Tax treatment of sum received after termination of employment – OECD’s draft guidance

The OECD Committee on Fiscal Affairs, through a sub-group, has undertaken to clarify how variety of payments, such as non-competition payments, notice pay, severance payment, etc., that may be made following the termination of an employment should be treated for tax treaty purposes. Accordingly, it issued a draft proposal for additions and alterations to the Commentary on the OECD Model Tax Convention. A brief synopsis of suggestions given by OECD Committee on tax treatment of termination payments is provided as follows:

1. Remuneration for previous work - Any remuneration paid after the termination of employment for work done before the employment is terminated (e.g. a salary or bonus for the last period of work or commission for sales made during that period) will be considered to have been derived from the State in which the relevant employment activities were exercised.

2. Payment in lieu of notice of termination - The payment received ‘in lieu’ of notice of termination should be considered to be derived from the State where employee would have worked during the period of notice, which will be the State where the employment activities were performed at the time of the termination.

3. Severance payment - Severance payment should be considered to be remuneration derived from the State where the employment was exercised when the employment was terminated.

4. Payment of damages for unlawful dismissal - The tax treatment of such payment will depend on what the damage award seeks to compensate. It can be categorised into following:

a) Remuneration: Sum paid for serving an insufficient period of notice or because a severance payment was required by law should be treated as remuneration for these damages.

b) Capital Gains or Other income: Punitive damages awarded on grounds such as discriminatory treatment or injury to one’s reputation would typically fall under Article 21 (Other Income) or Article 13 (Capital Gains).

Differentiating between whisky and non-whisky alcoholic beverages is undesirable for comparability under TNMM

Product similarity was to be seen for applying CUP method and not for TNMM. If assessee sold non-whisky alcoholic beverages (Vodka, Gin, Brandy, Rum, etc) to non-AEs and whisky to AEs, net profit margin on sale by assessee of non-whisky alcoholic beverages couldn’t be rejected as internal TNMM for calculating ALP on assessee's sale of whisky to AEs simply based on distinction made between whisky & non-whisky as two different products

The Tribunal held as under:

1) The profitability derived from uncontrolled party engaged in similar business activity under similar circumstances was the measure of arm's length result. The focus under the TNMM was on transactions rather than on operating income of the enterprise as a whole;

2) If there was similar nature of transactions and functions between controlled transactions with the related party and uncontrolled transactions with unrelated party, then internal comparability would result into more appropriate result for computing  ALP, as it would require least amount of adjustments;

3) The product similarity was to be seen while applying CUP method and not under the TNMM because under the CUP, the focus had to be on the price of the product sold or transferred;

4) In assessee's case, both the transactions with the A.Es and unrelated parties related to alcoholic beverages, which were in similar business line. Making intra-distinction between types of alcoholic beverages like "whisky" and "other than whisky", was wholly undesirable while carrying out comparability analysis under the TNMM;

5) Under the TNMM, functional comparability of transactions was to be analyzed at net profit margin level. If such a high degree of similarity was to be seen in TNMM, then it would become impractical to apply TNMM in any case;

6) Rejection of internal TNMM simply on the basis of distinction between whisky and non–whisky as two different products was wholly undesirable and, therefore, adjustment made by TPO was to be deleted - Diageo India (P.) Ltd. v. DY.CIT [2013] 34 taxmann.com 284 (Mumbai - Trib.)

Resultant Co. can file appeal after demerger; abundant caution appeal by demerged Co. dismissed to avoid duplicity

Appeals filed by demerged company under the apprehension that the original appeals filed by the resulting company might not be held as maintainable, were not permissible. Such duplicate appeals might lead to a serious problems  if they remained un-noticed, because mistakenly two judgments could be delivered and that might lead to a serious error.

The Tribunal held as under:

1) Demerger implies transfer of all the assets and liabilities of the undertaking or division by a 'demerged company' to a 'resulting company'. In consequence of assets being taken over by a ‘resulting co’ it would be responsible and would have the rights to be a party to the litigation to protect its interest;

2) A resulting company on one hand acquired the assets and on the other hand it was responsible for the liabilities, including tax liability;

3) As per sub-section (vi) of section 2(19AA), the transfer of the undertaking was on a going concern basis, meaning thereby, that as a result of demerger the effected undertaking would loose it’s independent legal identity which merged with the resultant company. Its entity thereafter vested in the resulting company. As a natural corollary the litigation couldn’t be pursued against a non-existing legal body;

4) As a result of demerger an undertaking or a unit of demerged company was transferred to a resulting company. Therefore, after the transfer, the demerged  company was not to be held responsible for any legal action but the transferee- company was legally answerable and accountable thereafter;

5) Appeals filed by the demerged company under the apprehension that the original appeals filed by the transferee-company (resulting company) might not be held as maintainable, were nothing but the duplicate appeal, which was not permissible in the eyes of law;

6) Such duplicate appeals might lead to a serious problems if these remained un-noticed, because mistakenly two judgments could be delivered and that might lead to a serious error. Duplicity is void ab initio hence appeals were required to be dismissed - Cairn Energy Gujarat BV v. ADIT [2013] 34 taxmann.com 281 (Ahmedabad - Trib.)

ITAT rejects recall application filed by CA in ‘personal’ capacity; directs ICAI to act suitably for his misconduct

CA appearing as Authorised representative (‘AR’) for client had no locus standi to file any application before ITAT in his individual capacity without the client’s consent, after disposal of client’s appeal. CA’s conduct of filing such application after the date of Tribunal’s order disposing it off in his client’s favour was contemptuous, abuse of process of law and scandalized the system of delivery of justice

The Tribunal held as under:

1) Once the appeal was disposed off, the power conferred upon the professionals or the AR by virtue of the Power of Attorney by the assessee, came to an end. They didn’t have any locus standi to file any application before the Tribunal in his individual capacity because the Tribunal was not created to redress the grievances of the professionals;

2) Its function was to adjudicate the disputes between the assessee and the Department. The appeal was allowed in favour of the assessee and the assessee had no grievance against the order passed by the Tribunal. Instant application was filed  by the CA with an ulterior motive for the reasons best known to him, disputing the facts recorded in the order sheet;

3) After disposal of the appeal, an application could be filed on behalf of the assessee under section 254(2) of the Act for seeking rectification in the order passed under section 254(1) of the Income Tax Act. But there was no provision under the Act in which an application could be filed by any Advocate or CA or AR in his individual capacity for seeking rectification in the proceedings of the hearing, without the consent of the assessee;

4) Moreover, to dispute the proceedings of the court, without any cogent material, was also an attempt to scandalize the court and also to create hindrance in the proper judicial functioning of the court, which couldn’t be permitted under any circumstances. If it was allowed the judicial system would collapse;

5) Since the facts recorded in the order sheet had not been controverted by filing an affidavit, the judicial proceedings were correct and the contentions raised in the application were highly misconceived, wrong and contemptuous. Therefore, the instant application was moved with an intention to browbeat and scandalize the court. Since the action of CA was grossly abuse of process of law, application was dismissed with cost of Rs 5,000 to be recovered from him;

6) This tough stand was being taken only to maintain the dignity, decorum of the institution and justice delivery system so that it might not be misused by any professional to settle their personal score. If they had any grievance against any judicial forum they could approach the higher forum instead of scandalizing the concerned court or judicial body;

7) Reference made to the President of ICAI with a request to take necessary action as per law against the CA for his professional misconduct and also to take corrective measures and necessary steps to educate its members, to behave with the judicial authorities befitting to their status - Omkar Nagreeya Sahkari Bank Ltd v. DyCIT [2013] 34 taxmann.com 283 (Lucknow - Trib.)

Admissions made during survey are not conclusive unless supported by convincing evidences

Addition on the basis of seized material was unjustified if assessee was able to show that the admissions made during survey were incorrect

In the instant case, during search and seizure operation on assessee-firm, the survey party worked out the certain value of excess stock by preparing a provisional trading account. The partners of assessee-firm, not being able to explain the excess stock, surrendered the same and agreed to pay tax on the value of excess stock. The excess cash found during survey was declared by the partners as income of firm other than regular income. The return filed after survey didn’t disclose the excess stock and excess cash found during survey. Consequently, the AO made addition for excess stock under section 69 and on account of excess cash under section 69A. The CIT(A), substantially reduced the addition made by the AO. Aggrieved by the order of CIT(A), revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) It is a well-settled law that admissions are not conclusive proof of the matter. They may be shown to be untrue or having been made under mistake of fact or law. Circumstances have to be seen under which same are made;

2) Admissions could be withdrawn unless it was conclusive. The Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18, had held that the assessee was to be given opportunity to show that admission was incorrect or didn’t show correct state of facts. The Punjab & Haryana High Court in the case of Kishan Lal Shiv Chand Rai v. CIT [1973] 88 ITR 293, had held that it was an established principle of law that a party was entitled to show and prove that admission made by it, was, in fact, not correct and true;

3) The sole basis of making addition, i.e., provisional trading account was not found to have correct figures of purchase and sales. Whatever items had been declared by the assessee on account of excess stock were correctly considered by the CIT(A). Since the figures of the sales and purchases were based on factual figures, it was a case of factual mistake committed by the Survey party as well as by the AO, which had been rightly corrected by the CIT (A);

4) Thus, the assessee on the basis of seized material had been able to show that the admission made at the time of survey, surrendering the additional income on account of excess stock was not correct and did not show correct state of facts. The CIT(A) correctly deleted the addition as no addition could be made against the assessee on the basis of mere admission. Therefore, the departmental appeal was to be dismissed – ACIT V. MAYA TRADING CO. [2013] 34 taxmann.com 144 (Agra - Trib.)

ITAT confirms TP adjustment for AMP expenditure; denies de-classification of an exp belonging to AMP category

If assessee had classified certain expenses in his accounts under the head "advertisement" and others under the head "Business Promotion", expenses under the former head would be treated as part of AMP expenses for TP adjustments in accordance with the SB ruling in LG Electronics. Assessee couldn’t claim that certain expenses classified by him as advertisement to be treated as business promotion expenses before the Tribunal

In the instant case, the assessee was importing electronic products from its associate enterprises. Thereafter, it marketed the said products in India through its retail chains and branded shops. Certain AMP expenses were incurred by the assessee. The TPO was of the view that assessee had promoted the aforesaid brand, since the assessee had been using the logo "Panasonic" in all correspondence, letterheads, visiting cards of its personnel, product catalogue, etc. It made TP adjustments in respect of AMP expenses, which was sustained by the DRP.

On appeal, the Tribunal held as under:

1) It had been held by the Special Bench in the case of LG Electronics that the AMP expenditures, incurred more than those in case of comparables, were transactions exigible to proceedings under Chapter X of the Act, being a case of brand building;

2) It further concluded that such expenses, even if paid to Indian entities, were covered by the definition of "transaction" within the meaning of section 92F(v) of the Act. Therefore, assessee's plea that AMP expenditure which had not been paid to overseas AEs won’t come within the purview of international transaction had no merits;

3) There was a force in the assessee's plea that as per Special Bench's decision, the expenses which were directly related to the sales won’t come within the meaning of "brand building";

4) The assessee itself had categorized the expenditure into two sub-heads, i.e., under the advertisement head comprising of expenses which had been incurred for "brand building". The other head was of business promotion expenses. Admittedly, there was no dispute about the category and nature thereof;

5) Hence, following the observations of the Special Bench (supra), the advertisement expenses had been incurred for brand building, whereas the business promotion expenses deserved to be treated as directly connected with the sales undertaken by the assessee;

6) Though the assessee had pleaded that even some of the advertisement expenses were business promotion expenses, yet, in view of the fact that since it itself had included the same under the head "advertisement", there was no reason to change the head of expenses from advertisement to business promotion. Hence, this latter plea of the assessee was to be declined. Thus, assessee’s appeal was to be partly allowed - Panasonic Sales & Services India (P.) Ltd. v. ACIT [2013] 34 taxmann.com 276 (Chennai - Trib.)

Right to collect toll is an intangible asset within the purview of sec. 32(1)(ii) and is eligible for depreciation

Where assessee in terms of agreement with Government of Madhya Pradesh was required to develop, construct and maintain a road on Build, operate and transfer (‘BOT’) basis at its own cost for a specified period, it was eligible for depreciation on amount capitalized under head 'License to collect Toll'

In the instant case, the assessee was awarded a project for development, operation and maintenance of a road in the State of Madhya Pradesh on BOT basis. It was required to develop, construct and maintain the road at its own cost for a specified period. On expiry of the specified period, the infrastructural facility was to be transferred to the State Government free of charge. In consideration of such expenditure, the assessee was bestowed with a right to collect toll during the specified period. The costs incurred on development and construction of infrastructural facility was capitalized by assessee under the head 'License to collect Toll' and depreciation thereon was claimed by it. During assessment, the AO disallowed the depreciation claim of assessee. The CIT(A), however, allowed its claim by holding that the right to collect toll was a valuable right, having commercial value and it was an intangible asset covered by section 32(1)(ii).

The Tribunal held in favour of assessee as under:

1) The right to collect toll was a result of the costs incurred by the assessee on development, construction and maintenance of the infrastructure facility. Such a right had been adjudicated by the Tribunal in the various judicial precedents to be in the nature of 'intangible asset' falling within the purview of section 32(1)(ii) and found to be eligible for claim of depreciation.

2) The plea of the revenue, that the impugned right was not of the nature referred to in section 32(1)(ii), for the reason that the agreement with the State Government only allowed the assessee to recover the costs incurred for constructing the road facility, whereas section 32(1)(ii) required that the assets mentioned therein to be acquired by the assessee after spending money, was factually and legally misplaced;

3) It was incorrect to say that impugned right acquired by the assessee was without incurring any cost. In fact, it was quite evident that the assessee had got the right to collect toll for the specified period only after incurring expenditure through its own resources on development, construction and maintenance of the infrastructure facility;

4) Section 32(1)(ii) permits allowance of depreciation on assets specified therein being 'intangible assets' which are wholly or partly owned by the assessee and used for the purposes of its business. The aforesaid condition was fully satisfied by the assessee. Thus, the assessee was eligible for depreciation inasmuch as right to collect toll was an intangible asset falling within the purview of section 32(1)(ii) – ACIT v. Ashoka Infraways (P.) Ltd. [2013] 33 taxmann.com 499 (Pune - Trib.)

ITAT disallows sec. 54F exemption to the extent sum invested in construction before transfer of original asset

Investment made by assessee in new residential property was not entitled to deduction under section 54F to extent same was made before the sale of existing property

In the instant case, the assessee had filed its return for the relevant assessment year and had claimed deduction under section 54F in respect of amount invested in construction of a residential house property. During assessment, AO was of the view that the assessee was not entitled to deduction, as construction of house was substantially completed before the sale of capital asset. Therefore, the moot question that arose for consideration of the Tribunal was as under:

Whether the cost of construction incurred by the assessee after the sale of capital asset was entitled to deduction under section 54F, even if, the construction was commenced before the sale of capital asset and was completed within two years from the sale of capital asset?

The Tribunal held as under:

1) As per the ratio laid down by Karnataka High Court in the case of CIT v. J.R. Subrahmanya Bhatt [1986] 28 Taxman 578, the assessee was entitled to deduction under section 54F of the Act, though the assessee has commenced construction before the sale but completed the construction within two years after the sale. The commencement of construction prior to the sale of capital asset was immaterial and the assessee was entitled to deduction under section 54F of the Act;

2) In the case of Chandru L. Raheja v. ITO [1988] 27 ITD 551 (Bom.), it was held that when the assessee had already purchased land, started construction of a building then only that part of the investment in new house that was made out of the sale proceeds received after the transfer of the old house would qualify for exemption under section  54 of the Act;

3) The investment in residential house which had taken place after the sale of existing capital asset was to be considered only for deduction under section 54F;

4) Thus, whatever investment was made by the assessee in construction of new property within the period stipulated under section 54F, after the sale of existing property, would be entitled to deduction, but, the assessee was not entitled to deduction under sec. 54F in respect of the investment made in new property to the extent of investment made before the sale of existing property. Thus, the appeal of the assessee was partly allowed - Smt. Nimmagadda Sridevi v. Dy.CIT [2013] 33 taxmann.com 306 (Hyderabad - Trib.)

Sunset clause doesn’t need a road map to end tax exemption; Parliament has legislative powers to withdraw it

Amendments by Finance Act, 2011 to withdraw exemption from MAT & DDT to SEZ developers were not unconstitutional. The road map was not a condition precedent for the Parliament to introduce sunset clause.  The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment.

In the instant case, the petitioners were SEZ developers. They had borrowed massive loans from various financial institutions and made investments in land, buildings, infrastructure facilities, etc., and commenced their projects on the basis that income accrued or arising to them as SEZ developers would be exempted from MAT and DDT. The Union Finance Minister moved the Union Budget for 2011-2012 on the floor of Parliament and the Finance Bill, 2011 was introduced, in terms of which, a proviso was inserted to Section 115 JB (6) and 115-O (6), to withdraw exemption from MAT and DDT. Being aggrieved by the insertion of the above provisos, the petitioners filed the instant writ petition.

The High Court dismissed the petitions by holding as under:

1) It was a settled position of law that every tax exemption and incentive would have a sunset clause. Every fiscal legislation, providing for tax exemption must have a life span fixed in the enactment;

2) There could be no permanent tax exemption or incentive in fiscal legislation. Realizing this lapse on the part of the Government, the impugned provisos were introduced restricting the exemption only for a particular period;

3) The impugned amendments were shown in the Finance Bill and were placed before the Parliament in the month of March, 2011 for the years 2011-2012;

4) The proposed amendments specified that the exemption from MAT would come to an end from 1st April, 2012 and exemption from tax on distribution of dividends would come to an end from 1st June 2011. Thus, the impugned amendments were prospective in nature;

5) The road map was not a condition precedent for the Parliament to introduce sunset clause. The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment. Thus, the instant writ petitions were  dismissed - Mindtree Ltd. v. Union of India [2013] 34 taxmann.com 250 (Karnataka)

Assessee can change his method for determining ALP before TPO if it exhibits a better result

Assessee was not precluded to plead before the TPO that the method chosen by him as the most appropriate method ('MAM') was not resulting into proper determination of ALP and some other method should be resorted to. Appellate authorities can take into consideration such a plea before them provided assessee demonstrates as to how a change in the method would produce better or more appropriate ALP in the facts of the case

In the instant case, the assessee was importing toys from its AE and reselling the same in India without any value addition. The assessee in its TP study report chooses TNM Method as MAM which was accepted by the TPO and additions were made by it applying operating gross profit margin as PLI instead of average operating margin chosen by assessee. Assessee contended before CIT(A) that method chosen by it was not MAM and that RPM was MAM. The CIT(A) rejected assessee's contentions and dismissed appeal.  Hence, instant appeal was filed by assessee against CIT(A)'s order.

The Tribunal held in favour of assessee as under:

1) Under the RPM, products similarity was not a vital aspect for carrying out comparability analysis but operational comparability was to be seen. The gross profit margin earned by the independent enterprise in comparable uncontrolled transactions was a guidance factor in this method;

2) This is also what happens in the case of a distributor wherein the property and service are purchased from the A.E. and are resold to other independent entities, without any value additions. The gross profit margin earned in such transactions becomes the determination factor to see the gross compensation after the cost of sales;

3) As the assessee was a distributor of Mattel toys and got the finished goods from its A.E. and resold the same to independent parties without any value addition.  In such a situation, RPM could be the best method to evaluate the transactions whether they were at ALP;

4) Even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it was not precluded from raising the objections before the TPO or the Appellate Courts that such a method was not an appropriate method and was not resulting in proper determination of ALP and some other method should be resorted to;

5) The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it was found that by adopting one of the prescribed methods other than those chosen earlier, the most appropriate ALP could be determined, the assessing authorities as well as the appellate Courts should take into consideration such a plea before them provided, it was demonstrated as to how a change in the method would produce a better or more appropriate ALP. Thus, the impugned order of CIT(A) was set aside - Mattel Toys (I) (P.) Ltd. v. DY. CIT [2013] 34 taxmann.com 203 (Mumbai - Trib.)

Valuation loss is allowable even if stock-in-trade shown as investment in compliance of RBI guidelines

Even though assessee-bank disclosed shares as investments in balance sheet to comply with RBI Guidelines, it was not estopped from treating the same as stock-in-trade for income-tax and claiming valuation loss thereon as these shares had been consistently shown as stock-in-trade in income tax in the past years also

The High Court held as under:

1) For the purpose of IT Act, as the assessee had consistently been treating the value of investment for more than two decades as stock-in-trade and claiming valuation loss thereon, it was not open to the authorities to disallow the said loss on the ground that in the balance-sheet it was shown as investment in terms of the RBI Regulations;

2) The question whether the assessee was entitled to particular deduction or not would depend upon the provisions of law relating thereto and not the way, in which the entries were made in the books of account. It was not decisive or conclusive in the matter;

3) The value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the Bank had to take into consideration the market value of the shares;

4) If the market value of shares was less than the cost price, they were entitled to deductions and it couldn’t be denied by the authorities under the pretext that it was shown as investment in the balance sheet;

5) The order passed by the authorities holding that in view of the RBI guidelines, the assessee was estopped from treating the investment as stock-in-trade was not correct. That finding recorded by the authorities was to be set aside - Karnataka Bank Ltd. v. ACIT [2013] 34 taxmann.com 150 (Karnataka)

Income can’t be attributed to LO in India if its operations are confined to assisting manufacturers for export orders

Where assessee-foreign company’s presence in India was limited to its liaison office (‘LO’) which assisted Indian manufacturers to manufacture goods according to specification for export to buyers in other countries (which were subsidiaries of assessee), it could be said that activities of NR assessee were confined in India to purchase of goods for export and hence income derived therefrom would not be deemed to accrue or arise in India and entitled to exemption under Explanation 1(b) to section 9(1)(ii)

Facts:

1) Assessee, a world known brand in sports apparels (i.e. Nike), had a main office in USA, which arranged for all its subsidiaries, spread all over the world, various sports apparels for sale to various customers;

2) Arrangement was through procurement by manufacturer who directly dispatched the apparels to the subsidiaries;

3) The assessee engaged various manufacturers all over the world on a job basis and made arrangements with its subsidiaries for purchasing the manufactured goods directly and pay for the same to the respective manufacturers;

4) With a view to ensure quality of its products in India through its liaison office, it employed professionals like merchandiser, product analyst, quality engineer, etc.;

5) Assessing Authority brought to tax 5% of the export value of goods as income deemed to accrue or arise in India. On appeal, the ITAT allowed assessee’s appeal. Thus, the instant appeal was filed by revenue against ITAT’s decision.

The High Court held in favour of assessee as under:

1) The assessee was not carrying out any business in India and it had established a LO in India, whose object was to identify the manufacturers, gave them the technical know-how and see that they manufactured goods according to the specification which would be sold to their affiliates;

2) The person who purchases the goods would pay the money to the manufacturer, in the said income, the assessee has no right. The said income couldn’t be deemed to be a income arising or accruing in the Tax Territories vis-à-vis the assessee;

3) As per Explanation 1(b) to Sec. 9(1) in the case of a NR, no income would be deemed to accrue or arise in India whether directly or indirectly through or from any ‘business connection, which are confined for the purpose of export;

4) The assessee was not purchasing any goods and it was enabling the manufacturers to manufacture goods of a particular specification which was required by a foreign buyer to whom the goods were sold;

5) The whole object of the instant transaction was to purchase goods for the purpose of export. Once the entire operations are confined to the purchase of goods in India for the purpose of export, the income derived therefrom shall not be deemed to accrue or arise in India and it shall not be deemed to be an income under section 9. In this process, the assessee was not earning any income in India;

6) If assessee was earning income outside India under a contract which was entered outside India, no part of its income could be taxed in India either under Section 5 or Section 9 of the Act – CIT (International Taxation) v. Nike Inc. [2013] 34 taxmann.com 170 (Karnataka)

Agency PE exist only if agents fit into meaning of ‘dependent agent’ provided in Article 5 of India-USA DTAA

In order to treat any agent as PE within meaning of Article 5 of relevant DTAA it is very vital that such agent should fit into description of 'Dependent Agent' and has to perform either of activities as mentioned in that article.

The facts of the instant case were as under:

1) Assessee was Indian branch (VIB) of an American company VIPL which in turn was a 100 per cent subsidiary of Varian USA. Varian group of companies (VGCs) had five overseas entities in USA, Australia, Italy, Switzerland and Netherlands;

2) VIPL entered into distribution and representation agreement with all five VGCs for supply and sale of analytical lab instruments manufactured by them to Indian customers directly;

3) As per agreements, VGCs sold analytical lab instruments to Indian customers directly and assessee carried out pre-sale activities like liasoning and other incidental post-sale support activities for which it was entitled to commission;

The moot issue that arose for consideration of Tribunal was as under:

Whether the assessee-company, i.e., VIPL through its Indian branch (VIB) constituted a PE for Varian USA, Varian Australia and Varian Italy?

The Tribunal held as under:

1) Under article 5(4) of Indo-US DTAA, an agent is deemed to be PE if conditions mentioned therein are fulfilled;

2) In the instant case, the first condition as to whether the assessee is habitually exercising the authority to conclude contracts on behalf of the VGCs was not fulfilled, as it could be gathered from the facts that the assessee has no authority and also cannot negotiate or conclude contracts on behalf of the VGCs. It only provides marketing support and liaisoning activity for pre-sale and incidental and ancillary post-sale activities;

3) The second condition that the agent has no such authorities but habitually maintains Stock of Goods and merchandise from which he regularly delivers goods on behalf of foreign enterprises which contributes to the sale of the goods and merchandise also does not fulfilled, as the assessee has no authority on behalf of the VGCs and does not maintain any cost of analytical instruments supplied by the VGCs to the customers in India. The assessee mainly facilitates the process of sale;

4) The third condition is whether the person habitually secures orders wholly or almost wholly for the enterprise. In assessee's case, the orders relating to indent sale are only introduced and liaised by the assessee and not secured by it. Thus, none of the three conditions as enumerated in article 5(4) stands fulfilled so as to hold that the assessee is a dependent agent of various VGCs in India;

5) Under Article 5(5) of the Indo-US DTAA, an agent is a PE when the following twin conditions are satisfied simultaneously Firstly, when the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise; and Secondly, the transactions between the agent and enterprise are not made under the arm's length conditions. Both these conditions were not complied with in the instant case. Thus, under Article 5(5) also, the assessee cannot be held to be agent for constituting a PE in India for the various VGCs;

6) Even under the India-Australia DTAA and India-Italy DTAA, similar provisions are there in Article 5(4) with regard to the dependent agents. Under these DTAAs also, except for clause (d) all other clauses are by and large similar to Article 5(4) of Indo-US DTAA. The additional clause (d) provides that if a dependent agent manufactures or processes enterprise's goods or merchandise belonging to enterprise in that State, then such an agent is deemed as PE. In the instant case, admittedly, the assessee does not manufacture or process any other products developed or manufactured by VGCs. Thus, this clause of Article 5(4) in the above DTAAs is also not applicable

7) In order to treat any agent as PE it is very vital that such agent should fit into the description of 'Dependent Agent' and has to perform either of the activities as mentioned in Articles 5 of relevant treaty, otherwise it couldn’t be held that agent constitutes a PE of the foreign enterprise - Varian India (P.) Ltd v. ADIT (International taxation) [2013] 33 taxmann.com 249 (Mumbai - Trib.)

Vehicle registration services rendered by motor car dealer to its buyers aren’t ‘Business Support Services’

Rendering of assistance by a motor car dealer to its buyers in getting motor vehicle registration done cannot, prima facie, be regarded as 'Business Support Services'

In the instant case, the assessee, a motor car dealer, rendered services relating to registration of car to its buyers on payment of fixed charges. Such charges were used towards registration of car and excess collection, if any, was retained by the assessee. The Department sought to levy service tax on excess amount retained by assessee under 'Business Support Service' regarding it as 'transaction processing'

The Tribunal took, prima facie, the view in favour of assessee with the following observation:-

1) Prima facie the activity undertaken by the assessee does not come within the purview of 'Business Support Service';

2) The assessee was rendering assistance to its clients in getting the motor vehicle registration done. The said activity, by no stretch of imagination, could be considered as supporting the business of its customers. - My Car (Pune) (P.) Ltd. v. Commissioner of Central Excise & Service Tax [2013] 33 taxmann.com 321 (Mumbai - CESTAT)

Tax rate on interest can’t exceed 12.5% under India-UAE DTAA; surcharge and cess can’t be levied in addition

Tax payable at 12.5 per cent on interest income under Article 11(2) of the DTAA between India and UAE is inclusive of surcharge and education cess

In the instant case, the moot issue that arose for consideration of the Tribunal was as under:

Whether the assessee was liable to pay education cess and surcharge in addition to the tax @ 12.5% payable on interest income under the provisions of India-UAE DTAA?

The Tribunal held as under:

1) There are specific Articles in DTAA dealing with taxation of income under different heads and interest income is governed by Article 11;

2) According to the Article 11(2) of India-UAE DTAA, interest income may be taxed in contracting State in which it arises, according to law of that State. If the recipient is beneficial owner of interest, tax so charged shall not exceed 5 per cent of gross interest, if the interest is received from bank and in other cases at 12.5 per cent of gross amount of interest;

3) In the instant case, the tax rate applicable was 12.5 per cent. Income-tax has been defined in Article 2(2)(b) as per which income-tax includes surcharge. Therefore, tax referred to in Article 11(2) at the rate of 12.5 per cent also includes surcharge. Further, nature of education cess and surcharge being same, education cess and surcharge can’t be levied separately as it is included in tax rate of 12.5 per cent.

4) Thus, in view of the above, it was held that tax payable at the rate 12.5 per cent under Article 11(2) of DTAA is inclusive of surcharge and education cess. Therefore, the claim of the assessee was to be allowed - Sunil V. Motiani v. ITO (International taxation ) [2013] 33 taxmann.com 252 (Mumbai - Trib.)

Sec. 54 only requires investment of cap gains, which can be in several independent residential units, HC rules

Exemption under section 54 cannot be denied, where residential house property purchased by an assessee consists of several independent units

In the instant case, the assessee had claimed deduction under section 54 in respect of two independent flats purchased by him with sale proceeds of an ancestral house property. During assessment, the AO held that deduction was to be restricted to only one flat since the two residential units purchased by the assessee were separated by a strong wall and, moreover, they were purchased from two different vendors and under separate sale deeds. On appeal, the CIT(A) sets aside the order of AO and the Tribunal confirmed the order of CIT(A). Aggrieved by the order revenue has filed the instant appeal.

The High Court held in favour of assessee as under:

1) The expression ‘a residential house’ used in section 54(1) has to be understood in a sense that the building should be of residential nature and ‘a’ should not be understood to indicate a singular number;

2) Where assessee had purchased two residential flats, he was entitled to exemption under section 54 in respect of both the flats, more so, when the flats were situated side by side and the builder had effected modification of the flats to make them as one unit, despite the fact that the flats were purchased by separate sale deeds;

3) The two flats purchased by the assessee were adjacent to one another and had a common meeting point. Exemption under section 54 only requires that the property should be of residential nature. The fact that residential house consists of several independent units can’t be an impediment to grant relief under section 54, even if such independent units are on different floors;

4) The decision in ITO v. Shushila M. Jhaveri [2007] 107 ITD 327 (Mum) (SB) holding that only one residential house had to be given the relief under section 54 didn’t appear to be correct and was to be disapproved. Hence, sec. 54F exemption was to be granted to assessee in respect of two independent flats purchased by him – CIT v. Syed Ali Adil [2013] 33 taxmann.com 212 (Andhra Pradesh)

Indian subsidiary providing back office support to its overseas parent co. to be treated as fixed place PE; Tribunal provides a method to allocate profits to PE

In the instant case, the assessee, i.e., 'CCMG', a US based company, providing IT enabled customer management services, had a subsidiary in india in name of CIS which was providing IT enabled call centre or back office support service to assessee to service its Indian customers. Issues that arose before the Tribunal were as under:

a) Whether assessee had a Fixed Place PE?

b) Determination of profits attributable to the alleged PE in India.

The Tribunal held as under:

On the issue of PE

1) The employees of the assessee frequently visited the premises of CIS to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal;

2) CIS was practically the projection of assessee's business in India and carried out its business under the control and guidance of the assessee, without assuming any significant risk in relation to such functions;

3) Thus, the finding of the CIT(A) that assessee has a fixed place PE in India under Article 5(1) of the India-USA DTAA was upheld. There was no infirmity in the order of the CIT(A) that CIS did not constitute a dependent agent PE of the assessee in India as the conditions provided in paragraph 4 of Article 5 of the India-USA DTAA were not satisfied.

On the issue of profits attributable to PE

4) An overall attribution of profits to the permanent establishment is a transfer pricing issue and no further profits can be attributed to a PE once an arm's length price has been determined for the Indian associated enterprise, which subsumes the functions, assets and risk profile of the alleged PE;

5) The correct approach to arrive at the profits attributable to the PE should be as under:

Step 1: Compute global operating income percentage of the customer care business as per annual report/10K of the company.

Step 2: This percentage should be applied to the end-customer revenue with regard to contracts/projects where services were procured from CIS. The amount arrived at would be the operating income from Indian operations.

Step 3: The operating income from India operations is to be reduced by the profit before tax of CIS. This residual is now attributable between US and India.

Step 4: The profit attributable to the PE should be estimated on residual profits as determined under Step 3 above - Convergys Customer Management Group Inc. v. ADIT (International taxation) [2013] 34 taxmann.com 24 (Delhi - Trib.)

‘Limitation on benefit’ clause denies treaty benefit for non-remittance of interest to Singapore

Interest on tax refund received by Singaporean resident won’t be taxed at concessional rate of 15% under Article 11 of India-Singapore DTAA, as mere proving that it has not been deposited in bank account in India wouldn’t be sufficient to prove its receipt in or remittance to Singapore to satisfy limitation of benefit clause.

In the instant case, the assessee, a resident of Singapore, had received interest on Income Tax refund. Assessee contended that it was taxable at concessional rate of 15% as per Article 11(2) of India-Singapore DTAA. However, Revenue taxed it at 20% as per section 115A by applying Article 24 (limitation on benefit) of India-Singapore DTAA. The CIT(A) upheld order of AO. Thus, the instant appeal was filed by assessee against CIT(A)’s decision.

The Tribunal held as under:

1) Article 24 of the India-Singapore DTAA limits the relief granted by other relevant Articles, including article 11 of the DTAA, subject to the fulfillment of the conditions enshrined therein;

2) Article 24 of the DTAA provides that the receipt or remittance of income in Singapore is sine qua non for claiming the benefit of lower rate of tax on the interest income from India. Thus, if the income hadn’t been remitted to or received in Singapore, then the benefit of Article-11 providing for a reduced rate of tax of 15% couldn’t be extended to the assessee. In that situation, the income would be taxed as per the Act, as had been done by the IT authorities;

3) The acceptance of Ld AR claim, that assessee had no bank account in India and, hence, the only possibility of receipt, was of receiving the amount in Singapore, would lead to making the Article 24 redundant and putting an unending burden on the Revenue to prove the negative, the positive of which is otherwise required to be established by the assessee;

4) The assessee had its presence in several countries and he could, instead of depositing the refund voucher in some bank account in Singapore, also deposit it in its bank account maintained in some other country, in which case again the requirement of Article 24 would be wanting;

5) The burden was on the assessee to prove that the amount of income was remitted to or received in Singapore. This burden could be discharged by showing a credit in the bank account maintained by the assessee in Singapore;

6) A submission not backed by any supporting evidence to prove the fulfillment of the requisite condition, couldn’t be a good reason for drawing an inference in favour of the assessee. The authorities below were justified in refusing the benefit of Article-11 of the DTAA to the assessee by taxing the interest on income-tax refund @ 20% as per section 115A of the Act - Abacus International (P.) Ltd. v. Dy. DIT( International taxation) [2013] 34 taxmann.com 21 (Mumbai - Trib.)

No concealment penalty if exp. claimed in current year and withholding taxes deposited in subsequent year

Provision of sec. 40(a)(i) would be deemed to have been substantially complied with if taxes withheld from payment made to non-resident were deposited subsequent to the previous year in which expenditure was claimed by assessee. Hence, concealment penalty would not be leviable.

In the instant case, assessee had paid fee for technical service (‘FTS’) to non-resident and TDS thereon was deducted and deposited after the end of previous year, but before the due date of filing of income-Tax Return. However, disallowance not made by assessee of the FTS amount in return though non-deduction of TDS was reported by tax auditor in Form 3CD accompanying the return. AO imposed penalty under section 271(1)(c) in respect of FTS ‘falsely claimed. Penalty was upheld by the CIT(A). Hence the instant appeal filed by assessee against CIT(A)’s decision.

The Tribunal held as under:

1) The relevant provisions of section 40(a)(i) provides for the disallowance of specific sums payable to non-residents, where tax deducible at source, has not been deducted and deposited to the credit of the Central Government within the time prescribed under section 200(1);

2) This section is not absolute in its terms, and provides for the allowance thereof in the year of payment, i.e., where the tax stands deducted and paid after expiry of the time prescribed under section 200(1). There is, as such, no reference or correlation with the due date of the filing of the return by the assessee-deductor under section 139(1);

3) The deposit of TDS subsequently would operate as a mitigating factor. The provision itself providing for the contingency and consequence of delayed payment, deferring the claim to the year of actual payment;

4) The assessee would be entitled to claim the deduction for the immediately succeeding year, and which it has ostensibly not. In terms of the provision itself, therefore, it has become clear that it has been substantially complied with as the payment of TDS was made, though subsequently.

5) It would decidedly be a different matter if the provision made no such exception, as in that case there would be no question of the principal condition of the payment having been met and, thus, of the assessee being substantially compliant. This, therefore, served as a valid explanation under Explanation (1B) to section 271(1)(c) Thus, assessee's appeal was allowed and penalty was deleted. - Dynatron (P.) Ltd. v. Dy. CIT [2013] 33 taxmann.com 603 (Mumbai - Trib.)