No concealment penalty if exp. claimed in current year and withholding taxes deposited in subsequent year

Provision of sec. 40(a)(i) would be deemed to have been substantially complied with if taxes withheld from payment made to non-resident were deposited subsequent to the previous year in which expenditure was claimed by assessee. Hence, concealment penalty would not be leviable.

In the instant case, assessee had paid fee for technical service (‘FTS’) to non-resident and TDS thereon was deducted and deposited after the end of previous year, but before the due date of filing of income-Tax Return. However, disallowance not made by assessee of the FTS amount in return though non-deduction of TDS was reported by tax auditor in Form 3CD accompanying the return. AO imposed penalty under section 271(1)(c) in respect of FTS ‘falsely claimed. Penalty was upheld by the CIT(A). Hence the instant appeal filed by assessee against CIT(A)’s decision.

The Tribunal held as under:

1) The relevant provisions of section 40(a)(i) provides for the disallowance of specific sums payable to non-residents, where tax deducible at source, has not been deducted and deposited to the credit of the Central Government within the time prescribed under section 200(1);

2) This section is not absolute in its terms, and provides for the allowance thereof in the year of payment, i.e., where the tax stands deducted and paid after expiry of the time prescribed under section 200(1). There is, as such, no reference or correlation with the due date of the filing of the return by the assessee-deductor under section 139(1);

3) The deposit of TDS subsequently would operate as a mitigating factor. The provision itself providing for the contingency and consequence of delayed payment, deferring the claim to the year of actual payment;

4) The assessee would be entitled to claim the deduction for the immediately succeeding year, and which it has ostensibly not. In terms of the provision itself, therefore, it has become clear that it has been substantially complied with as the payment of TDS was made, though subsequently.

5) It would decidedly be a different matter if the provision made no such exception, as in that case there would be no question of the principal condition of the payment having been met and, thus, of the assessee being substantially compliant. This, therefore, served as a valid explanation under Explanation (1B) to section 271(1)(c) Thus, assessee's appeal was allowed and penalty was deleted. - Dynatron (P.) Ltd. v. Dy. CIT [2013] 33 taxmann.com 603 (Mumbai - Trib.)

Section 13 can’t be invoked to deny exemption if siphoning off of funds by trustee can’t be proved

In absence of material on record showing that difference in cost of construction of building disclosed by assessee-society and estimation made by DVO resulted in siphoning off of money by managing trustee, AO was not justified in denying exemption of income to assessee by invoking provisions of section 13(1)(c)

In the instant case, the assessee-society was running an educational institution. During the assessment proceedings, the AO took a view that there was huge difference in the amount claimed to have been spent by the assessee on construction of building and estimation made by the DVO and it could be concluded that the money was being siphoned out of the society to benefit the managing trustee. The AO held that there was clear violation of section 13(1)(c)(ii) and assessee was not entitled to exemption under sections 11 and 12. The CIT (A) confirmed the order of AO. Aggrieved assessee filed instant appeal.

The Tribunal held in favour of assessee as under:

1) If the person in the prohibited category renders services and in lieu thereof a benefit is provided then the case doesn’t fall in clause (ii) of section 13(1)(c);

2) A benefit would be said to have been given to the persons of prohibited category, if they in return do nothing but only enjoy the fruits of the trust/society and take away the funds/income of the society for their personal benefit or for discharging personal obligations. There was no such situation in the case under consideration;

3) Section 13 carves out an exception to the general exemption granted under sections 11 and 12. The onus lies on the revenue to bring on record cogent material/evidence to establish that the trust/charitable institution is hit by provisions of Section 13;

4) The AO had made out the case on presumption, as he had neither brought on record any evidence nor was able to point out modus operandi, and how was the managing trustee directly or indirectly benefited out of the construction cost of building of the society;

5) Thus, it was held that the AO had erroneously invoked section 13 and withdrawn benefit of section 11, read with section 12. Consequently, the appeal filed by the assessee was allowed - Amol Chand Varshney Sewa Sansthan v. ACIT [2013] 33 taxmann.com 366 (Agra - Trib.)

Expenditure disallowed for default in withholding tax would qualify for sec. 80-IB deductions

Disallowance for non-deduction of TDS liability would increase profit of assessee from business of developing housing projects and ultimate profit would qualify for deduction under section 80-IB

In the instant case, interalia, the issue that arose before the Gujarat HC was as under:

Whether disallowance under section 40(a)(ia) would  qualify for deduction under section 80IB(10) of the Act?

The High Court held as under:

Even if a expenditure incurred by the assessee for the purpose of developing housing project was not allowable by virtue of section 40(a)(ia) of the Act, since the assessee had not deducted the tax at source as required under law, it couldn’t be denied that such disallowance would ultimately go to increase the assessee's profit from the business of developing housing project. So, whatever be the ultimate profit of assessee even after making disallowance under section 40(a)(ia) of the Act, would qualify for deduction as provided for under the law. As no question of law arose, tax appeal was dismissed – ITO v. Keval Construction [2013] 33 taxmann.com 277 (Gujarat)

Method of discounted cash flow can be used for share valuation if other methods of sec. 92C are not applicable

Where assessee-company sold its stake in an Indian company to its foreign associate company, discounted cash flow method could be used for valuation of shares sold, due to non-applicability of other methods prescribed under section 92C(1)

In the instant case, the assessee-company owning 84.97% of shareholding of AITPCL India, entered into a contract with its AE for sale of its stake in AITPCL. The TPO valued the shares using discounted cash flow method and made Transfer Pricing adjustment. The objections filed by the assessee were rejected by the Dispute Resolution Panel. Aggrieved assessee filed instant appeal.

The Tribunal held as under:

1) As per Section 92C, ALP in relation to an international transaction has to be determined by one of the six methods mentioned therein;

2) Re-sale price Method couldn’t be applied in the instant case because the shares sold by the assessee were, in turn, not sold to anybody else. Cost Plus Method couldn’t be applied since assessee had made no value addition to any item. Original cost per share was only its face value, and the cost incurred which resulted in increase of its intrinsic value couldn’t be correctly ascertained. Neither Profit Split Method nor TNM Method could be used. Further, similar companies doing similar share transactions were hard to find;

3) Purpose of transfer pricing rules is to verify whether the prices at which an international transactions have been carried out is comparable with the market value of the underlying asset or commodity or service. This might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction;

4) A water-tight attitude of interpretation of the prescribed methods will defeat the very purpose of enactment of transfer pricing rules and regulations and also detrimentally affect the effective and fair administration of an international tax regime;

5) Interpretation of the word 'shall' need not always be mandatory and could also be read as 'may', is a rule laid down by the Gujarat High Court in the case of CIT v.Gujarat Oil & Allied Industries [1993] 201 ITR 325;

6) Hence, while finding the most appropriate method, it is not that modern valuation methods fitting the type of underlying service or commodities have to be ignored. Fixing enterprise value based on discounted value of future profits or cash flow is a method used worldwide.

Endeavour was only at arriving at a value which would give a comparable uncontrolled price for the shares sold. If viewed from this angle, it couldn’t be said that the discounted cash flow method adopted by the TPO was not in accordance with section 92C(1) - Ascendas (India) (P. )Ltd. v. Dy.CIT [2013] 33 taxmann.com 295 (Chennai - Trib.)

Services availed for market research and customer’s credit rating are eligible for input credit

Management consultancy service availed by assessee relating to conduct of 'market research' and customers 'credit rating' in international market to improve its market condition abroad is eligible for input service credit

In the instant case, the assessee availed of management consultancy service relating to conduct of market research and customers credit rating in international market to improve its market condition abroad. The Department denied credit on ground that that there was no nexus of these services with manufacture.

The Tribunal held as under:

1. The definition of input services in the inclusive portion clearly includes market research services on which credit is available;

2. Credit rating of customers also relatables to sales promotion and business of manufacture. In any case, as the activity was specifically included in the definition of input services, credit thereof couldn’t be denied -  Gujarat Reclaim & Rubber Products Ltd. v. Commissioner of Central Excise [2013] 33 taxmann.com 276 (Ahmedabad - CESTAT)

Sec. 54F benefit available on sum invested in construction of house nonetheless parts of investment may be from different sources and not from cap gains

Where capital gain is assessed on notional basis under section 50C, whatever amount is invested in new residential house within prescribed period under section 54F would get benefit of deduction nonetheless parts of the investments may be from different sources and not from capital gains

In the instant case, the assessee had sold a house property for Rs. 20 lakhs having registration value of Rs 36 lakhs as fixed by the State authorities under the Stamp Act and had sought exemption under section 54F as he had re-invested Rs. 24 lakh for construction of residential house. The AO had deducted the cost price of land paid by the assessee at Rs. 1.93 lakhs and Rs. 20 lakhs towards investment in construction of residential house from the value of Rs 36 lakhs of the property under section 50C, and determined the long-term capital gain of Rs. 14.06 lakhs.The Tribunal upheld the order of the AO. Aggrieved by the order of Tribunal, assessee filed the instant appeal.

The HC held in favour of assessee as under:

1) The assessee had stated that he has invested Rs. 20 lakhs out of the sale consideration and had made further investment of Rs. 4 lakhs of agricultural income towards construction of the house. The total amount shown to have been invested for construction of house was Rs. 24 lakhs. The benefit of exemption of Rs. 4 lakhs was disallowed, which didn’t appear to be sound and proper;

2) As the ultimate object and purpose of section 50C is to see that the undisclosed income of capital gains received by the assessees should be taxed and the law should not encourage and permit the assessee to peg down the market value at his whims and fancy to avoid tax. In other words, the ultimate object is to curb the growth of black money;

3) When the capital gain is assessed on a notional basis, whatever amount is invested in new residential house within the prescribed period under section 54F, the assessee should get the benefit of deduction, irrespective of the fact that the funds from other sources are utilized for new residential house;

4) In that context, whatever amount was actually invested by the assessee for construction of house should be deducted, irrespective of the fact that parts of the investments were from different sources and not from the capital gains. Thus, full reinvestment made by assessee (i.e., 24 lakhs) in construction of residential house was to be allowed under section 54F - Gouli Mahadevappa v. ITO [2013] 33 taxmann.com 47 (Karnataka)

Margin of trading segment can’t be applied to indenting segment; no re-characterization unless facts justify

TPO cannot re-characterize assessee's indenting activity as trading activity unless it can be demonstrated by facts on record that the assessee though calling it a "service provider" was actually acting as a "trader". Absent facts justifying such re-characterization, there was no justification for TPO to apply trading margins to assessee's indenting activity under TNMM

In the instant case, the assessee had two segments-trading and indenting. Indenting was done by the assessee for its overseas AE and bulk of its turnover was from indenting.  Besides, indenting, assessee had small amount of trading with non-AEs. The gross profit margin (commission) for indenting on AE sales was 1.48% while GP margin on trading was 1.81%. TPO applied trading margin of 1.81% to indenting sales and made additions for difference between 1.81% and 1.48%. DRP upheld TPO's additions. Hence present appeal by assessee to ITAT

The Tribunal held as under:

1) As per the contracted terms and the unrebutted stand of the assessee it was merely providing indenting services. At no point of time the title in goods or possession of the merchandise was in assessee's hands. The contract was entered into by SCJ (AE) and Indian customers directly whether for export or import;

2) The negotiations were directly done by AE and the Indian customers, and the assessee merely functions as a facilitator. The assessee doesn’t need to incur cost either for maintaining or storing the inventory or for the transportation as the title in goods was never held by the assessee for its indenting activity as a service provider. Consequently, the assessee was not exposed to any credit risk in maintaining the inventory nor was the assessee exposed to price risk or the risk linked with offering credit sales;

3) It is an accepted economic principle that the trader acting as an entrepreneur is exposed to price risk, cost risk, credit risk, warranty risk etc, which would necessitate the contract being entered into and negotiated by assessee. In its indenting activity these facts were not evident;

4)  The performance of the critical functions, like decisions to enter into contract, to negotiate the terms of the contract, to decide the level and extent of exposure for price risk, credit risk, warranty risk etc are some of the risks to which a trader is exposed. The record shows that at no point of time the assessee was ever exposed to any of those risks as such, the two activities could not be treated at par and thus invited a similar treatment. There was no justification to apply the margins of trading activity to indenting activity in the facts of the present case - Sojitz India (P.) Ltd. v. Dy.CIT [2013] 33 taxmann.com 299 (Delhi - Trib.)

Ambiguous language in Bill can’t be compared with Act ratifying it; SB ruling in Merilyn Shipping’s case not acceptable

The provisions of section 40(a)(ia) of the Income Tax Act, 1961, are applicable not only to the amount which is shown as payable on the date  of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year.

In the instant case, following issue came for consideration of High Court:

“Whether Special Bench ruling in Merilyn Shipping’s case lays down the correct law in respect of interpretation of section 40(a)(ia)”?

The High Court declined to accept the proposition given by the ITAT Special Bench in the case of Merilyn Shipping’s with following observations:

1) The provisions of section 40(a)(ia) of the Income Tax Act, 1961, are applicable not only to the amount which is shown as payable on the date of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and is actually paid within the previous year;

2) Comparison between the pre-amendment and post amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. But the comparison between the draft and the enacted law isn’t permissible. Nor can the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It is the finally enacted law which is the will of the legislature;

3) The Learned Tribunal fell into an error in comparing the wordings of the provisions of Finance Bill and Finance Act for interpretation purposes;

4) The key words used in Section 40(a)(ia) are “on which tax is deductible at source under Chapter XVII –B”. If the question is “which expenses are sought to be disallowed?” The answer is bound to be “those expenses on which tax is deductible at source under Chapter XVII –B. Once this is realized nothing turns on the basis of the fact that the legislature used the word ‘payable’ and not ‘paid or credited’. Unless any amount is payable, it can neither be paid nor credited”;

5) The language used in the draft was unclear and susceptible to giving more than one meaning. By looking at the draft it could be said that the legislature wanted to treat the payments made or credited in favour of a contractor or sub-contractor differently than the payments on account of interest, commission or brokerage, fees for professional services or fees for technical services because the words “amounts credited or paid” were used only in relation to a contractor or sub-contractor. This differential treatment was not intended. But the language used by the legislature in the finally enacted law is clear and unambiguous whereas the language used in the bill was ambiguous. Majority views expressed in the case of Merilyn Shipping & Transports are not acceptable - CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250 (Kolkata)

Actual payment of tax isn’t a precondition to be a resident of partner country, as per India-UAE DTAA

As per Article 4(1) of India-UAE DTAA, to be a resident of contracting State, it isn’t necessary to pay tax there; mere right of contracting State to tax such person by reason of domicile, place of management or incorporation is sufficient

In the instant case, the assessee had challenged the section 40(a)(i) disallowance in respect of professional fee paid  to ‘V’, sole proprietor of KPMG, Dubai. Assessee, contended that these payments were made in pursuance of professional services carried out by KPMG, Dubai as understood in Article 14 of the India-UAE treaty dealing with independent personal services. It was stated that the income was not chargeable to tax in India since ‘V’ was not in India for more than 183 days during the previous year and, therefore, the question of deduction of tax at source didn’t not arise. The AO, on the other hand,  made disallowance on the footing that 'V' couldn’t take benefit of India-UAE treaty, as it couldn’t be treated as a resident of U.A.E. as per Article 4(1) of India-UAE DTAA, as he was not paying tax in U.A.E., which was confirmed by CIT(A). Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) Article 4(1) of India-UAE treaty provides that the term 'Resident' of a 'Contracting State' means any person, who, under the laws of that State (i.e. U.A.E.), is liable to tax therein by reason of his domicile, resident, place of management, place of incorporation, or any other criterion of similar nature. The term ‘liable to tax in the contracting State’ doesn’t necessarily imply that the person should actually pay the tax in that contracting State. Right to tax on such person is sufficient;

2) If a fiscal domicile of a person is in the contracting State, which in the present case has not been doubted was in U.A.E., then he was to be treated as resident of that contracting State irrespective of whether or not that person is actually liable to pay taxes in that country;

3) Liability to tax in the contracting State doesn’t imply that the person was actually liable to tax but would also cover the cases where the other contracting State has the right to tax such person. It is immaterial whether or not such right has been exercised. The basis for deducting the TDS under section 195 by the assessee for making the payment to 'V' was rejected. – KPMG v. JCIT [2013] 33 taxmann.com 23 (Mumbai - Trib.)

Rule of ‘force of attraction’ given in Article 7 of UN Model treaty can’t be imported into Article 7 of India-UK DTAA

Articles 7(1)(b) and 7(1)(c) of the UN Model Convention as well as of the UN Model Convention Commentary can’t be relied upon to come to a conclusion that the connotation of “profits indirectly attributable to permanent establishment” used in Article 7(1) of the Indo- UK treaty incorporated a force of attraction rule

In the instant case, the assessee- a U.K. partnership firm of Solicitors, was engaged in providing international legal services in certain areas and operated through its principal office in UK and branch offices in certain other countries. During the years under consideration, it rendered legal consultancy services in connection with different projects in India. It did not have an office in India. Assessee returned nil income relying on Art 15 of Indo-UK DTAA on the ground that the aggregate period or period of stay of its partners and employees during the said years did not exceed 90 days. Revenue rejected assessee’s claim on the footing that Article 7(1) of Indo-UK DTAA should be interpreted in the light of Article 7(1) of the UN Model Convention to read the force of attraction rule so as to deny assessee the benefit of Article 15 and tax the activities in India applying Article 7.

The Tribunal held in favour of assessee as under:

1) It would not be correct to say that the connotation of “profits indirectly attributable to permanent establishment” in Article 7(1) extend to the two categories of income as specified in clause (b) and clause (c) of Article 7(1) of the UN Model Convention and incorporate a force of attraction rule as held by the Division Bench of this Tribunal in the case of Linklaters LLP;

2) When the connotations of “profits indirectly attributable to permanent establishment” are defined specifically in Article 7(3) of the India-UK DTAA which clearly explains the scope and ambit of the profits indirectly attributable to the PE and the provisions of said article being unambiguous and capable of giving a definite meaning, there was no need to refer to the provisions of Article 7(1) of UN Model Convention which were materially different from the provisions of Article 7(1) of the India-UK DTAA read with Article 7(3) thereof - ADIT V. CLIFFORD CHANCE [2013] 33 taxmann.com 200 (Mumbai - Trib.) (SB)