Thursday, November 29, 2012

Super profit making comparables and 'notional interest' on credit period to AEs irrelevant factors for TP adjustments

In this case, assessee had received certain commission from its AE. Consequently, it raised debit note for Rs.18,43,796 as commission @ 3%. Assessee claimed that the commission earned by him was more than the industry’s average, thus, the test of arm's length principle was satisfied. On being referenced, the TPO compared the commission of 3% with controlled transactions of Indian clients of assessee where the average commission rate was worked out to be 3.375%. However, the average rate included commission rate of 7% received from ‘E’. In addition to above the TPO noticed that assessee had allowed extended credit period to its AE. Accordingly, the TPO made an addition in respect of notional interest for extended credit period and for the difference of 0.375% in the rate of commission.

Ruling in favour of assessee, the Tribunal held as under:

1) As per industry’s policy, the media agency earns commission @2.5%; the case of ‘E’ was an extreme case of earning 7% commission. Keeping in view the principle that the extreme profit companies are to be excluded, this company couldn’t be considered as a comparable for arriving at the average mean;

2) Therefore, AO/TPO was directed to exclude ‘E’ from list of comparables and work out the commission accordingly;

3) With reference to the calculation of interest on the so-called credit period it was noticed that the assessee was not charging any interest from clients for the services rendered/debit notes provided for delay in payments as a policy;

4) It was also noticed that in some of the transactions the credit period was ranging from 5 to 476 days, which indicated that the clients would not pay amount unless they verified the bills and services rendered;

5) Since it was practice of assessee not to charge interest from any client, this aspect should not be considered as an international transaction exclusively in the case of AE as it was not assessee’s policy to provide credit to any client specifically - Lintas India (P.) Ltd. v. ACIT [2012] 27 300 (Mumbai - Trib.)

6) The nature of the service and the fees being charged to ‘E’ were entirely different when compared to the other clients, which were considered as comparable. Therefore, the fixed fee received from ‘E’ couldn’t be used for comparison as it was not comparable to the transactions of commission undertaken by assessee with the other clients;

Friday, November 23, 2012

Concealment penalty is inevitable if bogus claim is withdrawn in revised return filed after initiation of survey

The assessee, a public limited company, claimed a deduction of Rs. 10,00,000 under section 35CCA purportedly paid to a trust for assessment year 1983-84. Subsequently, the claim was withdrawn by filing a revised return. During assessment, the AO observed that assessee had revised its return of income only as a result of survey action taken by revenue in the assessee’s premises. It was further noticed by AO that the assessee was in knowledge of the fact that the trust was not genuine and had deliberately made a false claim under Sec. 35CCA to reduce its taxable income. Accordingly, the AO imposed the maximum penalty, being 200% of the tax sought to be evaded. On appeal, the CIT(A) as well as ITAT held in favour of assessee.

On revenue’s appeal, the High Court held in favour of revenue as under:

1) The assessee made the donation through cheque, which was encashed through a bogus bank account opened specifically for this purpose;

2) It was evident from the records that bank account of the drawee had been opened in a fictitious name merely for the purpose of misappropriating the amount;

3) The assessee’s contention that it was a victim of a fraud played by several persons acting in concert couldn’t be accepted because the special crossing (‘account
payee’) in the cheque was converted or altered into an ordinary crossing by the assessee’s account manager and senior advisor who had also affixed their signatures;

4) The revised return was filed by assessee only when it was cornered and the income tax authorities had collected material on the basis of which it could be said that the claim for deduction was false or bogus.

From the above facts, it was held that filing of revised return was an act of despair and it couldn’t benefit the assessee in any way. Accordingly, penalty order passed by AO was restored – CIT v. Usha International Ltd. [2012] 27 227 (Delhi)

Thursday, November 22, 2012

Performing regulatory function by BIS isn’t a business activity even if it earned profit from such functions

The BIS (“the assessee”), a statutory body, was established under the Bureau of Indian Standards Act, 1986 ("the BIS Act"). The exemption granted to assessee under section 10(23C)(iv) was withdrawn by DIT(E) on the contention that the nature of activities carried on by the assessee was hit by proviso to section 2(15), as the activities carried on by assessee were in the nature of business. The DIT(E) further noted that the assessee had earned substantial amount of income. The assessee, thus, filed instant writ against the order of DIT(E).

The High Court held in favour of assessee as under:

1) Assessee is a statutory body established under the BIS Act and brought into existence "for the harmonious development of the activities of standardization, marking and quality certification of goods". This has been its primary and pre-dominant object, and the profit/revenue earned on discharging its functions is purely incidental;

2) The assessee performs sovereign and regulatory function, in its capacity of an instrumentality of the state. Therefore, it could not be said that it was carrying on an activity of trade, commerce or business;

3) "Rendering any service in relation to trade, commerce or business" couldn’t cover within its fold the regulatory and sovereign authorities, set up to act as agencies of the State in public duties;

4) The primary object for setting up such regulatory bodies is to ensure general public utility. Further, it couldn’t be said that the public utility activity of evolving, prescribing and enforcing standards, "involves" the carrying on of trade or commercial activity.

Therefore, the impugned order of DIT was quashed by High Court - Bureau of Indian Standards v. DGIT(E) [2012] 27 127 (Delhi)

Extension of period to submit ITR-V can’t validate a time-barred Sec. 143(2) notice

In this case, the return was e-filed by the assessee on 25-09-2009. The ITR-V for the same was received by CPC on 29-11-2010 i.e., within the period as extended by Circular No. 3/2009. Consequently, the AO issued a section 143(2) notice on 26-08-2011 and also passed the order under section 143(3). Assessee contended that the time limit for issue of notice should be reckoned from the date of e-filing of return. Consequently, the order passed by AO was without jurisdiction as it was passed on the basis of a time-barred notice.
Deliberating on the issue, the Tribunal held in favour of assessee as under:

1) According to the CBDT Scheme framed in this respect, the date of transmitting the return electronically shall be the date of furnishing of return if the form ITR-V is furnished in the prescribed manner and within the period specified;

2) Since ITR-V, received by CPC was within the prescribed time in the prescribed manner and in the prescribed form, hence, for all practical purpose, the date of filing of the return shall be the date on which the return was electronically uploaded i.e. 25-09-2009.

In view of the above, it was held that the notice served on the assessee was beyond the period of six months from the end of the financial year in which the return was furnished and therefore, was invalid and could not be acted upon. Consequently, the assessment order passed was quashed - E.K.K. & Co. v. ACIT [2012] 27 111 (Cochin - Trib.)

Wednesday, November 21, 2012

Unabsorbed depreciation of earlier years brings down tax burden on long-term Capital-gains

In the instant case, the assessee’s claim to set off brought forward unabsorbed depreciation against current year's long-term capital gain was rejected by the AO on the basis of following reasoning:

a) Set-off of current year's business loss against the income under the other heads of income does not include unabsorbed depreciation as it was not a part of business loss;

b) Section 32(2) restricts the allowable depreciation of the current year only to the extent of profits and gains of business; and

c) The other reason for rejecting assessee's claim was that the Act treats business loss separately from the depreciation because business loss can be carried forward only for 8 assessment years whereas depreciation can be carried forward for unlimited period.

The AO completed the assessment after disallowing the claim of the assessee for set off of brought forward depreciation. On appeal, the CIT(A) upheld the order of the AO.

On appeal, the Tribunal held in favour as under:

1) As per provisions of sec.32(2), if the current year's depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, then the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year. This means that brought forward depreciation merges with the current year's depreciation because of the legal fiction created by provisions of Sec. 32(2) of the Act;

2) However, this fiction has been subjected to the provisions of sections 72(2) and 73(3). Bare reading of sec. 72 suggest that in case of set off of business loss vis-à-vis depreciation, the first preference shall be given to the business loss as per the provisions of section 72(1) for the simple reason that the business loss can be carried forward only up to 8 assessment years whereas the depreciation can be carried over up to unlimited period; and

3) As has been discussed hereinabove, the brought forward unabsorbed depreciation is treated as current years' depreciation because of the legal fiction, therefore, the treatment given to the current year's depreciation is equally applicable to brought forward depreciation and  the same is also allowed to be set off from the long-term capital gains - Suresh Industries (P.) Ltd. v. ACIT [2012] 27 203 (Mumbai - Trib.)

Saturday, November 17, 2012

Subsequent reversal of a transaction among group entities isn’t colourable device, if effect carried in ledgers

The assessee-trust was managed by Ansal group. It had entered into agreement with its group concern (‘APIL’) for purchase of plots to open a school in furtherance of its objects. The assessee had paid 95 per cent of the sale consideration and obtained possession of the plots. Subsequently, the sale agreement was cancelled and entire sale consideration was returned to assessee by APIL. During assessment, AO held that the transactions were not genuine and were devised with an intention to advance surplus money to APIL. The AO withdrew the benefit of exemption under section 11 and 12 on the ground that the directors and trustees of both concerns were connected persons falling within the purview of specified persons under section 13(1)(c), and the money had been advanced without interest for the benefit of specified persons. The CIT(A) reversed the order of AO.

On appeal, the Tribunal held in favour of assessee as under:

1) The assessee was a charitable institution and there was no change in its objects;

2) From assessee's books of account, it clearly emerged that more often than not APIL had credit balance; thus, it had been providing monetary support to trust now and then. Therefore, a presumption could not be drawn that APIL had diverted the funds without proper justification for its use;

3) Assessee's debiting of 95 per cent advance to asset acquisition account itself indicated that because of substantial advance and possession it treated the plots as its assets. Treatment of these amounts as advances in APIL books did not militate against assessee's method of accounting. Therefore, the alleged variation in categorization of accounting in two different sets of books would not convert valid transactions into colourable transactions;

4) It could not be found that there was any motivation on the part of APIL to clandestinely divert Trust’s Funds for its personal use;

5) Assessee contended that cancellation of plots was in the interest of trust as by that time it had moved on to better projects including a university. Since no cancellation charges were to be levied, it terminated the agreements;

6) From objective view every entity has a right to carry on its objectives in the manner it best considers. Revenue couldn’t step in the shoes of the trustee in these matters.

Therefore, the exemption under Sec. 11 was allowed to assessee - Chiranjiv Charitable Trust v. ADIT [2012] 27 99 (Delhi - Trib.)

Friday, November 9, 2012

Indo-Swiss treaty relief extended to international shipping profits, ITAT explains meaning of ‘dealt with’

The assessee, a Swiss-company, was engaged in the business of operations of ships in international waters through chartered ships. During the relevant year, the assessee had declared his total income at nil on the following grounds:

1) There was no article in the India-Swiss treaty dealing specifically with taxability of shipping profit;

2) Article 7 of the treaty dealing with business profits specifically excluded profits from the operation of ships in international traffic; and

3) Article 22 of the treaty dealing with other income subjected to tax shipping profits only in the State of residence viz. Swiss confederation.

The AO rejected the assessee’s contention and held that the shipping profits were taxable in India under section 44B of the IT Act. CIT(A) however, allowed assessee’s appeal. The department then preferred an appeal to the ITAT.

The Tribunal held in favour of assessee as under:

1) Para 1 of Article 22 of indo-swiss treaty provides that the ‘items of income of a resident of a contracting State, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State’;

2) When Article 7 provides for taxability of business profits other than international shipping profits, then it can’t be said that the said article ‘dealt with’ international shipping profits;

3) The fact that the expression used in Article 22(1) of the Indo-Swiss treaty is “dealt with” clearly demonstrates that the expression “dealt with” is some thing more than a mere mention of such income in the article.

Article 22(1) of Indo-swiss treaty contemplates that items of income covered under this article will be taxable in the state of resident only i.e. Switzerland in the instant case. Therefore, the same couldn’t be taxed in India – ADIT v. Mediterranean Shipping Co. [2012] 27 77 (Mumbai - Trib.)

Wednesday, November 7, 2012

ITAT considered ‘carbon credits’ as inventory yet held income from their sale as ‘capital receipts

The assessee-company was generating power through biomass power generation unit. For the relevant year, it sold 1,70,556 Carbon Credits (‘CERs’) to a foreign company

for Rs. 12.87 crores. During assessment, the AO opined that the sale proceeds of the CERs were revenue receipts since the CERs are a tradable commodity and are even

quoted in the Stock Exchange. Accordingly, a tax demand of Rs. 3.60 crores was raised. The CIT (A) confirmed the order of AO.

On appeal, the Tribunal held in favour of assessee as under:

1) Carbon credit is in the nature of "an entitlement" received to improve world’s atmosphere and environment reducing carbon, heat and gas emissions;

2) Carbon credits are made available on account of saving of energy consumption and not because of assessee’s business. Transferable Carbon Credit is not a result or

incidence of one's business and it is a credit for reducing Carbon emissions;

3) The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying the business;

4) In the case of CIT vs. Maheshwari Devi Jute Mills Ltd. 57 ITR 36 the SC held that transfer of surplus loom hours to other mill was capital receipt and not income.

Being so, the consideration received by the assessee in respect of Carbon Credit was similar to consideration received by transferring of loom hours.

5) Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to

environmental concerns.

Thus, the entitlement earned for Carbon Credits can, at best, be regarded as a capital receipt and can’t be taxed as a revenue receipt.

Apart, from above observation, the Tribunal at the end of judgment took a view in accordance with Guidance Note issued by ICAI which states that CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets, those should be accounted for as per AS-2 (Valuation of inventories). Thus, the assessee generating these should apply AS-9 to recognise revenue in respect of sale of CERs - MY HOME POWER LTD.V. DCIT [2012] 27 27 (Hyderabad - Trib.)

Tuesday, November 6, 2012

‘Son of Sardar’ losses against ‘Jab tak hai Jaan’; recital between single screen theatre owners and YRF held valid

The Ajay Devgn Films (“ADF”) alleged that Yash Raj Films (“YRF”) while distributing the rights to exhibit ‘Ek Tha Tiger’ put a condition on single screen theater owners that they would have to simultaneously exhibit the other film ‘Jab Tak Hai Jaan’ to be released on the eve of Diwali. The ADF further alleged that, since there was a threat that the YRF would not allow to exhibit the movie ‘Ek Tha Tiger’ if the contract to exhibit ‘Jab Tak Hai Jaan’ was not entered simultaneously, it amounted to abuse of dominance and violation of section 3 and 4 of Competition Act. ADF argued that the agreement between theater owners and YRF was a tie-in arrangement.
The grievance of the ADF arose because of its fear that it would not get enough theaters for the movie ‘Son of Sardar’ releasing on the same date as of ‘Jab Tak Hai Jaan’

The Commission held in favour of YRF as under:

a) The impugned agreement would not be affecting the competition in the Indian market as such or would not create any barriers for new entrants or drive existing competitors out of the market;

b) The single screen theater owners took competitive business decision in their interest to screen two films of YRF. Such agreement was purely commercial in nature between parties promoting their economic interests;

c) Since single screen theater owners had liberty either to agree or not to agree, the agreement could not be said to be a restraint on the freedom of business of theater owners;

d) The release of any other film including ‘Son of Sardar’ could be postponed or preponed as per availability of the screens;

e) The market could not be restricted to any particular festival period like Eid or Diwali and the market had to be considered a market available throughout the year;

f) Further, the ADF didn’t present any evidence to prove the dominant position of the YRF in the film industry. In the absence of evidence of its market share, economic strength, etc. it could not be construed that YRF had dominance in the market just because it had produced various blockbuster movies in past and it had big name in the industry.

In view of above, the Commission was prima facie of the opinion that there was no contravention of the provision of the Act – AJAY DEVGN FILMS V. YASH RAJ FILMS PRIVATE LIMITED [2012] 26 350

Monday, November 5, 2012

No exemption to a trust if its main objects are abandoned and it is just perusing other incidental objects

The main objects of the assessee, a Section 25 company, were to organize and undertake scientific research. The assessee was recognised as a scientific research institution by the CBDT from its inception, which was, however, withdrawn wef 31st March, 1981 as it was found that assessee carried out no scientific research as stated in its main objects. In 1984, assessee applied for and was granted registration under Section 12A of the Act. During the relevant year, the assessee handed over the possession of commerce centre constructed by it to the various lessees and claimed exemption under section 11(1)(a) of the Act in respect of such lease income. The AO denied the exemption. The CIT(A) and ITAT also upheld the order of AO.

On appeal, the High Court held in favour of revenue as under:

1) Compliance with section 12A does not entitle an assessee to the benefit of section 11, ipso facto;

2) The assessee’s contention to have been engaged in “scientific research’ was unfounded in view of the withdrawal of its recognition under section 35(1)(ii);

3) During the assessment years 1978-79 to 1992-93, its expenditure on scientific research  never exceeded 3.32% of income in any year;

4) There was only a facade of being a scientific research institution by making claims in the annual report of scientific research activity;

5) The assessee never engaged itself in any activity connected to its main object, viz., to organize, sponsor, promote, establish, conduct or undertake the scientific research in any way;

6) Under the Companies Act,1956 an entity is entitled to carry on business in respect of the incidental and ancillary activities that didn’t by itself entitle it to claim an exemption under section11;

7) If, however, the main objects are abandoned, it can hardly be said that the expenditure towards the incidental objects was towards a charitable purpose;

8) In the assessee's case, its incidental or ancillary objects on their own, did not constitute charitable purposes. Indeed, it was rightly not even suggested by the assessee that its ancillary objects by themselves constituted charitable purposes.

Therefore, assessee’s claim for exemption under section 11 failed - M. VISVESVARAYA INDUSTRIAL RESEARCH & DEVELOPMENT CENTRE V. CIT [2012] 26 200 (Bombay)

Thursday, November 1, 2012

TP provisions are self-governing; TPO finding can be used against a transaction not referred to him

The assessee-company was a manufacturer of chemicals and dyes having six manufacturing divisions. To arrive at the ALP in respect of its international transactions the TPO disallowed certain adjustments as desired by assessee. The assessee filed this present appeal. The grounds of appeal, inter alia, were as follows:

i) TPO had made an upward adjustment on account of commission. In this respect, the assessee contended that since there was no reference in respect of commission because AO had made reference only in respect of goods sold to AEs, the upward adjustment in commission receipt as suggested by the TPO was without jurisdiction;

ii) The assessee raised the issue that the provisions of Chapter X could not be invoked without prima facie demonstrating that there was some tax avoidance.

On issue of adjustment on account of commission transaction, the Tribunal held in favour of assessee as under:

i) As per Section 92CA, the role of the TPO is restricted to determining the ALP in relation to the international transaction which has been referred to him, thus, it could be said that it was not within the domain of TPO to determine the ALP of a transaction not referred to him;

ii) This ground of assessee was, therefore, allowed. However, it was also held  that as per section 92C(3), the AO could consider it as a material fact and proceed to determine an international transaction which had come to his knowledge on the basis of any material or document available with him.

On issue of invoking TP Provisions without establishing tax avoidance the Tribunal held in favour of revenue as under:

1) There is nothing in the statutory language to suggest that the AO must demonstrate the avoidance of tax before invoking TP provisions;

2) Rather, the logic is to make certain that the transactions between the AEs should not be arranged in such a way that the ultimate tax payable in India is artificially reduced. Thus, the stand of the assessee on this ground was dismissed by Tribunal - ATUL LTD. v. ACIT [2012] 26 300 (Ahmedabad - Trib.)

Assessee escaped penalty for delay in filing e-TDS return on reasoning that he was new to this stuff

In the instant case, for the relevant assessment year, the assessee had not filed the E-TDS returns within the specified time and, thus, AO levied the penalty under Section 272A(2). Aggrieved by the order of AO, assessee preferred an appeal to the CIT(A), which  confirmed the penalty order passed by AO.

 On appeal, the Tribunal held in favour of assessee as under:

1) The delay in filing the returns, even if they are characterized as negligence on the part of the assessee, can only be considered as a technical or venial breach of law for which penalty should not be levied automatically;

2) The requirement of filing Form No. 24Q was new one for the assessee being the first year of filing such return and, moreover, there was no dispute about the fact that the tax had been deducted by the assessee; and

3) As held by the ITAT Mumbai Bench in the case of Royal Metal Printers (P.) Ltd.v.ACIT [2010] 37 SOT 139, for such technical or venial breach supported by reasonable cause, penalty under Section 272A(2) is not leviable.

Therefore, the impugned penalty order was cancelled - UNION BANK OF INDIA V. ACIT [2012] 26 347 (Agra - Trib.)