Revenue earned by eBay from its website won't be FTS; its Indian marketing agents won't form its agency PE

a) The assessee, incorporated in Switzerland, operated specific websites in India that provided an online platform for facilitating the purchase and sale of goods and services to users based in India;

b) For the purpose, the assessee had entered into marketing support agreements with eBay India and eBay motors,  for availing of certain support services in connection with its websites;

c) The Assessing officer concluded that the payments received by the assessee from operations of websites were mainly in the nature of FTS. Further, it also held that the assessee had a PE in India in the form of its entities namely, eBay India and eBay motors;

d) On appeal, the DRP upheld the order of AO. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The modus operandi of the transactions undertaken through the websites made it clear that the fees accruing to assessee on successful completion of the transactions between the buyer and seller could not be described as FTS, as the assessee had no role to play in1) effecting sales and these were in nature of business profits;

2) The existence of PE as per Article 5 of India-Singapore DTAA (‘treaty’) is a must for bringing to charge any business profits as per Article 7 of treaty. The eBay India and eBay motors were dependent agents of assessee, as they were assisting it in carrying on business in India and if any of the conditions given in para 5 of Article 5 of treaty was satisfied, then they would constitute dependent agent PE of the assessee in India;

3) First condition provided in para 5 of treaty refer to that the dependent agent "has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise”. By performing the activities as narrated in the agreement, it was seen that eBay India had at no stage negotiated or entered into contract for or on behalf of the assessee;

4) Second condition provided in Article 5 of treaty refers to the dependent agent habitually maintaining a stock of goods for or on behalf of the enterprise. This condition was not satisfied as eBay India didn’t maintain any stock of goods for delivery for or on behalf of the assessee;

5) Third condition applies where the dependent agent manufactures or processes the goods or merchandize in that State for the enterprise.  Obviously, this clause was also not applicable because eBay Motors was not required to manufacture or process the goods or merchandise on behalf of the assessee;

6) Thus, the eBay India and eBay motors were dependent agents of assessee but they did not constitute dependent agent PE and, thus, profits earned by assessee could not be taxed as per Article 7 of treaty - eBay International AG v. Dy. DIT [2013] 40 taxmann.com 20 (Mumbai - Trib.)

Order of amalgamation doesn't transfer tenancy rights from transferor-company to transferee-company

The High Court held as under:

1) Where order of amalgamation wasn't served on landlord by the transferee-company and landlord continued to issue rent receipts in the name of (dissolved) transferor-company, though he accepted rent from transferee-company, yet no right of tenancy was created or transferred in favour of transferee-company;

2) Tenancy is a non-transferable object that can extend to others either by an explicit contract or by statute;

3) In the instant case, there was neither any statute to support transfer of tenancy on amalgamation nor any agreement executed between tenant (transferor-company) and landlord to deal with such an eventuality - Ambalal Sarabhai Enterprises Ltd. v. Rajeev Daga [2013] 40 taxmann.com 99 (Calcutta)

Even info from CBI won't authorize search unless it is based on reasons given under sec. 132(1)

Search conducted in pursuance of authorization issued in absence of the eventualities mentioned in clauses (a) to (c) of sub-section (1) of section 132, couldn’t be deemed as valid search.

Facts:

a) On the basis of information given by CBI that undisclosed cash was being carried by assessee, search proceedings under section 132 were initiated by issuing warrant of authorization by the Director (Investigation);

b) Some alleged incriminating documents containing details of unexplained payments were found and seized. Thereafter, notice under section 153A was issued by the Assessing Officer;

c) The assessee filed his returns of income and the assessments were completed. On appeal, the assessee challenged the validity of assessments based on said search;

d) The CIT (A) held that the search was valid and the proceedings under section 153A were validly initiated by the Assessing Officer. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) From the provisions of section 132(1) it is clear that it contemplates existence of certain eventualities whereof the competent authority can authorize search;

2) In the instant case, there was no complete information in possession CBI about any bullion, jewellery, cash or any other document, which could reveal that the assessee was in possession of undisclosed assets or incriminating documents;

3) It appeared that the department had acted upon the information provided by the police department on 29-3-2007 and on the same day, the warrant of authorization was issued and the search was conducted, but nothing was brought on record to substantiate that any cash was found, although search was conducted on the information that undisclosed cash was being carried out by the assessee;

4) Thus, the authorization to conduct search based on reason under section 132(1) did not exist and search became invalid. Therefore, the assessment order based on the said search was not valid and had to be set aside - Parma Ram Bhakar v. Dy. CIT [2013] 39 taxmann.com 119 (Jodhpur - Trib.)

No depreciations to owner on assets given on lease if loan transaction was disguised as sale and lease back transaction

Assessee was not entitled to claim depreciation on asset which was purchased from Gujarat State Electricity Board and same was immediately leased back to it, since the transaction was a sham transaction

Facts:

a) The assessee had purchased energy meters of different makes for a consideration of Rs. 4.99 crores from Gujarat State Electricity Board [GEB] and these meters (assets) were then immediately leased back to GEB vide a lease agreement;

b) It accordingly claimed depreciation on the said meters under proviso to section 32(1). The Assessing Officer (‘AO’) disallowed the depreciation claim of assessee by holding that the alleged lease transaction was in reality a transaction of finance. On appeal, the CIT (A) upheld the order of AO.

The Tribunal held in favour of revenue as under:

1) The assessee’s contention that transaction was with a State Government and it would be highly improper to impute any collusiveness or colourable nature of the transaction without any concrete evidence was misconceived;

2) The facts on the file itself spoke that the transaction in question was a colourable device with the twin purposes of financing the GEB and at the same time making such an arrangement to enable the financer to claim depreciation on the assets and in lieu thereof to pay reduced rate of interest to the financer in proportion to the value of benefit availed by the financer, for which it otherwise was not entitled to;

3) A perusal of section 23 of the Indian Contract Act, 1872 reveals beyond doubt that even if the consideration or object of an agreement may not be expressly forbidden by law, but if it is of such a nature that, if permitted, it would defeat the provisions of law, the same will not be lawful;

4) It is always the goods or the assets itself which are the primary subject of a valid transfer, not the incidental benefits, which automatically pass on to the transferee with the transferred asset;

5) In the case in hand, only the incidental tax benefits were intended to be transferred without any intention to transfer the asset itself. Thus, whole of the effort had been made to transfer the right to claim depreciation on the assets to the assessee for the purpose of the Income-tax Act, but not the assets itself. Therefore, the Assessing Officer had rightly disallowed depreciation on electric meters - Hathway Investments (P.) Ltd. v. ACIT [2013] 38 taxmann.com 389 (Mumbai - Trib.)

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

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

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

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

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

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

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

The High Court disposed off the petition with following directions:

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

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

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

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

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

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

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

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

Facts:

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

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

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

The High Court dismissed the petition with following observations:

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

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

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

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

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

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

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

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

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

Facts:

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

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

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

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

The Competition Commission held as under:

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

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

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

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

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

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

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

Facts:

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

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

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

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

The Competition Commission held as under:

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

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

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

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

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

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

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

Facts:

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

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

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

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

The High Court held in favour of revenue as under:

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

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

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

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

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

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

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

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

Facts:   

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

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

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

The Tribunal held in favour of revenue as under:

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

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

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

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

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

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