Sum paid to acquire rights of telecasting from outside India, in absence of its link with PE in India, wasn’t royalty

Sum paid to acquire rights of telecasting from outside India had no connection with the marketing activities carried out through Permanent Establishment ('PE') of assessee in India. Thus, impugned payments couldn't be deemed as royalty in view of Article 12(7) of India-Singapore DTAA.
Facts:
a)The assessee, a Singaporean company, was engaged in the business of acquiring rights in television programmes and exhibiting the same on its television channels from Singapore.
b)The issues for consideration before High Court were:
i.Whether the payment to G (a Singaporean Company)for acquisition of telecasting rights were in the nature of 'royalty' covered by Explanation 2 to section 9(1)(vi)(c)?
ii.Even if payments would be deemed as royalty, whether they would not be chargeable to tax as per Article 12(7) of India-Singapore DTAA?
The High Court held as under:
1)The appellate authorities had already held that payment was made only for broadcasting operations carried out from Singapore, which had no connection with the marketing activities carried out through alleged Permanent Establishment ('PE') of assessee in India;
2)Thus, there was no economic link between the payments. The payer was not a resident of India and the liability to pay royalty had not been incurred in connection with and was not borne out by the PE of the payer in India
3)The absence of economic link was thus the foundation on which the Tribunal's conclusions were based. Thus, the Appeal was to be dismissed as no substantial question of law was involved. – DIT (INTERNATIONAL TAXATION) V. SET SATELLITE (SINGAPORE) PTE LTD. [2014] 45 taxmann.com 100 (Bombay)

SEBI is empowered to monitor call records of any person against whom any enquiry or investigation is pending

SEBI is authorized to call for call data records from telecom service providers. However, such power can only be exercised it in respect of a person against whom an authorized officer conducts any investigation or enquiry. Facts: a)The petitioner, Indian Council of Investor, filed the instant PIL alleging violation of fundamental right of privacy by SEBI as it had intercepted and monitored calls and called for Call Data Records (CDRs) from Telecom Service providers (TSP). b)The petitioner further stated SEBI was prohibited from calling for any records such as CDRs from any TSP in view of Section 5 (2) of the Indian Telegraph Act, 1885. The SEBI denied allegation made against it on ground that it had only called for data that was already available in the records of the telecom providers. c)The respondent stated that Section 5 (2) of the Indian Telegraph Act, 1885 has no application in respect of calling for CDRs from TSP as the provision only applies to intercepting call and, or prohibiting call/messages. The High Court held as under: 1)SEBI is authorized under SEBI Act to call for CDRs from TSP. However, this power is capable of misuse and can violate a citizen's right to privacy guaranteed by Article 21 of the Constitution. 2)SEBI cannot exercise such power for conducting a fishing enquiry. It cannot be a blanket power to hunt out information without any pending inquiry or investigation. This power can only be exercised by SEBI in respect of any person against whom any investigation or enquiry is being conducted. 3)Only an officer duly authorized by SEBI can call for information about CDRs from TSP. Thus, the instant PIL was disposed of- INDIAN COUNCIL OF INVESTORS V. UNION OF INDIA [2014] 45 taxmann.com 45 (Bombay)

Assessee can’t either seek withdrawal of appeal or file revision petition when appeal is pending before CIT(A)

Where an application is filed, seeking withdrawal of appeal, but no order is passed by CIT(A), appeal will remain pending and subsequent revision petition will not be maintainable. Facts: a) Scrutiny assessment was made on assessee. Thereafter, he had filed an appeal before the CIT(A). Subsequently, the assessee sent an application by post seeking withdrawal of his appeal. The application was received by the CIT(A). Thereafter, the assessee preferred revision of assessment order stating that he had already waived of his right of appeal. b) The Commissioner allowed revision by deleting part of the addition made during assessment. When a notice was issued for hearing before the CIT(A), the assessee did not appear. He sought adjournment but the CIT (A) declined the same. The CIT(A) rejected the withdrawal application of assessee. c) Further, the CIT (A) confirmed the assessment. Subsequently, the Commissioner also passed order cancelling/revoking his earlier revisional order. The aggrieved-assessee filed the instant writ. The High Court held as under: 1) There is no provision in Income-tax Act, which permits withdrawal of an appeal, once it is filed. Once party exhausts right of appeal, and the appeal is filed before appropriate appellate authority, who after receiving the same has registered it, then there is no provision in the statute permitting withdrawal thereof; 2) Mere filing of an application seeking withdrawal of appeal would not mean a deemed withdrawn unless an order is passed by appellate authority thereon. The appeal continues to remain pending even when the assessee files the application for withdrawal of an appeal; 3) The assesseee’s appeal was pending before the CIT(A) when the revision application was filed by him or when the Commissioner passed an order on revision petition. Hence, the revisional authority was barred from revising order of assessing authority by virtue of sub-section (4) of section 264; 4) Clause (a) of section 264(4) provides for a situation where assessee has not waived of his right of appeal. When appeal was filed, the right of appeal was availed of and exhausted by assessee, hence, question of waiver of right of appeal thereafter would not arise. 5) Thus, the Commissioner had committed a manifest error in exercising revisional power when assessee's appeal was pending before the CIT (A). That being so, it had rightly been recalled. Thus, the writ petition was to be dismissed. - YOGENDRA PRASAD SANTOSH KUMAR V. CIT [2014] 44 taxmann.com 299 (Allahabad)

Courtyard of residential unit isn’t includible in built-up area to determine sec. 80-IB(10) relief, rules HC Area of courtyard appurtenant to residential unit is not to be included to compute built-up area in terms of section 80-IB(10)

The High Court held in favour of assessee as under: 1) Section 80-IB(14)(a) prescribes that in order to avail of the deduction, the built-up area of the residential unit cannot exceed 1500 square feet. In order to be treated as a 'built -up area' some construction has to be in existence in such area. 2) Unless and until it is shown that some construction is there, the area of the courtyard which is open to the sky, cannot be included to compute the built-up area. 3) The meaning of a courtyard in the Legal dictionary, inter alia, signifies a space of land around a dwelling house which might be enclosed, appurtenant to which buildings and structures may be erected; 4) Thus, area of courtyard could not be included to calculate the built-up area in terms of section 80-IB(10). The Tribunal had misconstrued the provisions of Act and the material on record to deny the benefit of deduction to the assessee in terms of section 80-IB(10). - COMMONWEALTH DEVELOPERS V. ACIT [2014] 44 taxmann.com 303 (Bombay)

ITAT raps revenue for invoking sec. 40(b) by treating only those partners as working who were entitled to salary

Facts:

a)  The assessee firm had four partners. In terms of the partnership deed, salary was being paid only to three partners. However, bonus was paid to all the four partners.

b)  The Assessing Officer opined that when only three partners were drawing salary, only they could be treated as the working partners. Hence, the Assessing Officer disallowed the bonus paid to fourth partner.

c)  The CIT(A) confirmed said disallowance.

The Tribunal held in favour of assessee as under:

1)  It was not disputed that all the four partners were actively engaged in the conduct of the business of the firm and, thus, they were the working partners. The provisions contained under section 40(b) provide that any remuneration by whatever name called, shall not be allowable if such payment is not made to a working partner. Secondly, such payment is not found to be authorized by or is not found to be in accordance with the terms of the partnership deed;

2)  In the instant case, the partnership deed authorized payment of salary to three partners whereas payment of bonus was allowed to all the four partners. Thus, all the conditions provided under section 40(b) stand fulfilled. The interpretation by the AO and the ld. CIT(A) that only those partners who were paid the salary were working partners and not the others, was a complete misreading of the provision;

3)  It was decision taken by the partners by mutual consent that out of all the four partners, salary would be payable to only three partners whereas bonus shall payable to all the four partners, in which the law does not permit interference by the revenue.

4)  The CIT (A) had wrongly interpreted section40(b)(v) while holding that the definition of 'working partners' was meant only for section 40(b)(v). The Explanation 4 below section 40(b) clearly reads that for the purpose of this clause which meat clause (b) to section 40. Thus, the disallowance under section 40(b) was to be deleted. - Id. Mohd. Nizamuddin v. ACIT [2014] 44 taxmann.com 213 (Jaipur - Trib.)

Successor Co-op. Societies can’t claim set-off losses of amalgamating societies; Sec. 72A meant for Cos. only

IT:Section 72A provides for setting off losses on amalgamation of companies only. There is no provision in the Income-tax Act, which would permit the amalgamating co-operative society to carry forward and adjust such losses against the profits of the amalgamated co-operative society.

Facts:

The instant appeal was filed before the Supreme Court on following issue:

Whether the amalgamated society could claim the set-off of losses of amalgamating co-operative societies with its profits?

The Supreme Court held in favour of revenue as under:

1)  A non-existent person cannot file an income-tax return and, therefore, cannot carry forward its losses after its existence ends. Societies, upon their amalgamation into the appellant society, had ceased to exist. Thus, those societies had no right under the provisions of the Act to file a return to get their earlier losses adjusted against the income of a different legal personality, i.e., the appellant-society.

2)  There is a specific provision in the Act that upon amalgamation of one company with another, losses of the amalgamating companies can be carried forward and the amalgamated company can get those losses set off against its profits. This is permissible by virtue of Section 72 A of the Act but there is no such provision in the case of co-operative societies.

3)  Such a provision has been made only with regard to amalgamation of companies and later on similar provisions were made with regard to banks, etc., but at the relevant time, there was no such provision, which would permit the amalgamating co-operative society to carryforward and adjust such losses against the profits of the amalgamated co-operative society.

4)  The societies and companies belong to different classes. Simply because both have a distinct legal personality, it could not be said that both ought to have been given the same treatment. In the taxation matters, one has to interpret taxation statute strictly.

5)  Simply because one class of legal entities is given some benefit which is specifically stated in the Act does not mean that the legal entities not referred to in the Act would also get the same benefit. Thus, amalgamating co-operative societies are not entitled to carry forward and set off losses against profits of the amalgamated co-operative societies.- Rajasthan R.S.S. & Ginning Mills FED. Ltd. v. Dy. CIT [2014] 45 taxmann.com 1 (SC)

Payment to seconded employees is FTS; Foreign co. is real employer if Indian co. can cancel secondment agreement only

Overseas entity was the real employer of seconded employees when Indian entity had only the right to terminate the secondment without conferring the right to terminate the original employment. Reimbursement of salary of seconded employees to the overseas entities was to be regarded as FTS when they rendered quality control services till the necessary skills were acquired by the resident employee group.

Facts:

a)  The CIOP ('petitioner'), incorporated in India, was wholly owned subsidiary of Centrica Plc. (a company incorporated in the UK).The BSTL and DEML were other subsidiaries of Centrica Plc.

b)  These overseas entities outsourced their back office support functions to third party vendors in India. To ensure that the Indian vendors complied with quality guidelines, the petitioner was established in India.

c)  Accordingly, the petitioner entered into a secondment agreement with these overseas entities, wherein employees continued to remain on the payrolls of the overseas entities. The petitioner was required to reimburse salary costs to the overseas employers.

d)  The issue which arose for the consideration in the instant case was:

Whether the secondment of employees by the overseas entities, would fall within Article 12 of the India-Canada and Article 13 of the India-UK DTAAs?

The High Court held in favour of revenue as under:

1)  Sums paid to the overseas entities for the seconded employees could be covered by the India-Canada DTAA, when it was established that not only technical services were performed, but the enterprise made available the skills behind that service to the other party;

2)  The India-UK DTAA defines Fees for Technical Services ('FTS') as "payments of any kind of any person in consideration for therendering of any technical or consultancy services (including the provision of services of a technical or other personnel)". In this case, the overseas entities had, through the seconded employees, provided technical services to the petitioner including the provision of services of personnel;

3)  The nature of the services rendered by the CIOP was in the nature of "business support services" and was covered within the fold of "technical or consultancy" services. The CIOP and seconded employees were to oversee the quality of service rendered by vendors to the overseas entities, which would fall within the scope of the technical or consultancy services.

4)  It was admitted by the petitioner that the reason for entering into the secondment agreement was to provide support for the initial years of operation, till the necessary skills were acquired by the resident employee group;

5)  All direct costs of such seconded employee's, social security plans, other benefits and costs were ultimately to be paid by the overseas entity. The petitioner was given the right to terminate the secondment only, excluding the right to terminate the original employment relationship (the services of the secondee vis-à-vis the overseas entities);

6)  The Division Bench in DIT v. E-Funds IT solutions [2014] 42 taxmann.com 50 (Delhi) highlighted that the nature of activity undertaken by the employees was determinative of whether it constituted a service. In the present case, the overseas entities outsourced their back office support functions to third party vendors in India. The seconded employees were to oversee quality control of the work of such vendors. This work could not be characterized as mere stewardship;

7)  What could have been left to the petitioner to do was, in fact, being done through the seconded employees, whose expertise and training lent quality and content to the Indian entity. Therefore, the real employer of these seconded employees continued to be the overseas entity concerned. And the payment made by the petitioner to the overseas entities was to be treated as FTS. - Centrica India Offshore (P.) Ltd. v. CIT [2014] 44 taxmann.com 300 (Delhi)

‘Ready to use’ rig isn’t an Installation PE as per India-USA DTAA; HC denies interpreting term ‘used’ as per I-T Act

When 'rig' was lying 'ready for use', it could not be considered as 'used' for purpose of Article 5  of India-USA DTAA. The Tribunal had rightly concluded that the word 'used' as specified in said DTAA clarifies usage of an installation or structure for exploration of natural resources and if it was so used for a period of 120 days in 12 months, only then it can be considered as PE in India.

Facts:

a)  The assessee operated the rigs for its clients in India. Those rigs remained unused during the period specified by assessee due to maintenance and repair.

b)  The Assessing Officer (‘AO’) was of the view that India-USA DTAA (‘Agreement’), specified the word "used" without furnishing meaning to the said word and, accordingly, its meaning thereof to be culled out from the Income-tax Act, 1961 (‘I-T Act’), which includes term 'ready for use'.

c)  He further held that as the rig was lying ready for use and, as such, the rig having been used for more than 120 days during the relevant assessment year, the assessee had a permanent establishment (‘PE’) in India.

d)  The CIT(A) accepted the said decision and the Tribunal had reversed the findings of AO and the CIT(A).

The High Court held as under:

1)  The term 'PE' includes an installation or structure used for exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve calendar month period;

2)  Thus, the Tribunal was of the view that the word ‘used’ had been explained in the Agreement and, thus, there was no scope to refer to the I-T Act.

3)  The Tribunal had rightly concluded that the word 'used' as specified in said DTAA clarifies usage of an installation or structure for exploration of natural resources and if it was so used for a period of 120 days in 12 months, only then it can be considered as PE in India;

4)  There was no infirmity in the order of Tribunal and he had rightly reversed the findings of the AO as well as the CIT(A). – DIT(International Taxation) v. R & B Falcon Offshore Ltd. [2014] 44 taxmann.com 400 (Uttarakhand)

Larger bench gives prospective effect to CBDT’s Instructions on revised monetary limits for filing of an appeal

IT: Revised monetary limits for filing of an appeal as specified by CBDT through an Instruction of 2011 would not apply to all pending appeals.

Facts:

The following question of law has been referred to the larger bench of Court:

Whether the view taken by the High Court [in case of CIT v. Sureshchandra Durgaprasad Khatod(HUF)[2013] 31 taxmann.com 74 (Gujarat)] that the instructions of 2011 of the Board providing for revised monetary limits for filing the appeals, would apply to all pending cases, irrespective of the date of filing of such appeals was correct?

The High Court held as under:

1)  The clause 11 of the Instructions of 2011 specifically states that “this instruction will apply to appeals filed on or after 9^thFebruary 2011. However, the cases where appeals have been filed before 9th of February, 2011 will be governed by the instructions on this subject, operative at the time when such appeal was filed”.

2)  There was no ambiguity in the instructions of 2011as regards its applicability, and it had been made clear that if those appeals were not filed after the dates mentioned in those instructions, the fate of the appeals would be governed in accordance with the instructions prevailing on the date of presentation of such appeals.

3)  In view of such clear legislative intention, it could not be held that even if an appeal was filed prior to February 9, 2011 the same would be barred notwithstanding the fact that at the time of filing such appeal, the same was not barred by the then instructions of the CBDT. The view taken in case of DurgaprasadKathod [HUF](supra) could not be accepted because in that decision, the well-settled principle relating to literal construction was not followed.

4)  In the absence of any ambiguity, there was no scope of interpreting the said provision in a different way by ignoring the literal meaning of the words used in the said delegated statutory provisions.

5)  From the language of the enabling provisions of the statute, it was clear that no power had been conferred on the CBDT to make the pending appeals or references filed in accordance with the then existing law infructuous by issuing any such direction or instruction with retrospective effect.

6)  The CBDT being fully conscious of its limitation had given clear prospective effect to those instructions in paragraph 11 of the instructions. Thus, the conclusion arrived at by the High Court was in conflict with the existing law of the land.- CIT v. Shambhubhai Mahadev Ahir [2014] 44 taxmann.com 344 (Gujarat)

Payment for software licensed to foreign HO and used by Indian branch with non-exclusive rights isn't 'royalty'

Where foreign Bank had obtained a license to use software and, subsequently, allowed its Indian branch to use such software, data processing cost reimbursed by Indian branch for use of such software could not be deemed as royalty if head office alone had exclusive right of license to use software.

Facts:

a)  The assessee-bank, incorporated in Belgium, was operating through a branch office in India.  It had acquired banking application software from an Indian company.

b)  Later on, when its branch was set up in India, it allowed the Indian branch to use the same software by making it accessible through server located at Belgium.

c)  In terms of agreement, the branch had to reimburse the cost of data processing for use of said software to the head office.

d)  The Assessing Officer opined that payment made by Indian branch amounted to ‘royalty’. Further, the CIT(A) reversed the order of AO. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  As per the definition of 'royalty' provided in Article12(3)(a) of India-Belgium DTAA (‘treaty’), when the payment of any kind is received for 'use' of or 'the right to use' of any of the copy right of any item or for various terms used in the said article, then only it can be held as 'royalty';

2)  The character of payment towards royalty depends upon the independent 'use' or the 'right to use' of the computer software, which is a kind of copyright. In the instant case, the Branch did not have any independent right to use or control over such computer software installed in Belgium, but it simply sent the data to the Head Office for getting it processed;

3)  The Branch was only reimbursing the cost of processing of such data to the Head Office. Such reimbursement did not fall within the ambit of 'royalty'. To fall within its ambit, the Branch should have exclusive and independent use or right to use the software and for such usage, payment had to be made in consideration thereof;

4)  The character of the payment under the royalty transactions depends upon the rights that the transferee acquires in relation to the use and exploitation of the software programme;

5)   In the instant case, there was no such right which had been acquired by the Branch in relation to the usage of software, because the head office alone had the exclusive right to use the software. Thus, the reimbursement of the data processing cost to the Head Office did not fall within the ambit of definition of 'royalty' under article 12(3)(a) of treaty.  Accordingly, the conclusion drawn by the Commissioner (Appeals) was to be affirmed. – ADIT v. Antwerp Diamond Bank NV Engineering Centre [2014] 44 taxmann.com 175 (Mumbai - Trib.)