Payment for transponder service is ‘royalty’; ITAT refers Explanation 6 to Sec. 9(1)(vi) to interpret ‘process’

Payment for use of transponder service for broadcasting of programme held as ‘royalty’ as it involves transmission by satellite which falls in the expression ‘process’ as per Explanation 6 of Section 9(1)(vi) of the I-T Act

Facts:

1)    The assessee, engaged in broadcasting television channels from India, received transponder service from Intelsat, a tax resident of USA, in lieu of a fee.

2)    The assessee approached to the AO under 195(2) of I-T Act for Nil withholding tax certificates, for such payment of fees to Intelsat, which was denied by the AO.

3)    On the question of whether fee payable to Intelsat is in the nature of ‘Royalty’ in the light of amended provisions of section 9(1)(vi) as well as under Article 12 of Indo-US DTAA, the Tribunal held in favour of revenue as under.

Held:

a)    The Explanation 6 introduced by Finance Act, 2012 was only clarificatory in nature and, therefore, it did not amend the definition of royalty per se.

b)    There was no quarrel on the point that any payment for use or right to use of process is in the nature of royalty as per the provisions of Article 12(3) of DTAA between India and USA as well as per the Explanation 2 of section 9(1)(vi) of the Act.

c)    Since the term ‘process’ is not defined under the DTAA, therefore, by virtue of Article 3(2) of the India-US DTAA,the meaning of term ‘process’ as defined in the Act would apply for this purpose.

d)    The use of transponder by the assessee for telecasting/broadcasting the programme involves the transmission by the satellite including up-linking, amplification, conversion for downlinking of signals which falls in the expression ‘process’ as per Explanation 6 of Section 9(1)(vi).

e)    Hence the payments made for use/ right to use of process falls in the ambit of expression ‘royalty’ as per DTAA as well as per provisions of Income Tax Act.

f)    The decision of Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 197 Taxman 263 (Delhi)was not applicable in present case as it was pronounced prior to the insertion of Explanation 6 and Explanation below section 9(2).

Income from hoardings earned by Municipal Corporation is taxable under sec. 56

Where assessee, a Municipal Corporation, granted licences for putting up hoardings in its property, income from hoardings was in nature of 'income from other sources' and, therefore, it was exempt under section 10(20).

Facts:

a)  The assessee, a Municipal Corporation, granted licences for putting up hoardings in its properties. It had received income from hoardings and claimed that the same was exempted under section 10(20) as it was in the nature of 'income from other sources'.

b)  The Assessing Officer treated the income from hoardings as 'income from business' and accordingly disallowed the assessee's claim for exemption under section 10(20).

c)  On appeal, the CIT (A) held in favour of assessee. Further, the Tribunal upheld the order of the CIT (A).

The High Court held in favour of assessee as under:

1)  The Corporation was granting licenses for putting up hoardings in its properties and it was merely charging license fees to regulate such activities;

2)  In terms of its function, it would also be necessary for the Corporation to regulate such activities. It is the duty of the Corporation to regulate the offensive trades or practices and to construct, maintain, alter and improve public streets, bridges, sub-ways, etc;

3)  Further, it is the duty of the Corporate to remove obstructions and projections in or upon the streets, bridges and other public places. It may undertake any measure not specifically hereinbefore named, likely to promote public safety, health, convenience or instruction;

4)  Thus, if the Corporation permits hoardings to be put up in its property by issuing licenses, for which it was charging license fees, the same could not be deemed as its business activity;

5)  The collection from such licence fees is less than 1 per cent of the total revenue of the Corporation. Therefore, such income was not 'business income' and to be held as 'income from other sources'.-  CIT v. Rajkot Municipal Corporation [2014] 43 taxmann.com 99 (Gujarat)

Mandatory e-filing for firms, political parties and trusts giving notice of accumulation of income

The CBDT amended Rule 12 with Income-tax (Fourth Amendment) Rules, 2014, which brings following assessee within the net of mandatory e-filing of return or notice, as the case may be:

1)   Partnership firms: Earlier e-filing of return was mandatory only for those firms who were liable to get their accounts audited. In view of this amendment, every firm is now required to e-file the return even when they are not liable for tax audit for Assessment Year 2014-15.

2)   Political parties: Earlier political parties were given an option to file e-returns. Now every political party (it its income exceeds the maximum amount not chargeable to tax) is under an obligation to file e-return.

3)   Specified Trust: As per section 11(2) every trust can accumulate its income for application in subsequent years if its total income wasn’t applied or was not deemed to have been applied for charitable purposes in India during the previous year. Such trusts are required to give notice to the Assessing officer in prescribed format regarding accumulation of income. These trusts are now are required to file such notice in electronic mode.

NOTIFICATION NO.24/2014 [F.NO.142/2/2014-TPL]/SO 997(E), DATED 1-4-2014

No sec. 10(23C) relief to school collecting fees in name of development fund to be created for benefit of trustee

Facts:

a)  The assessee-trust established a higher secondary school. There was a search in the premises of husband of managing trustee of trust. The seized material found during the course of search operation showed excess collection over and above the fees in the name of development fund.

b)  Before the Assessing officer, the assessee claimed exemption under section 10(23C). The Assessing Officer held that since it was a family trust which was established for the benefit of children of managing trustee, thus, claim of the assessee for exemption under section 10(23C) was to be rejected;

c)  The CIT(A), however, allowed the claim of the assessee on the ground that it was a capital receipt. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)  Section 10(23C) provides that the educational institution existing solely for educational purposes and not for purposes of profit is eligible for exemption. In the instant case, the trust was established for the benefit of the children of managing trustee;

2)   It was a private family trust. Now, the question for consideration was as to when the trust itself was established for the benefit of the two children of managing trustee, whether the trust had any profit motive or not?;

3)  A bare reading of the trust deed clearly showed that the trust was established for the benefit of two children of managing trustee;

4)  There was a clause in the trust deed which enabled the children of managing trustee to appropriate the profit. The assessee had no obligation to reinvest the profit in the educational activities. Therefore, it could be concluded that the assessee was not in existence solely for educational purposes. It existed only for profit motive and, hence, it was not eligible for exemption under 10(23C). – ACIT v. Sabarigiri Trust [2014] 43 taxmann.com 19 (Cochin - Trib.)

‘Satisfaction’ of AO for assessment of other person may come after concluding assessment of searched person: SC

The Assessing Officer could record his satisfaction for issuing notice under section 158BD in the case of person other than searched person even after the completion of assessment of searched person.

The issue that falls for consideration of Supreme Court is:

At what stage of proceedings under Chapter XIV-B the assessing authority is required to record his satisfaction for issuing a notice under section 158BD?

The Supreme Court held in favour of revenue as under:

1)  The section 158BD is a machinery provision and it is inserted in the statute book for the purpose of carrying out assessment of a person other than the searched person. Under Section 158BD, if an officer is satisfied that there exists any undisclosed income which may belong to a person other than the searched person, after recording such satisfaction, he may transmit the records/documents to the Assessing Officer having jurisdiction over such other person;

2)  After receipt of the aforesaid satisfaction and upon examination of the said other documents relating to such other person, the jurisdictional Assessing Officer may proceed to issue a notice for the purpose of completion of the assessments under Section 158BD;

3)  Section 158BD provides that the satisfaction note could be prepared by the Assessing Officer either at the time of initiating proceedings for completion of assessment of a searched person under Section 158BC or during the stage of the assessment proceedings.

4)  It didn't mean that after completion of the assessment, the Assessing Officer couldn't prepare the satisfaction note to the effect that there exists undisclosed income belonging to person other than the searched person;

5)  Thus, for the purpose of Section 158BD, a satisfaction note is sine qua non and must be prepared by the Assessing Officer before he transmits the records to the other Assessing Officer who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages:

a)  At the time of or along with the initiation of proceedings against the searched person under Section 158BC;

b)  Along with the assessment proceedings under Section 158BC ; and

c)  Immediately after the assessment proceedings are completed under Section 158BC of the searched person.- CIT v. Calcutta Knitwears [2014] 43 taxmann.com 446 (SC)

Scope of retro-amendments couldn’t be curtailed by treaty - HC’s passing remarks; denies stay on recovery of demand

The scope and effect of the legislation cannot be curtailed by the DTAA, if after it comes into force an Act of Parliament is passed which contains contrary provision. This issue could have been discussed further had the petitioner questioned the legality of the Finance Act, 2012 inserting Explanations 5 and 6 in section 9(1)(vi) of the Act.

Facts:

a)  The assessee, engaged in business of providing telecom services to its subscribers in India, entered into agreements with non-resident telecom operators ('NTOs') for providing bandwidth and inter-connects capacity outside India.

b)  It also entered into a capacity transfer agreement with 'Belgacom' (a tax resident of Belgium) for acquisition of capacity over the Europe-India gateway (EIG) cable system.

c)  The assessee argued that the payments to NTOs and Belgacom couldn't be termed as 'royalty' under the provisions of Income-tax Act. Accordingly, it filed the instant writ with the High Court against the impugned order of Tribunal granting limited stay on recovery of tax.

The High Court held in favour of revenue as under:

1)  Section 9(1)(vi) makes it clear that payments for rendering any services in connection with activities referred to in clauses (iv) and (v) of the Explanation 2 to section 9(1)(vi) would attract the definition of 'Royalty;

2)  Explanations 5 and 6 to section 9(1)(vi) inserted by the Finance Act, 2012 provide that royalty includes consideration in respect of any right, property or information. As these Explanations are in the book of statute, unless they are declared ultra vires or their legality is tested, it is indispensable for the Assessing Officer to apply these Explanations while determining tax liability under the Act;

3)  The petitioner had not questioned the validity of the said amendments in this writ. Thus, the Assessing Officer was bound to apply such provisions in determining the taxability of the payments made by the petitioner to the NTOs;

4)  The scope and effect of the legislation can't be curtailed by the DTAA if after its entry into force an Act of Parliament is passed which contains contrary provision. The DTAA is entered into pursuant to the power conferred upon the Government under section 90;

5)  Thus, a detailed discussion was required as to whether section 90(2) was of such nature so as to nullify all Acts of the Parliament which create tax liability under the Act? This issue could be debated further had the petitioner questioned the legality of the Finance Act, 2012, inserting Explanations 5 and 6in section 9(1)(vi) of the Act;

6)  Any observation made on the above issues would not be construed as an expression of opinion on merit in view of the fact that all these issues are sub judice in the two appeals filed before the Tribunal. Thus, it needed to be examined whether the petitioner had made out a case for grant of stay in its entirety;

7)  There was no material placed before the Court to show that the petitioner would suffer irreparable hardship and injuries to his favour due to order of Tribunal granting limited stay on recovery of tax. The Tribunal had answered the grounds urged by the petitioner seeking grant of interim stay and had reached the logical conclusion by directing the petitioner to deposit 50% of the tax liability. The order of the Tribunal could not be interfered with.- Vodafone South Ltd. v. Dy. DIT (International Taxation) [2014] 43 taxmann.com 444 (Karnataka)

MCA notifies Rules under Companies Act, 2013

The Ministry of Corporate Affairs has notified 11 Rules under Companies Act, 2013. They will be effective from April 1, 2014. The major sections of Companies Act, 2013 have already been notified on March, 26, 2014. The salient features of these Rules are as under:

1)  New Definitions: It incorporates definitions of ‘Certifying Authority’, ‘digital signature’, ‘Digital Signature Certificate’,  ‘electronic Mail’, ‘electronic mode’ , electronic record’, ‘electronic Registry’.

2)  One person company (‘OPC’): Only a natural person who is an Indian citizen and resident shall be eligible to incorporate a OPC.

3)  Cessation of OPC status: OPC’s status shall be ceased if-

a)  Its paid up capital exceeds fifty lakh rupees or

b)  Its average annual turnover exceeds two crore rupees.

4) Penalty: The OPC or any of its officer will be liable for penalty of upto Rs 10,000 and further a fine of Rs 1,000 per day if they contravenes any of the provisions of these rules.

5) Prospectus:  Following reports shall be required to be filed along with the Prospectus:

a) Auditor’s report on profits and losses and assets and liabilities.

b) The reports of preceding five financial years relating to profits and losses of the enterprise. Reports can be filed for less than five financial years if the enterprise was in existence for lesser period.

c) Auditor’s report in respect of business of the enterprise.

6) Annual Return: Every company is required to prepare its annual return in Form No. MGT.7. Companies satisfying the following criteria are required to certify its Annual Return from a Company Secretary in practice:

(i)    listed companies or

(ii)   Companies having paid-up share capital of Rs 10 crore or more or

(iii)  Companies with turnover of Rs 50 crore or more.

Agricultural land won't lose its privileges even if sold in violation of State laws; not taxable as capital asset

Merely because agricultural land was sold in favour of non-agriculturist in breach of law prevailing in State, said land would not lose its character as agricultural land and, hence, could not be treated as capital asset.

Facts:

a)  The assessee had filed return of income and disclosed income from sale of agricultural land in response to notice issued under section 153C.

b)  The Assessing Officer made addition on account of capital gain by holding that the land, which was sold by assessee, was a capital asset as it was sold in violation of laws prevailing in the State.

c)  On appeal, the CIT(A) deleted the addition. Further, the Tribunal confirmed order of the CIT(A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)  It was not in dispute that what was sold by the assessee was an agricultural land which was situated beyond 8 Kms. of local limits of the Municipality and at the relevant time, the land was held by the assessee as agricultural land;

2)  The character of land would not change merely because it was sold to a non-agriculturist in breach of law prevailing in the State and the land still would continue as an agricultural land;

3)  Even though the sale in favour of non-agriculturist could be declared as illegal, yet the land would not lose its character as agricultural land;

4)  When the land was an agricultural land, which was situated beyond 8 Kms. from the municipal limits, no error had been committed by the Tribunal in not considering the land as 'capital asset';

5)  Thus, the land was to be treated as agricultural land and it was outside the purview of capital asset. – CIT v. Rajshibhai Meramanbhai Odedra [2014] 42 taxmann.com 497 (Gujarat)

ITAT explains interplay between Article 7 and Article 13 of India-UK DTAA

The Tribunal held as under:

1)  The Para 1 of Article 7 of the India-UK treaty ('DTAA') provides that if an enterprise carries on business in the other Contracting State through a permanent establishment (‘PE’) situated therein, then the profits of the enterprise may be taxed in the other State but only so much of them as are directly or indirectly attributable to that PE;

2)  The effect of Para 9 of Article 7 is that if 'Business profits' include an item of income which falls under any of the specific Articles of the DTAA, such as Royalties and fees for technical services (‘FTS’) under Article 13, then such income shall be excluded from the 'Business Profits' and falls under specific Articles such as Article 13;

3)  Para 6 of Article 13 of DTAA provides that the provisions of paragraphs 1 and 2 of Article 13 shall not apply if the beneficial owner of the royalties or FTS, carries on business in the other Contracting State (in which the royalties or FTS arise) through a PE situated therein and the right, property or contract in respect of which the royalties or FTS are paid is effectively connected with such PE. In such case, the provisions of Article 7 (Business profits) of this Convention, as the case may be, shall apply;

4)  Thus when Article 7 had excluded royalty or FTS to be considered under Article 13 but Para 6 of Article 13 has sent the matter back to Article 7, it was the mandate of Article 7 which would apply on the amount excluded by Para 6 of Article 13. – Dy. DIT v. JC Bamford Excavators Ltd. [2014] 43 taxmann.com 343 (Delhi - Trib.)

Rental income of godown constructed on an agricultural land couldn't be termed as agriculture income

Facts:

a)  The assessee, a partnership firm, was carrying on business of constructing godowns and renting them to parties for earning rental income.

b)  It had constructed a godown on agricultural land belonging to its partners. The godown was given on rent and rental income so derived was declared by assessee as agricultural income.

c)  The Assessing Officer had accepted assessee's claim of agricultural income. The CIT passed a revisional order to hold that the rental income from godown could not be treated as agricultural income within meaning of section 2(1A)(c). The agrrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)  The income in the instant case needed to be considered under section 2(1A)(c). The requirement of section 2(1A)(c) is that the income should be derived from any building owned and occupied by the receiver of the rent or revenue of the land;

2)  In the instant case, neither the assessee was receiver of the rent or revenue of the land, nor was the building occupied by it;

3)  Further, the requirement of this section is that the building must be occupied by the cultivator or the receiver of rent-in-kind of any land with respect to which or with respect to the produce of which, any process which is ordinarily employed by a cultivator or receiver of rent in kind, (so as to render the produce raised or received by him fit to be taken to the market)  is performed;

4)  The assessee also failed to fulfill this requirement, as the godown building was occupied by 'K' and 'I', who were the assessee's tenants during the year under consideration and were not either cultivators, or receivers of rent in kind of any land.;

5)  Further, it had also not been shown by the assessee that either the land beneath the godown building, or the produce thereof was subjected to any process ordinarily employed by a cultivator or receiver of rent in kind to render the produce raised or received by him fit to be taken to the market. Thus, the rental income from godown could not be treated as agricultural income. - New Jain Godowns v. ITO [2014] 42 taxmann.com 434 (Delhi - Trib.)