Monday, August 24, 2015

PLI of BPO can't be compared with PLI of KPO for transfer pricing analysis


a) Assessee was providing voice base customer care services, i.e., BPO to its Associated Enterprises (‘AE’).

b) The Assessing Officer (‘AO’) made certain additions to transactions with AE on basis of comparables chosen by TPO.

c)  Assessee argued that two companies chosen by TPO were not comparable as such companies were basically providing knowledge process outsourcing (KPO) services.


1) As per Rule 10B(2)(a) of income-tax Rules, 1962 the comparability of the transactions should be judged with reference to service/product characteristics.

2)  The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services could not be a ground to benchmark transactions of BPO service provider with the transactions of KPO services providers.

3)  A KPO includes involvement of advance skills normally; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc. On the other hand, Voice Call Centers are normally involved in customer support and processing of routine data.

4) Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that could not be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable Arm’s length Price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified.

5) Thus, where the tested party was not a KPO service provider, an entity rendering KPO services could not be considered as a comparable for the purposes of Transfer Pricing analysis. – RAMPGREEN SOLUTIONS (P.) LTD. V. CIT - [2015] 60 355 (Delhi)

Saturday, August 22, 2015

How payment banks will be a game changer for you?

On August 19, 2015 the RBI had granted ‘in principle’ approval to 11 entities for establishment of payment banks, which include established ones like Reliance Industries, Aditya Birla, Tech Mahindra, Airtel and Vodafone. The 'in-principle' approval shall be valid for a period of 18 months during which the applicants shall have to comply with the stipulated guidelines and fulfil other conditions as may be laid down by the RBI.
A payment bank is a type of non-full service niche bank in India. It can only receive deposits and provide remittances. It cannot carry out lending activities.
Payment banks are created to help a country to reach its financial inclusion targets. It is expected of payment banks to target migrant labourers, low-income households and small businesses by offering small savings accounts and remittance services with a low transaction cost.
What services payment banks can render?
§  Accept demand deposits of upto Rs. 100,000 per individual customer.
§  Issue ATM/debit cards usable on ATM networks of all banks.
§  Make payments and provide remittance services through various channels.
§  Act as a Corporate Business Correspondents of another bank (BCs), subject to the RBI’s guidelines on BCs.
§  Distribution of mutual fund units and insurance products, etc
What activities payment banks cannot undertake
§  The payments bank cannot undertake lending activities; they cannot offer loans and cannot raise a deposit exceeding Rs. 1 lakh
§  Payments banks cannot issue credit cards.
How payment banks will benefit people?
RBI has granted in-principle approval to entities which have experience in different sectors and which possess different capabilities so that different models could be tried. All selected entities would have wide reach and adequate technological and financial strength to service customers across the country. Their likely impact on Indian banking system is listed out hereunder:

Cash less banking: The 11 approved entities include phone companies which have large distribution networks throughout India, including in rural remote locations. The phone companies will essentially rely on technology to provide banking services to all customers, using mobiles as the vehicle of banking which will help them to reach people living in remote areas. They will be able to easily convert cash into virtual money and vice versa.  

They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a simple phone. They can transfer money directly to bank accounts at nearly no cost acting as a part of the gateway that will connect with banks.

Cheaper banking services: Cheaper baking services will be available for people as banking costs will come down due to intense competition in banking sector after introduction of 11 new entities as payment banks. At present private banks like HDFC Bank, ICICI Bank and Axis Bank make huge profits from their low-cost current and savings bank accounts. Now a big chunk of their banking services will move to payment banks, who will offer higher savings bank rates of 5 to 7 %[1].
Facilitation of Government’s subsidy schemes: Government subsidies like subsidy on LPG, kerosene or food and fertiliser will be routed through payment banks which would have a greater reach.

Friday, August 21, 2015

Capital gain exempted under sec. 47 isn't liable to MAT as it doesn't fall in definition of income

Whether capital gains exempted under section 47(iv) of income-tax Act (‘the Act’) would be includible in the books profit under section 115JB for computing MAT?

The Mumbai ITAT held in favour of assessee as under:

1)  The provisions of section 10 lists out various types of income, which do not form part of total income. All those items of receipts shall otherwise fall under the definition of the term "income" as defined in section 2(24) of the Act, but they are not included in total income in view of the provisions of section 10 of the Act. Since they are considered as "incomes not included in total income", the legislature, in its wisdom, has decided not to subject them to MAT.

2)   Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10 applies (other than the provisions contained in clause (38) thereof) than it is to be reduced from the Net profit, if they are credited to the Profit and Loss account.

3)  The logic of these provisions is that an item of receipt which falls under the definition of "income" but exempted under section 10 are to be excluded for the purpose of computing "Book Profit".

4)  Thus, it is seen that the legislature seeks to maintain parity between the computation of "total income" and "book profit", in respect of exempted category of income.

5)   If the said logic is extended further, an item of receipt which does not fall under the definition of "income" at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in "book profit" under Section 115JB of the Act.

6)   The profits and gains arising under Section 47(iv) is not falling under the definition of "transfer" and consequently, the same does not fall within the purview of the definition of "income" given under Section 2(24)(vi) of the Act.

7)   Therefore in the instant case the capital gains does not fall within the purview of the definition of "income", so the question of including the same in the Book Profit under section 115JB of the Act does not arise. - SHIVALIK VENTURE (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX, 8(3), MUMBAI - [2015] 60 314 (Mumbai - Trib.)

Wednesday, August 19, 2015

Govt. tweaks Rules relating to reduction of tax credit under Delhi VAT

Sale of goods below purchase price requires reduction of proportionate tax credit under Delhi VAT. Now the Government has made changes in Delhi VAT Rules, 2005 in respect of proportionate reduction of tax credit. It has also made certain other changes in Delhi VAT Rules, 2005. Key changes are highlighted as under:

1)  Reduction in tax credit due to price variation: Under the extant provisions of Section 10(5) of Delhi VAT Act (‘the Act’) sale of goods below its purchase price requires reduction of proportionate tax credit. Now, such proportionate reduction in tax credit is not required where discount or incentive has been received through a credit note issued by the selling dealer after issuance of tax invoice.

2)   Reduction of tax credit on account of stock transfer: Tax credit is required to be reduced on goods which are sent outside State by way of Inter-State stock transfer. Earlier different rates were prescribed for reduction of tax credit. Now Government has prescribed one formula to determine reduction of tax credit on all goods (except that of Second Schedule). Now tax credit shall be reduced by [(2/R)*100] percent, where R is the rate of tax applicable as per Section 4 the Act. For goods falling under Second Schedule, tax credit shall be reduced by 100 percent.

3)  Cancellation of registration: Now dealer is not required to surrender original certificate of registration while applying for cancellation of his registration. He is not even required to deliver such certificate to the Commissioner after cancellation of his registration.

4)  Variation in tax amount via Credit/Debit notes: Dealer is required to show amount of variation in tax amount on credit and debit notes. Now it has to be shown wherever an adjustment to tax credit is required to be made as per the provisions of sub-sections (1) and (2) of section 8.

Tuesday, August 18, 2015

SEBI notifies norms for listing of start ups on Institution Trading platforms

SEBI had taken some key decisions in its board meeting held in June 2015, wherein one of the key decision was introduction of new platform for raising of capital by startups. Now SEBI has notified rules for listing of startups on Institution Trading platforms (‘ITP’) making it easier for such companies to raise capital. Such a bold move could change the landscape of the country’s equity capital markets. Consequently, SEBI has also made certain other changes due to introduction of Institutional Trading Platform.
The Key changes are given hereunder:

1)  Eligibility of entities for listing on ITP: Following entities are eligible for listing on ITP:
-    Entities which are intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition. 25% of pre-issue capital of such entities should be held by qualified institutional buyer(s) as on the date of filing of draft information document or draft offer document with the Board, as the case may be; or
-    Any other entity in which at least 50% of the pre-issue capital is held by QIBs as on the date of filing of draft information document or draft offer document with the Board, as the case may be.

The norms further provides that no person, individually or collectively with person acting in concert shall hold 25% or more of the post-issue share capital in the start ups.
2)  Listing of securities on ITP without public issue: The entity shall obtain in-principle approval from the recognised stock exchanges on which it proposes to get its securities listed. It should list its specified securities on the recognised stock exchange(s) within thirty days from the date of issuance of observation by the Board.  Norms of SEBI relating to allotment, opening and closing of issue, advertisement, underwriting, etc., shall not be applicable on such entities.
3)  Easier exit for entities listed on ITP without making a public issue: Entity whose securities are listed on the ITP platform may exit from such platform if:
-          Its shareholders approve such exit by passing a special resolution via postal ballot where 90 % of the total votes and the majority of non-promoter votes should be in favor of such move; and
-          Recognised stock exchange approves of such exist.
4)  Listing of securities on ITP pursuant to public issue: For such listing of securities SEBI has kept the size of minimum trading lot and minimum application amount as Rs. 10 lakhs. The number of allottees in such case shall be more than 200. The allocation in the net offer to public category shall be 75% for institutional investor and 25% for non-institutional investor.
5)  Lock in: The entire pre-issue capital of the shareholders shall be locked-in for a period of 6 months. In case of listing pursuant to public issue such period of 6 months will be counted from the date of allotment of securities. However, in case listing without public issue such period will be counted from date of listing of securities.
6)  Migration to main board: The start-ups listed on the institutional trading platform can migrate to the main board after expiry of three years by meeting certain guidelines.

7)  Other provisions: In order to reduce the timeline of public issue process, SEBI has mandated that acceptance of bids shall be made only by using Application Supported by Blocked Amount (‘ASBA’). In order to reduce the burden on compliance on start ups, SEBI also provides exemption to startups (listed on ITP without making public issue) from delisting norms and Take over code.

Monday, August 17, 2015

Transferee-Co. can change its name as per Amalgamation Scheme without adhering to Companies Act

Where scheme of amalgamation provided that name of transferee company would be deemed to have been changed to name of transferor company then there is no need to follow the procedures and rules laid down under Companies Act for such change of name.
·         In pursuant to a scheme of amalgamation sanctioned under Section 391 of CompaniesAct, 1956 (corresponding to section 230 of Companies Act, 2013), it was decided that name of transferee company would be deemed to have been changed to name of transferor company.
·         However, Regional director raised an objection that Transferee Company should follow the procedures laid down under Section 21 of Companies Act, 1956 (corresponding to section 13 of Companies Act, 2013) for such name change even if scheme of amalgamation itself provides for such change.
The High Court held that-
·         Section 391 is a complete Code under which the Court can sanction a Scheme of amalgamation containing all the alterations required in the structure of the Company for the purpose of carrying out the Scheme.
·         In the instant case, scheme was passed through the procedure laid down under Section 391 and approved by the majority of the shareholders.

·         Hence, there was no need to follow the repetitive procedures laid down under Section 21 for name change when sanctioned scheme of amalgamation itself provide for the same- Michelin India (P.) Ltd. v. Michelin India Tamilnadu Tyres (P.) Ltd. [2015] 60 220 (Madras)

Thursday, August 13, 2015

ITAT sounds note of caution for frivolous appeal by revenue; it damages public faith

Filing of appeal with complete knowledge of its fate by the Revenue only reflects the mischievous adamancy to attempt to mislead the Tribunal and waste the time of the Court and the officers concerned.
1)    CIT(A) on its first remand order dated 06.06.2012 had accepted the application filed by assessee seeking permission to file additional evidence which was objected to by Assessing Officer (AO).
2)    On 22.06.2012 CIT(A) issued second remand report directing AO to verify the claim of assessee as same was unverified.
3)    In the second remand report, AO admitted the assessee’s claim and based on such remand report CIT(A) deleted the addition made under Section 68.
4)    Still, revenue filed appeal before tribunal referring to the fact that the relief was granted by CIT(A) on the basis of first remand report dated 06.06.2012 thereby consciously ignoring making reference to the second remand report dated 22.06.2012 before the tribunal.
Tribunal held in favour of assessee as under:
a)    Filing of an appeal by an Assessing Officer ('AO') is a right which is vested in him by the statue. However, same should be exercised by applying proper due diligence in order to avoid any inappropriate litigations.
b)    Since the claim had been given up in the second remand report by the AO himself in second remand report, he could not claim to be aggrieved by the findings arrived at relying upon his own remand report. The CIT(A) accepted the assessee's claim based on the strength of the second remand report. Reference to this material document, i.e., second remand report in the grounds raised by revenue was curiously missing. This omission appeared to be deliberate and led us to conclude that the revenue had consciously indulged in meritless litigation.
c)    Once the AO in second remand report had already communicated that the enquiries made after issuing notices under Section 133(6) to the parties/persons who had confirmed the assessee's version and the AO concluded that the loans taken stood verified. No further legitimate grievance could be said to have remained for examination by the AO.
d)    This deliberate, mischievous and selective reference to facts by such responsible persons grievously damages the public faith and belief in the honest fair play of the tax administration.
e)    Filing of appeal with complete knowledge of its fate by the Revenue only reflects on revenue’s attempt to mislead the Tribunal and waste the time of the Court and the officers concerned.

f)    Departmental officers had willfully and deliberately failed to exercise their powers using their minds as was required of them as per law and has abused government machinery to initiate a litigation which entailed financial costs and tarnished the image of the Department and also strained the government resources. - ACIT v. R.P.G. Credit & Capital Ltd. [2015] 60 160 (Delhi - Trib.)

Saturday, August 8, 2015

Levy of VAT on Indian liquor sold by hotels in Tamil Nadu is constitutionally valid

Levy of VAT on Indian-made liquor sold by hotels/clubs is constitutionally valid, irrespective of the fact that VAT has been imposed without giving benefit of set-off of tax-suffered turnover at the time of purchase. It is so since liquor is non-vatable goods and provisions imposing non-vatable tax on goods has not been challenged.
Background of the case:
(1)   Hotels and clubs were paying Tamil Nadu VAT on foreign liquor sold by them to their customers. However, no tax was payable on sale of Indian-made-liquor by them to their customers.
(2)   A tax had been levied in 2012 on sale of Indian-made-liquor by hotels and clubs to their customers.
(3)   This tax had to be paid upon total turnover arising on sale of such liquor without any set-off of tax-suffered turnover at the time of purchase.
(4)   Hotels and clubs purchase Indian-made-liquor from Tamil Nadu State Marketing Corporation Limited (“TASMAC”, a State’s instrumentality) after payment of tax. TASMAC has the benefit of paying tax on turnover after setting off tax-suffered turnover at the time of purchase. However, hotels and clubs have no such benefit.
(5)   It was argued by the hotels and clubs that there could not be taxation of entire turnover. It placed fetters on the right of the petitioners to carry on their own business. Therefore, there was violation of Article 19(1)(g).
The High Court held that:
(1)   The rights protected by Article 19(1) are not absolute but qualified. The qualifications are stated in clauses (2) to (6) of Article 19. The fundamental rights guaranteed in Article 19(1)(a) to (g) are,therefore, to be read along with the said qualifications.
(2)   Potable liquor as a beverage is an intoxicating and depressant drink which is dangerous and injurious to health and is, therefore, an article which is res extra commercium, being inherently harmful. A citizen has, therefore, no fundamental right to do trade or business in liquor. Hence, the trade or business in liquor can be completely prohibited.
(3)   The State can create a monopoly either in itself or in the agency created by it for the manufacture, possession, sale and distribution of the liquor as a beverage and also sell the licences to the citizens for the said purpose by charging fees. This can be done under Article 19(6) or even otherwise.
(4)   The petitioners made considerable profit by the escalation of sale price. The petitioners were making considerable value additions to their sales in favour of their customers.When the petitioners were selling liquor at a higher price than the TASMAC, they could not seek parity.
(5)   Liquor is specified as non-vatable item. Provisions as to tax certain goods treating them as non-vatable have not been challenged [Section 3(5) and Second Schedule].

(6)   The petitioners, who are clubs and hotels, cannot be compared with the retail outlets of TASMAC. The customers of the TASMAC and the petitioners form two distinct and different categories based upon their respective socio-economic status. The petitioners are not prevented from doing their business. Thus, there is no violation of Article 19(1)(g) - Hotel & Bar (FL.3) Association of Tamil Nadu (HOBAT)v.Secretary to Government, Commissioner Taxes Department [2015] 60 75 (Madras).

Thursday, August 6, 2015

Landing and parking charges for Aircrafts are not for ‘use of land’; attract Sec. 194C TDS

Landing and parking charges payable by Airlines in respect of aircrafts are not for the ‘use of land’ per se but the charges are in respect of number of facilities provided by the Airport Authority of India. Thus, landing and parking charges payable by Airlines would attract TDS under Section 194C and not under Section 194-I.
a)  The issue disputed in the instant case was as to whether landing and parking charges paid by Airlines would attract TDS under Section 194-I or under Section 194C of the income-tax Act (‘the Act’)?
b)  The High Court of Delhi in case of CIT v. Japan Airlines Co. Ltd. [2009] 180 Taxman 188 (Delhi) has held that landing and parking charges would attract TDS under Section 194-I of the Act.
c)  However, the Madras High Court in case of CIT v. Singapore Airlines Ltd. [2012] 24 200 (Madras) has taken a contrary view that landing and parking charges would attract TDS under Section 194C. The two judgments are in conflict with each other.It has to be determined as to which judgment should be allowed to hold the field?
The Supreme Court held as under:
1)    In the instant case, the Airlines are allowed to land and take-off their Aircrafts at Indira Gandhi International Airport (‘IGIA’) for which landing fee is charged. Likewise, they are allowed to park their Aircrafts at IGIA for which parking fee is charged. It is done under an agreement and/or arrangement with the Airport Authority of India (‘AAI’). The moot question is as to whether landing and take-off facilities on the one hand and parking facility on the other hand, would mean ‘use of land’.
2)    In the opinion of the Delhi High Court (Supra) “when the wheels of an aircraft coming into an airport touch the surface of the airfield, use of the land of the airport immediately begins”. Similarly, for parking the aircraft in that airport, there is use of the land. This is the basic, rather, the only reason given by the Delhi High Court in support of its conclusion that landing and parking charges would attract TDS under Section 194-I.
3)    The Madras High Court (Supra) examined the issue keeping wider perspective in mind thereby encompassing the utilization of the airport providing the facility of landing and take-off of the airplanes and also parking facility. After taken into consideration these aspects, the Madras High Court came to the conclusion that the facility was not of ‘use of land’ per se but the charges for landing and taking-off these airlines were in respect of number of facilities provided by the AAI which were to be necessarily provided in compliance with the various international protocol. The charges, therefore, were not for land usage or area allotted simpliciter. These were the charges for various services provided.
4)    We are convinced that the charges fixed by the AAI for landing and taking-off services as well as for parking of aircrafts were not for the ‘use of land’. That would be too simplistic an approach, ignoring other relevant details which would amply demonstrate that these charges were for services and facilities offered in connection with the aircraft operation at the airport. These services included providing of air traffic services, safety services, aeronautical communication facilities, installation and maintenance of navigational aids and meteorological services at the airport.

5)    Thus, paymentsfor landing and parking charges wereliable for TDS under Section 194C and not under Section 194-I of the Act.The view taken by the Madras High Court (Supra) was correct view and the judgment of the Delhi High Court (Supra)was to be over-ruled. -Japan Airlines Co. Ltd. v. CIT [2015] 60 71 (SC)

Wednesday, August 5, 2015

Proviso to Sec. 68 requiring closely held co. to explain source of share capital is retrospective

Proviso to Section 68 casting onus on closely held company to explain source of share capital is applicable with retrospective effect
Whether the amendment to section 68 by way of insertion of proviso is retrospective or prospective?
1) Proviso to Section 68 inserted by Finance Act, 2012 w.e.f. April 1, 2013 read as under:
“Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless-
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory….”
2) Ordinarily the courts are required to gather the intention of the legislature from the overt language of the provision as to whether it has been made prospective or retrospective, and if retrospective, then from which date. However, some times what happens is that the substantive provision, as originally enacted or later amended, fails to clarify the intention of the legislature. In such a situation if subsequently some amendment is carried out to clarify the real intent, such amendment has to be considered as retrospective from the date when the earlier provision was made effective.
3) Any amendment to the substantive provision which is aimed at clarifying the existing position or removing unintended consequences to make the provision workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively.
4) A careful perusal of the first para of the Memorandum brings out that the onus of satisfactorily explaining issue of share capital with premium etc. by a closely held company is on the company. In the next para, it has been clarified that : `Certain judicial pronouncements havecreated doubts about the onus of proof and the requirements of thissection, particularly, in cases where the sum which is credited as sharecapital, share premium, etc…’. Next para recognizes that judicial pronouncements, while considering that the pernicious practice of conversion of unaccounted money through masquerade of investment in the share capital of a company needs to be prevented, have advised a balance to be maintained regarding onus of proof to be placed on the company.
5) Thus, the amendment makes it manifest that the intention of the legislature was always to cast obligation on the closely held companies to prove receipt of share capital etc. to the satisfaction of the AO and it was only with the aim of setting to naught certain contrary judgments which `created doubts’ about the onus of proof by holding no addition could be made in the hands of company even if shareholders are bogus.
6) As the amendment aims at clarifying the position of law which always existed, but was not properly construed in certain judgments, there can be no doubt about the same being retrospective in operation. Therefore, the amendment to section 68 by insertion of proviso is clarificatory and hence retrospective. -SUBHLAKSHMIVANIJYA (P.) LTD. V. CIT - [2015] 60 60 (Kolkata - Trib.)