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

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

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

The High Court held as under:

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

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

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

Buyer should withhold tax from sum paid to a non-resident co-owner to acquire a house property

Where assessee purchased a property jointly owned by co-owners, in view of fact that one of co-owners of property was a non-resident, assessee was required to deduct tax at source under section 195 to extent sale-consideration paid to said co-owner.

Facts:

a) The assessee purchased a property owned by two co-owners for a total consideration of 1.20 crores. One of the co-owner was a non-resident who had executed a General Power of Attorney in favour of other resident co-owner to execute sale agreement;

b) The AO opined that since one of co-owner was a non-resident, assessee was required to deduct tax at source under section 195 on entire sale consideration of Rs 1.20 crores. On assessee's failure to deduct tax at source, the AO treated the assessee as 'assessee-in-default';

c) On appeal, the CIT (A) held that assessee ought to have deducted tax at source on the share of the non-resident in the sales consideration. Aggrieved assessee filed the instant appeal.

The Tribunal held partly in favour of assessee as under:

1) To the extent the sum was paid to non-resident co-owner, the provisions of section 195 were attracted and the assessee ought to have deducted tax at source while making payments to her;

2) Thus, the assessee could be considered as an 'assessee-in-default' only to the extent of sum paid to the non-resident - R. Prakash v. ITO [2013] 38 TAXMANN.COM 123 (Bangalore –Trib.)

Gift received by assessee on the occasion of his daughter’s marriage isn’t exempt from tax

Gift received by assessee on occasion of his daughter's marriage won't be exempt as the word individual appearing in proviso to sub-clause (vi) of sec. 56(2) relates to marriage of assessee and not of his daughter

The High Court held as under:

1) Proviso to sec. 56(2)(vi) provides that gift received on the occasion of the marriage of an individual would be exempt from tax. There is no ambiguity in such proviso;

2) The expression "individual" appearing in proviso (b) to section 56(2)(vi) of the Act, is preceded by the word "marriage" and, therefore, relates to the marriage of the individual concerned, i.e., the assessee and not to the marriage of any other person related to him in whatsoever degree, whether as his daughter or son;

3) The expression "marriage of the individual" is unambiguous in its intent and does not admit of an interpretation, that it would include an amount received on the marriage of a daughter;

4) If the Legislature had intended that gifts received on the occasion of marriage of the assessee's children would be exempted, nothing would prevent the Legislature from adding the words "or his children", after the words "marriage of the individual";

5) Thus, in view of unambiguous legislative intent appearing in the proviso, the addition made to the appellant's income on account of gifts received on the occasion of his daughter's marriage was to be affirmed - Rajinder Mohan Lal v. Dy.CIT [2013] 36 taxmann.com 250 (Punjab & Haryana)

‘Tax avoidance’ arrangement is legitimate if it’s within four corners of law, says HC

Where arrangement of assessee to avoid payment of tax did not contravene any statutory provision and was achieved within four corners of law, it couldn’t be found fault with

In the instant case the assessee was holding shares in BFSL, which had purchased 15 acres of land from assessee. The assessee sold its shareholding in BFSL for a certain consideration to DLF through Stock Exchange after paying STT and claimed exemption from gain on sale of shares under section 10(38). The AO held that sale of shares by assessee was a colourable device and that virtually the immovable property had been transferred to DLF and assessee was liable to tax on short-term capital gain on sale of immovable property. Further, the CIT (A) and the Tribunal upheld the order of the AO.

The High Court held in favour of assessee as under:

1) Every taxpayer is entitled to arrange his affairs so that his taxes would be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. If the taxpayer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other will not, he would at liberty to choose the latter one and would do so effectively in the absence of any specific tax avoidance provision;

2) If BFSL had sold the property by executing a registered sale deed and received the sale consideration, then it ought to have paid capital gains on the said consideration. All the authorities were carried away by this aspect of the matter and because the Department was deprived of the tax, they had come to the conclusion that it was a colourable device and tax planning to avoid payment of taxes;

3) The assessee by resorting to such tax planning had taken advantage of the benefit of the loopholes in the law, which had endured to his benefit. After seeing how this loophole had been exploited within four corners of the law, it was open to the Parliament to amend the law plugging the loopholes;

4) However, by any judicial interpretation one couldn’t read into the section, which was not intended to by the Parliament at the time of enacting this provision. If the shareholder chose to transfer the land to the purchaser of the shares, it would be a legal transaction, in law, and merely because it was able to avoid payment of tax, it couldn’t be said to be a colourable device or a share transaction;

5) The finding of the assessing authority that it was a transfer of immovable property was contrary to law and material on record.

Unfortunately, three authorities committed the very same mistake which was illegal, contrary to settled legal position and, therefore, required to be set aside - Bhoruka Engineering Inds. Ltd. v. Dy.CIT [2013] 36 taxmann.com 82 (Karnataka)

Service tax on restaurants and hotel accommodations is unconstitutional; HC sets aside levy of ST

Levy of service tax on service forming part of supply of goods in a restaurant, as well as short-term accommodation services in hotels, inns, etc. is unconstitutional

In the instant case the assessee challenged the levy of service tax on AC restaurants licensed to serve alcoholic beverages and short-term accommodation provided by hotel, inn,  guest house, club or camp-site under sections 65(105)(zzzzv) and 65(105)(zzzzw)] as unconstitutional.

The High Court held the impugned levy as unconstitutional with the following observations:

1) Article 366(29A)(f) empowers State Governments to impose tax on supply, whether it is by way of or as a part of any service of goods either being food or any other article for human consumption or any drink, intoxicating or not. Incidence of sales-tax is on supply of any goods by way of or as part of any service;

2) When food is supplied or alcoholic beverages are supplied as part of any service, such transfer is deemed to be a sale and there cannot be a different component of service which could be charged to service tax by Central Government;

3) In view of judgment in K. Damodarasamy Naidu & Bros. v. State of Tamil Nadu [2000] 1 SCC 521, it held that service formed part of sale of goods and State Government alone had legislative competence to enact law imposing a tax on service element forming part of sale of goods as well;

4) In view of judgment in Godfrey Philips India Ltd. v. State of U.P [2005] 2 SCC 215, it held that luxuries were activities of enjoyment or indulgences which were costly or generally recognised as being beyond necessary requirements of an average member of society;

5) Service tax imposed on services provided in a hotel and other similar establishments, which fall within extended meaning of word "luxuries", trenches upon legislative function of State under Entry 62 of List II;

6) Hence , sub-clauses (zzzzv) and (zzzzw) to clause 105 of section 65 of the Finance Act, 1994 as amended by the Finance Act, 2011 were beyond the legislative competence of the Parliament as the sub-clauses were covered by Entry 54 and Entry 62 of List II of the Seventh Schedule - Kerala Classified Hotels & Resorts Association v. Union of India [2013] 35 taxmann.com 568 (Kerala)

Karnataka HC lays down law on imposition of concealment penalty

In the instant case appeals were filed before the Karnataka HC regarding imposition of penalty. The HC interpreted section 271 and laid down law as under:

1) Penalty under section 271(1)(c) is a civil liability;

2) Mens rea isn’t an essential element for imposing penalty for breach of civil obligations or liabilities;

3) Existence of conditions stipulated in section 271(1)(c) is a sine qua non for initiation of penalty proceedings. Even if these conditions do not exist in the assessment order, at least a direction to initiate proceedings under section 271(1)(c) is a sine qua non for the AO to initiate the proceedings because of the deeming provision contained in section 271(1B);

4) Imposition of penalty even if the tax liability is admitted is not automatic. Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest, that by itself would not be sufficient for the authorities either to initiate penalty proceedings or to impose penalty, unless it is discernible from the assessment order that it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax;

5) Even though explanation offered, has not been substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty can be imposed;

6) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty, though emanate from proceedings of assessment, yet are independent and separate aspect of the proceedings. The findings recorded in the assessment proceedings, in so far as 'concealment of income' and 'furnishing of incorrect particulars' would not operate as res judicata in the penalty proceedings;

7) It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment, in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings;

Thus, in light of the above it was clear that merely because the assessee had agreed for certain addition and, accordingly, assessment order was passed and when the assessee had paid the tax and the interest thereon in the absence of any material on record to show the concealment of income, it couldn’t be inferred that the said addition was on account of concealment – CIT v. Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250 (Karnataka)

Freebies promised in election manifesto disrupts free and fair election; SC directs EC to issue guidelines

The Supreme Court held as under:

1) Promise of ‘freebies’ (TV sets, laptops, mixers, grinders etc.) in election manifestoes of political parties was not ‘corrupt practice’ under section 123 of Representation of People Act, 1951. As the said section covered corrupt practices & inducements by  candidates for winning elections (irrespective of whether the candidate’s party forms Government or not) and not promises by political party which it would implement if it forms Govt.;

2) Distribution of ‘freebies’ at State cost using tax revenues falls within the scope of ‘public purposes’ and such expenditure was not unconstitutional. Court can interfere only when expenditure incurred by Govt. is unconstitutional or contrary to a statutory provision. But it can’t interfere on the ground that such expenditure or action is not wise or that the expenditure is not good for the state;

3) Duty of CAG to scrutinize or audit Govt. expenditures arises only after the expenditure was incurred. There is no power or duty of CAG to do “pre-scrutiny” of expenditure before it is incurred;

4) Although promise of freebies in election manifesto is not corrupt practice, such promises and distribution using State funds would influence all peoples and shakes the root of free and fair elections, disturbs level playing field and vitiates the electoral process. Court has limited power to direct Legislature to legislate on particular issue;

5) However, Election Commission has power to issue directions to political parties to ensure level playing field so long as the matter is not covered by any law. Election Commission, thus, directed to issue guidelines to regulate election manifestoes as early as possible - S. Subramaniam Balaji v. Government of Tamil Nadu [2013] 35 taxmann.com 175 (SC)

Tax treatment of sum received after termination of employment – OECD’s draft guidance

The OECD Committee on Fiscal Affairs, through a sub-group, has undertaken to clarify how variety of payments, such as non-competition payments, notice pay, severance payment, etc., that may be made following the termination of an employment should be treated for tax treaty purposes. Accordingly, it issued a draft proposal for additions and alterations to the Commentary on the OECD Model Tax Convention. A brief synopsis of suggestions given by OECD Committee on tax treatment of termination payments is provided as follows:

1. Remuneration for previous work - Any remuneration paid after the termination of employment for work done before the employment is terminated (e.g. a salary or bonus for the last period of work or commission for sales made during that period) will be considered to have been derived from the State in which the relevant employment activities were exercised.

2. Payment in lieu of notice of termination - The payment received ‘in lieu’ of notice of termination should be considered to be derived from the State where employee would have worked during the period of notice, which will be the State where the employment activities were performed at the time of the termination.

3. Severance payment - Severance payment should be considered to be remuneration derived from the State where the employment was exercised when the employment was terminated.

4. Payment of damages for unlawful dismissal - The tax treatment of such payment will depend on what the damage award seeks to compensate. It can be categorised into following:

a) Remuneration: Sum paid for serving an insufficient period of notice or because a severance payment was required by law should be treated as remuneration for these damages.

b) Capital Gains or Other income: Punitive damages awarded on grounds such as discriminatory treatment or injury to one’s reputation would typically fall under Article 21 (Other Income) or Article 13 (Capital Gains).

Sunset clause doesn’t need a road map to end tax exemption; Parliament has legislative powers to withdraw it

Amendments by Finance Act, 2011 to withdraw exemption from MAT & DDT to SEZ developers were not unconstitutional. The road map was not a condition precedent for the Parliament to introduce sunset clause.  The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment.

In the instant case, the petitioners were SEZ developers. They had borrowed massive loans from various financial institutions and made investments in land, buildings, infrastructure facilities, etc., and commenced their projects on the basis that income accrued or arising to them as SEZ developers would be exempted from MAT and DDT. The Union Finance Minister moved the Union Budget for 2011-2012 on the floor of Parliament and the Finance Bill, 2011 was introduced, in terms of which, a proviso was inserted to Section 115 JB (6) and 115-O (6), to withdraw exemption from MAT and DDT. Being aggrieved by the insertion of the above provisos, the petitioners filed the instant writ petition.

The High Court dismissed the petitions by holding as under:

1) It was a settled position of law that every tax exemption and incentive would have a sunset clause. Every fiscal legislation, providing for tax exemption must have a life span fixed in the enactment;

2) There could be no permanent tax exemption or incentive in fiscal legislation. Realizing this lapse on the part of the Government, the impugned provisos were introduced restricting the exemption only for a particular period;

3) The impugned amendments were shown in the Finance Bill and were placed before the Parliament in the month of March, 2011 for the years 2011-2012;

4) The proposed amendments specified that the exemption from MAT would come to an end from 1st April, 2012 and exemption from tax on distribution of dividends would come to an end from 1st June 2011. Thus, the impugned amendments were prospective in nature;

5) The road map was not a condition precedent for the Parliament to introduce sunset clause. The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment. Thus, the instant writ petitions were  dismissed - Mindtree Ltd. v. Union of India [2013] 34 taxmann.com 250 (Karnataka)

Tax rate on interest can’t exceed 12.5% under India-UAE DTAA; surcharge and cess can’t be levied in addition

Tax payable at 12.5 per cent on interest income under Article 11(2) of the DTAA between India and UAE is inclusive of surcharge and education cess

In the instant case, the moot issue that arose for consideration of the Tribunal was as under:

Whether the assessee was liable to pay education cess and surcharge in addition to the tax @ 12.5% payable on interest income under the provisions of India-UAE DTAA?

The Tribunal held as under:

1) There are specific Articles in DTAA dealing with taxation of income under different heads and interest income is governed by Article 11;

2) According to the Article 11(2) of India-UAE DTAA, interest income may be taxed in contracting State in which it arises, according to law of that State. If the recipient is beneficial owner of interest, tax so charged shall not exceed 5 per cent of gross interest, if the interest is received from bank and in other cases at 12.5 per cent of gross amount of interest;

3) In the instant case, the tax rate applicable was 12.5 per cent. Income-tax has been defined in Article 2(2)(b) as per which income-tax includes surcharge. Therefore, tax referred to in Article 11(2) at the rate of 12.5 per cent also includes surcharge. Further, nature of education cess and surcharge being same, education cess and surcharge can’t be levied separately as it is included in tax rate of 12.5 per cent.

4) Thus, in view of the above, it was held that tax payable at the rate 12.5 per cent under Article 11(2) of DTAA is inclusive of surcharge and education cess. Therefore, the claim of the assessee was to be allowed - Sunil V. Motiani v. ITO (International taxation ) [2013] 33 taxmann.com 252 (Mumbai - Trib.)

‘Limitation on benefit’ clause denies treaty benefit for non-remittance of interest to Singapore

Interest on tax refund received by Singaporean resident won’t be taxed at concessional rate of 15% under Article 11 of India-Singapore DTAA, as mere proving that it has not been deposited in bank account in India wouldn’t be sufficient to prove its receipt in or remittance to Singapore to satisfy limitation of benefit clause.

In the instant case, the assessee, a resident of Singapore, had received interest on Income Tax refund. Assessee contended that it was taxable at concessional rate of 15% as per Article 11(2) of India-Singapore DTAA. However, Revenue taxed it at 20% as per section 115A by applying Article 24 (limitation on benefit) of India-Singapore DTAA. The CIT(A) upheld order of AO. Thus, the instant appeal was filed by assessee against CIT(A)’s decision.

The Tribunal held as under:

1) Article 24 of the India-Singapore DTAA limits the relief granted by other relevant Articles, including article 11 of the DTAA, subject to the fulfillment of the conditions enshrined therein;

2) Article 24 of the DTAA provides that the receipt or remittance of income in Singapore is sine qua non for claiming the benefit of lower rate of tax on the interest income from India. Thus, if the income hadn’t been remitted to or received in Singapore, then the benefit of Article-11 providing for a reduced rate of tax of 15% couldn’t be extended to the assessee. In that situation, the income would be taxed as per the Act, as had been done by the IT authorities;

3) The acceptance of Ld AR claim, that assessee had no bank account in India and, hence, the only possibility of receipt, was of receiving the amount in Singapore, would lead to making the Article 24 redundant and putting an unending burden on the Revenue to prove the negative, the positive of which is otherwise required to be established by the assessee;

4) The assessee had its presence in several countries and he could, instead of depositing the refund voucher in some bank account in Singapore, also deposit it in its bank account maintained in some other country, in which case again the requirement of Article 24 would be wanting;

5) The burden was on the assessee to prove that the amount of income was remitted to or received in Singapore. This burden could be discharged by showing a credit in the bank account maintained by the assessee in Singapore;

6) A submission not backed by any supporting evidence to prove the fulfillment of the requisite condition, couldn’t be a good reason for drawing an inference in favour of the assessee. The authorities below were justified in refusing the benefit of Article-11 of the DTAA to the assessee by taxing the interest on income-tax refund @ 20% as per section 115A of the Act - Abacus International (P.) Ltd. v. Dy. DIT( International taxation) [2013] 34 taxmann.com 21 (Mumbai - Trib.)

No exemption for ‘LTC’ spent on overseas journey even if part of journey is performed in India

LTC is exempt from tax only when employee has utilized LTC for travel within India. Nothing in Rule 2B provides assessee with a liberty to claim exemption where part of his package is spent on his overseas travel and part of his journey has been performed within India

In the instant case, the assessee had claimed exemption of LTC received from his employer under section 10(5) of the IT Act. The AO disallowed the LTC exemption claimed by assessee after noticing that leave travel package covered Singapore and Malaysia also, on the footing that section 10(5) doesn’t allow exemption for overseas travel. Further, the CIT(A) upheld the order of AO. Aggrieved assessee filed the instant appeal to Tribunal.

The Tribunal held in favour of revenue as under:

1) The provisions of the Act are in relation to LTC for proceeding on leave to any place in India;

2) LTC is exempt from tax only when employee has utilized LTC for travel within India;

3) Nothing in Rule 2B provides assessee with at liberty to claim exemption where part of his package is spent on his overseas travel and part of his journey has been performed within India. Thus, assessee’s exemption claim under section 10(5) was rejected - OM PARKASH GUPTA V. ITO [2013] 33 taxmann.com 169 (Chandigarh - Trib.)

CBDT mandates e-filing of audit report and return with 5 lacs income; no more ITR 1 if Sec. 10 benefit exceeds 5k

Audit report to be filed electronically; threshold limit for e-filing of return reduced to Rs. 5 lakhs; return can’t be filed in ITR-1 if assessee earns exempt income which exceeds 5,000.
Income-tax (3rd Amendment) Rules, 2013 redefines the conditions and eligibility to choose from a variety of Income-tax return forms. In addition, certain important amendments are also being brought in, which are as follows:

1) Return in ITR 1 can’t be filed if assessee incurs losses under the head ‘Income from other sources’.

2) Return in ITR 1 can’t be filed if assessee claims tax relief or has any income which is exempt under Chapter III i.e. section 10, 10A, 10AA, etc.

3) Return in ITR 4S can’t be filed if assessee claims tax relief or has any income which is exempt under Chapter III i.e. section 10, 10A, 10AA, etc.

4) Mandatory e-filing of audit reports.

5) Mandatory e-filing of return if income exceeds Rs. 5,00,000 or if assessee claims tax relief.

Arithmetic Mean of ALPs to be determined even if actual price exceeds one of the ALPs determined by TP method

Proviso to section 92C(2) requiring calculation of arithmetical mean of multiple ALPs (more than 1 ALP) determined as per Most Appropriate Method doesn’t become inapplicable where one of the ALPs determined as per Most Appropriate Method is less than the price indicated by assessee

In the instant case, the most appropriate method, as accepted by both, the assessee and revenue, was the Transactional Net Margin Method. The dispute that arose was with regard to the following observation of the Tribunal:
Where one of the prices determined by the most appropriate method is less than the price as indicated by the assessee. Then there would be no need to adopt the process of taking the arithmetical mean of all the prices arrived at through the employment of the most appropriate method.

The High Court held as under:

1) When more than one price is thrown up by the most appropriate method, the statute requires that the arm's length price shall be taken to be the arithmetical mean of such prices. This is the plain and simple meaning of the proviso to section 92C(2) of the said Act;

2) The Tribunal was wrong in holding that if one profit level indicator of a comparable, out of a set of comparables, was lower than the profit level indicator of the taxpayer, then the transaction reported by the taxpayer was at an arm's length price;

3) The proviso to section 92C(2) is explicit in that where more than one price is determined by most appropriate method, the arm's length price would be taken to be the arithmetical mean of such prices – CIT v. Mentor Graphics ( Noida) (P.) Ltd. [2013] 32 taxmann.com 300 (Delhi)

Withholding tax rate not to include cess and surcharge if treaty is silent on these aspects

In the instant case, the assessee had paid management fee, interest, etc., to a resident of France. However, surcharge was not taken into consideration by assessee while deducting the tax at source. Revenue contended that under the Income-tax Act, the taxpayer is expected to deduct tax after taking into consideration surcharge. Assessee, on the other hand, contended that it was not liable to deduct tax including surcharge as the DTAA between India and France is silent on inclusion of surcharge for the purpose of deduction of tax at source.

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

1) It was not in dispute that there was an agreement between the government of India and Government of France for avoidance of double taxation. It was also not in dispute that the DTAA between the government of India and France didn’t say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there was an apparent conflict between the Income-tax Act and DTAA between the two sovereign countries with regard to inclusion of surcharge and education cess for the purpose of deduction of tax at source;

2) In respect of a taxpayer on whom the DTAA applied, the provisions of the Indian Income-tax Act would apply to the extent they were more beneficial to that taxpayer. In other words, if the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income-tax Act. Since the DTAA was silent on the surcharge and education cess for the purpose of deduction of tax at source, the taxpayer would take advantage of that provision in the DTAA for deduction of tax – ITO  v. M Far Hotels Ltd. [2013] 32 taxmann.com 100 (Cochin - Trib.)

Offshore services not taxable under DTAA, despite being covered in Sec. 9(1)(vii) post-amendment

Income from offshore activities, even though taxable under Sec. 9(1)(vii) in view of the Explanation substituted by the Finance Act, 2010, cannot be taxed in India if it is not effectively connected with its PE in India.

The assessee, a tax resident of Japan, carried out the offshore and onshore contract of supply of equipments and services. In respect to income from offshore contracts, the assessee did not offer to tax any income therefrom by claiming that it had not accrued or arisen in India. It provided that all activities in connection with the offshore supplies were undertaken outside India and project office in India, set-up for onshore contract, had no role to play in respect of such offshore services. Since the transfer of property in goods as well as the payments were carried on outside India, the income from such transaction was not taxable in India.

The Tribunal held in favour of assessee as follows:

Position under Section 9:

1) Before amendment, the provisions of Section 9(1)(vii) envisaged fulfilment of two conditions for treating the payment as ‘Fees for technical services’, viz., the services which were the source of income must have been utilized in India and such services must have been rendered in India;

2) However, the amendment by the Finance Act, 2010 had diluted these twin conditions. Now the rendering of services even outside India would be a good case for bringing the income of NR from fees for technical services within the purview of Sec. 9(1)(vii), if such services were utilized in India;

3) Thus, the payment for offshore service contract, even though carried outside India, would fall within the domain of Sec. 9(1)(vii).

Position under DTAA:

1) The Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd v. DIT [2007] 158 TAXMAN 259 (SC) has held that Article 7 – Business Profits would be relevant insofar as the income from offshore services were concerned;

2) Since the entire services rendered outside India were not connected with the permanent establishment (‘PE’) in India, there could not be any taxability of this amount in India;

3) Hence, the income arising from the offshore services would not be taxable in India.

Therefore, the income from the offshore supplies, even though chargeable to tax under Section 9(1)(vii), yet was exempt under the DTAA and could not be charged to tax in view of Section 90(2) – IHI Corporation v. ADIT [2013] 32 taxmann.com 132 (Mumbai - Trib.)

Advance booking of a hotel suite is capital asset; its transfer is chargeable to tax

Long-term advance booking of hotel suite, which gave assessee perpetual right of possession and right to transfer same, was capital asset

In the instant case, the assessee had entered into an agreement with 'G' for long-term advance booking of a suite in a hotel complex, permanently reserved for her use, till the agreement subsisted. She had treated profit on sale of such right in the suite as long term capital gain (‘LTCG’) after reducing indexed cost of acquisition, which consisted of security deposit paid to 'G' and maintenance charges paid to hotel. The AO noticed that the assessee had claimed both the benefit of deduction under sec. 24(a) in previous year as well as indexed cost of acquisition on maintenance expenses while computing capital gains. He held that the long term advance booking was not tenancy right and, hence, not a capital asset. Therefore, he treated the profit on surrender of reservation of suite as income from other sources, after deducting the amount of installments, but not the maintenance charges. On appeal, the CIT (A) held that the sale consideration received was taxable as long-term capital gain and assessee was entitled to benefit of indexation. He, however, held that assessee was not entitled to benefit of indexation on amount paid as maintenance charges to hotel. Aggrieved by the order of CIT(A), assessee filed the present appeal.

The Tribunal held in favour of assessee as under:

1) The assessee was entitled to constant use of suite only in consideration of the agreement and the security deposit. Further, the agreement contained covenants as under:

    a) All government, Municipal and other tax or levies in relation to the suite were to be paid by the assessee separately.

    b) Although the booking was in favour of the assessee, yet it could occupy it itself or use the same for its family members or  senior staff and bona fide personal and business guests.

    c) The agreement/advance booking was transferable as and when desired by the assessee in writing.

All these covenants made it abundantly clear that assessee had got right of residence or possession in the suite by virtue of the agreement. This right was transferable at the option of assessee. Thus, this right was akin to the tenancy rights which are a valuable right in the property.

2) Section 2(14) defines 'capital asset' as property of any kind held by an assessee. The term 'property' encompasses in its ambit bundle of rights. The right to dispose of a thing in every legal way, to possess it and to use it to exclude everyone from interfering with it, comes within the ambit of property. The exclusive right of possessing, enjoying and disposing of a thing comes within the term of 'property'. The assessee had perpetual right of possession of suite and was entitled to transfer the same. Therefore, long-term advance booking, by virtue of which assessee got right to possession, was 'capital asset' within the definition of section 2(14) and, therefore, on transfer of the same, LTCG had accrued to the assessee and assessee was, accordingly, entitled to indexation of cost of acquisition. Thus, the department's appeal was dismissed – ACIT v. Shabnam Sachdev [2013] 32 taxmann.com 22 (Delhi - Trib.)

Loan repaid by the guarantor to lender on default by borrower is ‘capital receipt’ in the hands of borrower

Gillette Co. USA had provided primary security in shape of corporate guarantee for grant of loan to assessee for running its business. On default by assessee in repaying the debts, Gillette USA repaid the bank loan to discharge the corporate guarantee. Amount so paid was to be treated as capital receipt

In the instant case, Gillette Co. USA (‘G’) had provided primary security in shape of guarantee for grant of loan to assessee for running its business.  Since the assessee- company was incurring losses, G considered it prudent to get it discharged from security provided by it in respect of loan taken by assessee. In furtherance thereto G, remitted a sum to various Banks. Banks after receipt of money released corporate guarantee of G. During assessment, AO concluded that remittance of said amount was a revenue receipt. On appeal, CIT(A) held that the remittance was capital receipt not chargeable to tax. Revenue preferred an appeal to the ITAT. So the moot question that arose for consideration of ITAT was as under:

Whether since amount had been paid to bank for discharge of stated corporate guarantee and, moreover, it was not in nature of compensation and was not paid to improve financial position of assessee for running its business, it was to be treated as, a capital receipt?

The Tribunal held in favour of assessee as under:

1) The undisputed fact was that G had provided primary security in the shape of corporate guarantee for the grant of loan to the assessee and the amount had been paid to the bankers for discharge of such corporate guarantee directly. It suggests that the sum remitted was not in the nature of profit but was a capital receipt;

2) The master agreement and the relevant clause of the agreement nowhere suggested that the sum was remitted to the assessee to improve its financial position by discharging its liability and enabling it to earn income. Thus, such finding of the AO was contrary to the material on record;

3) The sum paid was also not in the nature of compensation because there was no obligation on G under any contract to compensate the assessee. Under these circumstances there was no infirmity in the decision of the first appellate authority in treating the sum remitted as capital receipt and, hence, not chargeable to tax;

4) It was only in such circumstances that G remitted the sum to discharge its own liability and, hence, it was not correct to conclude that the assessee had obtained any subsidy or grants in aid or compensation as a result of remittance of sum to the bank. The finding of the CIT(A) on the issue was ,thus, upheld - Luxor Writing Instruments (P.) Ltd. v. Dy. CIT [2013] 31 taxmann.com 408 (Delhi - Trib.)

Cremation services are covered in negative list

Cremation services provided by a crematorium operated by any assessee, including a local authority, are covered under negative list under section 66D(q)

In the instant case, the assessee, a charitable association, was operating a crematorium in the town of Halle. It made an application to the Department, seeking information as to the tax reference number under which the last notice of tax assessment was issued to Lutherstadt Eisleben, a local authority, which also operated a crematorium. The Department denied any such information. So, the moot question that arose for consideration of Court was:

Whether a private taxable person which is in competition with a body governed by public law may rely on the second sub-paragraph of Article 4(5) of the Sixth Directive in order to assert that its rights have been infringed upon by the treatment of that body as a non-taxable person or when under taxed?

European Court of Justice held as under

1) Second sub-paragraph of Article 4(5) of the Sixth Directive is intended to ensure compliance with the principle of neutrality of the tax, which, in particular, precludes treating similar supplies of services, which are in competition with each other, differently for VAT purposes;

2) That provision contains derogation from the rule of treatment of bodies governed by public law as non-taxable persons in respect of the activities or transactions engaged in by them as public authorities, where such treatment would lead to significant distortions of competition;

3) Consequently, if the exemption of the economic activity in question from VAT was to give rise to distortions of competition within the meaning of the second sub-paragraph of Article 4(5) of the Sixth Directive, the operation of a crematorium by Lutherstadt Eisleben would be taxable by virtue of same provision;

4) It is for the national Court to determine whether there are economic circumstances which justify, in particular case, an exception to the rule of the treatment of bodies governed by public law as non-taxable persons;

5) Consequently, a private person who is in competition with a body governed by public law and alleges that that body is, in respect of the activities in which it engages in as a public authority, treated as a non-taxable person for VAT purposes or is under taxed is entitled to rely, before the national court, on the basis of second sub-paragraph of Article 4(5) of the Sixth Directive in proceedings, such as the main proceedings, between a private person and the national tax authorities -FINANZAMT EISLEBEN VS. FEUERBESTATTUNGSVEREIN HALLE EV [2013] 30 TAXMANN.COM 226 (ECJ)