Wednesday, April 30, 2014

‘Ready to use’ rig isn’t an Installation PE as per India-USA DTAA; HC denies interpreting term ‘used’ as per I-T Act

When 'rig' was lying 'ready for use', it could not be considered as 'used' for purpose of Article 5  of India-USA DTAA. The Tribunal had rightly concluded that the word 'used' as specified in said DTAA clarifies usage of an installation or structure for exploration of natural resources and if it was so used for a period of 120 days in 12 months, only then it can be considered as PE in India.
a)  The assessee operated the rigs for its clients in India. Those rigs remained unused during the period specified by assessee due to maintenance and repair.
b)  The Assessing Officer (‘AO’) was of the view that India-USA DTAA (‘Agreement’), specified the word "used" without furnishing meaning to the said word and, accordingly, its meaning thereof to be culled out from the Income-tax Act, 1961 (‘I-T Act’), which includes term 'ready for use'.
c)  He further held that as the rig was lying ready for use and, as such, the rig having been used for more than 120 days during the relevant assessment year, the assessee had a permanent establishment (‘PE’) in India.
d)  The CIT(A) accepted the said decision and the Tribunal had reversed the findings of AO and the CIT(A).
The High Court held as under:
1)  The term 'PE' includes an installation or structure used for exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve calendar month period;
2)  Thus, the Tribunal was of the view that the word ‘used’ had been explained in the Agreement and, thus, there was no scope to refer to the I-T Act.
3)  The Tribunal had rightly concluded that the word 'used' as specified in said DTAA clarifies usage of an installation or structure for exploration of natural resources and if it was so used for a period of 120 days in 12 months, only then it can be considered as PE in India;

4)  There was no infirmity in the order of Tribunal and he had rightly reversed the findings of the AO as well as the CIT(A). – DIT(International Taxation) v. R & B Falcon Offshore Ltd. [2014] 44 400 (Uttarakhand)

Tuesday, April 29, 2014

Larger bench gives prospective effect to CBDT’s Instructions on revised monetary limits for filing of an appeal

IT: Revised monetary limits for filing of an appeal as specified by CBDT through an Instruction of 2011 would not apply to all pending appeals.
The following question of law has been referred to the larger bench of Court:

Whether the view taken by the High Court [in case of CIT v. Sureshchandra Durgaprasad Khatod(HUF)[2013] 31 74 (Gujarat)] that the instructions of 2011 of the Board providing for revised monetary limits for filing the appeals, would apply to all pending cases, irrespective of the date of filing of such appeals was correct?

The High Court held as under:
1)  The clause 11 of the Instructions of 2011 specifically states that “this instruction will apply to appeals filed on or after 9thFebruary 2011. However, the cases where appeals have been filed before 9th of February, 2011 will be governed by the instructions on this subject, operative at the time when such appeal was filed”.
2)  There was no ambiguity in the instructions of 2011as regards its applicability, and it had been made clear that if those appeals were not filed after the dates mentioned in those instructions, the fate of the appeals would be governed in accordance with the instructions prevailing on the date of presentation of such appeals.
3)  In view of such clear legislative intention, it could not be held that even if an appeal was filed prior to February 9, 2011 the same would be barred notwithstanding the fact that at the time of filing such appeal, the same was not barred by the then instructions of the CBDT. The view taken in case of DurgaprasadKathod [HUF](supra) could not be accepted because in that decision, the well-settled principle relating to literal construction was not followed.
4)  In the absence of any ambiguity, there was no scope of interpreting the said provision in a different way by ignoring the literal meaning of the words used in the said delegated statutory provisions.
5)  From the language of the enabling provisions of the statute, it was clear that no power had been conferred on the CBDT to make the pending appeals or references filed in accordance with the then existing law infructuous by issuing any such direction or instruction with retrospective effect.
6)  The CBDT being fully conscious of its limitation had given clear prospective effect to those instructions in paragraph 11 of the instructions. Thus, the conclusion arrived at by the High Court was in conflict with the existing law of the land.- CIT v. Shambhubhai Mahadev Ahir [2014] 44 344 (Gujarat)

Monday, April 28, 2014

Payment for software licensed to foreign HO and used by Indian branch with non-exclusive rights isn't 'royalty'

Where foreign Bank had obtained a license to use software and, subsequently, allowed its Indian branch to use such software, data processing cost reimbursed by Indian branch for use of such software could not be deemed as royalty if head office alone had exclusive right of license to use software.
a)  The assessee-bank, incorporated in Belgium, was operating through a branch office in India.  It had acquired banking application software from an Indian company.
b)  Later on, when its branch was set up in India, it allowed the Indian branch to use the same software by making it accessible through server located at Belgium.
c)  In terms of agreement, the branch had to reimburse the cost of data processing for use of said software to the head office.
d)  The Assessing Officer opined that payment made by Indian branch amounted to ‘royalty’. Further, the CIT(A) reversed the order of AO. The aggrieved-revenue filed the instant appeal.
The Tribunal held in favour of assessee as under:
1)  As per the definition of 'royalty' provided in Article12(3)(a) of India-Belgium DTAA (‘treaty’), when the payment of any kind is received for 'use' of or 'the right to use' of any of the copy right of any item or for various terms used in the said article, then only it can be held as 'royalty';
2)  The character of payment towards royalty depends upon the independent 'use' or the 'right to use' of the computer software, which is a kind of copyright. In the instant case, the Branch did not have any independent right to use or control over such computer software installed in Belgium, but it simply sent the data to the Head Office for getting it processed;
3)  The Branch was only reimbursing the cost of processing of such data to the Head Office. Such reimbursement did not fall within the ambit of 'royalty'. To fall within its ambit, the Branch should have exclusive and independent use or right to use the software and for such usage, payment had to be made in consideration thereof;
4)  The character of the payment under the royalty transactions depends upon the rights that the transferee acquires in relation to the use and exploitation of the software programme;

5)   In the instant case, there was no such right which had been acquired by the Branch in relation to the usage of software, because the head office alone had the exclusive right to use the software. Thus, the reimbursement of the data processing cost to the Head Office did not fall within the ambit of definition of 'royalty' under article 12(3)(a) of treaty.  Accordingly, the conclusion drawn by the Commissioner (Appeals) was to be affirmed. – ADIT v. Antwerp Diamond Bank NV Engineering Centre [2014] 44 175 (Mumbai - Trib.)

Saturday, April 26, 2014

No IT relief to trust if its business receipts exceeded threshold; yet its registration couldn't be revoked

Where gross receipts of a charitable institution from its business exceeds prescribed limit, it will not be entitled for exemption or other admissible tax benefits for relevant year only; however its registration as charitable institution will continue.
a)  The assessee, a textile promotion council, was registered as a charitable trust. Its activities were falling under the category of 'advancement of any other objects of general public utility' as per definition of 'charitable purpose' given under section 2(15);
b)  The Director (Exemption) had cancelled the registration of assessee as he noticed that the assessee was carrying out activities in the nature of trade, commerce or business, etc., and its gross receipts therefrom were in excess of prescribed limit.
c)  The aggrieved-assessee filed the instant appeal.
The Tribunal held in favour of assessee as under:
1)  Merely because income of a registered charitable trust from ancillary activities of business crosses prescribed limit, that by itself cannot be a ground for cancellation of its registration invoking section 12AA(3);
2)  If income arising out of the activities is not in accordance with the objects of the trust, the assessee may not get the exemption under section 11.
3)  Thus, for the previous year, during which the gross receipt of income of trust crossed the prescribed limit, it would not get exemption or benefit of its being charitable in nature despite its charitable activities;

4)  Therefore, the impugned order of the Director (Exemptions) was to be set aside and the registration granted to assessee under section 12A was to be restored.- Cotton Textiles Exports Promotion Council v. DIT (Exemption) [2014] 44 168 (Mumbai - Trib.)

Friday, April 25, 2014

Higher salary bill couldn't be disallowed on pretext of odd trend if it was genuinely incurred for business

Genuine hike in salary expense incurred for the purpose of business couldn’t be disallowed merely on pretext of odd trend
a)   The assessee filed its return of income claiming certain expenditure in respect of payment of salaries.
b)   The Assessing Officer issued show-cause notice with reference to inflation in salary expenditure, which the assessee had justified by furnishing relevant details.
c)   Without any further notice, AO disallowed a part of salary expense by applying the ratio of salary expense to domestic turnover in earlier year.
d)   The CIT (A) confirmed disallowance made by AO to a substantial extent. The aggrieved assessee filed the instant appeal.
The Tribunal held in favour of assessee as under:
1)   The backward calculation made by AO to disallow salary expenditure couldn’t be accepted in the absence of any allegation against assessee about non-maintenance of books, non-furnishing of vouchers, non-compliance of the notices, as section145 could be applied only when conditions specified therein were satisfied.
2)   Expenditure under section 37(1) could be disallowed only when Assessing Officer could show that expenditure was not incurred wholly and exclusively for the purpose of business. There was no such finding in this order as assessee had justified the expenditure by explaining the change of business profile and also by furnishing necessary statements and vouchers before the authorities.
3)   Without examining these relevant documents, Assessing Officer and Commissioner (Appeals) had erred in resorting to mathematical jugglery so as to deny the expenditure claimed by the assessee. There was no basis for disallowance of the so-called inflated expenditure. Commissioner (Appeals) also did not apply his mind in restricting the amount of disallowance on an ad hoc basis. At least, he should have examined the contentions made by the assessee and proved that they were not correct.

4)   This sort of disallowance of expenditure claimed by the assessee could not be accepted or justified. There should have been no hesitation in cancelling the so-called disallowance of expenditure resorted by the Assessing Officer- IIC Systems (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle -2(1), Hyderabad [2014] 44 169 (Hyderabad - Trib.)

Thursday, April 24, 2014

Trust activities couldn't be tainted as commercial even if it had earned profits from its charitable activities

Assessee-trust was not hit by proviso to section 2(15) if its aims and objects were charitable and profit earned from said activities was incidental in nature.
a)  The assessee-trust was created with object to breed the cattle and to improve the quality of the cows and oxen.
b)  During the course of assessment, the Assessing Officer (‘AO’) denied benefit of section 11 to assessee-trust on ground that considerable income was generated from the activity of milk production and sale and therefore, trust was directly hit by the proviso to section 2(15).
c)  On appeal, the CIT (A) had confirmed the order of the AO. On further appeal, the Tribunal held in favour of assessee. The aggrieved-revenue filed the instant appeal.
The High Court held in favour of assessee as under:
1)  The proviso to section 2(15) applies only to cases of advancement of any other object of general public utility, if the conditions provided under the proviso are satisfied. However, for the application of the proviso, what is necessary is that the entity should be involved in carrying on activities in the nature of trade, commerce or business.
2)  Many activities of genuine charitable purposes, which are not in the nature of trade, commerce or business, may still generate marketable products. The law does not expect the trust to dispose of its produce at any consideration less than the market value;
3)  If there is any surplus generated at the end of the year, that by itself would not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating 'surplus' is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature.
4)  The objects of the trust clearly established that the same was for general public utility and were for charitable purposes. Profit making was neither the aim nor object of the Trust. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, it would not render the activity as in the nature of trade, commerce or business;

5)  The proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of 'public utility'. Thus, the Tribunal had not committed any error in directing the Assessing Officer to provide exemption under section 11 and holding that the proviso to section 2(15) was not applicable to this case. – DIT (Exemption) v. Sabarmati Ashram Gaushala Trust [2014] 44 141 (Gujarat)

Wednesday, April 23, 2014

TDS refund couldn't denied if delay in issue of TDS certificates caused delay in filing of refund claim

a)  The Land Acquisition Officer (‘LAO’) acquired assessee’s lands and paid compensation to assessee in installments from financial year 2000-01 to 2005-06. He had deducted tax at source on the entire compensation and remitted the same to the department. 
b)  However, TDS certificate was issued in favour of petitioner only in financial year 2005-06. The petitioner filed application for refund of the tax so deducted.
c)  The Commissioner rejected the said application on ground that the petitioner had not prayed for refund within a period of six years i.e. 2000-01 to 2005-06. The aggrieved-assessee filed the instant petition.
The High Court held in favour of assessee as under:
1)  The TDS certificate was issued in favour of the petitioner only on 10-2-2005. Only thereafter, petitioner came to know that certain sum was deducted at source from the compensation;
2)  The petitioner filed the returns in the year 2005 itself. Thus, there was no delay on the part of the petitioner. No tax deduction was required be made under section 194-L(2) from any payment made on or after June 1, 2000;
3)  Thus, deduction made by the LAO towards tax, out of the compensation awarded was illegal. Therefore, the amount so deducted was to be refunded to the petitioner. - Ashok B. Jadhav v. CIT [2014] 44 102 (Karnataka)

Tuesday, April 22, 2014

ITAT rejects working of PLI when TPO took FOB value of goods as 'total cost' instead of cost incurred by assessee

While working out PLI 'total cost' has to be taken as costs incurred by assessee and not the FOB value of goods.
a) The assessee had provided 'Sourcing Support services' to its associated enterprises and it was compensated at cost plus markup of 5 per cent.
b) It adopted Transactional Net Margin Method (TNMM) as the most appropriate method with Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC).
c) The assessee declared its OP/TC and claimed that its margin was within tolerable range of 5 per cent range and, hence, the transactions to be considered at ALP.
d) T.P.O. applied markup on the FOB value of goods between third party enterprises instead of assessee's cost. The DRP did not change the cost base but reduced the percentage of markup applied by the TPO.
The Tribunal held as under:
1) In the preceding year, the Transfer Pricing officer (‘TPO’) had applied the same base of 'total cost' as in the year under consideration, which got the approval from the Tribunal;
2) The assessee had assailed the Tribunal's order before the High Court and, the High Court had reversed the Tribunal's order by holding the FOB value of goods between the third party enterprises, sourced through the assessee, could not be accepted.
3) Thus, the markup (on FOB value of goods) applied by TPO and approved by the DRP could not be accepted. Therefore, the 'total cost' being the denominator in the PLI of OP/TC, was to be taken as the cost incurred by the assessee and not the FOB value of goods between third party enterprises. - Li & Fung (India) (P.) Ltd. v. DY. CIT [2014] 44 125 (Delhi - Trib.)

Monday, April 21, 2014

Methodologies in Return Form don’t prevail over I-T Act; MAT credit to be given after computing surcharge and SHEC

Tax has to be computed on the total income as assessed under normal provisions of the Income-tax Act as increased by applicable surcharge and education cess, MAT credit to be granted thereafter.
a)  The Assessing officer made certain additions during assessment of the assessee. 
b)  The assessee contended that the MAT credit should be allowed before calculation of surcharge and education-cess, as per the methodology provided in the form for filing of return of income.
c)  The CIT(A) rejected such contention and held against the assessee. The aggrieved-assessee filed the instant appeal.
The Tribunal held as under:
1)  In an issue before the Madras High Court in Chemplast Sanmar Ltd. [2009] 180 Taxman 335 as to whether the form for filing return of income, which lays down the manner of computing the total tax, prevails over the provisions of the Act, the Court held that rule 12(1)(a) of Income-tax Rules and Form for filing of return couldn’t go beyond the provisions of the Act;
2)  The Supreme Court in the case of CIT v. K Srinivasan, [1972] 83 ITR 346 held as under:
a)  The meaning of ‘surcharge’ is to charge in addition or to subject to an additional or extra charge. The additional charges form a part of the income-tax and Super-tax. The word ‘surcharge’ has been used in article 271 for the purposes of distributing the proceeds between the Union and the States.
b)  The proceeds of the surcharge are exclusively assigned to the Union. Even in the Finance Act it is expressly stated that the surcharge is meant for the purpose of Union;
3)  The income-tax includes surcharge which is a receipt in the nature of additional income-tax. The assessee’s argument that the term ‘tax’ has been defined under section 2(43) and it includes only income-tax and not surcharge, goes against the proposition laid down by the Supreme Court. The only requirement is that the levy should have been under the Income-tax Act itself as there is no reference to any Central Act in the proviso or in section 158 BA(2). [Merit Enterprises v. DCIT (Hyd.)(SB).

4)  Thus, the impugned tax is to be computed on the total income as assessed under normal provisions of the Income-tax Act as increased by applicable surcharge and education cess, thereafter credit of MAT is to be granted.- 3F Industries Ltd. v. JCIT [2014] 44 200 (Visakhapatnam - Trib.) 

Saturday, April 19, 2014

ITAT highlights lacuna in Rule 10B; it doesn't mandate and merely provide an option to apply Comparable PSM

Rule 10B(1)(d) of Income-tax Rules provides an option but not a compulsory mandate to apply a comparable Profit Split Method.

The Tribunal held as under:
1)  Comparable Profit Split Method (‘PSM’) is rarely used internationally, in view of lack of reliable external data with respect to third party behavior to split profits;
2)  OECD and UN clearly gives taxpayers an option to adopt any one of the three sub-methods under the overall PSM, namely, contribution PSM, residual P'SM and comparable PSM, without requiring the contribution and residual PSMs to mandatorily pass through the sanity of comparable PSM, being a mandate given under the Indian transfer pricing regulations, in the form of rule 10B(I)(d) of the Income-tax Rules (I-T Rules);
3)  The requirement contained in IT Rules of mandatory adoption of comparable PSM in all cases of PSM is a lacuna, which renders the entire scheme or mechanism of PSM virtually redundant, otiose and impossible to comply with even in the most deserving cases.
4)  Such lacuna is curable through interpreting rule 10B(1)(d) in a manner that the same provides an option and not compulsorily mandate to apply a comparable PSM in a case where reliable external data to gauge third party behavior is impossible to be obtained.- Global One India Ltd. V. ACIT [2014] 44 100 (Delhi - Trib.)

Friday, April 18, 2014

TRO couldn't declare sale of property void under sec. 281 and attach property even if tax was overdue from seller

TRO had no power to declare sale transaction as void and attach property even when several demand notices were issued against the seller of such property
a)    The assessee purchased a property from one 'M' who had defaulted in making payment of income tax dues even after issuing with several demand notices by AO.
b)    Consequently, TRO attached the said property and passed the order without giving any notice to the assesse about recovery of the tax dues of ‘M’.
c)    Consequently, assessee preferred a writ with Gujarat High Court.
1)   Section 281 provides that if during pendency of any proceedings under the Act or after completion thereof, an assessee creates a charge on or parts with the possession of any of his assets in favour of any other person, such charge or transfer shall be held void if any tax was payable by the assesse as a result of completion of the said proceedings unless such charge or transfer was made-
a)   For adequate consideration and without any notice of pendency of such proceedings or tax payable by assesse; or
b)   With prior permission of AO.
2)    The above two exceptions are equally applicable to the transferor as well as to the transferee. Therefore, even if the transferor had notice of the pendency or the outstanding tax or sum payable, the transferee can still take shelter of the transactions having been entered into by him for adequate consideration and without notice of such proceeding against the transferor.
3)    The Bombay High Court in the case of GangadharVishwanathRanade v. T.R.O. [1989] 177 ITR 176 held that under section 281, the TRO has no power to declare a transfer as void. This decision of the Bombay High Court was carried in appeal before the Supreme Court. The Apex Court in TRO v. GangadharVishwanathRanade [1998] 100 Taxman 236 confirmed the view of the Bombay High Court.

4)    Since the issue involved in the instant case is squarely covered by the decision of the Supreme Court in the case of GangadharVishwanathRanade (supra), the order passed by the Tax Recovery Officer under section 281 was liable to be set aside- KarsanbhaiGandabhai Patel v.Tax Recovery Officer [2014] 43 415 (Gujarat)

Thursday, April 17, 2014

ITAT exempts capital gain on sale of self-generated trademark as its cost of improvement isn't ascertainable

The self-generated trademark is not capable of improvement at an ascertainable cost in terms of money, therefore, it is outside the scope and ambit of the charge envisaged under section 45(1).
a)  The assessee-firm had sold some 'trademarks'. The Assessing Officer denied claim of deduction of 'cost of improvement' on the ground that 'cost of improvement' was liable to be taken as 'Nil' in view of section 55(1)(b).
b)  The assessee contended that it was not liable to pay any capital gains tax in respect of sale of trademarks because such asset did not have any cost of improvement as same could not be ascertained.
c)  On appeal, the CIT(A) disallowed the claim of assessee. The aggrieved-assessee filed the instant appeal.
The Tribunal held in favour of assessee as under:
1)  The term 'cost of any improvement' for the purposes of section 48 has been explained in section 55(1)(b) and the same does not include a capital asset in the shape of trademark. A conjoint reading of section 55(2)(a) and section 55(1)(b), ascribes the meaning of 'cost of acquisition' and 'cost of any improvement' respectively for the purposes of section 48;
2)  Section 55(2)(a) prescribes cost of acquisition of a trademark for the purposes of section 48 at Nil, whereas no such prescription is contained in section 55(1)(b) defining the 'cost of any improvement' of a trademark for the purposes of section 48;
3)  Therefore, the plea of the assessee that a self-generated trademark was not capable of improvement at an ascertainable cost in terms of money and 'cost of any improvement' thereto has not been defined for purposes of section 48 in section 55(1)(b), was well founded;
4)  The self-generated trademarks are not capable of improvement at an ascertainable cost in terms of money and therefore, the computation of capital gains fails and, accordingly, it is outside the scope and ambit of the charge envisaged under section 45(1);

5)  Therefore, there was no capital gain exigible to tax under section 45(1) on transfer of the impugned trademark by the assessee and the lower authorities had erred in taxing the same while computing the total income of the assessee. - Institute For Micronutrient Technology v. DY. CIT [2014] 43 426 (Pune - Trib.)