Thursday, December 26, 2013

ITAT accepts insurance value of cars instead of its WDV for wealth tax purposes

Where assessee-company owned several motor cars, 80 per cent of insurance value of motor cars to be accepted for wealth tax purpose instead of written down value of these cars.


a) The assessee-company owned several motor cars and offered 80 per cent of the insurance value of the motor cars for wealth-tax purpose instead of their written down value;

The Assessing Officer (‘AO’) held that the method used by the assessee was not acceptable because as per the Wealth-tax Act the valuation of the motor vehicles is based on the written down value, i.e., considering the wear and tear and usage of the same. Therefore, he, accordingly, made addition to the net wealth of assessee;

c) On appeal, the Commissioner of Wealth-tax (Appeals) upheld the order of AO. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The value of motor cars shown in their insurance policies had to be taken as the basis for determining their market value;

2) However, as the insurance company would also take other things into consideration in arriving at a particular value for the purpose of insurance, market value of motor cars could be reasonably estimated at 80 per cent of their insurance value;

Therefore, the AO was to be directed to take 80% insurance value of the cars shown by the assessee for wealth tax purpose. - Zee Entertainment Enterprises Ltd. v. Assistant Commissioner of Wealth-tax [2013] 40 74 (Mumbai - Trib.)

Tuesday, December 24, 2013

Sec. 35ABB doesn’t deem sums paid on telecom licenses as capital exp., it is operative when exp. is of capital nature

The High Court held as under:

1) Section 35ABB does not stipulate or mandate that any expenditure for a right to operate telecommunication services or payment made for the said license as per the section is deemed to be a capital expenditure;

2) Section 35ABB is not a deeming provision but comes into operation and is effective when the expenditure itself is of a capital nature and is incurred for acquiring a right to operate telecommunication services or is made to obtain a license for the said services;

It can be incurred before commencement of business or thereafter, but should be incurred during the previous year. Thus, section 35ABB by itself does not help in determining and deciding the question whether license fee paid under the New Telecom Policy, 1999 (NTP) or under the 1994 agreement, was/is capital or revenue in nature;

4) Variable payments made under the NTP on revenue-sharing basis were revenue expenditure deductible under section 37(1). The expenditure incurred towards license fee was partly revenue and partly capital in nature;

License fee payable up to 31st July, 1999 to be treated as capital expenditure and license fee on revenue sharing basis after 1st August, 1999 to be treated as revenue expenditure. Capital expenditure qualifies for deduction as per section 35ABB of the Act – CIT v. Bharti Hexacom Ltd. [2013] 40 40 (Delhi)

Monday, December 23, 2013

‘Bigg Boss’ not to withhold tax from sum paid to NR assisting in production of programme; AAR refers to Sec. 194C

Services rendered by NR for production of programmes for purpose of broadcasting and telecasting shall be specifically characterized as ‘work’ for the purpose of section 194C. Consequently, income therefrom would be treated as ‘business income’ and not as ‘Fees for Technical Service’.


a) The applicant, Endemol India (P) Ltd. (EIPL) starting its operation with production of reality shows Bigg Boss and Fear Factor, was engaged in the business of providing and distributing television programmes. It produced a reality show (‘the show’) for which the shooting took place in Argentina.

b) For the purpose of that show it engaged Endemol Argentina SA (Endemol) for providing line production services in Argentina.

c) It approached the AAR to determine whether the amount paid to Endemol would constitute Fees for Technical Services or Royalty?

The Authority held in favour of the Applicant as under:

1) The Delhi High Court in the case of CIT v. Prasar Bharati (Broadcasting Corporation of India), [2007] 158 Taxman 470 (Delhi) held that broadcasting and telecasting including production of programmes for such broadcasting and telecasting do not fall under the provision of section 194J as they are specifically covered by definition of work in section 194C of the Act;

2) CBDT’s Circular No. 715, dated 08-08-1995 stated that payments made to advertising agencies for production of programmes, which are to be broadcasted / telecasted, would be subject to withholding tax under section 194C of the Act;

3) Since the payments made by the applicant to Endemol were for production of programmes for the purpose of broadcasting and telecasting, the services rendered by such non-resident would be specifically characterized as ‘work’ for the purpose of section 194C;

4) If the services were characterized as ‘contact work’ under section 194C of the Act, then the income received would be necessarily treated as business income. In absence of PE of non-resident in India, the income of the non-resident company was not taxable in India;

5) In that case it would not be appropriate to treat the item, i.e., services for production of programmes for telecasting as ‘Fees for Technical Services’ under the provision of section 9(1)(vii) of the Act  - Endemol India (P.) Ltd., In re [2013] 40 340 (AAR - New Delhi)

Wednesday, December 18, 2013

Financial analysis of borrowers won’t be deemed as facilitation of loan agreement as per India-France treaty

Where role of assessee in facilitating foreign currency loan to its client is providing financial analysis of borrowers, general market conditions and regulatory environment, such nature of services will not fall under Para 4 of protocol between India and France.


a) The assessee had facilitated foreign currency loan to its clients from head office outside India but did not show any income on the said transactions contending that services provided by assessee was limited to providing financial analysis of borrowers, general market conditions and regulatory environment and it has no role to play in decision of granting of loan;

b) The TPO did not accept the contention of the assessee and computed the arm's length charges being 25 per cent of the total amount comprising interest and fee received by the offshore branches of the bank and made an adjustment. On appeal, the CIT(A) reduced the adjustment from 25 per cent to 20 per cent.

The Tribunal held as under:

1) As per Para 4 of the India-France protocol if the role of the PE is only to facilitate the conclusion of foreign trade or loan agreement or mere signing thereof, then no profit shall be attributable to PE in terms of article 7(2) of the Indo-France DTAA;

2) The assessee provided the services regarding credibility analysis of clients, their capacity to repay the loan and risk involved in the loan transaction;

3) Therefore, the role of the assessee in providing such services were inevitable for taking the decision of providing loan and as such couldn’t be said to be a mere facilitation of conclusion of the loan agreement or signing thereof; Thus, Para 4 of the Protocol does not apply in the instant case;

4) Since the assessee has provided certain services for that arms length charges could be determined as per the provisions of transfer pricing regulation. The interest couldn’t be taken into account for attribution of income towards service charges/fees and, therefore, only the fee charged by the foreign branches could be taken into consideration for making adjustment under transfer pricing provisions;

5) As none of the parties have come out with the suitable comparables, the estimation made by the CIT (A) at the rate of 20 per cent was justified, however, the same would be only in respect of the fee and charges other than interest received by the foreign branches - Credit Lyonnais v. ADIT (International Taxation) [2013] 40 87 (Mumbai - Trib.)

Quotation price isn’t analogous to actual price paid; former can’t be used for benchmarking under CUP method

Under CUP method, a quotation which hasn't fructified into a transaction can’t be used for benchmarking

The Tribunal held as under:

1) When the statute read with rules specifically provides that the ALP under the CUP method should be determined by considering 'the price charged or paid' in a comparable uncontrolled 'transaction', one fails to comprehend as to how any 'quotation' which has not fructified into a 'transaction' can be substituted with the actual price charged or paid in a transaction;

As the law provides for considering the price charged or paid in a comparable uncontrolled transaction, there can be no scope for considering a quotation price in isolation which is not preceded with or succeeded by any actual transaction - Sinosteel India (P.) Ltd. Dy. CIT [2013] 40 240 (Delhi - Trib.)

Monday, December 16, 2013

Routing of a legitimate expenditure through P&L Account isn't a precondition to allow such expenditure

Where claim of assessee regarding share trading and future options losses was substantiated by it by furnishing valid and statutorily accepted documents, merely debiting these items directly in capital account instead of in profit and loss account, could not be a ground to disregard legally acceptable claim of assessee.


a) The Assessing Officer disallowed the assessee’s claim of share trading and F&O losses on the ground that these transactions were not routed through the profit and loss accounts;

b) On appeal, CIT (A) did not agree with the reasoning of the Assessing Officer and thus, deleted the said additions;

c) Further, the Tribunal concurred with the findings of the CIT (A) as far as future holding loss was concerned and held in favour of the assessee however, for share trading loss, it remanded the matter to

Assessing Officer.

The High Court held in favour of assessee as under:

1) The transactions would not cast any doubt and there was no dispute over the quantum of loss computed by the assessee and it had substantiated the entire transactions by furnishing otherwise valid and statutorily accepted documents;

2) The Apex Court in case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 had held that "whether the assessee is entitled to a particular deduction or not will depend upon the provision of law relating thereto and not on the view which the assessee might take of his rights nor the existence or absence of entries in the books of account be decisive or conclusive in the said matter";

3) Thus, merely debiting these items directly in capital account instead of in P&L account and thus, not routing share trading account through audited account under section 44AB couldn’t be deemed as a valid ground to disregard overwhelming legally acceptable evidences to reject the claim of assessee;

4) In the instant case though the item, as rightly pointed out by both the authorities, could not have been debited directly in the capital account but in view of voluminous documents substantiating the claim of the assessee, there was no reason to interfere  - CIT v. Naishad I. Parikh [2013] 39 191 (Gujarat)

Friday, December 13, 2013

Only drawer of cheque was liable under Negotiable Instrument Act even if cheque was issued from joint account

The Supreme Court held as under:

1) Considering the language used in section 138 of the Negotiable Instrument Act, 1881 (‘NI Act’) and taking note of background agreement pursuant to which a cheque was issued by more than one person, it was opined that it was only the drawer of the cheque who could be made liable for the penal action under the provisions of the NI Act;

2) Thus, under section 138 of the NI Act, it was only the drawer of the cheque who could be prosecuted. In the instant case, admittedly, the appellant was not a drawer of the cheque and she had not signed the same;

3) As per the provisions of the NI Act, in case of issuance of cheque from joint accounts, a joint account holder cannot be prosecuted, unless the cheque has been signed by each and every person who is a joint account holder. It couldn’t be said that the complainant had no remedy against the appellant, but certainly not under section 138;

4) Under these circumstances, the appeal deserved to be allowed and process in Criminal case pending before the Court of Metropolitan Magistrate deserved to be quashed accordingly, against the appellant - Mrs. Aparna A. Shah v. Sheth Developers (P.) Ltd. [2013] 40 43 (SC)

Thursday, December 12, 2013

Interest on I-T refund not taxable at concessional rate of 10% as per Treaty if NR has PE in India

Interest earned by a non-resident on income-tax refund is not taxable in India at concessional rate of 10% as per India-France treaty if such non-resident has a PE in India

In the instant appeal, appellant had sought interpretation of Article 12 of India-France treaty. It contented that interest earned in India on income-tax refund was taxable at 10% as per Article 12(2) of treaty.

The High Court held as under:

1) Plain reading of Article 12 of treaty would make it absolutely clear that Paras 1 and 2 of Article 12 will apply, inter alia, when the recipient of interest does not have a permanent establishment in the country, where he has received interest;

2) There was no dispute that the respondent-assessee had a permanent place of business in India and it had paid tax in India on its income, except income from interest;

3) The interest earned in India on the refund of income-tax was, therefore, not covered by Paras 1 and 2 of Article 12 of the said Treaty. To that extent, the judgment of the Tribunal was to be set aside and, accordingly, the appeal was to be allowed – Director of Income-tax v. Pride Foramer SAS [2013] 40 100 (Uttarakhand)

Wednesday, December 11, 2013

Revenue earned by eBay from its website won't be FTS; its Indian marketing agents won't form its agency PE

a) The assessee, incorporated in Switzerland, operated specific websites in India that provided an online platform for facilitating the purchase and sale of goods and services to users based in India;

b) For the purpose, the assessee had entered into marketing support agreements with eBay India and eBay motors,  for availing of certain support services in connection with its websites;

c) The Assessing officer concluded that the payments received by the assessee from operations of websites were mainly in the nature of FTS. Further, it also held that the assessee had a PE in India in the form of its entities namely, eBay India and eBay motors;

d) On appeal, the DRP upheld the order of AO. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The modus operandi of the transactions undertaken through the websites made it clear that the fees accruing to assessee on successful completion of the transactions between the buyer and seller could not be described as FTS, as the assessee had no role to play in1) effecting sales and these were in nature of business profits;

2) The existence of PE as per Article 5 of India-Singapore DTAA (‘treaty’) is a must for bringing to charge any business profits as per Article 7 of treaty. The eBay India and eBay motors were dependent agents of assessee, as they were assisting it in carrying on business in India and if any of the conditions given in para 5 of Article 5 of treaty was satisfied, then they would constitute dependent agent PE of the assessee in India;

3) First condition provided in para 5 of treaty refer to that the dependent agent "has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise”. By performing the activities as narrated in the agreement, it was seen that eBay India had at no stage negotiated or entered into contract for or on behalf of the assessee;

4) Second condition provided in Article 5 of treaty refers to the dependent agent habitually maintaining a stock of goods for or on behalf of the enterprise. This condition was not satisfied as eBay India didn’t maintain any stock of goods for delivery for or on behalf of the assessee;

5) Third condition applies where the dependent agent manufactures or processes the goods or merchandize in that State for the enterprise.  Obviously, this clause was also not applicable because eBay Motors was not required to manufacture or process the goods or merchandise on behalf of the assessee;

6) Thus, the eBay India and eBay motors were dependent agents of assessee but they did not constitute dependent agent PE and, thus, profits earned by assessee could not be taxed as per Article 7 of treaty - eBay International AG v. Dy. DIT [2013] 40 20 (Mumbai - Trib.)

Order of amalgamation doesn't transfer tenancy rights from transferor-company to transferee-company

The High Court held as under:

1) Where order of amalgamation wasn't served on landlord by the transferee-company and landlord continued to issue rent receipts in the name of (dissolved) transferor-company, though he accepted rent from transferee-company, yet no right of tenancy was created or transferred in favour of transferee-company;

2) Tenancy is a non-transferable object that can extend to others either by an explicit contract or by statute;

3) In the instant case, there was neither any statute to support transfer of tenancy on amalgamation nor any agreement executed between tenant (transferor-company) and landlord to deal with such an eventuality - Ambalal Sarabhai Enterprises Ltd. v. Rajeev Daga [2013] 40 99 (Calcutta)

Thursday, December 5, 2013

Even info from CBI won't authorize search unless it is based on reasons given under sec. 132(1)

Search conducted in pursuance of authorization issued in absence of the eventualities mentioned in clauses (a) to (c) of sub-section (1) of section 132, couldn’t be deemed as valid search.


a) On the basis of information given by CBI that undisclosed cash was being carried by assessee, search proceedings under section 132 were initiated by issuing warrant of authorization by the Director (Investigation);

b) Some alleged incriminating documents containing details of unexplained payments were found and seized. Thereafter, notice under section 153A was issued by the Assessing Officer;

c) The assessee filed his returns of income and the assessments were completed. On appeal, the assessee challenged the validity of assessments based on said search;

d) The CIT (A) held that the search was valid and the proceedings under section 153A were validly initiated by the Assessing Officer. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) From the provisions of section 132(1) it is clear that it contemplates existence of certain eventualities whereof the competent authority can authorize search;

2) In the instant case, there was no complete information in possession CBI about any bullion, jewellery, cash or any other document, which could reveal that the assessee was in possession of undisclosed assets or incriminating documents;

3) It appeared that the department had acted upon the information provided by the police department on 29-3-2007 and on the same day, the warrant of authorization was issued and the search was conducted, but nothing was brought on record to substantiate that any cash was found, although search was conducted on the information that undisclosed cash was being carried out by the assessee;

4) Thus, the authorization to conduct search based on reason under section 132(1) did not exist and search became invalid. Therefore, the assessment order based on the said search was not valid and had to be set aside - Parma Ram Bhakar v. Dy. CIT [2013] 39 119 (Jodhpur - Trib.)

Tuesday, December 3, 2013

No depreciations to owner on assets given on lease if loan transaction was disguised as sale and lease back transaction

Assessee was not entitled to claim depreciation on asset which was purchased from Gujarat State Electricity Board and same was immediately leased back to it, since the transaction was a sham transaction


a) The assessee had purchased energy meters of different makes for a consideration of Rs. 4.99 crores from Gujarat State Electricity Board [GEB] and these meters (assets) were then immediately leased back to GEB vide a lease agreement;

b) It accordingly claimed depreciation on the said meters under proviso to section 32(1). The Assessing Officer (‘AO’) disallowed the depreciation claim of assessee by holding that the alleged lease transaction was in reality a transaction of finance. On appeal, the CIT (A) upheld the order of AO.

The Tribunal held in favour of revenue as under:

1) The assessee’s contention that transaction was with a State Government and it would be highly improper to impute any collusiveness or colourable nature of the transaction without any concrete evidence was misconceived;

2) The facts on the file itself spoke that the transaction in question was a colourable device with the twin purposes of financing the GEB and at the same time making such an arrangement to enable the financer to claim depreciation on the assets and in lieu thereof to pay reduced rate of interest to the financer in proportion to the value of benefit availed by the financer, for which it otherwise was not entitled to;

3) A perusal of section 23 of the Indian Contract Act, 1872 reveals beyond doubt that even if the consideration or object of an agreement may not be expressly forbidden by law, but if it is of such a nature that, if permitted, it would defeat the provisions of law, the same will not be lawful;

4) It is always the goods or the assets itself which are the primary subject of a valid transfer, not the incidental benefits, which automatically pass on to the transferee with the transferred asset;

5) In the case in hand, only the incidental tax benefits were intended to be transferred without any intention to transfer the asset itself. Thus, whole of the effort had been made to transfer the right to claim depreciation on the assets to the assessee for the purpose of the Income-tax Act, but not the assets itself. Therefore, the Assessing Officer had rightly disallowed depreciation on electric meters - Hathway Investments (P.) Ltd. v. ACIT [2013] 38 389 (Mumbai - Trib.)

Monday, December 2, 2013

Vodafone’s case: HC puts ball in DRP’s court to decide applicability of TP provisions on issue of shares

a) Assessee allotted shares to its foreign holding company (AE) at a  premium of Rs. 8,951 per share and received the amount against allotment of shares;

b) The AO referred this transaction to TPO for determining its ALP The TPO issued show cause notice to assessee;

c) The assessee contended that Chapter X doesn’t apply to issue of equity shares as no income arises from issue of equity shares and the transaction is a capital account transaction;

d) TPO rejected assessee’s contentions relying on retro amendment to section 92B made by the Finance Act,2012 by inserting Explanation(i)(c) and

(e) which brings capital financing transactions within the purview of international transactions and TP provisions of Chapter X;

e) The TPO determined ALP of shares and made TP adjustments of 1397.27 crores. The AO passed draft assessment order wherein he didn’t deal with assessee’s objections. Thus, the assessee filed the instant writ petition challenging AO’s draft assessment order.

The High Court disposed off the petition with following directions:

1) We were not inclined to set aside the draft assessment order of the AO or the order of the TPO and remand the matter to AO, because the AO has already filed an affidavit contesting the petition on merits and justifying the stand that the alleged shortfall in premium upon issue of shares was chargeable to tax under Chapter X.";

2) Thus, instead of remanding the matter to the AO to examine this question, the merits of this question must be considered by DRP;

3) The petitioner would submit before the DRP its preliminary objections to Draft Assessment Order and the TPO's order within two weeks by
raising jurisdictional issues;

4) The DRP would decide the issue of jurisdiction before considering issue of valuation raised by the petitioner in its objections filed before the DRP, of course subject to the additional grounds on jurisdiction being filed by the petitioner within two weeks;

5) The DRP would decide the issue of jurisdiction as a preliminary issue within two months from the date on which the petitioner filed its objections on the question of jurisdiction;

6) In case the decision of the DRP on the above preliminary issue was adverse to the petitioner, it would be open to the petitioner to challenge the order of the DRP on the preliminary issue in a writ petition if a case was made out at that stage that the decision of the DRP was patently illegal, notwithstanding the availability of alternative remedy of filing an appeal before the Income Tax Appellate Tribunal - Vodafone India Services (P.) Ltd. v. Union of India [2013] 39 201 (Bombay)

Mother is natural guardian even during lifetime of father; clubbing provisions not unconstitutional

Sub-section (1A) of section 64, including clause (a) of the Explanation to said sub-section is constitutionally valid


a) The assessing authority completed the assessment by clubbing the income of assessee’s two minor sons with her income as her income was greater than that of her husband;

b) The assessee contended that the provisions of clubbing the income of the minor child, infringed the right of equality as enshrined by article 14 of the Constitution of India and, thus, were ultra vires;

c) She further contended that clause (a) of the Explanation to section 64(1A), was violative of section 6 of the Hindu Minority and Guardianship Act, 1956, according to which the father is the natural guardian and after him the mother is the natural guardian. Thus, the assessee filed instant writ petition challenging the constitutional validity of section 64(1A).

The High Court dismissed the petition with following observations:

1) HC relied on following interpretation of SC in case of Githa Hariharan v. Reserve Bank of India [1999] 104 Taxman 220:

a) Under the Hindu law both mother and father are the natural guardians of the minor sons or daughters;

b) Gender equality is one of the basic principles of our Constitution and in the event the word 'after' is to be read to mean a disqualification of a mother to act as a guardian during the lifetime of the father, the same would definitely run counter to the basic requirement of the constitutional mandate and would lead to a differentiation between male and female;

c) The father by reason of a dominant personality cannot be ascribed to have a preferential right over the mother in the matter of guardianship, since both fall within the same category

2) Thus,  it cannot be said that the mother is not the natural guardian during the lifetime of the father or until he is disqualified from being the natural guardian;

3) When both mother and father are natural guardians, then adding the income of the minor child in the income of the parent, whose income is greater, can’t be said to be arbitrary, artificial or evasive of the object sought to be achieved;

4) Therefore, the constitutional validity of sub-section (1A) of section 64, including clause (a) of the Explanation to the said sub-section was to be upheld and the same were not violative of article 14 of the Constitution of India or section 6 of the Hindu Minority and the Guardianship Act -Anju Mehra v. Union of India [2013] 38 383 (Punjab & Haryana)