under Section 12A holding that the object clause of the Trust Deed is specifically for the benefit of the Jain Community which is a specific religious community and hence attracts the provisions of sec.13(1)(b)?"

The Tribunal Held in favour of assessee as under:

1)In order to avail of the deduction under sections 11 and 12 of the Act, the trust or institution has to make an application for registration under section 12AA of the Act;

2)The CIT after satisfying himself about the objects of the trust or Institution and about the genuineness of its activities, had to pass an order in writing granting or refusing the registration;

3)The Assessing Officer had to consider non-fulfillment of the conditions laid down in section 13(1)(b) during assessment procedure while allowing deduction under sections 11 and 12 to the trust or Institution;

4)Therefore, the CIT was not authorized to consider violation by the trust or Institution on account of provisions of section 13(1)(b) while granting it registration under section 12A-Kul Foundation v. CIT[2015] 54 taxmann.com 143 (Pune - Trib.)

Recognition of revenue by developer only on registration of sale deeds wasn't a valid method under sec. 145

Section 145 makes it mandatory on the part of the assessee to follow either cash or mercantile system of accounting.Recognizing the revenue by developer (i.e., assessee) only when the sale deedswould be registered in favour of the buyerscould not be regarded to be either cash or mercantile system of accounting. This method was neither project completion method nor percentage of completion method, thus, this was not a recognized method to recognize revenue under AS-7 too.

Facts:

a)Assessee was engaged in the business of real estate activities, such as construction of residential-cum-commercial project, developing of plots, etc. It had completed development work of plots on 31.3.2009, but it did not showthe sale proceeds in the profit and loss account even after receiving 70-80% of the sale proceeds.

b)The Assessing Officer (‘AO’) was of the view that development had already been completed, therefore, he re-computed the profit relating to these projects.

c)Assessee contended that he was following project completion method as per AS-7 and it was showing the sales when the registration of the sale deed would be carried out.

d)On appeal,theCIT(A) deleted the additions on the ground that the AO had changed the profit recognition method from project completion to percentage completion. The aggrieved revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of revenue as under:

1)The CIT(A) had agreed with assessee’s contention that he was following the project completion method but assesseewas not recognizing the revenue on the basis of the project completion method.

2)Registration of the sale deed represents only the transfer of the title in favour of the buyer once development work on the plots had been completed.

3)Assessee was recognizing the revenue only when the sale deeds would be registered in favour of the buyers. Under AS-7 this was not a recognized method of recognizing the revenue. This method of revenue recognition followed by assessee was neither project completion method nor percentage of completion method.

4)Section 145 makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. This method of recognizing the revenue when the sale deedswould be registered in favour of the buyerscould not be regarded as either cash or mercantile system of accounting.

5)Thus, the method adopted by the assessee was notin compliancewith the ingredients as laid down underSection 145.Consequently,the order of AO was to berestored–ACIT. v.Alcon Developers[2015] 54 taxmann.com 54 (Panaji - Trib.)

No denial of sec. 35 deduction without seeking opinion of prescribed authority about nature of research activity

Where assessee raised claim for deduction under section 35(1), Assessing Officer could not decide the issue but had to place the issue before the Board who, in terms of section 35(3), would refer the question to the prescribed authority to seek opinion on nature of research activity undertaken by assessee.

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

Whether AO could disallow deduction under section 35(1) without placing the matter before the CBDT to make a reference to the prescribed authority if he was not sure about nature of research activity undertaken by assessee?

The High Court held in favour of assesse as under:

1)Section 35(3) requires a reference to be made by the Board to the prescribed authority when a question arises as to whether and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research. The decision of the prescribed authority on such a question would be final.

2)Therefore, whenever any such question arises, the Assessing Officer cannot decide the issue but must place the issue before the Board who, in terms of section 35(3) of the Act, would refer the question to the prescribed authority.

3)However, no such reference is required in cases where the assessee lodges a claim without any supporting material or claim of the assesse is accepted by AO. - CIT V. MASTEK LTD.[2015] 53 taxmann.com 388 (Gujarat)

TPO can’t decide about deductibility of an exp. as his jurisdiction is limited to determination of ALP

Facts:

a)The international transaction which was disputed in the instant case was commission payment by the assessee to its AEs.

b)The TPO held that ALP of this transaction was Nil because the assessee failed to provide any evidence of an independent transaction between unrelated parties and further the assessee could not explain with any documentary evidence about the functions performed by the AE necessitating the payment of such commission.

c)The assessee remained unsuccessful before the DRP and the Assessing Officer, accordingly, made addition of entire commission paid by the assessee to its AEs. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The Delhi High Court in the case CIT v. Cushman and Wakefield India Pvt. Ltd.[2014] 46 taxmann.com 317 (Delhi),held that the authority of the TPO was limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO.

2)Applying the ratio decidendi ofCushman and Wakefield India Pvt. Ltd. (supra)to the facts of the instant case, it was to be held that the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount under Section 37(1). 3)Therefore, case was remanded to AO with an instruction to decide the deductibility of the commission paid to foreign AE.- ITW INDIA LTD. V. ACIT[2015] 53 taxmann.com 531 (Delhi - Trib.)

BCCI to pay service tax on reverse charge basis on payments made to foreign Cos for audio-visual coverage of IPL matches

Services received by BCCI from foreign media companies for coverage of Indian Premier League Matches through audio-visual coverage of the cricket matches are covered under 'Programme production services' and liable to service tax on reverse charge basis.

a)Assessee, BCCI, received services from foreign media companies for coverage of Indian Premier League Matches.

b)As per agreements, such non-resident service providers were required to provide audio-visual coverage of the cricket matches conducted by BCCI and digitalized images of coverage were uploaded and broadcasted for benefit of the viewers of cricket match all over the world.

c)Department demanded service tax from BCCI under reverse charge.

d)Tribunal held in favour revenue:

.Section 65(86a) of the Finance Act, 1944 defines "programme" as any audio or visual matter, live or recorded, which is intended to be disseminated by transmission of electro-magnetic waves through space or through cables intended to be received by the general public either directly or indirectly through the medium of relay stations.

a.The Tribunal in its judgment observed that non-resident service providers had installed cameras in stadium to capture images of cricket matches.

b.A combination of audio and visual recording would be a programme and expression 'audio or visual matter' in section 65(86a) can be read as 'audio and visual matter' also, hence, activities undertaken by non-resident service providers would fall within definition of 'programme' and service providers would be 'programme producers', as defined.

c.Even services rendered by way of supply of equipments and personnel for recording live programmes and actually participating in such programmes would also fall within definition of 'programme producer's services’.

e)The Supreme Court dismissed appeal preferred against the judgment of Tribunal holding there was no infirmity in the said judgment - Board of Control for Cricket In India v. Commissioner of Service Tax, Mumbai-I [2015] 53 taxmann.com 533 (SC).

Aluminium dross and skimmings aren't manufactured goods; decision of larger bench of CESTAT reversed

Aluminium dross and skimmings and similar non-ferrous metal drosses and skimmings which arise as by-products in process of manufacture of aluminium/non-ferrous metal products are "not manufactured goods" and, hence, not liable to excise duty.

Facts:

a)The assessee was a manufacturer of aluminium sheets and coils falling under heading 7607 1190 of the Central Excise Tariff Act using major raw material 'aluminium ingots'.

b)In the course of manufacture of aluminium sheets/coils, aluminium dross/skimmings emerge as by products. The assessee sold these by products on a regular basis.

c)The department raised demand of duty on "aluminium dross/skimmings" on ground that it was a manufactured product and liable to excise duty in view of Explanation to section 2(d) of the Central Excise Act, 1944. The Tribunal's Larger Bench held in favour of revenue.

d)Assessee argued that 'aluminium dross/skimmings' were not 'manufactured goods' and were not, therefore, liable to duty. It further argued that the Explanation was inserted in section 2(d) in order to clarify that the goods which could be bought and sold in the market were deemed to be marketable. The explanation deals only with the marketability aspect of the question and does not say that even non-manufactured goods are deemed to be manufactured goods.

The High Court held in favour of assessee as under:

1)In case of Indian Aluminium Co. Ltd. v. A. K. Bandyopadhyay 1980 (6) ELT 146 (Bom.), it was held that dross and skimmings are not manufactured goods.

2)In Union of India v. Indian Aluminium Co. Ltd. 1995 (77) ELT 268 (SC), the Supreme Court agreed with the reasons and conclusions of the Single Judge and confirmed the view taken in case of A.K. Bandyopadhyay (supra).

3)Further, the Supreme Court has held in Grasim Industries Ltd. v. Union of India 2011 (273) ELT 10(SC) that the conditions contemplated under section 2(d) and section 2(f) have to be satisfied conjunctively in order to entail imposition of excise duty under section 3 of the Act, therefore the impugned judgment of the Tribunal could not be agreed with. The larger Bench's decision did not take into account the fact that the authoritative pronouncement by the Supreme Court was binding on it.

4)Merely because the goods satisfying the test of being maerketable and saleable, it does not mean that the test of being manufactured in India has been satisfied. The Supreme Court had in aforesaid cases rejected argument of addition of dross, cinder, skimmings, etc. in the list of the items to the Schedule to the Central Excise Tariff and also held 'that is not safe to make it excisable as it has to pass further test of manufactured or produced in India.'

5)Fact that the revenue did not wish to abide by them would not mean that the Tribunal was justified in not following them. The issue stood completely covered by the Judgments of the Supreme Court and which had been totally disregarded by the Tribunal.

6)All Circulars impugned in this Writ Petition brought to the notice of this Court would not survive after the legal position had been set out as above – Hindalco Industries Ltd. v. Union of India (2015) 53 taxmann.com 156 (Bombay).