I-T returns and info provided to tax authorities are exempt from disclosure under RTI Act

Issue

Whether the Income-tax returns and other information provided to Income Tax Authorities by a taxpayer are personal and confidential in nature and, therefore, cannot be placed in public domain through RTI Act?

The High Court held as under-

1) Income-tax returns and other information provided to Income Tax Authorities by individuals and unincorporated assessees are confidential in nature and cannot be placed in public domain, as it would be exempt under section 8(1)(j) of Right to Information Act, 2005 (RTI Act).

2) In cases of widely held companies, most information relating to their income and expenditure would be in public domain and, therefore, it is only confidential information that would be exempt from disclosure under section 8(1)(d) of RTI Act.

3) Information furnished by an assessee in income-tax return can be disclosed only where it is necessary thing to do so in public interest and where such interest outweighs in importance any possible harm or injury to assessee or any other third party. However, information furnished by corporate assessees that neither relates to another party nor is exempt under section 8(1)(d) RTI Act can be disclosed- Naresh Trehan v. Rakesh Kumar Gupta [2014] 51 taxmann.com 548 (Delhi)

Lumpsum amount paid for transfer of know-how wasn’t royalty if payment wasn’t made for any particular period

Assessee had entered into an agreement with UK based company for supply and installation of machinery, which involved transfer of technical know-how. It had paid lumpsum amount in connection with transfer of technical know-how. Such payment could not be treated as royalty as it was not made for any particular period.

Facts:

a) Assessee entered into an agreement with UK based Co. to supply and install certain machinery, which involved transfer of technical know-how.

b) The AO treated the payment inconnection with transfer of technical know-how as royalty. The assessee pleaded that the such payment couldn’t be treated as royalty on following grounds:

i) It was paid in lumpsum and not year after year for the use of patent or any facility;

ii) The transfer of technical know-how or patent was for the limited purpose of installation and fixing the machinery.

c) On appeal, the CIT(A) dismissed the appeal of assessee. Further, the Tribunal set aside the order of AO by holding that amount paid to UK Co. couldn’t be treated as royalty.Aggrieved by the order of tribunal, the revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) Though the royalty is required to be paid periodically during the subsistence of the arrangement, it is quite possible for the parties to agree for payment of a lumpsum amount. However, a lumpsum payment would be deemed as royalty, only when it is for a fixed period for which the facility can be utilised.

2) A lumpsum payment without mentioning the period is prone to take away such amount from the definition of royalty.

3) Royalty, by its very nature, is a sum payable to the owner of a design, invention or trademark by another for using it. It is clearly opposed to an outright transfer.

4) In the instant case, the amount paid in lumpsum was not for any particular period. It was paid for transfer of technical know-how for limited purpose of installation and fixing of machinery. Thus, such lumpsum payment could not be treated as royalty- CIT v. The Andhra Petrochemicals Ltd. [2014] 51 taxmann.com 451(AP)

Sum received by international news agency on distribution of news and related photos in India is royalty

Facts:

a)The assessee, an International News Agency, was having its headquarter in France. It had been distributing its news and photos connected with news in India through various Indian News agencies.

b)There were two categories of payments received by assessee from India - one for transmission of news and the other for transmission of related photos.

c)The Assessing Officer (‘AO’) as well as the CIT(A) held that copyright subsisted in news-reports and photographs circulated by the assessee in terms of Copyright Act, 1957. Hence, the payments received by the assessee would qualify as 'royalties' under section 9(1)(vi) and Article 13(3) of the India-France Treaty (‘DTAA’).

d)The assessee submitted that no copyright subsisted in the work of the assessee as news reports as well as photographs provided by the assessee lacked originality and were devoid of any creativity.

The Tribunal held in favour of revenue as under:

1)On a perusal of Article 13 of DTAA, it was evident that 'royalty' cover within its fold payments pertaining to copyright of literary, artistic work, etc. Since these terms had neither been defined nor illustrated under Income-tax Act nor under DTAA, reliance was to be placed on relevant provisions of the Indian Copyright Act, 1957 to understand their true meaning and context.

2)To appreciate the distinction between mere reporting of facts from news stories, it would be worthwhile to analyse the recent reporting about Malaysia Airlines Flight 370 flight that disappeared on 8 March, 2014. In one of the newspapers i.e. 'Strait Times', the catchline read as Malaysia's MH 370 report shows delayed response, offers no new clues' while, another newspaper 'The New York Times' reported this incident with the catchline Questions Over Absence of Cellphone Calls From Missing Flight's Passengers'. It was to be pointed out that, the piece reported by the first newspaper consisted of news inputs as well as photographs from AFP while as the latter one consisted of news inputs from 'New York Times News Service'.

3)From a reading of the above news-item, it is evident that, even though the factum or news remains to be imbedded in a fact its reporting or form of an expression makes it unique. Thus, such news-reports as well as archived data being in the nature of 'original literary works' meet the statutory requirements for copyright outlined under section 13(1)(a) of the Indian Copyright Act, 1957. Hence, copyright subsisted in such news item/news story.

4)Section 2(c)(i) of the Indian Copyright Act, 1957 categorically includes photographs as artistic work. As per terms of usage of assessee's photos for news items or non-news items, it could not be denied that it had an intrinsic value of its own and when used for 'news items'; it helped to assist in conveying the message in the news story. Hence, copyright subsisted in such photographs/ image under consideration. Therefore, sum received by international news agency on distribution of its news and related photos in India was taxable as royalty. – Agence France Presse v. ADIT, International Taxation, New Delhi [2014] 51 taxmann.com 186 (Delhi - Trib.)

HC can’t review orders of SetCom; powers are confined to reviewing its decision making process rather decision itself

IT: High Court cannot assume the role of an appellate authority to review orders passed by the SetCom. Its role is confined to judicial review of the decision making process adopted by the SetCom and not the decision itself.

The High Court held as under:

1)The High Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, cannot assume the role of an appellate authority to conduct a review of orders passed by the Settlement Commission (‘SetCom’).

2)Its role is confined to reviewing decision making process adopted by the SetCom and not the decision itself.

3)The scope of enquiry of the Court, in matters involving a challenge to orders passed by the SetCom, is only to see whether its order complied with the statutory provisions of Chapter XIX-A of the I-T Act.

4)The Karnataka High Court in N.Krishnan v. Settlement Commission [1989] 47 TAXMANN 294 (KAR.) observed that a decision of the SetCom could be interfered with only:

i)If grave procedural defects, such as violation of the mandatory procedural requirements of the provisions in Chapter XIXA of the Income-tax Act, 1961, and/or violation of the rules of natural justice were made out; or

ii)If it was found that there was no nexus between the reasons given and the decision taken by the SetCom..

5)The Supreme Court in Union of India v.Ind-Swift Laboratories Limited [2011] 4 SCC 635 held that an order passed by the SetCom could be interfered with only if the said order was found to be contrary to any provisions of the Act. So far as the findings of fact recorded by the SetCom or question of facts were concerned, the same were not open for examination either by the High Court or by the Supreme Court.

6)Hence, it was well-settled that the power of judicial review was not to be exercised to decide the issue on facts or on an interpretation of the documents available before the Court. Thus, in the instant case, the enquiry by Court could only be whether or not the SetCom had exercised a jurisdiction that it did not have or, alternatively, if it did have the jurisdiction, whether it had erred in the exercise of that jurisdiction. In the latter event, the Court would also have to bear in mind the nature of the jurisdiction exercised by the SetCom, which was akin to a statutory arbitration. – CIT v. Settlement Commission (IT & WT) [2014] 51 taxmann.com 351 (Kerala)

SEBI plans to widen definition of insider in insider norms and to reduce timeline to complete delisting process

The SEBI board met in Mumbai on November 19, 2014 and approved of new regulation in place of existing insider trading regulations and amendment to delisting regulations. It has widened the definition of insider under amended insider trading norms and has reduced the time-line for completing delisting process.

Some of the changes approved by SEBI are outlined hereunder:

1)Amendment to Insider trading norms: In order to strengthen the regulatory framework dealing with insider trading in India, SEBI has approved of new regulation in place of the existing Insider Trading regulations. The salient features of the proposed regulations are as under:

a)Definition of ‘insider’ broadened: The definition of insider has been widened. Following persons have been included in the definition of ‘insider’:

Persons connected in any contractual, fiduciary or employment relationship that allows such persons access to unpublished price sensitive information (UPSI).

Immediate relatives would be presumed to be connected persons, with a right to rebut the presumption.

b)Insider trading norms aligned with international practices: The requirement of communication of UPSI in the case of legitimate business transaction has been recognized, in law, and a safeguard has been provided.

c)Disclosure of UPSI in public domain: Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market, as prevalent in other jurisdictions.

2)Insertion of uniform regulation in place of listing agreement: SEBI has approved of conversion of Listing Agreement to Listing Regulations. Listing Regulations, interalia, would be comprehensive Regulations in respect of various types of listed securities. These Regulations would consolidate and streamline the provisions of existing listing agreements, thereby ensure better enforceability.

3)Amendment to delisting regulations: SEBI has approved certain changes to SEBI (Delisting of Equity Shares) Regulations, 2009:

a)Conditions for delisting:

It has been proposed that delisting would be considered successful only when the shareholding of the acquirer together with the shares tendered by public shareholders reach 90% of the total share capital of the company, and Atleast 25% of the number of public shareholders, (holding shares in dematerialised mode as on the date of the Board meeting approve of the delisting proposal) tender in the reverse book building process.

b)Exemption from reverse book building process: Further, companies whose paid-up capital and net worth does not exceed Rs.10 crores and Rs.25 crores, respectively, as on the last day of the previous financial year are exempted from following the Reverse Book Building process.

c)Reduction in time-line to complete delisting: Timelines for completing the delisting process has been reduced from 137 calendar days (approx 117 working days) to 76 working days.

4)Risk based supervision of market intermediaries: SEBI is in the process of formalizing its risk based approach towards supervision of market intermediaries which will be in alignment with the global best practices. The system will be implemented in a phased manner.

5) Granting Single Registration to Depository Participants: With a view to further simplify the registration requirements for Depository Participants (DPs), the Board has approved of the policy of granting single registration for the application of initial registration as well as the permanent registration for operating with both the Depositories.

6) Use of Secondary Market infrastructure for public issuance (“e-IPO”): The Board has approved the proposal to frame suitable regulations for using Secondary Market infrastructure for public issuance (“e-IPO”) after going through the public consultation process

7) Imposing restrictions on wilful defaulters - Amendments to Regulations framed under SEBI Act, 1992: The Board has approved of the proposal to review the policy in respect of restricting an issuer company / its promoter / directors, categorized as wilful defaulter, from raising capital after going through the public consultation process.

Sales incentives to employees establish LO promotional activities in India; treated as PE of foreign Co.

Facts:

a)The assessee, a company incorporated in US, established a Liaison Office (‘LO’) in India. During assessment the Assessing Officer (‘AO’) contended that the activities of the LO extended to searching for the prospective buyers and for promoting sales of the assessee in India.

b)The AO posed a few queries before the Chief Representative Officer (‘CRO’) of the assessee which were explained by him.

c)In one of the queries pertaining to the remuneration schemes for the employees, the CRO explained that the employees were entitled to sales incentives to the extent of 25% of their annual remunerations. Further, the performance of the employees was judged by the number of direct orders received by them.

d)The CRO further explained that the incentive plan was a standard term which was inadvertently included in the offer letters given to the employees. In fact, no such incentive was given to any employees during the year.

e)On basis of such an enquiry, the Assessing Officer held that the activities of LO were not limited to preparatory or auxiliary activities in India and they had extended to marketing and promotional activities as well. Accordingly, the income attributable to the LO in India would be taxable in India. The Commissioner (Appeals) and the Tribunal upheld the order of the Assessing Officer.

The High Court upheld order of the Tribunal:

The High Court upheld the order of the Tribunal which provided that:

1)Whether or not any incentive was paid to an employee during the year was not material. What was relevant was the nature of the incentive plan.

2)Nature of incentives to employees indicated that purpose of LO was not just to advertise products of assessee but extended to activities which traversed the actual marketing of the products of assessee in India.

3)The explanation that the incentive plan, being a standard language, was inadvertently included in the offer letter was far-fetched, because the assessee carrying over a transnational business with a range of advisors could not be assumed to have committed an inadvertent mistake on this significant issue.

4)Therefore, LO would be treated as PE of foreign company.

5)However, on the issue of determination of the income attributable to the LO which had to be taxed in India, the High Court restored the matter before the AO. - BROWN AND SHARPE INC. V. CIT [2014] 51 taxmann.com 327 (Allahabad)

Time gap of 30 days isn't intended between book closure date and record date for declaration of dividend, says SAT

As per clause 16 of 'Listing agreement' time gap of 30 days is intended to be between two book closures and two record dates and not between a book closure and a record date

Facts:

a)The appellant-company, listed on BSE and NSE (‘respondents’), had declared book closure date for the purpose of its AGM. The AGM was held and on the same day interim dividend was declared and the record date was fixed.

b)Thereafter, both the respondent's alleged that time gap between book closure date and record date was less than 30 days which was violative of clause 16 of the 'Listing Agreement'.

c)The SEBI held that appellant-company had violated clause 16 and, accordingly, called upon appellant to comply with it.

On appeal the Securities Appellate Tribunal held as under:

1)On perusal of clause 16 of ‘Listing Agreement’ it was seen that in a year there could be more than one book closure for the purpose of declaration of dividend or the rights issue or bonus shares, etc.

2)If more than one book closure was postulated under clause 16 of the listing agreement, then the time gap of 30 days under clause 16 would be referred to as the time gap between two book closure dates and it could not be inferred that time gap should be between book closure date and record date.

3)Where a company kept its transfer books closed during AGM as per clause 16 and also sought to declare dividend, then stipulating record date for such dividend after 30 days of book closure date as well as payment of dividend would be violative of section 205A of the Companies Act, 1956 – ORACLE FINANCIAL SERVICES SOFTWARE LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA [2014] 51 TAXMANN.COM 24 (SAT - MUMBAI)

Forex losses arising from services provided to foreign AEs are operative in nature; to be part of PLI for TP study

Foreign exchange loss in case of providing services to AEs is to be considered as operative in nature and, hence, is to be included in PLI calculation of an assessee.

Facts:

One of the grounds raised for appeal was as under:

The DRP/AO had erred in confirming the action of the TPO in considering the foreign exchange loss as operating, though the loss was mainly due to the re-instatement of balances at the year end and did not pertain to the operations of the Appellant.

The Tribunal held as under:

1)The Bangalore Bench of the Tribunal in the case of SAP Labs India P. Ltd v. ACIT [2011] 44 SOT 156 (Bang.), observed as follows:

a)The foreign exchange fluctuation gain was nothing but an integral part of the sales proceeds of an assessee carrying on export business.

b)The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of an exporter-assessee. The foreign exchange fluctuation income could not be excluded from the computation of the operating margin of the assessee-company.

2)Thus, following the aforesaid decision of the Tribunal, it was to be held that while computing the margin for determining the ALP, the foreign exchange gain/loss has to be taken as part of the operating margin. Therefore, foreign exchange loss in case of providing services to AEs was to be considered as operative in nature and, hence, was to be included in the PLI calculation of the assessee. - KENEXA TECHNOLOGIES (P.) LTD. V. DY.CIT [2014] 51 taxmann.com 282 (Hyderabad - Trib.)

Provision of suspension of legal proceedings under SICA prevails over provisions of debt recovery under RDDB Act

Section 22 of SICA covers and interdicts instances of application for recovery made under the provisions of the RDDB Act. Provisions of SICA, in particular section 22, shall prevail over provisions for recovery of debts in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB’).

Issues:

a)Whether as per bar contained in section 22 of Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’), no recovery proceeding could be effected against defaulting-Company?

b)Since Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB’) was a subsequent enactment, whether provisions under sub-section (2) of section 34 of RDDB Act would have an overriding effect over other laws mentioned therein, including SICA?

The Supreme Court held as under:

1)Proceedings by way of an application for recovery according to a summary procedure as provided for under the RDDB Act are not referred to in Section 22 of SICA simply because the RDDB Act had not then been enacted.

2)Though the RDDB Act is the later enactment, sub-section (2) of Section 34 specifically provides that the provisions of the Act or the rules thereunder, shall be in addition to, and not in derogation of the other laws mentioned therein including SICA.

3)Section 22 of SICA clearly covers and interdicts such an application for recovery made under the provisions of the RDB Act. Therefore, the provisions of SICA, in particular Section 22, shall prevail over the provision for the recovery of debts in the RDDB Act. – KSL & INDUSTRIES LTD. V. ARIHANT THREADS LTD. [2014] 51 TAXMANN.COM 252 (SC)

Consent fee paid to SEBI without admitting alleged violation by broker couldn’t be held as penalty; deduction allowed

IT: When SEBI accepted consent application (settlement application) without admitting or denying guilt by assessee-stock-broker, resultant consent fee paid to SEBI could not be equated with a “penalty” - The fee was paid for purpose of business, to settle a dispute with SEBI and to be able to conduct business without interruption - Thus, consent fee was allowable as business expenditure under Section 37.

Facts:

a)The assessee-company was engaged in share broking business. It filed its return of income. on examination of the said return, the Assessing Officer (‘AO’) noticed that assessee had paid a sum of Rs. 50 lakhs to SEBI as consent fee.

b)On further examination, he noticed that the SEBI had recommended suspension of Certificate of Registration of assessee as stock broker for a period of nine months for violating the various regulations framed by SEBI. After hearing the assessee, period of suspension was reduced to four months.

c)The assessee challenged said order by filing an appeal before the Securities Appellate Tribunal. While the said appeal was pending, the SEBI issued a circular whereby it agreed to settle the disputes in consideration of ‘Consent Application’ furnished by the assessee on payment of consent fee.

d)Thus, the AO took the view that the said amount of Rs.50 lakhs was a compounding fee paid for offences committed under SEBI (Stock Brokers and sub-brokers)Regulations, 1992. Accordingly, he held that it was a penalty paid for infraction of law and, hence, disallowed the said claim by invoking the Explanation to Sec. 37(1) of the Income-tax Act (‘I-T Act’). On appeal, the CIT(A) deleted the disallowance made by AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

The Tribunal upheld the order of the CIT(A) which provided as under:

a)It was apparent from the Circular issued by the SEBI that instances of administrative/civil actions which included, inter-alia, orders of suspension from trading, etc., were different from criminal actions.

b)Further, it was apparent from the order of SEBI that the appellant had been suspended from doing trading activity for a period of four months and had not been awarded any monetary fines. It had been mentioned in the said order that the consent application of the appellant was without admitting or denying the guilt. SEBI had also accepted the application on this basis.

c)Thus, SEBI had accepted that guilt might or might not be established at the end of the appellate proceedings. Therefore, the fee paid could not be equated with a “penalty” which had necessarily to be a punishment for infraction of a law or a regulation having statutory force.

d)The fee was claimed to have been paid for the purposes of business to settle a dispute with SEBI and to be able to conduct its business without interruption. Thus, if the concerned impost was purely compensatory in nature, the same was an allowable expense under section 37 of the I-T Act. – ITO V. RELIANCE SHARE & STOCK BROKERS (P.) LTD. [2014] 51 taxmann.com 215 (Mumbai - Trib.)