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)

Assessee can change his method for determining ALP before TPO if it exhibits a better result

Assessee was not precluded to plead before the TPO that the method chosen by him as the most appropriate method ('MAM') was not resulting into proper determination of ALP and some other method should be resorted to. Appellate authorities can take into consideration such a plea before them provided assessee demonstrates as to how a change in the method would produce better or more appropriate ALP in the facts of the case

In the instant case, the assessee was importing toys from its AE and reselling the same in India without any value addition. The assessee in its TP study report chooses TNM Method as MAM which was accepted by the TPO and additions were made by it applying operating gross profit margin as PLI instead of average operating margin chosen by assessee. Assessee contended before CIT(A) that method chosen by it was not MAM and that RPM was MAM. The CIT(A) rejected assessee's contentions and dismissed appeal.  Hence, instant appeal was filed by assessee against CIT(A)'s order.

The Tribunal held in favour of assessee as under:

1) Under the RPM, products similarity was not a vital aspect for carrying out comparability analysis but operational comparability was to be seen. The gross profit margin earned by the independent enterprise in comparable uncontrolled transactions was a guidance factor in this method;

2) This is also what happens in the case of a distributor wherein the property and service are purchased from the A.E. and are resold to other independent entities, without any value additions. The gross profit margin earned in such transactions becomes the determination factor to see the gross compensation after the cost of sales;

3) As the assessee was a distributor of Mattel toys and got the finished goods from its A.E. and resold the same to independent parties without any value addition.  In such a situation, RPM could be the best method to evaluate the transactions whether they were at ALP;

4) Even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it was not precluded from raising the objections before the TPO or the Appellate Courts that such a method was not an appropriate method and was not resulting in proper determination of ALP and some other method should be resorted to;

5) The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it was found that by adopting one of the prescribed methods other than those chosen earlier, the most appropriate ALP could be determined, the assessing authorities as well as the appellate Courts should take into consideration such a plea before them provided, it was demonstrated as to how a change in the method would produce a better or more appropriate ALP. Thus, the impugned order of CIT(A) was set aside - Mattel Toys (I) (P.) Ltd. v. DY. CIT [2013] 34 taxmann.com 203 (Mumbai - Trib.)

Valuation loss is allowable even if stock-in-trade shown as investment in compliance of RBI guidelines

Even though assessee-bank disclosed shares as investments in balance sheet to comply with RBI Guidelines, it was not estopped from treating the same as stock-in-trade for income-tax and claiming valuation loss thereon as these shares had been consistently shown as stock-in-trade in income tax in the past years also

The High Court held as under:

1) For the purpose of IT Act, as the assessee had consistently been treating the value of investment for more than two decades as stock-in-trade and claiming valuation loss thereon, it was not open to the authorities to disallow the said loss on the ground that in the balance-sheet it was shown as investment in terms of the RBI Regulations;

2) The question whether the assessee was entitled to particular deduction or not would depend upon the provisions of law relating thereto and not the way, in which the entries were made in the books of account. It was not decisive or conclusive in the matter;

3) The value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the Bank had to take into consideration the market value of the shares;

4) If the market value of shares was less than the cost price, they were entitled to deductions and it couldn’t be denied by the authorities under the pretext that it was shown as investment in the balance sheet;

5) The order passed by the authorities holding that in view of the RBI guidelines, the assessee was estopped from treating the investment as stock-in-trade was not correct. That finding recorded by the authorities was to be set aside - Karnataka Bank Ltd. v. ACIT [2013] 34 taxmann.com 150 (Karnataka)

Income can’t be attributed to LO in India if its operations are confined to assisting manufacturers for export orders

Where assessee-foreign company’s presence in India was limited to its liaison office (‘LO’) which assisted Indian manufacturers to manufacture goods according to specification for export to buyers in other countries (which were subsidiaries of assessee), it could be said that activities of NR assessee were confined in India to purchase of goods for export and hence income derived therefrom would not be deemed to accrue or arise in India and entitled to exemption under Explanation 1(b) to section 9(1)(ii)

Facts:

1) Assessee, a world known brand in sports apparels (i.e. Nike), had a main office in USA, which arranged for all its subsidiaries, spread all over the world, various sports apparels for sale to various customers;

2) Arrangement was through procurement by manufacturer who directly dispatched the apparels to the subsidiaries;

3) The assessee engaged various manufacturers all over the world on a job basis and made arrangements with its subsidiaries for purchasing the manufactured goods directly and pay for the same to the respective manufacturers;

4) With a view to ensure quality of its products in India through its liaison office, it employed professionals like merchandiser, product analyst, quality engineer, etc.;

5) Assessing Authority brought to tax 5% of the export value of goods as income deemed to accrue or arise in India. On appeal, the ITAT allowed assessee’s appeal. Thus, the instant appeal was filed by revenue against ITAT’s decision.

The High Court held in favour of assessee as under:

1) The assessee was not carrying out any business in India and it had established a LO in India, whose object was to identify the manufacturers, gave them the technical know-how and see that they manufactured goods according to the specification which would be sold to their affiliates;

2) The person who purchases the goods would pay the money to the manufacturer, in the said income, the assessee has no right. The said income couldn’t be deemed to be a income arising or accruing in the Tax Territories vis-à-vis the assessee;

3) As per Explanation 1(b) to Sec. 9(1) in the case of a NR, no income would be deemed to accrue or arise in India whether directly or indirectly through or from any ‘business connection, which are confined for the purpose of export;

4) The assessee was not purchasing any goods and it was enabling the manufacturers to manufacture goods of a particular specification which was required by a foreign buyer to whom the goods were sold;

5) The whole object of the instant transaction was to purchase goods for the purpose of export. Once the entire operations are confined to the purchase of goods in India for the purpose of export, the income derived therefrom shall not be deemed to accrue or arise in India and it shall not be deemed to be an income under section 9. In this process, the assessee was not earning any income in India;

6) If assessee was earning income outside India under a contract which was entered outside India, no part of its income could be taxed in India either under Section 5 or Section 9 of the Act – CIT (International Taxation) v. Nike Inc. [2013] 34 taxmann.com 170 (Karnataka)

Agency PE exist only if agents fit into meaning of ‘dependent agent’ provided in Article 5 of India-USA DTAA

In order to treat any agent as PE within meaning of Article 5 of relevant DTAA it is very vital that such agent should fit into description of 'Dependent Agent' and has to perform either of activities as mentioned in that article.

The facts of the instant case were as under:

1) Assessee was Indian branch (VIB) of an American company VIPL which in turn was a 100 per cent subsidiary of Varian USA. Varian group of companies (VGCs) had five overseas entities in USA, Australia, Italy, Switzerland and Netherlands;

2) VIPL entered into distribution and representation agreement with all five VGCs for supply and sale of analytical lab instruments manufactured by them to Indian customers directly;

3) As per agreements, VGCs sold analytical lab instruments to Indian customers directly and assessee carried out pre-sale activities like liasoning and other incidental post-sale support activities for which it was entitled to commission;

The moot issue that arose for consideration of Tribunal was as under:

Whether the assessee-company, i.e., VIPL through its Indian branch (VIB) constituted a PE for Varian USA, Varian Australia and Varian Italy?

The Tribunal held as under:

1) Under article 5(4) of Indo-US DTAA, an agent is deemed to be PE if conditions mentioned therein are fulfilled;

2) In the instant case, the first condition as to whether the assessee is habitually exercising the authority to conclude contracts on behalf of the VGCs was not fulfilled, as it could be gathered from the facts that the assessee has no authority and also cannot negotiate or conclude contracts on behalf of the VGCs. It only provides marketing support and liaisoning activity for pre-sale and incidental and ancillary post-sale activities;

3) The second condition that the agent has no such authorities but habitually maintains Stock of Goods and merchandise from which he regularly delivers goods on behalf of foreign enterprises which contributes to the sale of the goods and merchandise also does not fulfilled, as the assessee has no authority on behalf of the VGCs and does not maintain any cost of analytical instruments supplied by the VGCs to the customers in India. The assessee mainly facilitates the process of sale;

4) The third condition is whether the person habitually secures orders wholly or almost wholly for the enterprise. In assessee's case, the orders relating to indent sale are only introduced and liaised by the assessee and not secured by it. Thus, none of the three conditions as enumerated in article 5(4) stands fulfilled so as to hold that the assessee is a dependent agent of various VGCs in India;

5) Under Article 5(5) of the Indo-US DTAA, an agent is a PE when the following twin conditions are satisfied simultaneously Firstly, when the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise; and Secondly, the transactions between the agent and enterprise are not made under the arm's length conditions. Both these conditions were not complied with in the instant case. Thus, under Article 5(5) also, the assessee cannot be held to be agent for constituting a PE in India for the various VGCs;

6) Even under the India-Australia DTAA and India-Italy DTAA, similar provisions are there in Article 5(4) with regard to the dependent agents. Under these DTAAs also, except for clause (d) all other clauses are by and large similar to Article 5(4) of Indo-US DTAA. The additional clause (d) provides that if a dependent agent manufactures or processes enterprise's goods or merchandise belonging to enterprise in that State, then such an agent is deemed as PE. In the instant case, admittedly, the assessee does not manufacture or process any other products developed or manufactured by VGCs. Thus, this clause of Article 5(4) in the above DTAAs is also not applicable

7) In order to treat any agent as PE it is very vital that such agent should fit into the description of 'Dependent Agent' and has to perform either of the activities as mentioned in Articles 5 of relevant treaty, otherwise it couldn’t be held that agent constitutes a PE of the foreign enterprise - Varian India (P.) Ltd v. ADIT (International taxation) [2013] 33 taxmann.com 249 (Mumbai - Trib.)

Vehicle registration services rendered by motor car dealer to its buyers aren’t ‘Business Support Services’

Rendering of assistance by a motor car dealer to its buyers in getting motor vehicle registration done cannot, prima facie, be regarded as 'Business Support Services'

In the instant case, the assessee, a motor car dealer, rendered services relating to registration of car to its buyers on payment of fixed charges. Such charges were used towards registration of car and excess collection, if any, was retained by the assessee. The Department sought to levy service tax on excess amount retained by assessee under 'Business Support Service' regarding it as 'transaction processing'

The Tribunal took, prima facie, the view in favour of assessee with the following observation:-

1) Prima facie the activity undertaken by the assessee does not come within the purview of 'Business Support Service';

2) The assessee was rendering assistance to its clients in getting the motor vehicle registration done. The said activity, by no stretch of imagination, could be considered as supporting the business of its customers. - My Car (Pune) (P.) Ltd. v. Commissioner of Central Excise & Service Tax [2013] 33 taxmann.com 321 (Mumbai - CESTAT)

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.)

Sec. 54 only requires investment of cap gains, which can be in several independent residential units, HC rules

Exemption under section 54 cannot be denied, where residential house property purchased by an assessee consists of several independent units

In the instant case, the assessee had claimed deduction under section 54 in respect of two independent flats purchased by him with sale proceeds of an ancestral house property. During assessment, the AO held that deduction was to be restricted to only one flat since the two residential units purchased by the assessee were separated by a strong wall and, moreover, they were purchased from two different vendors and under separate sale deeds. On appeal, the CIT(A) sets aside the order of AO and the Tribunal confirmed the order of CIT(A). Aggrieved by the order revenue has filed the instant appeal.

The High Court held in favour of assessee as under:

1) The expression ‘a residential house’ used in section 54(1) has to be understood in a sense that the building should be of residential nature and ‘a’ should not be understood to indicate a singular number;

2) Where assessee had purchased two residential flats, he was entitled to exemption under section 54 in respect of both the flats, more so, when the flats were situated side by side and the builder had effected modification of the flats to make them as one unit, despite the fact that the flats were purchased by separate sale deeds;

3) The two flats purchased by the assessee were adjacent to one another and had a common meeting point. Exemption under section 54 only requires that the property should be of residential nature. The fact that residential house consists of several independent units can’t be an impediment to grant relief under section 54, even if such independent units are on different floors;

4) The decision in ITO v. Shushila M. Jhaveri [2007] 107 ITD 327 (Mum) (SB) holding that only one residential house had to be given the relief under section 54 didn’t appear to be correct and was to be disapproved. Hence, sec. 54F exemption was to be granted to assessee in respect of two independent flats purchased by him – CIT v. Syed Ali Adil [2013] 33 taxmann.com 212 (Andhra Pradesh)

Indian subsidiary providing back office support to its overseas parent co. to be treated as fixed place PE; Tribunal provides a method to allocate profits to PE

In the instant case, the assessee, i.e., 'CCMG', a US based company, providing IT enabled customer management services, had a subsidiary in india in name of CIS which was providing IT enabled call centre or back office support service to assessee to service its Indian customers. Issues that arose before the Tribunal were as under:

a) Whether assessee had a Fixed Place PE?

b) Determination of profits attributable to the alleged PE in India.

The Tribunal held as under:

On the issue of PE

1) The employees of the assessee frequently visited the premises of CIS to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal;

2) CIS was practically the projection of assessee's business in India and carried out its business under the control and guidance of the assessee, without assuming any significant risk in relation to such functions;

3) Thus, the finding of the CIT(A) that assessee has a fixed place PE in India under Article 5(1) of the India-USA DTAA was upheld. There was no infirmity in the order of the CIT(A) that CIS did not constitute a dependent agent PE of the assessee in India as the conditions provided in paragraph 4 of Article 5 of the India-USA DTAA were not satisfied.

On the issue of profits attributable to PE

4) An overall attribution of profits to the permanent establishment is a transfer pricing issue and no further profits can be attributed to a PE once an arm's length price has been determined for the Indian associated enterprise, which subsumes the functions, assets and risk profile of the alleged PE;

5) The correct approach to arrive at the profits attributable to the PE should be as under:

Step 1: Compute global operating income percentage of the customer care business as per annual report/10K of the company.

Step 2: This percentage should be applied to the end-customer revenue with regard to contracts/projects where services were procured from CIS. The amount arrived at would be the operating income from Indian operations.

Step 3: The operating income from India operations is to be reduced by the profit before tax of CIS. This residual is now attributable between US and India.

Step 4: The profit attributable to the PE should be estimated on residual profits as determined under Step 3 above - Convergys Customer Management Group Inc. v. ADIT (International taxation) [2013] 34 taxmann.com 24 (Delhi - 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.)