Vodafone’s case: HC puts ball in DRP’s court to decide applicability of TP provisions on issue of shares

a) Assessee allotted shares to its foreign holding company (AE) at a  premium of Rs. 8,951 per share and received the amount against allotment of shares;

b) The AO referred this transaction to TPO for determining its ALP The TPO issued show cause notice to assessee;

c) The assessee contended that Chapter X doesn’t apply to issue of equity shares as no income arises from issue of equity shares and the transaction is a capital account transaction;

d) TPO rejected assessee’s contentions relying on retro amendment to section 92B made by the Finance Act,2012 by inserting Explanation(i)(c) and

(e) which brings capital financing transactions within the purview of international transactions and TP provisions of Chapter X;

e) The TPO determined ALP of shares and made TP adjustments of 1397.27 crores. The AO passed draft assessment order wherein he didn’t deal with assessee’s objections. Thus, the assessee filed the instant writ petition challenging AO’s draft assessment order.

The High Court disposed off the petition with following directions:

1) We were not inclined to set aside the draft assessment order of the AO or the order of the TPO and remand the matter to AO, because the AO has already filed an affidavit contesting the petition on merits and justifying the stand that the alleged shortfall in premium upon issue of shares was chargeable to tax under Chapter X.";

2) Thus, instead of remanding the matter to the AO to examine this question, the merits of this question must be considered by DRP;

3) The petitioner would submit before the DRP its preliminary objections to Draft Assessment Order and the TPO's order within two weeks by
raising jurisdictional issues;

4) The DRP would decide the issue of jurisdiction before considering issue of valuation raised by the petitioner in its objections filed before the DRP, of course subject to the additional grounds on jurisdiction being filed by the petitioner within two weeks;

5) The DRP would decide the issue of jurisdiction as a preliminary issue within two months from the date on which the petitioner filed its objections on the question of jurisdiction;

6) In case the decision of the DRP on the above preliminary issue was adverse to the petitioner, it would be open to the petitioner to challenge the order of the DRP on the preliminary issue in a writ petition if a case was made out at that stage that the decision of the DRP was patently illegal, notwithstanding the availability of alternative remedy of filing an appeal before the Income Tax Appellate Tribunal - Vodafone India Services (P.) Ltd. v. Union of India [2013] 39 taxmann.com 201 (Bombay)

Mother is natural guardian even during lifetime of father; clubbing provisions not unconstitutional

Sub-section (1A) of section 64, including clause (a) of the Explanation to said sub-section is constitutionally valid

Facts:

a) The assessing authority completed the assessment by clubbing the income of assessee’s two minor sons with her income as her income was greater than that of her husband;

b) The assessee contended that the provisions of clubbing the income of the minor child, infringed the right of equality as enshrined by article 14 of the Constitution of India and, thus, were ultra vires;

c) She further contended that clause (a) of the Explanation to section 64(1A), was violative of section 6 of the Hindu Minority and Guardianship Act, 1956, according to which the father is the natural guardian and after him the mother is the natural guardian. Thus, the assessee filed instant writ petition challenging the constitutional validity of section 64(1A).

The High Court dismissed the petition with following observations:

1) HC relied on following interpretation of SC in case of Githa Hariharan v. Reserve Bank of India [1999] 104 Taxman 220:

a) Under the Hindu law both mother and father are the natural guardians of the minor sons or daughters;

b) Gender equality is one of the basic principles of our Constitution and in the event the word 'after' is to be read to mean a disqualification of a mother to act as a guardian during the lifetime of the father, the same would definitely run counter to the basic requirement of the constitutional mandate and would lead to a differentiation between male and female;

c) The father by reason of a dominant personality cannot be ascribed to have a preferential right over the mother in the matter of guardianship, since both fall within the same category

2) Thus,  it cannot be said that the mother is not the natural guardian during the lifetime of the father or until he is disqualified from being the natural guardian;

3) When both mother and father are natural guardians, then adding the income of the minor child in the income of the parent, whose income is greater, can’t be said to be arbitrary, artificial or evasive of the object sought to be achieved;

4) Therefore, the constitutional validity of sub-section (1A) of section 64, including clause (a) of the Explanation to the said sub-section was to be upheld and the same were not violative of article 14 of the Constitution of India or section 6 of the Hindu Minority and the Guardianship Act -Anju Mehra v. Union of India [2013] 38 taxmann.com 383 (Punjab & Haryana)

E-homes with pre-fitted gadgets akin to other residential units; their developer isn’t dominant player

E-homes with facilities like wifi, finger print security cannot be said to be different from other residential units

Facts:

a) The informant, allottee of e-homes, filed information alleging abuse of dominance by Opposite Party (‘OP’) for adopting anti-competitive practices for the allotment of their e-homes;

b) He alleged that the e-homes developed by OP were likely to attract buyers who wanted to buy homes pre-fitted with hi-tech gadgets like wifi, finger print security system, parkings lots, etc;

c) He also contended that the OP created the special category of e-homes and had acquired a 100% dominant status for being the only real estate developer to design and develop such e-homes in Delhi/NCR;

d) As a result of the dominance enjoyed by OP, it started demanding high premiums and forced allottees to sign an Allotment Agreement.

The Competition Commission held as under:

1) The argument of informant that 'the provision for services of e-home' was a distinct product having separate market for itself, does not seem to be convincing because the facilities being provided by the OP like prefitted hi-tech gadgets, i.e., wifi, finger print security system, parking lots, etc., could easily be installed in any house without much structural modifications and alterations;

2) Thus, e-homes in question couldn’t be deemed as different products from other residential flats;

3) There has been no information in the public domain to prove that the OP was a dominant real estate developer in the relevant market and it had been abusing its position of dominance;

4) As per the information in public domain, there were several upcoming residential projects in Delhi/NCR and OP was not the only real estate developer in the relevant geographical market;

5) Therefore, the OP did not, prima facie, appear to be a dominant player in the relevant market. In the absence of dominance of OP in the
relevant market, there was, prima facie, no reason for abuse of dominance in that market - Achyut P. Rao v. Designarch Infrastructure (P.) Ltd. [2013] 38 taxmann.com 380 (CCI)

E-homes with pre-fitted gadgets akin to other residential units; their developer isn’t dominant player

E-homes with facilities like wifi, finger print security cannot be said to be different from other residential units

Facts:

a) The informant, allottee of e-homes, filed information alleging abuse of dominance by Opposite Party (‘OP’) for adopting anti-competitive practices for the allotment of their e-homes;

b) He alleged that the e-homes developed by OP were likely to attract buyers who wanted to buy homes pre-fitted with hi-tech gadgets like wifi, finger print security system, parkings lots, etc;

c) He also contended that the OP created the special category of e-homes and had acquired a 100% dominant status for being the only real estate developer to design and develop such e-homes in Delhi/NCR;

d) As a result of the dominance enjoyed by OP, it started demanding high premiums and forced allottees to sign an Allotment Agreement.

The Competition Commission held as under:

1) The argument of informant that 'the provision for services of e-home' was a distinct product having separate market for itself, does not seem to be convincing because the facilities being provided by the OP like prefitted hi-tech gadgets, i.e., wifi, finger print security system, parking lots, etc., could easily be installed in any house without much structural modifications and alterations;

2) Thus, e-homes in question couldn’t be deemed as different products from other residential flats;

3) There has been no information in the public domain to prove that the OP was a dominant real estate developer in the relevant market and it had been abusing its position of dominance;

4) As per the information in public domain, there were several upcoming residential projects in Delhi/NCR and OP was not the only real estate developer in the relevant geographical market;

5) Therefore, the OP did not, prima facie, appear to be a dominant player in the relevant market. In the absence of dominance of OP in the relevant market, there was, prima facie, no reason for abuse of dominance in that market - Achyut P. Rao v. Designarch Infrastructure (P.) Ltd. [2013] 38 taxmann.com 380 (CCI)

Revenue exempted from disclosing info obtained from Financial Intelligence Unit justifying search operations

Preparation of satisfaction note on information collected from Financial Intelligence Unit to be treated as unpublished document for which privilege under Evidence Act could be validly claimed.

Facts:

a) The assessee was a leading importer and exporter of bullion, platinum bars and other precious metals;

b) The search and seizure operations under section 132 were carried out against assessee on basis of information received from Financial Intelligence Unit (‘FIU’) that heavy cash amounts were deposited in bank accounts of assessee and its sister concern on a regular basis;

c) The assessee filed writ challenging the search and seizure operations and claimed its right to examine satisfaction note to assail validity and bona fides of search and seizure operation;

d) On other hand, revenue filed an application claiming privilege of unpublished material in public interest under the Evidence Act

The High Court held in favour of revenue as under:

1) It couldn’t be denied that the FIU, reporting directly to the Finance Ministry, was responsible for receiving, processing, analyzing and disseminating information related to suspected financial transactions;

2) It was also responsible for coordinating with and strengthening the efforts of national and international agencies, investigation into it in pursuance of global efforts against money laundering, terrorist financing and related crimes;

3) The preparation of the satisfaction note on such information could be treated as unpublished documents for which the revenue has validly claimed privilege under sections 123 and 124 of the Evidence Act;

4) A large amount of accounted black money is floating in the market which poses a serious threat to the national economy. The Government of India has adopted several methods to discouraging the parallel economy being run by unscrupulous persons;

5) The FIU is engaged in collecting such information against the money laundering, terrorist financing and related crimes. The sources and methods of the organization collecting and processing such sensitive information couldn’t be subjected to public scrutiny to jeopardize the interest of the organization and national interest.

6) Thus, the application filed by the Income-tax department was to be allowed - M.D. Overseas Ltd. v. Director General of Income-tax [2013] 38 taxmann.com 433 (Allahabad)

Assistance in financial and risk management is a ‘technical service’; FTS under India-US DTAA

Where assessee-company was making use of advice, input, experience and assistance rendered by US based company in its decision making process of financial and risk management, etc., services so rendered would be technical services under India-US DTAA.

Facts:   

a) The assessee-company, engaged in providing software development services to the customers in India, claimed deduction of payment made to US based company (‘foreign company’)  towards management services rendered by it;

b) In course of assessment, the Assessing Officer opined that the payment made by the assessee to foreign company would come within the ambit of consultancy fees and, therefore, the it was liable to deduct tax on these payments under section 195;

c) Since assessee failed to deduct tax at source, the Assessing Officer disallowed payments made by assessee by invoking provisions of section 40(a)(ia). Further, the CIT (A) confirmed said disallowance. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1) The assessee was making use of the advice, input, experience and assistance rendered by the foreign company in its decision making process of financial and risk management, etc;

2) The foreign company was also giving training to the assessee's employees in making use of the inputs, experience, experimentation, assistance and advice rendered by them for taking a better possible decision in order to achieve the desired objectives;

3) Decision making process is a highly complicated and technical one, unless the assessee gets a technical input and advice from financial and risk management experts it may be difficult to select a right process for the growth of the company;

4) It was not the case of the assessee that in given set of facts/problem, the foreign company gave its solution or advice. The solution or decision was, admittedly, taken by the assessee on the basis of the advice/service rendered by the foreign company;

5) Therefore, the technical knowledge, experience, skill possessed by the foreign company with regard to financial and risk management was made available in the form of advice or service which was used by the assessee in the decision making process not only in management affairs but also in financial matters;

6) Therefore, such service rendered by the foreign company was technical in nature as per India-USA treaty - US Technology Resources (P.) Ltd. v.  ACIT [2013] 39 taxmann.com 23 (Cochin - Trib.)

No ‘royalty’ from sale of software, HC ignores amended Sec. 9 as DTAA more beneficial; Samsung’s case distinguished

Delhi High Court upheld the order of the Tribunal that amount received by the assessee under the license agreement for allowing the use of the software would not be royalty under the DTAA.

The Delhi High Court held as under:

1) What was transferred was neither the copyright in the software nor the use of the copyright in the software, but what was transferred was the right to use the copyrighted material or article which was distinguishable from the rights in a copyright;

2) It further held that the right that was transferred was not a right to use the copyright but was only limited to the right to use the copyrighted material and the same would  not give rise to any royalty income and would be business income;

3) The Delhi High Court expressed its disagreement with the decision of the High Court in the case of CIT v. Samsung Electronics Co. Ltd. [2011] 203 Taxman 477 (Kar.) that right to make a copy of  the software and storing the same in the hard disk of the designated computer and taking backup would amount to copyright work – DIT v. Infrasoft Ltd. [2013] 39 taxmann.com 88 (Delhi)

Sale of business in lieu of shares under an amalgamation scheme not a ‘slump sale’; in sync with Bharat Bijilee’s case

Where no monetary consideration was involved in transfer of manufacturing division along with all its assets and liabilities under amalgamation scheme, same could not be considered as slump sale under section 50B

Facts:

a) The assessee transferred its manufacturing division to NIL under a scheme of amalgamation as per which all the assets and liabilities of the assessee were vested in NIL;

b) The assessee in return received certain investments held by NIL besides allotment of equity shares to the shareholders of the assessee;

c) The Assessing Officer held that the transfer of the manufacturing division to NIL would tantamount to a 'slump sale' attracting liability of capital gains under section 50B;

d) On appeal, the CIT(A) deleted the order of Assessing Officer. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) To qualify as slump sale two conditions have to be satisfied, viz., (A) there must be transfer of one or more undertakings as a result of sale, and (2) the sale should be for a lump sum consideration without values being assigned to the individual assets and liabilities;

2) In the instant case it was not disputed that there was no monetary consideration involved for transfer of the assets and liabilities of the manufacturing division to NIL, though there might have been transfer of an undertaking;

3) Since there was no monetary consideration involved in transferring the manufacturing division under scheme of amalgamation approved by the High Court, it couldn’t be considered to be a slump sale so as to attract the liability of the capital gain under section 50B – ITO v. Zinger Investments (P.) Ltd [2013] 38 taxmann.com 388 (Hyderabad - Trib.)

Cenvat credit was allowable to assessee even if supplier hadn’t discharged its duty

Requirement of taking "reasonable steps" does not mean that assessee is required to verify from department whether duty stands paid by supplier because that would be practically impossible and would lead to transactions getting delayed; therefore, assessee is entitled to credit even if supplier has not paid duty to department

In the instant case the assessee took deemed Modvat credit benefit under Notification No. 58/97-CE(NT) on basis of invoices issued by supplier of inputs, but on verification it was found that supplier had not paid duty. The Department opined that since rule 57A(6) required the assessee to take all reasonable steps to ensure that duty had been paid, no credit could be allowed if duty had not been paid on inputs supplied.

The Supreme Court held in favour of assessee as under:

1) In this case supplier of inputs had given declaration indicating that excise duty had been paid on said inputs. Fact that supplier had not discharged duty was a lapse on part of seller; it was different and not a condition or rather a precondition postulated in Notification;

2) When there was a prescribed procedure and that had been duly followed by the assessee, it could not be said that the assessee had not taken reasonable steps as prescribed in notification;

3) Due care and caution were taken by the assessee and it was not stated by Department what further care and caution could have been taken. Requirement of "reasonable care" does not mean verification from department whether duty stands paid by supplier because that would be travelling beyond notification and practically impossible and would lead to transactions getting delayed;

4) Thus, the Assessee was entitled to deemed credit under the Notification No. 58/97-CE(NT). -  Commissioner of Central Excise, Jalandhar v. Kay Kay Industries [2013] 38 taxmann.com 336 (SC)

Sum paid to NR to identify potential customers and to conduct market survey abroad held taxable as FTS

Payment made to a foreign company for marketing survey and identifying potential foreign customers for assessee's product was only for consultancy services and it was taxable in India as FTS

Facts:

a) The assessee engaged a foreign company ‘SR’ as marketing agent for South East Asian countries;

b) SR had to study the market situation in South East Asia for the products manufactured by the assessee and it had to market the products of the assessee in those countries;

c) The CIT(A) found that payment made to SR was consultancy charge, therefore, tax had to be deducted. Accordingly, it confirmed the disallowance made by the Assessing Officer. Aggrieved-assessee filed the instant appeal.   

The Tribunal held in favour of revenue as under:

1) The work of SR was to identify the potential customers and file a report regarding the market strategy and developmental studies;

2) The agreement did not enable SR to market the products of the assessee in South East Asian countries. The company SR only had to do survey and file a report so that the assessee could market its products after considering the report filed by the foreign party;

3) Therefore, the payment made to SR was only consultancy charge. It was not a case of marketing the products in the foreign country. The CIT
(A) had rightly confirmed the order of the Assessing Officer. Thus, the order of the lower authority holding assessee liable for TDS was to be confirmed - English Indian Clays Ltd. v. ACIT [2013] 39 taxmann.com 50 (Cochin - Trib.)