Wednesday, December 31, 2014

Defect of framing assessment on non-existent entity couldn't be cured by resorting to sec. 292B


a) The assessee-company had been amalgamated with another company under Sections 391(2) and 394 of the Companies Act. Consequently, the assessment order was made on the assessee.

b) Aggrieved by the assessment order, the assessee appealed to the CIT(A). It argued that the assessment order was invalid, because on the date on which order was passed, it had already ceased to exist (having been amalgamated). The CIT(A) held in favour of assessee. 

c) The revenue, being aggrieved by the order of CIT(A) appealed to the ITAT, which upheld the order of CIT(A). Finally the aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) In case of Spice Entertainment Ltd. v. CIT [IT Appeal No. 475 of 2011] the Delhi High court held that:

“it [becomes] incumbent upon the Income Tax Authorities to substitute the successor in place of the said 'dead person'. Such a defect cannot be treated as procedural defect... once it is found that assessment is framed in the name of non-existing entity it does not remain a procedural irregularity of the nature which could be cured by invoking the provisions of Section 292B of the Act."

2) In Spice Entertainment Ltd. (supra), this Court expressly classified "the framing of assessment against a non-existing entity/person" as a jurisdictional defect. This had been a consistent position. In case of CIT v. Express Newspapers Ltd. [1960] 40 ITR 38 (Mad), the Madras High Court held that:

“there cannot be an assessment of non-existent person. The assessment in the instant case was made long after the Free Press Company was stuck off from the register of the companies, and it could not be valid."

3) It was clear that all contentions sought to be urged by the revenue were in respect of familiar grounds, which had been ruled upon, against it. Thus, assessment could not be made on amalgamating company even by resorting to Section 292B. – CIT v. Dimension Apparels (P.) Ltd [2014] 52 356 (Delhi).

Every suit for recovery of money from Sick Co. doesn't require prior permission of BIFR, rules HC


a) The petitioner-company filed an application under section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) but same was dismissed by impugned order holding that a simple suit for recovery of moneys was not barred by section 22 of SICA.

b) The Trial court in the impugned order also recorded that in spite of repeated directions to the petitioner/defendant, no document was filed to show that the debt of the respondent/plaintiff was included in the scheme of rehabilitation of the petitioner-company

On writ, the High Court of Delhi held as under:

Since every suit for recovery of money does not require permission under section 22 of SICA and despite repeated directions of Court petitioner-company failed to show that debt of the respondent was included in scheme of rehabilitation, application filed by petitioner under section 22 of SICA was to be dismissed. - Kusum Products Ltd. v. Hitkari Industries Ltd. [2014] 52 230 (Delhi)

Requirement of amending articles pursuant to Section 43A in case of hybrid Companies is only optional on part of shareholders

Requirement of amending Articles of Association pursuant to Companies (Amendment) Act, 2000 insofar as hybrid companies, i.e., deemed public companies are concerned, is only optional on part of shareholders


Whether requirement of amending Articles of Association pursuant to Amendment Act 53 of 2000, in case of hybrid companies are optional on part of shareholders?

The Supreme Court held as under:

1) A private company which becomes a public company by virtue of operation of any one of four sub-sections of section 43A of Companies Act, 1956 has choice either to retain or delete those stipulations as specified in its Articles of Association relating to matters specified under section 3(1)(iii)

2) After amendment to Companies Act by Act No. 53 of 2000 concept of hybrid (section 43A) companies is not altogether abolished, at least insofar as companies falling under section 43A(1C) are concerned which were in existence on 13-12-2000 would continue to be hybrid companies 

3) Effect of amendment to section 3(1)(iii) on private companies in existence on 13-12-2000 is that if they choose to make provisions in their Articles of Association to give effect to mandate of section 3(1)(iii)(d), they become private companies with effect from such date when they make such provision by virtue of section 43(2A) and if they do not make such an amendment, they would still continue to be public companies governed by section 43A(1C) (hybrid companies) and can continue to have provisions in their Articles of Association referable to section 3(1)(iii)(a), (b) & (c) 

4) Thus, requirement of amending Articles of Association pursuant to Amendment Act 53 of 2000, insofar as hybrid companies are concerned, is only optional on part of shareholders---Darius Rutton Kavasmaneck v. Gharda Chemicals Ltd. [2014] 52 349 (SC)

Wednesday, December 24, 2014

SC: Mobile charger is an accessory of mobile phone and not its integral part; leviable to VAT at 12.5%

Where assessee was selling mobile phone with battery charger in same packing, it did not charge any separate amount for battery charger from customers and was charging only for handset; battery charger was an accessory to cell phone and was not a part of it, thus, liable to VAT at general rate of 12.5 %.


a) The assessee ('Nokia India (P.) Ltd.'), was a registered dealer under the Punjab VAT Act. It had sold mobile phones alongwith battery chargers. It had paid tax at 4% (i.e., the rate at which tax on sale of mobile phone was paid) on the sale of value of charger.

b) It stated that the product was being sold as mobile phone under a solo pack and was covered under Entry No. 60 of Schedule 'B' of the Punjab VAT Act. No separate amount for battery charger was being claimed from the customers and only amount charged was for handsets. Whenever it sold chargers separately then VAT at 12.5% was charged, which was applicable to goods in residuary Schedule 'F' of the VAT Act.

c) The assessing authority held that the battery charger was an accessory to the mobile phone and was not a part of it. It was liable to be taxed at general rate, i.e., at 12.5% and not at concessional rate applicable to the mobile phones (i.e., at 4%).

The Supreme Court held in favour of revenue as under:

1) The authorities had rightly held that the battery charger was not a part of the mobile phone. If the charger was a part of mobile phone, then it could not have been operated without using the battery charger. But in reality, it was not required at the time of operation.

2) The battery in the mobile phone could be charged directly from the other means also like laptop without employing the battery charger, implying thereby, that it was nothing but an accessory to the mobile phone.

3) The Tribunal noticed that as per the information available on the website of the assessee, it had invariably put the mobile battery charger in the category of an accessory, which meant that in the common parlance also the mobile battery charger would have to be understood as an accessory.

4) Thus, the authorities had rightly held that the mobile phone charger was an accessory to mobile phone and was not a part of mobile phone. The battery charger could not be held to be a composite part of the cell phone but was an independent product which could be sold separately without selling the cell phone. The High Court failed to appreciate the aforesaid fact and wrongly held that the battery charger was a part of the cell phone.

5) Thus, battery charger was liable to be taxed at general rate, i.e., at 12.5% and not at concessional rate applicable to the mobile phones (i.e., at 4%). - State of Punjab v. Nokia India (P.) Ltd. (2014) 52 410 (SC)

Tuesday, December 23, 2014

Perpetual transfer of satellite rights of a film for 99 years is a sale; excluded from definition of ‘royalty’

Transfer of satellite right to assessee under an agreement for a period of 99 years is a sale and, therefore, excluded from definition of 'royalty' under clause (5) of Explanation 2 to section 9(1)(vi).


a) The assessee was dealings in film satellite rights by taking them on assignment basis and reassigning to channels.

b) He did not deduct tax at source on purchase of copyright of film as he was of the view that such purchase was neither covered under section 194J nor under section 194C. However, the Assessing Officer held that the payments debited as purchase warranted TDS under section 194J and worked out disallowance under section 40(a)(ia).

c) The CIT(A) allowed the appeal of assessee by holding that the consideration paid did not attract section 194J.

d) On appeal, the Tribunal held that the payments made would fall within the definition of 'royalty' and as the assessee had failed to deduct tax under Section 194J rigour of section 40(a)(i) stood attracted. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1) Perusal of the facts and circumstances of the instant case and case of Mrs. K. Bhagyalakshmi v Dy.CIT [2013] 40 350 (Madras) would show that the substantial question of law raised were the one and same in both the cases.

2) The earlier division bench of this court in case of Mrs. K. Bhagyalakshmi (supra) after considering the perpetual transfer of rights for a period of 99 years [in terms of Section 26 of Copy Right Act and also the definition under clause (5) to Explanation 2 to section 9(1)] held that it was a sale and, therefore, excludible from definition of royalty.

3) Following the decision rendered in the case of Mrs. K. Bagyalakshmi (supra) it was to be held that transfer of satellite right to assessee under an agreement for a period of 99 years would be a sale and excludible from definition of 'royalty'. Therefore, the Tribunal had erred in concluding that the payment made by the assessee was royalty and not sale. - S.P.Alaguvel v. DY. CIT [2014] 52 231 (Madras)

HC nods to capital reduction scheme approved by majority of shareholders as it wasn't prejudicial to creditor’s rights

Where reduction of share capital was approved by majority of shareholders and did not involve any cash outflow to prejudice rights of creditors, same was to be confirmed


a) The petitioner filed petition under section 101(1) of the Companies Act, 1956 for confirming the reduction of share capital account.

b) It was submitted that after the proposed reduction of the equity share capital by adjusting with debit balance and profit and loss account, financial statements of the company would exhibit realistic picture of the company's financial position.

c) The company also had no secured or unsecured creditors and, hence, there was no question of interest of the company's creditors to be adversely affected.

d) Further, the shareholders had unanimously passed the special resolution approving of the reduction of capital in extraordinary general body meeting. The petitioner also sought liberty of the Court for dispensing with the words 'and reduced' as contemplated in section 102(3) of the Companies Act, 1956.

The High Court of Madras held as under:

1) Since reduction of share capital was purely a commercial decision which was approved by majority of shareholders and reduction did not involve any cash out flow to prejudice rights of creditors with procedure laid down under section 100 of the Companies Act, 1956 having been fully complied with, reduction of share capital as resolved by company in its special resolution was to be confirmed and also the prayer for dispensing with the words 'and reduced' as contemplated in section 102(3) of the Companies Act, 1956 was to be allowed..-----Comtec Components Ltd., In re [2014] 52 173 (Madras)

Friday, December 19, 2014

Bombay High Court: Service tax on services of advocate/arbitral tribunal is constitutional

Levy of service tax on services provided by advocates and arbitral tribunal is constitutionally valid and not violative of Article 19(1)(g); further, exemption to services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs is based on intelligible differentia and not violative of Article 14.


The petitioner, a practicing advocate, filed writ petition for declaration that section 65(105) (zzzzm) of the Finance Act, 1994 as inserted by the Finance Act, 2011 providing for service tax on services by advocates is null and void and ultra vires the Constitution of India.

The High Court held in favour of revenue as under:

1) There is no basis or foundation in the complaint by petitioner inasmuch as imposition of such levy does not burden the litigant or the consumer of justice. There is no substance in the complaint that the profession of advocates and legal profession itself has been treated on par with commercial or trading activities or dealings in goods and other services. Merely because of the role of the advocate, it does not mean that his position as an officer of the Court and part and parcel of administration of justice is in any way undermined, leave alone interfered with.

2) The Advocates and legal practitioners are known to pay professional taxes and taxes on their income. They are also brought within the purview of service tax because their activities in legal field are expanding in the age of globalization, liberalization and privatization. They are not only catering to individuals but business entities too. If it is found that the advocates are catering to affluent and rich class of litigants and recipients of legal services, then, the tax on the services rendered to them is definitely within the permissive sphere of legislation. That cannot be faulted.

3) Hence, activities carried out by advocates for consideration by way of fees, etc., amounts to 'service' and can be charged to service tax. Similarly, arbitration is also carried out for hefty fees and levy of service tax on services by arbitral tribunal is not invalid.

4) Levy of service tax is not violative of Article 19(1)(g) of Constitution, as it is a reasonable restriction and similar to income-tax and professional tax being paid by advocates. Since services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs stands exempted, it does not deny justice to poor and needy. Further, such exemption to individuals and small businessmen does not transgress doctrine of equality under Article 14 of Constitution of India, as such exemption is based on intelligible differentia/classification.

5) Moreover, since service tax on non-exempt services provided by advocates/arbitral tribunal is payable by service recipients under reverse charge on and from 1-7-2012, such advocates/arbitral tribunal can no longer complain of levy of service tax. Even for period prior thereto when there was no reverse charge, levy of service tax could not be regarded as invalid and arguments that 'reverse charge be treated as retrospective' was to be set aside. - P.C. Joshi v. Union of India [2014] 52 311 (Bombay)

Wednesday, December 17, 2014

“Stake money” or “prize money” paid by race clubs to horse owners won’t attract TDS under Sec. 194B

The issue that arose before the High Court was:

Whether the assessee was liable to deduct tax at source under Section 194B on making payment of ‘stake money’ to the owners of the horses?

The High Court held as under:

1) A cursory look of the Finance Act, 2001 introduced with effect from 01.04.2002 and particularly section 194B would indicate that it was introduced to tax deduction at source on winning from ‘card games and other games of any sort’. Explanation to Section 224)(ix) was simultaneously introduced along with the words inserted in section 194B where under the card games and other games of any sort was introduced with the ambit of tax deduction along with lotteries and cross-word puzzles.

2) Game show involving prize money being telecast through electronic media and said prize money had not found its place in the definition of clause “income” under the income-tax Act (I-T Act’). The Legislature had introduced Explanation (i) and (ii) to Section 2(24)(ix) so as include such prize money also under definition of “income”, since in those events people would compete with each other to win prizes. This position would become clear from budget speech of the Finance Minister herein below: “Winnings from lotteries, crossword puzzles etc., are currently taxed at 40%. As the marginal personal income-tax rates have now stabilized at 30%. Television game shows are very popular these days. I wish the winners well. At the same time, I propose that income-tax at the rate of 30% will be deducted at source from the winnings of these and all similar game shows”

3) Thus, amendment brought by the Finance Act, 2001 to Section 2(24) and section 194B would have no bearing on the income earned from ‘owning and maintaining horses’. The term ‘any other similar game’ found in Explanation (ii) to Section 2(24)(ix) is inclusive definition and has to be read ejusdem generis and as such, activity of owning and maintaining horses cannot by any stretch of imagination fall in the definition of ‘card game or other game of any sort’ found in section 194B.

4) Therefore, the “stake money” or “prize money” paid by race clubs to horse owners would not attract the provisions of Section 194B of the IT Act. - Bangalore Turf Club Ltd. v. Union of India [2014] 52 290 (Karnataka)

Tuesday, December 16, 2014

Sec. 80-IB relief available even if buyer can convert flats into duplexes in excess of built-up limit after acquisition

Where supplying design to merge flats into a duplex in excess of limit of built-up area constituted only a marketing strategy to boost sale of flats and assessee constructed flats in accordance with plan approved by authorities it was entitled to deduction under section 80-IB.


a) The assessee had formed an AOP for developing a property with two wings and each wing was to have 96 flats. All the flats were approved to be with the built up area of less than 1000 sq. ft. as prescribed in clause (c) of Explanation to section 80-IB(10).

b) There was a survey action under section 133A and the officers noted that flats were constructed in such a way that the said flats could be conveniently combined with the lower 1-BHK flats vertically in order to generate spacious duplex flats.

c) The built up area of each of the said duplex flat exceeded the stipulated area. Accordingly, the revenue officers opined that the assessee intended to sell 1 BHK flats as duplex flats. Thus, the AO held that the assessee was not eligible for Section 80-IB relief as it had violated the condition relating to the maximum stipulated area of the flat. Further, the CIT(A) upheld the opinion of AO.

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

1) Impounding of the brochure with details of method of merger of 1-BHK flats into a duplex, could not be used against the assessee as it only provided the design of merger. The fact was that the assessee got the approval for constructing impugned flats from the authorities and completed the construction as per the approved plans. In the instant case, from the approval stage till the stage of issuance of the completion certificate, there was no violation by the developer.

2) There was no evidence to suggest that it was the developer who had planned and generated duplex flats out of the 1-BHK flats and, then sold as such to the buyers.

3) The AO undertook the exercise of verification under section 133(6) and all the flat buyers responded to the said queries. Not even a single flat owner stated that the developer (‘assessee’) constructed those duplex flats.

4) The discrepancy of mere providing a hole for intended staircase for flat buyers and supplying of the design to merge flats into a duplex flat constituted a marketing strategy to boost the sale of the 1-BHK.

5) Thus, such a marketing strategy would not come in the way of granting deduction under Section 80-IB. Therefore, the assessee was entitled to deduction in respect of the profits attributable to all the 1-BHK flats of the projects. – Poddar & Ashish Developers v. ITO [2014] 51 505 (Mumbai - Trib.)

Monday, December 15, 2014

No clubbing of interest-free loan given by 'Shahrukh Khan' to his wife from whom she had purchased assets

'Shahrukh Khan' gave interest-free loan to his wife, Gauri Khan, who in turn, purchased a residential house and jewellery from said loan amount. The department clubbed the value of loan amount in the net wealth of 'Shahrukh Khan'. Extending cash loan, to wife does not come within the definition of asset as provided under Section 2(ea) of the wealth tax Act, thus, it could not be said that there was a transfer of asset; the impugned loan amount was not includible in net wealth of assessee.


a)Shahrukh Khan (assessee) gave interest free loan to his wife, Gauri Khan, who, in turn, purchased residential house and jewellery in her name from such loan amount.

b)The Assessing Officer ('AO') opined that the loan given by the assessee to his wife would be treated as indirect "transfer of asset" within the meaning of section 4(1)(a)(i) of the Wealth Tax Act. Accordingly, he clubbed the value of loan amount in the net wealth of the assessee.

c)On appeal, the CIT(A) affirmed the view of the AO against which the assessee had filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)Section 4(1)(a)(i) of the Wealth-tax Act, 1957 provides as under: In computing the net wealth of an individual, there shall be included, the value of any asset which are held by spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart.

2)Extending cash loan, to wife does not come within the definition of asset as provided under Section 2(ea) of the wealth tax Act, thus, it could not be said that there was a transfer of asset as alleged by the department.

3)The instant case was not of tax avoidance as in the instant case assessee gave the loan to his wife and the same was duly declared. There is distinction between the term "transfer" and "loan". In act of transfer, some legal interest is created in the transferee over the subject matter of transfer, whereas in case of lending, except a possessory interest, which may be momentary also, no other interest is created.

4)In the instant case, the wife of assessee was having independent source of income, filing her return and even subsequently repaid part of the loan. Therefore, there was no "transfer of asset" or "colourable device", as assessee was not the owner of "any asset" which was transferred to the wife, rather a new property was purchased from a third party out of the interest free cash loan taken by the wife from her husband.

5)The CIT(A) had opined that it amounts to indirect transfer of asset within meaning of Section 4(1)(a)(i) of the Wealth Tax Act. This angle of CIT(A) was on weak footing as in the instant case there was no transfer of asset rather interest-free loan was given by the assessee to his wife.

6)Thus, the impugned loan amount was not includible in wealth of assessee. Accordingly the order of CIT(A) was to be reversed- Shah Rukh Khan v. Assistant Commissioner of Wealth Tax (2014) 52 252 (Mumbai - Trib.)

Saturday, December 13, 2014

Call centre services to recipients located abroad were export of services even when Indian TelCos were involved

When call centre services were provided electronically to recipient located outside India, data had to be delivered to telecom authorities for transmission abroad and merely because of involvement of telecom authorities in India, it could not be said services were not exported.

The issues that arose for the consideration of the CESTAT was:

a) Whether call centre services provided by assessee to recipients located outside India would be deemed as 'exports' if they were not directly exported from premises of assessee but were routed through telecom service provider?

b) Whether the use of leased telecom lines for exporting call centre services electronically was 'input service' and, thus, was eligible for credit?

The CESTAT held in favour of assessee as under:

1) When data was transmitted through electronic medium, it had to be first transmitted to a server of telecom authorities in India and, thereafter, up-linked/transmitted to foreign service recipient. In the instant case, foreign service recipient had received output service and had made payment in convertible foreign exchange to assessee. Hence, said activity was export of service.

2) Exports were undertaken electronically and to undertake export, assessee needed dedicated lines from their office premises to telecom authorities. Without these dedicated lines, assessee could not deliver output service and therefore, leasing of telecom lines by telecom authorities was an eligible input service. - WNS GLOBAL SERVICES (P.) LTD. V. COMMISSIONER OF CENTRAL EXCISE (2014) 52 131 (Mumbai - CESTAT)

Friday, December 12, 2014

Entity set-up for providing housing and other infra facilities is charitable in nature; entitled to registration


a) The assessee ('Jaipur Development Authority') was wholly owned and controlled by Government of Rajasthan.

b) It was formed for planning, coordinating and supervising proper, orderly and rapid development of the areas in Jaipur region and of executing plans, projects and schemes for such development, so that housing, community facilities, civil amenities and other infrastructural facilities were created in such region.

c) The registration was granted to the assessee under section 12AA. During the relevant year, the CIT withdrew the registration by observing that the objects of the assessee were not charitable but came under the purview of last limb of section 2(15) of the Act, i.e., 'Advancement of any other object of general public utility'.

The Tribunal held in favour of assessee as under:

1) The Jaipur Development Authority was a tool of State Government for coordinated and planned development in Jaipur region. In practical, the main work of Jaipur Development Authority was construction of roads, sewerage, parks, play grounds, provide plots for educational, health and cultural institution for over all development of the community.

2) By making planned development it provides smooth transportation so that air pollution can be minimized and save time of the public. If it would be left in the hands of private operator, these facilities would not be provided on similar price as provided by the Jaipur Development Authority. The intention of the institution was not to earn profit but recover the cost of the establishment as well as other expenditure to implement its objects.

3) The CIT can cancel the registration in two situations, viz, if the activities of the institution are not genuine and if the activities assessee not carried out in accordance with the objects of the institution.

4) In the instant case, as the assessee was a government authority, its object was to prove civil amenities and infrastructure and no trade or business, therefore, withdrawal of registration by the CIT was not justified. - Jaipur Development Authority v. CIT (2014) 52 25 (Jaipur - Trib.)

Thursday, December 11, 2014

"Umbrella" of combined entity level TNMM can't be used to benchmark separate transactions on combined basis

The Tribunal held as under:

1) Transfer pricing legislation contemplates determination of arm's length price ('ALP') of an international transaction, which means for each transaction separately. The term 'transaction' has been defined in Rule 10A(d) to mean 'a number of closely linked transactions.'

2) ALP is required to be determined in respect of each international transaction separately. If, however, there are a number of closely linked transactions, then such closely linked transactions can be considered as a single transaction for the purposes of benchmarking. To put it conversely, the transactions which are not closely linked, should be processed under the transfer pricing regime independently and not on a consolidated basis.

3) In the instant case, the clubbing of royalty payment with other international transactions for processing them in a combined TNMM approach, would defeat the mandate of the transfer pricing legislation.

4) When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be usurped by the income from the other international transaction giving higher income on transacted value. That was why the legislature provided for determining the ALP of each international transaction separately.

5) As the international transaction of royalty payment was separate transaction and not closely linked with the other transactions (i.e., import of raw materials, service spares and export of finished goods, etc.) with which the assessee had merged it, such merger could not be allowed for the purposes of the determination of its ALP on entity level under TNMM. - LG ELECTRONICS INDIA (P.) LTD. V. ACIT (2014) 52 240 (Delhi - Trib.)

Wednesday, December 10, 2014

ITAT invokes MFN clause to import make available clause from India-Portugese DTAA into the India-Sweden DTAA

Swedish-company could claim Fee for Technical Services ('FTS') received from its Indian subsidiaries as tax-exempt if 'make available' condition was not satisfied, as India-Sweden DTAA contained Most Favoured Nation clause ('MFN' clause) as per which make available clause in India-Portugese could be imported into the India-Sweden DTAA.

The issue that arose for consideration of the ITAT was:

Whether the assessee, a Swedish-company could be given benefit of India-Portuguese DTAA on principle of MFN clause?

The ITAT held in favour of assessee as under:

1) An MFN clause can direct more favourable treatment available in other treaties only in regard to the same subject matter, same category of matter or same clause of the matter.

2) The MFN clause in the protocol attached to the treaty takes care of a situation wherein either of the contracting states enter into a DTAA with another sovereign state and where the same subject matter has been given more favourable treatment by way of a definition or mode of tax.

3) The parties can claim the benefit on the recognized principle of MFN clause. On the basis of protocol to India-Sweden DTAA, a Swedish-company could claim the benefit of 'make available' condition in India-Portugal treaty to claim tax-free status for FTS received from its Indian Subsidiaries.- Sandvik AB v. Dy. DIT (International Taxation) (2014) 52 211 (Pune - Trib.)

Tuesday, December 9, 2014

Commission paid to affiliate on import of furnace oil was illegal as it was purchased in breach of law

Where purchases of furnace oil from sister concern, its storage and consequent sale were in complete breach of Solvent, Raffinate & Slop [Acquisition, Safe, Storage & Prevention of Use in Automobiles] Order, 2000, payment made by assessee to sister concern could not be allowed under section 37(1).


1) The assessee entered into a contract with a foreign company for purchase of furnace oil. It failed to get licence for storage and sale of solvents, as required by the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000 (‘SRS order’).

2) After realizing that any import in absence of valid license would attract criminal/penal proceedings, it approached its sister concern who had said licence. It transferred the contract of import in the name of its sister concern and made payment for said purpose by claiming it as commission.

3) The AO disallowed the commission.

4) On appeal CIT(A) allowed said payment which was subsequently reversed by the Tribunal. Further the High Court upheld the order of Tribunal. The assessee filed the Special leave petition before Supreme court against impugned order of High Court.

The Supreme Court dismissed the Special Leave Petition against the order of High Court, wherein the High Court held as under:

1) When the SRS order prohibits importation of goods, its acquisition, storage and sale, without a valid licence, assessee could not import such furnace oil without issuance of requisite licence.

2) Even assuming that the sister concern had a licence for importing the furnace oil, the assessee diverted its contractual obligation for averting the payment of damages, yet nothing was brought on the record to explain as to how the sum termed as 'commission' for performing the contractual obligation was needed to be paid to the sister concern.

3) It also emerged from record that not only the assessee got contract executed through its sister concern even by a valid licence held by the sister concern, the subsequent purchases from the sister concern of the very furnace oil, its storage and consequent sale appeared to be in complete breach of the SRS Order.

4) Even the nomenclature used as 'Commission' was not taken into consideration and if the character of payment in substance was to be looked at, nowhere it emerged that there was any valid claim for allowing the impugned sum (paid as commission) which was a consideration for transfer of contractual obligation.

5) Even if there was no loss to the revenue because the revenue had recovered tax on the said amount from the sister concern, then also, when from the record itself, it showed that the transaction was in contravention of SRS order and entire modus was also apparent from the paper book produced by the assessee, disallowance by the Tribunal invoking its statutory power required to be sustained. - Overseas Trading & Shipping Co. (P.) Ltd. v. ACIT [2014] 51 374 (SC)

Monday, December 8, 2014

No penalty for inadvertently filling 'no' response in column seeking info about tax audit

Where assessee-company at time of filing its e-return had inadvertently filled column regarding details of audit under section 44AB wrongly as 'No', penalty could not be levied under section 271B.


a) The assessee-company e-filed its return of income. In the said return of income, the assessee was required to answer whether it was liable for audit under section 44AB and if yes, it was required to furnish certain information regarding same.

b) The Assessing Officer noticed that the assessee had answered the said question as 'No' and, consequently, it did not furnish the details relating to auditor. Hence, he took the view that the assessee did not get its accounts audited under section 44AB and, accordingly, he initiated penalty proceedings under section 271B.
c) On appeal, the CIT(A) also confirmed said penalty. The aggrieved assessee filed the instant appeal.

The ITAT held in favour of assessee as under :

1) The assessee had filed the return of income under e-filing procedure. 'Part A-01' of the return of income requires the assessees who would be liable for audit under section 44AB to furnish certain information. The same is optional for the assessees who are not liable for audit under section 44AB.

2) The information to be given in 'Part A-01' contains the details to be furnished in Form No. 3CD. It was seen from the copy of e-return filed by the assessee that the assessee had duly furnished all the details under 'Part A-01' of the return of income, meaning thereby, there appeared to be some truth in the submission of the assessee that it had obtained the tax audit report before the due date for filing return of income.

3) Hence, it was viewed that the assessee could have obtained the audit report under section 44AB before filing the return of income and it had inadvertently filled the relevant column wrongly as 'No'. Since the assessee could have obtained the tax audit report before the due date for filing return of income, there was no justification for levying penalty under section 271B. Accordingly, the order of CIT(A) was to be set aside and he was to be directed to delete the penalty levied in the hands of the assessee under section 271B. - Sujata Trading (P.) Ltd. v. Income-tax Officer, [2014] 50 397 (Mumbai - Trib.)

Friday, December 5, 2014

Sale on principal-to-principal basis to be included in 'turnover' for purpose of tax audit under sec. 44AB

Sale of gas cylinders to consumers was to be included in turnover for purpose of Section 44AB when assessee was appointed as a distributor on principal-to-principal basis for sale of such cylinders.


a) The assessee was a distributor of Indian Oil Cooking Gas and was also engaged in sale of gas stoves and spare parts.

b) The assessee did not include the turnover from sale of cylinders for computing the threshold limit prescribed under section 44AB. By including such sales, the turnover of assessee would exceed the threshold limit prescribed under section 44AB.

c) Thus, the Assessing Officer (AO) issued a show-cause notice to assessee on the ground that it did not get its accounts audited under section 44AB.

d) The assessee contended that it had sold gas cylinders on commission basis as the ownership of same remained with the Indian Oil Corporation. Therefore, sale of gas cylinders could not be included in its turnover to compute the threshold limit prescribed under section 44AB. The Assessing Officer did not agree with assessee's reply and imposed a penalty on it under section 271B.
e) The appellate authorities affirmed the order of AO. Aggrieved assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

1) The agreement clearly indicated that the assessee was appointed as a distributor on principal-to-principal basis for sale of gas cylinders to consumers and it was not selling gas cylinders on commission basis.

2) Consequently, the sale of gas cylinders was liable to be included in the turnover of the assessee. Since the turnover exceeded the threshold limit prescribed under Section 44AB, the books of account were liable to be audited.
3) Since the books of account were not audited, penalty proceedings were rightly initiated. The explanation given by the assessee for non-compliance with the provision of section 44AB was neither sound nor justifiable. - Attara Gas Service v. CIT (2014) 50 445 (Allahabad)

Thursday, December 4, 2014

Though income of Chamber of Commerce held as business receipt, yet Sec. 11 relief available as profit motive absent

The Tribunal held in favour of assessee as under:

1) The concept behind Section 28(iii) is to overcome the mutuality principle being relied upon in support of a claim for exemption, when the assessee was actually deriving income or making profits as a result of rendering specific services to its members in a commercial way.

2) The reason for the introduction of Section 28(iii) of Act was to ignore the principle of mutuality and reach the surplus arising to the mutual association. It was clear from the fact that these provisions were confirmed to services performed by the association "for its members". Such income would either be charged as business income or under the residual head, depending upon whether the activities of the association with the non-members amounted to a business or otherwise.

3) Section 28(iii) constitutes certain income of the association to be business income without affecting the scope of the exemption under Section 11.

4) Section 2(15) incorporates the definition of "charitable purposes" and shows that several mutual associations may also fall within the definition.

5) The receipts derived by a chamber of commerce and industry for performing specific services to its members, though treated as business income under Section 28(iii), would still be entitled to the exemption under Section 11 read with Section 2(15) of the Act, provided there is no profit motive.

6) Thus, assessee being a charitable Institution carrying on the object of promotion and development of trade and commerce and not involved in the carrying on of any activity in the nature of "business", the said section 28(iii) of the Act would not apply.

7) Hon'ble Apex Court in the earliest case of Andhra Chamber of Commerce had clearly laid out the principle that if the primary purpose of an Institution was advancement of objects of general public utility, it would remain charitable in nature even if an incidental or ancillary activity or purpose, for achieving the main purpose, was profitable in nature. The basic principle underlying the definition of "charitable purpose" remained unaltered even on amendment in the section 2(15) of the Act w.e.f. 01/04/2009, though the restrictive first proviso was inserted therein- Indian Chamber of Commerce v. ITO (Exemption) (2014) 52 52 (Kolkata - Trib.)

Monday, December 1, 2014

I-T returns and info provided to tax authorities are exempt from disclosure under RTI Act


Whether the Income-tax returns and other information provided to Income Tax Authorities by a taxpayer are personal and confidential in nature and, therefore, cannot be placed in public domain through RTI Act?

The High Court held as under-

1) Income-tax returns and other information provided to Income Tax Authorities by individuals and unincorporated assessees are confidential in nature and cannot be placed in public domain, as it would be exempt under section 8(1)(j) of Right to Information Act, 2005 (RTI Act).

2) In cases of widely held companies, most information relating to their income and expenditure would be in public domain and, therefore, it is only confidential information that would be exempt from disclosure under section 8(1)(d) of RTI Act.

3) Information furnished by an assessee in income-tax return can be disclosed only where it is necessary thing to do so in public interest and where such interest outweighs in importance any possible harm or injury to assessee or any other third party. However, information furnished by corporate assessees that neither relates to another party nor is exempt under section 8(1)(d) RTI Act can be disclosed- Naresh Trehan v. Rakesh Kumar Gupta [2014] 51 548 (Delhi)

Lumpsum amount paid for transfer of know-how wasn’t royalty if payment wasn’t made for any particular period

Assessee had entered into an agreement with UK based company for supply and installation of machinery, which involved transfer of technical know-how. It had paid lumpsum amount in connection with transfer of technical know-how. Such payment could not be treated as royalty as it was not made for any particular period.


a) Assessee entered into an agreement with UK based Co. to supply and install certain machinery, which involved transfer of technical know-how.

b) The AO treated the payment inconnection with transfer of technical know-how as royalty. The assessee pleaded that the such payment couldn’t be treated as royalty on following grounds:

i) It was paid in lumpsum and not year after year for the use of patent or any facility;

ii) The transfer of technical know-how or patent was for the limited purpose of installation and fixing the machinery.

c) On appeal, the CIT(A) dismissed the appeal of assessee. Further, the Tribunal set aside the order of AO by holding that amount paid to UK Co. couldn’t be treated as royalty.Aggrieved by the order of tribunal, the revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) Though the royalty is required to be paid periodically during the subsistence of the arrangement, it is quite possible for the parties to agree for payment of a lumpsum amount. However, a lumpsum payment would be deemed as royalty, only when it is for a fixed period for which the facility can be utilised.

2) A lumpsum payment without mentioning the period is prone to take away such amount from the definition of royalty.

3) Royalty, by its very nature, is a sum payable to the owner of a design, invention or trademark by another for using it. It is clearly opposed to an outright transfer.

4) In the instant case, the amount paid in lumpsum was not for any particular period. It was paid for transfer of technical know-how for limited purpose of installation and fixing of machinery. Thus, such lumpsum payment could not be treated as royalty- CIT v. The Andhra Petrochemicals Ltd. [2014] 51 451(AP)