Tuesday, November 25, 2014

Sum received by international news agency on distribution of news and related photos in India is royalty


a)The assessee, an International News Agency, was having its headquarter in France. It had been distributing its news and photos connected with news in India through various Indian News agencies.

b)There were two categories of payments received by assessee from India - one for transmission of news and the other for transmission of related photos.

c)The Assessing Officer (‘AO’) as well as the CIT(A) held that copyright subsisted in news-reports and photographs circulated by the assessee in terms of Copyright Act, 1957. Hence, the payments received by the assessee would qualify as 'royalties' under section 9(1)(vi) and Article 13(3) of the India-France Treaty (‘DTAA’).

d)The assessee submitted that no copyright subsisted in the work of the assessee as news reports as well as photographs provided by the assessee lacked originality and were devoid of any creativity.

The Tribunal held in favour of revenue as under:

1)On a perusal of Article 13 of DTAA, it was evident that 'royalty' cover within its fold payments pertaining to copyright of literary, artistic work, etc. Since these terms had neither been defined nor illustrated under Income-tax Act nor under DTAA, reliance was to be placed on relevant provisions of the Indian Copyright Act, 1957 to understand their true meaning and context.

2)To appreciate the distinction between mere reporting of facts from news stories, it would be worthwhile to analyse the recent reporting about Malaysia Airlines Flight 370 flight that disappeared on 8 March, 2014. In one of the newspapers i.e. 'Strait Times', the catchline read as Malaysia's MH 370 report shows delayed response, offers no new clues' while, another newspaper 'The New York Times' reported this incident with the catchline Questions Over Absence of Cellphone Calls From Missing Flight's Passengers'. It was to be pointed out that, the piece reported by the first newspaper consisted of news inputs as well as photographs from AFP while as the latter one consisted of news inputs from 'New York Times News Service'.

3)From a reading of the above news-item, it is evident that, even though the factum or news remains to be imbedded in a fact its reporting or form of an expression makes it unique. Thus, such news-reports as well as archived data being in the nature of 'original literary works' meet the statutory requirements for copyright outlined under section 13(1)(a) of the Indian Copyright Act, 1957. Hence, copyright subsisted in such news item/news story.

4)Section 2(c)(i) of the Indian Copyright Act, 1957 categorically includes photographs as artistic work. As per terms of usage of assessee's photos for news items or non-news items, it could not be denied that it had an intrinsic value of its own and when used for 'news items'; it helped to assist in conveying the message in the news story. Hence, copyright subsisted in such photographs/ image under consideration. Therefore, sum received by international news agency on distribution of its news and related photos in India was taxable as royalty. – Agence France Presse v. ADIT, International Taxation, New Delhi [2014] 51 taxmann.com 186 (Delhi - Trib.)

HC can’t review orders of SetCom; powers are confined to reviewing its decision making process rather decision itself

IT: High Court cannot assume the role of an appellate authority to review orders passed by the SetCom. Its role is confined to judicial review of the decision making process adopted by the SetCom and not the decision itself.

The High Court held as under:

1)The High Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, cannot assume the role of an appellate authority to conduct a review of orders passed by the Settlement Commission (‘SetCom’).

2)Its role is confined to reviewing decision making process adopted by the SetCom and not the decision itself.

3)The scope of enquiry of the Court, in matters involving a challenge to orders passed by the SetCom, is only to see whether its order complied with the statutory provisions of Chapter XIX-A of the I-T Act.

4)The Karnataka High Court in N.Krishnan v. Settlement Commission [1989] 47 TAXMANN 294 (KAR.) observed that a decision of the SetCom could be interfered with only:

i)If grave procedural defects, such as violation of the mandatory procedural requirements of the provisions in Chapter XIXA of the Income-tax Act, 1961, and/or violation of the rules of natural justice were made out; or

ii)If it was found that there was no nexus between the reasons given and the decision taken by the SetCom..

5)The Supreme Court in Union of India v.Ind-Swift Laboratories Limited [2011] 4 SCC 635 held that an order passed by the SetCom could be interfered with only if the said order was found to be contrary to any provisions of the Act. So far as the findings of fact recorded by the SetCom or question of facts were concerned, the same were not open for examination either by the High Court or by the Supreme Court.

6)Hence, it was well-settled that the power of judicial review was not to be exercised to decide the issue on facts or on an interpretation of the documents available before the Court. Thus, in the instant case, the enquiry by Court could only be whether or not the SetCom had exercised a jurisdiction that it did not have or, alternatively, if it did have the jurisdiction, whether it had erred in the exercise of that jurisdiction. In the latter event, the Court would also have to bear in mind the nature of the jurisdiction exercised by the SetCom, which was akin to a statutory arbitration. – CIT v. Settlement Commission (IT & WT) [2014] 51 taxmann.com 351 (Kerala)

SEBI plans to widen definition of insider in insider norms and to reduce timeline to complete delisting process

The SEBI board met in Mumbai on November 19, 2014 and approved of new regulation in place of existing insider trading regulations and amendment to delisting regulations. It has widened the definition of insider under amended insider trading norms and has reduced the time-line for completing delisting process.

Some of the changes approved by SEBI are outlined hereunder:

1)Amendment to Insider trading norms: In order to strengthen the regulatory framework dealing with insider trading in India, SEBI has approved of new regulation in place of the existing Insider Trading regulations. The salient features of the proposed regulations are as under:

a)Definition of ‘insider’ broadened: The definition of insider has been widened. Following persons have been included in the definition of ‘insider’:

Persons connected in any contractual, fiduciary or employment relationship that allows such persons access to unpublished price sensitive information (UPSI).

Immediate relatives would be presumed to be connected persons, with a right to rebut the presumption.

b)Insider trading norms aligned with international practices: The requirement of communication of UPSI in the case of legitimate business transaction has been recognized, in law, and a safeguard has been provided.

c)Disclosure of UPSI in public domain: Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market, as prevalent in other jurisdictions.

2)Insertion of uniform regulation in place of listing agreement: SEBI has approved of conversion of Listing Agreement to Listing Regulations. Listing Regulations, interalia, would be comprehensive Regulations in respect of various types of listed securities. These Regulations would consolidate and streamline the provisions of existing listing agreements, thereby ensure better enforceability.

3)Amendment to delisting regulations: SEBI has approved certain changes to SEBI (Delisting of Equity Shares) Regulations, 2009:

a)Conditions for delisting:

It has been proposed that delisting would be considered successful only when the shareholding of the acquirer together with the shares tendered by public shareholders reach 90% of the total share capital of the company, and Atleast 25% of the number of public shareholders, (holding shares in dematerialised mode as on the date of the Board meeting approve of the delisting proposal) tender in the reverse book building process.

b)Exemption from reverse book building process: Further, companies whose paid-up capital and net worth does not exceed Rs.10 crores and Rs.25 crores, respectively, as on the last day of the previous financial year are exempted from following the Reverse Book Building process.

c)Reduction in time-line to complete delisting: Timelines for completing the delisting process has been reduced from 137 calendar days (approx 117 working days) to 76 working days.

4)Risk based supervision of market intermediaries: SEBI is in the process of formalizing its risk based approach towards supervision of market intermediaries which will be in alignment with the global best practices. The system will be implemented in a phased manner.

5) Granting Single Registration to Depository Participants: With a view to further simplify the registration requirements for Depository Participants (DPs), the Board has approved of the policy of granting single registration for the application of initial registration as well as the permanent registration for operating with both the Depositories.

6) Use of Secondary Market infrastructure for public issuance (“e-IPO”): The Board has approved the proposal to frame suitable regulations for using Secondary Market infrastructure for public issuance (“e-IPO”) after going through the public consultation process

7) Imposing restrictions on wilful defaulters - Amendments to Regulations framed under SEBI Act, 1992: The Board has approved of the proposal to review the policy in respect of restricting an issuer company / its promoter / directors, categorized as wilful defaulter, from raising capital after going through the public consultation process.

Wednesday, November 19, 2014

Sales incentives to employees establish LO promotional activities in India; treated as PE of foreign Co.


a)The assessee, a company incorporated in US, established a Liaison Office (‘LO’) in India. During assessment the Assessing Officer (‘AO’) contended that the activities of the LO extended to searching for the prospective buyers and for promoting sales of the assessee in India.

b)The AO posed a few queries before the Chief Representative Officer (‘CRO’) of the assessee which were explained by him.

c)In one of the queries pertaining to the remuneration schemes for the employees, the CRO explained that the employees were entitled to sales incentives to the extent of 25% of their annual remunerations. Further, the performance of the employees was judged by the number of direct orders received by them.

d)The CRO further explained that the incentive plan was a standard term which was inadvertently included in the offer letters given to the employees. In fact, no such incentive was given to any employees during the year.

e)On basis of such an enquiry, the Assessing Officer held that the activities of LO were not limited to preparatory or auxiliary activities in India and they had extended to marketing and promotional activities as well. Accordingly, the income attributable to the LO in India would be taxable in India. The Commissioner (Appeals) and the Tribunal upheld the order of the Assessing Officer.

The High Court upheld order of the Tribunal:

The High Court upheld the order of the Tribunal which provided that:

1)Whether or not any incentive was paid to an employee during the year was not material. What was relevant was the nature of the incentive plan.

2)Nature of incentives to employees indicated that purpose of LO was not just to advertise products of assessee but extended to activities which traversed the actual marketing of the products of assessee in India.

3)The explanation that the incentive plan, being a standard language, was inadvertently included in the offer letter was far-fetched, because the assessee carrying over a transnational business with a range of advisors could not be assumed to have committed an inadvertent mistake on this significant issue.

4)Therefore, LO would be treated as PE of foreign company.

5)However, on the issue of determination of the income attributable to the LO which had to be taxed in India, the High Court restored the matter before the AO. - BROWN AND SHARPE INC. V. CIT [2014] 51 taxmann.com 327 (Allahabad)

Tuesday, November 18, 2014

Time gap of 30 days isn't intended between book closure date and record date for declaration of dividend, says SAT

As per clause 16 of 'Listing agreement' time gap of 30 days is intended to be between two book closures and two record dates and not between a book closure and a record date


a)The appellant-company, listed on BSE and NSE (‘respondents’), had declared book closure date for the purpose of its AGM. The AGM was held and on the same day interim dividend was declared and the record date was fixed.

b)Thereafter, both the respondent's alleged that time gap between book closure date and record date was less than 30 days which was violative of clause 16 of the 'Listing Agreement'.

c)The SEBI held that appellant-company had violated clause 16 and, accordingly, called upon appellant to comply with it.

On appeal the Securities Appellate Tribunal held as under:

1)On perusal of clause 16 of ‘Listing Agreement’ it was seen that in a year there could be more than one book closure for the purpose of declaration of dividend or the rights issue or bonus shares, etc.

2)If more than one book closure was postulated under clause 16 of the listing agreement, then the time gap of 30 days under clause 16 would be referred to as the time gap between two book closure dates and it could not be inferred that time gap should be between book closure date and record date.

3)Where a company kept its transfer books closed during AGM as per clause 16 and also sought to declare dividend, then stipulating record date for such dividend after 30 days of book closure date as well as payment of dividend would be violative of section 205A of the Companies Act, 1956 – ORACLE FINANCIAL SERVICES SOFTWARE LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA [2014] 51 TAXMANN.COM 24 (SAT - MUMBAI)

Forex losses arising from services provided to foreign AEs are operative in nature; to be part of PLI for TP study

Foreign exchange loss in case of providing services to AEs is to be considered as operative in nature and, hence, is to be included in PLI calculation of an assessee.


One of the grounds raised for appeal was as under:

The DRP/AO had erred in confirming the action of the TPO in considering the foreign exchange loss as operating, though the loss was mainly due to the re-instatement of balances at the year end and did not pertain to the operations of the Appellant.

The Tribunal held as under:

1)The Bangalore Bench of the Tribunal in the case of SAP Labs India P. Ltd v. ACIT [2011] 44 SOT 156 (Bang.), observed as follows:

a)The foreign exchange fluctuation gain was nothing but an integral part of the sales proceeds of an assessee carrying on export business.

b)The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of an exporter-assessee. The foreign exchange fluctuation income could not be excluded from the computation of the operating margin of the assessee-company.

2)Thus, following the aforesaid decision of the Tribunal, it was to be held that while computing the margin for determining the ALP, the foreign exchange gain/loss has to be taken as part of the operating margin. Therefore, foreign exchange loss in case of providing services to AEs was to be considered as operative in nature and, hence, was to be included in the PLI calculation of the assessee. - KENEXA TECHNOLOGIES (P.) LTD. V. DY.CIT [2014] 51 taxmann.com 282 (Hyderabad - Trib.)

Saturday, November 15, 2014

Provision of suspension of legal proceedings under SICA prevails over provisions of debt recovery under RDDB Act

Section 22 of SICA covers and interdicts instances of application for recovery made under the provisions of the RDDB Act. Provisions of SICA, in particular section 22, shall prevail over provisions for recovery of debts in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB’).


a)Whether as per bar contained in section 22 of Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’), no recovery proceeding could be effected against defaulting-Company?

b)Since Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB’) was a subsequent enactment, whether provisions under sub-section (2) of section 34 of RDDB Act would have an overriding effect over other laws mentioned therein, including SICA?

The Supreme Court held as under:

1)Proceedings by way of an application for recovery according to a summary procedure as provided for under the RDDB Act are not referred to in Section 22 of SICA simply because the RDDB Act had not then been enacted.

2)Though the RDDB Act is the later enactment, sub-section (2) of Section 34 specifically provides that the provisions of the Act or the rules thereunder, shall be in addition to, and not in derogation of the other laws mentioned therein including SICA.

3)Section 22 of SICA clearly covers and interdicts such an application for recovery made under the provisions of the RDB Act. Therefore, the provisions of SICA, in particular Section 22, shall prevail over the provision for the recovery of debts in the RDDB Act. – KSL & INDUSTRIES LTD. V. ARIHANT THREADS LTD. [2014] 51 TAXMANN.COM 252 (SC)

Thursday, November 13, 2014

Consent fee paid to SEBI without admitting alleged violation by broker couldn’t be held as penalty; deduction allowed

IT: When SEBI accepted consent application (settlement application) without admitting or denying guilt by assessee-stock-broker, resultant consent fee paid to SEBI could not be equated with a “penalty” - The fee was paid for purpose of business, to settle a dispute with SEBI and to be able to conduct business without interruption - Thus, consent fee was allowable as business expenditure under Section 37.


a)The assessee-company was engaged in share broking business. It filed its return of income. on examination of the said return, the Assessing Officer (‘AO’) noticed that assessee had paid a sum of Rs. 50 lakhs to SEBI as consent fee.

b)On further examination, he noticed that the SEBI had recommended suspension of Certificate of Registration of assessee as stock broker for a period of nine months for violating the various regulations framed by SEBI. After hearing the assessee, period of suspension was reduced to four months.

c)The assessee challenged said order by filing an appeal before the Securities Appellate Tribunal. While the said appeal was pending, the SEBI issued a circular whereby it agreed to settle the disputes in consideration of ‘Consent Application’ furnished by the assessee on payment of consent fee.

d)Thus, the AO took the view that the said amount of Rs.50 lakhs was a compounding fee paid for offences committed under SEBI (Stock Brokers and sub-brokers)Regulations, 1992. Accordingly, he held that it was a penalty paid for infraction of law and, hence, disallowed the said claim by invoking the Explanation to Sec. 37(1) of the Income-tax Act (‘I-T Act’). On appeal, the CIT(A) deleted the disallowance made by AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

The Tribunal upheld the order of the CIT(A) which provided as under:

a)It was apparent from the Circular issued by the SEBI that instances of administrative/civil actions which included, inter-alia, orders of suspension from trading, etc., were different from criminal actions.

b)Further, it was apparent from the order of SEBI that the appellant had been suspended from doing trading activity for a period of four months and had not been awarded any monetary fines. It had been mentioned in the said order that the consent application of the appellant was without admitting or denying the guilt. SEBI had also accepted the application on this basis.

c)Thus, SEBI had accepted that guilt might or might not be established at the end of the appellate proceedings. Therefore, the fee paid could not be equated with a “penalty” which had necessarily to be a punishment for infraction of a law or a regulation having statutory force.

d)The fee was claimed to have been paid for the purposes of business to settle a dispute with SEBI and to be able to conduct its business without interruption. Thus, if the concerned impost was purely compensatory in nature, the same was an allowable expense under section 37 of the I-T Act. – ITO V. RELIANCE SHARE & STOCK BROKERS (P.) LTD. [2014] 51 taxmann.com 215 (Mumbai - Trib.)

Wednesday, November 12, 2014

RBI prescribes stringent norms for NBFCs on lines of banking norms

In order to bring Non Banking Finacial Company (NBFC) regulations in alignment with the banking norms, RBI has issued revised regulatory framework for NBFCs. The key changes introduced to regulatory framework are delineated below:

1)Limit of minimum ‘Net Owned Fund’ raised to Rs. 2 Crores: As per new regulations, it shall be mandatory for all NBFCs to attain a limit of minimum Net Owned Fund (‘NOF’) of Rs. 200 lakhs by the end of March 2017, as per the milestone given below:

a)Rs. 100 lakh by the end of March 2016,

b)Rs. 200 lakh by the end of March 2017.

NBFCs failing to achieve the aforesaid ceiling within the stipulated time shall not be eligible to hold the Certificate of Registration (‘CoR’) as NBFCs. It will be incumbent upon such NBFCs, the NOF of which falls below Rs. 200 lakh, to submit a certificate of statutory auditor certifying compliance to the revised levels at the end of each of the two financial years, i.e. (March 2016 and March 2017).

2)Existing unrated asset finance companies to get themselves rated: In order to move over to a regimen of only credit rated NBFCs accepting public deposits, the existing unrated asset finance companies are required to get themselves rated by March 31, 2016.

3)Revised Systemic Significance: The threshold limit for defining systemic significance for non-deposit accepting NBFCs (‘NBFCs-ND’) has been revised in the light of the overall increase in the growth of the NBFC sector. Now systemically important non-Deposit taking NBFCs (‘NBFCs-ND-SI’) should have asset size of Rs. 500 crore and above as per the last audited balance sheet.

4)Assets size of NBFCs in case of multiple NBFCs: NBFCs that are part of a corporate group or floated by a common set of promoters will not be viewed on a standalone basis. The total assets of NBFCs in a group (including deposit taking NBFCs, if any) will be aggregated to determine if such consolidation falls within the asset sizes two categories, i.e., NBFCs-ND or NBFCs-ND-SI.

5)Compliance with prudential norms and conduct of business regulations: All NBFCs-ND with assets of Rs. 500 crore and above, irrespective of whether they have accessed public funds or not, shall comply with prudential regulations as applicable to NBFCs-ND-SI. They shall also comply with conduct of business regulations if customer interface exists.

6)Prudential regulations applicable to NBFCs-ND with assets of less than Rs. 500 crores: The NBFCs-ND with asset size of less than Rs. 500 crores, are exempted from the requirement of maintaining Capital To Risk Asset Ratio (CRAR) and complying with credit concentration norms.

7)Revised criteria for NPA classification: The revised norms would reduce the period in a phased manner so that the norms would become at par with banks by March 31, 2018.

8)Revised provisioning norms for Standard Assets: The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D, had been increased to 0.40%. The compliance to the revised norm will be phased in as given below:

a)0.30% by the end of March 2016.

b)0.35% by the end of March 2017.

c)0.40% by the end of March 2018

9)Revised corporate governance and disclosure norms for NBFCs: NBFCs-D with minimum deposits of Rs. 20 crores, and NBFCs-ND with minimum asset size of Rs. 50 crores are required to constitute an Audit Committee. NBFCs-D with minimum deposits of Rs. 20 crores and NBFCs-ND with minimum assets of Rs. 100 crores are advised to constituting Nomination Committee to ensure ‘fit and proper’ status of proposed/existing directors and Risk Management Committee.

10)Minimum Tier-I capital: Non-deposit taking NBFCs with minimum asset size of Rs. 500 crores and all deposit taking NBFCs are required to maintain minimum Tier-I capital of 10% by the end of March 2014 and 8.5% by the end of March 2016.

Circular No. DNBR (PD) CC.No.002/03.10.001/2014-15 Dated, 10-11-2014

Tuesday, November 11, 2014

Short deduction of tax due to application of wrong provision won't lead to sec. 40(a)(ia) disallowance


a)The Tribunal held that the assessee had to deduct tax under section 194-I and that the provisions of section 194C were not applicable in respect of transactions entered between the assessee and the contractee.

b)On appeal, the High Court confirmed the order of the Tribunal. However, the High Court restored the matter back to the file of the Tribunal for the limited purposes of applicability of section 40(a)(ia) in respect of short deduction of tax at 2.06% instead of at 10%.

c)On remand, the revenue contended that for the short deduction of TDS there would be disallowance under section 40(a)(ia).

The Tribunal held in favour of assessee as under:

1)In case of Apollo Tyres Ltd. v. Dy. CIT [2013] 35 taxmann.com 593 (Coch.) it was held that section 40(a)(ia) did not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act.

2)There was an obvious omission to include short deduction/lesser deduction in section 40(a)(ia) of the Act. Therefore, in case of short/lesser deduction of tax the entire expenditure could not be disallowed whose genuineness was not doubted by the Assessing Officer.

3)Thus, in view of the decision of this Tribunal in Apollo Tyres (Supra) short deduction of tax could not be a reason or basis for disallowance under section 40(a)(ia). Accordingly, the orders of the lower authorities were to be set aside and the disallowance made under section 40(a)(ia) was to be deleted. - THREE STAR GRANITES (P.) LTD. V. ACIT [2014] 49 taxmann.com 578 (Cochin - Trib.)

Monday, November 10, 2014

Sum paid to NR without deduction of tax would not invite sec. 40(a)(i) disallowance if such sum was capitalized

Where assessee had not claimed payment made to non-resident for providing engineering site services as expenditure but capitalised it and claimed only depreciation thereon, no disallowance could be made under section 40(a)(i).


a)The assessee, a non-banking financial company, made payment to non-resident for providing engineering site services but did not deduct tax at the time of payment. The Assessing Officer disallowed the entire payment made by the assessee.

b)The assessee submitted that no disallowance could be made as it had not claimed said payment as expenditure but capitalized it and only depreciation was claimed thereon.

c)On appeal, the CIT(A) upheld order of the Assessing Officer. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The payment made to non-resident for technical services was admittedly taxable in India, therefore, the assessee was bound to deduct tax at source. The assessee could claim the same as expenditure. However, such claim of expenditure could be allowed only in case the assessee deducted the tax at the time of payment.

2)In the instant case, the deduction was not claimed as expenditure while computing the income chargeable to tax. The CIT(A) observed that irrespective of the fact whether the assessee had claimed deduction or not disallowance had to be made since tax was not deducted.

3)Both the authorities had not examined whether the amount paid to the non- resident was deducted while computing the income chargeable to tax or not. The language of section 40 clearly provides that the amount paid to non-resident (on which tax is not deducted) shall not be deducted while computing the income chargeable to tax.

4)Therefore, if the assessee had not deducted the amount (i.e., claimed it as expenditure) while computing the chargeable income, there was no necessity for further disallowance. - Muthoot Finance Ltd. v. ACIT [2014] 49 taxmann.com 580 (Cochin - Trib.)

Saturday, November 8, 2014

SEBI norms and clause 35 of listing agreement don't require promoters to make disclosure of encumbered shares

Neither any regulation of SEBI nor clause 35 of the Listing Agreement casts an obligation on promoter to make disclosures of shares encumbered to listed company. SEBI was not justified in directing listed company to disclose details of shares which were 'otherwise encumbered' by promoter to Stock Exchanges.


a)SEBI imposed penalty upon appellants under Section 23E of the Securities Contract Regulation Act and Section 15HA of the SEBI Act for allegedly violating clause 35 of the Listing Agreement and Regulations 3(d) and 4(2)(f) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

b)Issue raised in appeal was:

Whether a listed Company was required to disclose details of ‘otherwise encumbered’ shares held by the promoter under clause 35 of the Listing Agreement even though there was no obligation cast upon the promoter to make such disclosures to the listed Company?

The Securities Appellate Tribunal held as under:

1)Since neither any regulation of SEBI nor clause 35 of the Listing Agreement would casts an obligation on the promoter to make disclosure of encumbered shares to the listed Company, and

2)In the absence of such disclosure made by promoter, SEBI was not justified in directing the listed Company to disclose details of shares which were ‘otherwise encumbered’ by the promoter. Accordingly, penalty imposed by SEBI was to be set aside. – GOLDEN TOBACCO LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA [2014] 51 TAXMANN.COM 51 (SAT - MUMBAI)

Friday, November 7, 2014

Failure to issue notice in time couldn't be cured by sec. 292BB

Failure to issue a notice under section 143(2) within prescribed period cannot be cured by taking recourse to section 292BB.


a)The Assessing Officer issued a notice under section 143(2) to assessee. Thereafter assessment proceedings were completed and an order of assessment was passed under section 143(3).

b)On appeal, the CIT(A), held that the notice under section 143(2) was not issued within the period stipulated in that provision. Hence, section 292BB would not save a situation where the notice itself had not been issued before the expiry of the period of limitation since it could only cure a defect of service within the stipulated period.

c)Further, the Tribunal held that since no notice under Section 143(2) was issued within the prescribed period, the assessment was not valid. The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)In the present case, the notice under Section 143(2) was issued much beyond the period of six months. Section 292BB provides a deeming fiction that once the assessee has appeared in any proceedings or cooperated in any enquiry relating to an assessment or reassessment, it shall be deemed that notice has been duly served upon assessee in time in accordance with the provisions of the Act.

2)Once the deeming fiction came into operation, the assessee was precluded from raising a challenge about the service of a notice, service within time or service in an improper manner. However, Section 292BB could not obviate the requirement of complying with a jurisdictional condition. Where the Assessing Officer failed to issue a notice under Section 143(2) within the period of six months as spelt out in the proviso to clause (ii) of section 143(2), the assumption of jurisdiction under section 143(3) would be invalid.

3)The deeming fiction in section 292BB overcomes a procedural defect in regard to the non-service of a notice on the assessee, and obviates a challenge that the notice was either not served or that it was not served in time or that it was served in an improper manner.

4)Section 292BB could not come to the aid of the revenue in a situation where the issuance of a notice itself was not within the prescribed period, in which event the question of whether it was served correctly or otherwise, would be of no relevance whatsoever. Thus, failure to issue a notice under section 143(2) within prescribed period could not be cured by taking recourse to section 292BB. – CIT V. SALARPUR COLD STORAGE (P.) LTD [2014] 50 taxmann.com 105 (Allahabad)

Thursday, November 6, 2014

AO can’t disregard ITAT’s stay order to collect pending tax dues on basis of consent letter from assessee

If Tribunal grants stay of recovery of demand, the Assessing Officer cannot collect the pending amount from assessee even after obtaining a consent letter from him.


a)The AO made a reference to Transfer Pricing Officer for determining the arm's length price of the international transactions. Thereafter an order was passed by the AO raising additional demand.

b)The assessee made an application before the ITAT, Mumbai for stay of demand. The Tribunal granted stay. Despite a specific direction by the Tribunal, the AO collected the demand by obtaining a consent letter from the assessee during the subsistence of the said order.

c)Though the case was posted from time to time, the same was adjourned at the request of the learned D.R. or for want of time, and, hence, the assessee had filed a fresh stay application for extension of the stay.

The Tribunal held as under:

1)Neither the assessee nor the Revenue had the right to flout the decision of the Tribunal and the AO, being an officer functioning under the Government of India, it was his obligation to follow the directions of the superior authority and even if there was consent he should not have collected the amount.

2)We have recently come across other cases where similar consent letters were obtained or the Department had collected tax despite the stay order passed by the ITAT. We deplore this practice and direct the Chief CIT to issue a letter to all the concerned AOs not to adopt this kind of approach of obtaining consent letters and to respect the orders passed by the Tribunal.

3)Thus, stay was granted on collection of outstanding demand for a further period of six months and AO was directed to refund the amount collected contrary to the order passed by the ITAT alongwith interest. – JOHNSON & JOHNSON LTD. V. ACIT [2014] 51 taxmann.com 1 (Mumbai - Trib.)

Wednesday, November 5, 2014

Sec. 115A doesn't debar assessee from entering into a new agreement to have lower tax rate on royalty

Provisions of section 115A(1)(b)(AA) do not debar assessee to enter into a new agreement after change of situation resulting in reduced rate of royalty.


a)The assessee-company was incorporated in the United Kingdom. It had two associate companies in India, namely, ‘GKN S’ and ‘GKN D’.

b)The assessee had entered into agreements with GKN S and GKN D allowing them to use trademarks in respect of various products and services, in accordance with the terms and conditions mentioned in such agreements. Sum received by assessee from GKN D and GKN S was offered to tax as royalty at the rate of 10.56 per cent as per section 115A.

c)The revenue authorities opined that the subsequent agreements entered into in the year 2007 were nothing but extension of existing agreement between the contracting parties. Since it was extension of earlier agreement, the assessee would not get advantage of provisions of section 115A, wherein there was a provision for lower rate of taxability, i.e., 10 per cent. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)As per provisions of section 115A(1)(b)(AA), the rate of tax on license fee has to be taxed at the rate of 10 % on the strength of the agreement. It was undisputed that the assessee was having earlier agreement dated 12-7-2004 with GKN S and the same had been renewed from 1-1-2007.

2)The provisions of section 115A(1)(b)(AA) do not debar the assessee to enter into new agreements after change of situation in the provisions of said section as far as the reduced rate of royalty is concerned.

3)It was undisputed that the new agreements entered into in 2007 between the assessee and GKN S and with GKN D were independent agreements. The revenue authorities could not interfere into the business decisions of the assessee.

4)By no stretch of imagination, the new agreement entered into in 2007 could be said to be the extension of old agreements entered into between the parties. Even if the assessee had managed its affaires, as far as renewal of agreement was concerned, the revenue authorities could not interfere with the same, unless it was proved beyond doubt that it was nothing but a colourable devise.

5)Even if the assessee had entered into new licence agreement with GKN S and in the same year with GKN D to take advantage of lower rate of tax of 10 per cent, the same could not be denied to the assessee on the ground that the it was nothing but extension of old agreement which was otherwise not correct.

6)The new licence fee agreement entered into by the assessee with GKN S and with GKN D was nothing but a new and separate agreement. Accordingly, licence fee had to be taxed at 10%. - GKN HOLDINGS PLC V. DEPUTY DIT [2014] 50 TAXMANN.COM 307 (PUNE - TRIB.)

Tuesday, November 4, 2014

Takeover option wasn't available to petitioner as he failed to exercise it within 15 days of order of CLB

Where pursuant to CLB's order petitioner exercised takeover option of respondent-company, as a relief to bring an end to acts of oppression and mismanagement, beyond 15 days from date of relevant orders of CLB and High Court, such option was no more available


a)While disposing of oppression and mismanagement petition the Company Law Board directed petitioners to takeover the respondent-company and to communicate their decision to the respondents within 15 days from the date of the CLB’s order.

b)However, the petitioners did not exercise the option within 15 days, instead filed an appeal before the High Court. Consequently, the appeal was dismissed and a certified copy was delivered to the petitioner.

c)Thereafter, the petitioner within two days of the receipt of a copy of the High Court's order (but beyond 15 days of final order of High Court), sent a letter to the respondents exercising its option to take over the respondent-company.

d)The petitioner contended that there was no delay on his part in complying with the directions to exercise his option within 15 days as he had exercised the option with two days of receipt of copy from the High Court and was, therefore, entitled to enforcement of CLB’s order to takeover the respondent-company.

The Company Law Board held as under:

1)In view of the fact that Counsel of the petitioner was present before the CLB and before the High Court on the date of the order dismissing the appeal, the knowledge thereof on such dates to the petitioner could safely be inferred.

2)Since no appeal was preferred by the Petitioner against the order High Court, the date of receipt of certified copy of the said order would lose significance and, therefore, the petitioner should have exercised the option within 15 of final order of High Court.

3)Even though the petitioner was in knowledge of respective orders on same date, yet he failed to exercise option within 15 days from date of CLB order as well as final order of High Court, thus, takeover option would no more be available to petitioner. – DR. RAJ KACHROO V. D.S.M. HEALTHCARE (P.) LTD. [2014] 50 TAXMANN.COM 233 (CLB - NEW DELHI)

Monday, November 3, 2014

Expenses incurred on abandoned projects are allowable under sec. 37(1)

Where assessee had incurred a liability under a contract, which was terminated and, therefore, no amount under contract or in pursuance of a claim was receivable, assessee was entitled to claim said amount as business expenditure.


a)The Madhya Pradesh Electricity Board ('MPEB') awarded a contract to assessee-company for revival of a Thermal Power Station and paid certain amount as an advance.

b)The assessee gave a bank guarantee for such amount. The MPEB arbitrarily terminated the contract and invoked the bank guarantee. The assessee debited the amount, being the cost of abandoned project, in the profit and loss account.

c)The assessing authority was of the view that the assessee had been following mercantile method of accounting, thus, the expenditure on a particular project could not be allowed as an expenditure, unless there was a corresponding credit in the form of contract receipt or work-in-progress.

d)The CIT (A) as well as the Tribunal confirmed said disallowance. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1)If the assessee incurred a liability when the contract was terminated and when no amounts under the contract or in pursuance of a claim were receivable, assessee was entitled to claim the said amount as expenditure for implementing the contract as a set off under section 37(1), read with section 28.

2)Though the assessee had incurred expenditure during the year in which he had not received any amount, yet when he would receive the money in pursuance of the award, the said amount would be chargeable to tax whether the business would be in existence or not in that year. Therefore, the interest of the revenue was fully protected.

3)Thus, assessee was entitled to claim the cost of abandoned project as business expenditure under Section 37(1). - ASIA POWER PROJECTS (P.) LTD. V. DY. CIT [2014] 49 taxmann.com 428 (Karnataka)

Saturday, November 1, 2014

Cenvat credit couldn’t be denied merely because original manufacturer of inputs was non-traceable

Where assessee had complied with all procedures in availing of credit and had taken all steps in accordance with law, credit could not be denied merely because original manufacturer of inputs was not traceable.


a)The department invoked extended period of limitation to deny credit taken by assessee on ground that original manufacturer could not be traced. The Tribunal relied upon its earlier order dated 24-1-2011 and upheld denial.

b)The Assessee argued that order (dated 24-1-2011) of Tribunal was reversed in Prayagraj Dyeing & Printing Mills (P.) Ltd v. Union of India [2013] 30 TAXMANN.COM 139/38 STT 525 (GUJ.).

The High Court held in favour of assessee as under:

1)In case of Prayagraj Dyeing & Printing Mills's case (supra) it was held that if document (based on which credit was taken) was issued even by fraud, extended period of limitation could not be invoked against a holder in due course unless he was shown to be a party to a fraud.

2)Without elaborate reasons, present appeal was allowed on same lines, as was done in case of Prayagraj Dyeing (supra). Order of Tribunal was to be reversed accordingly. – KIRTIDA SILK MILLS V. C.C.E.C. [2014] 50 TAXMANN.COM 264 (GUJARAT)