No denial of sec. 35 deduction without seeking opinion of prescribed authority about nature of research activity

Where assessee raised claim for deduction under section 35(1), Assessing Officer could not decide the issue but had to place the issue before the Board who, in terms of section 35(3), would refer the question to the prescribed authority to seek opinion on nature of research activity undertaken by assessee.

The issue that arose before the High Court was as under:

Whether AO could disallow deduction under section 35(1) without placing the matter before the CBDT to make a reference to the prescribed authority if he was not sure about nature of research activity undertaken by assessee?

The High Court held in favour of assesse as under:

1)Section 35(3) requires a reference to be made by the Board to the prescribed authority when a question arises as to whether and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research. The decision of the prescribed authority on such a question would be final.

2)Therefore, whenever any such question arises, the Assessing Officer cannot decide the issue but must place the issue before the Board who, in terms of section 35(3) of the Act, would refer the question to the prescribed authority.

3)However, no such reference is required in cases where the assessee lodges a claim without any supporting material or claim of the assesse is accepted by AO. - CIT V. MASTEK LTD.[2015] 53 taxmann.com 388 (Gujarat)

TPO can’t decide about deductibility of an exp. as his jurisdiction is limited to determination of ALP

Facts:

a)The international transaction which was disputed in the instant case was commission payment by the assessee to its AEs.

b)The TPO held that ALP of this transaction was Nil because the assessee failed to provide any evidence of an independent transaction between unrelated parties and further the assessee could not explain with any documentary evidence about the functions performed by the AE necessitating the payment of such commission.

c)The assessee remained unsuccessful before the DRP and the Assessing Officer, accordingly, made addition of entire commission paid by the assessee to its AEs. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The Delhi High Court in the case CIT v. Cushman and Wakefield India Pvt. Ltd.[2014] 46 taxmann.com 317 (Delhi),held that the authority of the TPO was limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO.

2)Applying the ratio decidendi ofCushman and Wakefield India Pvt. Ltd. (supra)to the facts of the instant case, it was to be held that the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount under Section 37(1). 3)Therefore, case was remanded to AO with an instruction to decide the deductibility of the commission paid to foreign AE.- ITW INDIA LTD. V. ACIT[2015] 53 taxmann.com 531 (Delhi - Trib.)

BCCI to pay service tax on reverse charge basis on payments made to foreign Cos for audio-visual coverage of IPL matches

Services received by BCCI from foreign media companies for coverage of Indian Premier League Matches through audio-visual coverage of the cricket matches are covered under 'Programme production services' and liable to service tax on reverse charge basis.

a)Assessee, BCCI, received services from foreign media companies for coverage of Indian Premier League Matches.

b)As per agreements, such non-resident service providers were required to provide audio-visual coverage of the cricket matches conducted by BCCI and digitalized images of coverage were uploaded and broadcasted for benefit of the viewers of cricket match all over the world.

c)Department demanded service tax from BCCI under reverse charge.

d)Tribunal held in favour revenue:

.Section 65(86a) of the Finance Act, 1944 defines "programme" as any audio or visual matter, live or recorded, which is intended to be disseminated by transmission of electro-magnetic waves through space or through cables intended to be received by the general public either directly or indirectly through the medium of relay stations.

a.The Tribunal in its judgment observed that non-resident service providers had installed cameras in stadium to capture images of cricket matches.

b.A combination of audio and visual recording would be a programme and expression 'audio or visual matter' in section 65(86a) can be read as 'audio and visual matter' also, hence, activities undertaken by non-resident service providers would fall within definition of 'programme' and service providers would be 'programme producers', as defined.

c.Even services rendered by way of supply of equipments and personnel for recording live programmes and actually participating in such programmes would also fall within definition of 'programme producer's services’.

e)The Supreme Court dismissed appeal preferred against the judgment of Tribunal holding there was no infirmity in the said judgment - Board of Control for Cricket In India v. Commissioner of Service Tax, Mumbai-I [2015] 53 taxmann.com 533 (SC).

Aluminium dross and skimmings aren't manufactured goods; decision of larger bench of CESTAT reversed

Aluminium dross and skimmings and similar non-ferrous metal drosses and skimmings which arise as by-products in process of manufacture of aluminium/non-ferrous metal products are "not manufactured goods" and, hence, not liable to excise duty.

Facts:

a)The assessee was a manufacturer of aluminium sheets and coils falling under heading 7607 1190 of the Central Excise Tariff Act using major raw material 'aluminium ingots'.

b)In the course of manufacture of aluminium sheets/coils, aluminium dross/skimmings emerge as by products. The assessee sold these by products on a regular basis.

c)The department raised demand of duty on "aluminium dross/skimmings" on ground that it was a manufactured product and liable to excise duty in view of Explanation to section 2(d) of the Central Excise Act, 1944. The Tribunal's Larger Bench held in favour of revenue.

d)Assessee argued that 'aluminium dross/skimmings' were not 'manufactured goods' and were not, therefore, liable to duty. It further argued that the Explanation was inserted in section 2(d) in order to clarify that the goods which could be bought and sold in the market were deemed to be marketable. The explanation deals only with the marketability aspect of the question and does not say that even non-manufactured goods are deemed to be manufactured goods.

The High Court held in favour of assessee as under:

1)In case of Indian Aluminium Co. Ltd. v. A. K. Bandyopadhyay 1980 (6) ELT 146 (Bom.), it was held that dross and skimmings are not manufactured goods.

2)In Union of India v. Indian Aluminium Co. Ltd. 1995 (77) ELT 268 (SC), the Supreme Court agreed with the reasons and conclusions of the Single Judge and confirmed the view taken in case of A.K. Bandyopadhyay (supra).

3)Further, the Supreme Court has held in Grasim Industries Ltd. v. Union of India 2011 (273) ELT 10(SC) that the conditions contemplated under section 2(d) and section 2(f) have to be satisfied conjunctively in order to entail imposition of excise duty under section 3 of the Act, therefore the impugned judgment of the Tribunal could not be agreed with. The larger Bench's decision did not take into account the fact that the authoritative pronouncement by the Supreme Court was binding on it.

4)Merely because the goods satisfying the test of being maerketable and saleable, it does not mean that the test of being manufactured in India has been satisfied. The Supreme Court had in aforesaid cases rejected argument of addition of dross, cinder, skimmings, etc. in the list of the items to the Schedule to the Central Excise Tariff and also held 'that is not safe to make it excisable as it has to pass further test of manufactured or produced in India.'

5)Fact that the revenue did not wish to abide by them would not mean that the Tribunal was justified in not following them. The issue stood completely covered by the Judgments of the Supreme Court and which had been totally disregarded by the Tribunal.

6)All Circulars impugned in this Writ Petition brought to the notice of this Court would not survive after the legal position had been set out as above – Hindalco Industries Ltd. v. Union of India (2015) 53 taxmann.com 156 (Bombay).

Amended definition of NPA allowing different regulators to lay down different NPA norms isn't unconstitutional

Facts:

a)Prior to an amendment to definition of NPA, it was defined as 'an account of a borrower which has been classified' by a bank or financial institution ('Creditor') either 'as a sub-standard asset or a doubtful asset or a loss asset' of the Creditor and such a classification was required to be made in accordance with the guidelines issued by the RBI

b)However, under the amended definition, such a classification of NPA is required to be made in accordance with the guidelines issued by any authority which regulates such creditor and if the Creditor is not administered or regulated by any such Regulator then NPA classification is to be made in accordance with the guidelines issued by the RBI.

c)Amendment to definition of NPA i.e Section 2(1)(o) of SARFAESI Act was challenged in various High Courts. The Gujrat High Court, by a common judgment in a batch of writ petitions, held amended definition of NPA as unconstitutional.

d)On the other hand, the Madras High Court rejected the submission of the petitioners that the impugned provision suffers from the vires of excessive delegation

e)Learned counsel appearing for the borrowers/petitioners argued that the amended definition of NPA was unconstitutional on following grounds:

1.that the Parliament, by authorizing the various bodies to frame the guidelines in accordance with which the account of a borrower could be classified as a NPA abdicated its essential legislative function by making an excessive delegation;

2.the amended provision enables different Banks and Financial Institutions ('Creditors') to adopt different guidelines to classify account of a borrower as NPA

3.As the Act does not provide for a reasonable opportunity to demonstrate that the classification of the borrower's account as a NPA is untenable, the power to make such a classification itself becomes arbitrary and violative of Article 14 of the Constitution. On writ, The Supreme Court upheld the Constitutional validity of amended definition of NPA and made following observations:

1)Authorizing different Regulators for e.g. National Housing Bank or Asian Development Bank and Housing Finance corporations to prescribe different norms for the identification of a NPA with reference to different Creditors would not amount to unreasonable classification for the reason that all the Creditors do not form a uniform/homogenous class

2)The function of prescribing the norms for classifying a borrower's account as a NPA was not an essential legislative function. The amendment of the definition of the expression 'NPA' under Section 2(1) (o) was not bad on account of excessive delegation of legislative function

3)Parliament was only stipulating that the expression "NPA" must be understood by all the Creditors in the same sense in which such expression is understood by the expert body i.e., the RBI or other Regulators which are in turn subject to the supervision of the RBI- KESHAVLAL KHEMCHAND AND SONS PVT. LTD. & OTHERS (2015) 53 TAXMANN.COM 470 (SC)

I-T authorities can collect relevant info to check tax evasion; HC upholds constitutional validity of sec. 133(6)

High Court has upheld the constitutional validity of amendment made to section 133(6) by the Finance Act, 1995 which widened the scope of the said section and gave power to AO to call for information not only in case of 'pending proceedings' but also as a part of the enquiry as said amendment was brought in to tackle tax evasion.

Facts:

a)The income tax authorities had issued notice to petitioner ('Co-Operative Bank'), asking it to furnish details of cash deposit in 'Savings Bank Accounts', aggregating to Rs.5 lakhs and details of payment of interest exceeding Rs.10,000/- to the depositors.

b)Consequently, the petitioner filed the instant writ to challenge the constitutional validity of section 133(6) which empowered the tax authorities to call for information not only in case of 'pending proceedings' but also as a part of the enquiry.

c)The petitioner contended that rights of privacy is an integral part of Article 21 of the constitution of India, which in turn, was violated.

The High Court dismissed the writ by holding as under:

1)Even assuming that the right to privacy is itself a fundamental right, such fundamental right must be subject to restriction, on the basis of compelling 'public interest'.

2)There is no prohibition on the State in gathering information for preventing tax evasion and curbing black money as proceedings can be pursued against wrongdoers only on basis of some information.

3)It is well-settled principle that the 'taxation entry' confers powers upon the Legislature to legislate in matters 'ancillary or incidental', including the provisions for evasion of tax.

4)Thus, no case was made out for striking down section 133(6) or second proviso thereto as unconstitutional, in so far as they apply to inquiries when no proceeding is pending- Pattambi Service Co-operative Bank Ltd. v. Union of India (2015) 53 taxmann.com 453 (Kerala)

Uttarakhand HC denies quashing of notification that blacklisted Cyprus for not sharing tax information

The Government had specified ‘Cyprus’ as notified jurisdictional area' for the purposes of the section 94A via NOTIFICATION NO.86/2013 as it was not providing information sought for by Indian Tax authorities. The instant petition was filed to quash such notification on the ground that "Cyprus" ought not have been declared as notified jurisdictional area as they had never denied any information and they had been ready and willing to supply the information sought for by the Indian Government. The High Court denied quashing of said notification.

Facts:

The instant petition was filed to quash the Notification no. 86/2013, on the ground that "Cyprus" ought not have been declared as notified jurisdictional area as Cyprus have never denied any information and they had been ready and willing to supply the information sought by the Government of India.

The High Court denied to quash the notification and made following observations:

1)Bare perusal of the notification would reveal that Cyprus had not been providing the information as requested by the Indian Authorities under the provisions of Exchange of Information Agreement, therefore, Government of India had decided to notify Cyprus as notified jurisdictional area under Section 94-A.

2)While exercising the writ jurisdiction ordinarily Court should not proceed to look into whether information sought by the Indian Authorities was declined by the Government of Cyprus or whether the Government of Cyprus was ready and willing to supply the information sought for by the Indian Authorities. Moreover, there seemed to be no valid reason to disbelieve the satisfaction so recorded by the Indian Authorities.

3)Thus, relief sought for by petitioner could not be granted. - EXPRO GULF LTD. V. UNION OF INDIA [2015] 53 taxmann.com 413 (Uttarakhand)

Delhi High Court reads down first proviso to sec. 2(15); rescues genuine charities from its clutches

Facts:

a)The instant writ petition was filed for quashing of the first Proviso to Section 2(15) of the Income-tax Act, 1961 (‘Act').

b)The petitioner contended that the first proviso was arbitrary and unreasonable since the Finance Act, 2008 introduced it to deny the benefit of exemption to "purely" commercial entities, which wore the mask of a charity but it, hit even genuine charitable organizations.

c)The petitioner also contended that the first proviso clubs together two unequal entities, i.e., 'purely business and commercial entities' and 'charitable entities'; therefore, it is violative of Article 14 of the Constitution of India.

The High Court upheld the constitutional validity of first proviso and made following observations:

1)The Finance Act, 2008 introduced the first proviso to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of a general public utility. It was not designed to hit those institutions, which had the advancement of the objects of general public utility at their heart and were charitable institutions.

2)First Proviso carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In order to determine whether the institution would fall within the ambit of first proviso to section 2(15), the dominant and the prime objective has to be seen behind both the activities.

3)If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'.

4)On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it would be regarded as an institution established for charitable purposes- INDIA TRADE PROMOTION ORGANIZATION V. DGIT (EXEMPTIONS) [2015] 53 taxmann.com 404 (Delhi)

Mere cash deposit of above 10 lakhs in bank account doesn’t indicate that income has escaped assessment, says ITAT

The assessee had deposited cash in excess of Rs 10 lakhs in his saving bank account but he had not filed return of income. The AO reopened the assessment of assessee, as he had reason to believe that there was an escapement of income in respect of cash deposited in bank account. The Tribunal held that the AO proceeded on the fallacious assumption that bank deposits constituted undisclosed income and overlooked fact that the source of deposit need not necessarily be income of the assessee.

Facts:

a)The assessee had deposited Rs 10 lakhs (approx) in his saving bank account but no return of income was filed by him. The AO reopened the assessment of assessee, as he had reason to believe that there was an escapement of income of Rs 10 lakhs on part of assessee.

b)The instant appeal was filed against validity of reassessment proceedings.

The Tribunal held in favour of assessee as under:

1)At the stage of recording the reasons for reopening the assessment, the formation of prima facie belief that an income has escaped the assessment is necessary. However, it is also necessary that there must be something which indicates, even if not establishes, the escapement of income from assessment.

2)Merely because some further investigation had not been carried out, which, could have led to detection to an income escaping assessment could not be a reason enough to hold the view that income had escaped assessment.

3)In the instant case, merely the fact that deposits have been made in a bank account do not indicate that these deposits constitute an income which had escaped assessment.

4)AO proceeded on the fallacious assumption that bank deposits constituted undisclosed income and overlooked the fact that the sources of deposit need not necessarily be income of the assessee. The reassessment proceedings could not be resorted to unless there was reason to believe, rather than suspect, that income had escaped assessment. Thus, reassessment proceeding was to be set aside. – BIR BAHADUR SINGH SIJWALI V. ITO [2015] 53 taxmann.com 366 (Delhi - Trib.)

Longer credit period allowed to AE on realization of sale proceeds would be an international transaction under TP

Longer credit period to AE is 'international transaction' in terms of Explanation to section 92(1) but same is 'closely linked' to international transaction of sale or service to AE in terms of Rule 10A(d). This is not a transaction of loan or advance to the AE but is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest rate would be the average cost of the total fund available to the assessee and not the rate at which a loan is available.

The issues that arose before the Tribunal were as follows:

a)Whether allowance of longer credit period to AE could be treated as an international transaction in terms of Explanation to section 92(1)?

b)Whether allowance of longer credit period to AE could be treated as transaction of loan or advance to AE so as to determine arms’ length interest rate at a rate at which a loan was available?

The Tribunal held as under:

1)After the insertion of Explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business would fall under the expression international transaction. Thus, in view of the expanded meaning of the international transaction, the delay in realization of dues from the AE in comparison to non-AE would certainly fall in the ambit of international transaction.

2)As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregation and clubbing of closely linked transaction are permitted under said rule.

3)When the transactions are influenced by each other, particularly in determining the price and profit involved in the transactions, then those transactions can safely be regarded as closely linked transactions.

4)In the instant case, the credit period extended to the AE was a direct result of sale transaction. The sale price of the product or service determined between the parties would always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds were closely linked.

5)When the assessee was not making any difference for not charging the interest from AE as well as non-AE then the only difference between the two could be considered as the average period allowed along with outstanding amount.

6)If the average period multiplied by the outstanding amount of the AE was at arm's length in comparison to the average period of realization and multiplied by the outstanding from non-AEs then no adjustment could be made being the transaction was at arm's length.

7)The transaction in question was not a transaction of loan or advance to the AE but it was only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan was available. - GOLDSTAR JEWELLERY LTD. V. JCIT [2015] 53 taxmann.com 353 (Mumbai - Trib.)