Corporate guarantees are outside the ambit of international transaction even after retro amendment to sec. 92B

The Tribunal held as under:

1)    Capital financing transactions (covered by the Explanation to section 92B) are international transactions only if they have any real bearing as distinct from contingent effect on the profits, income, losses or assets of the enterprise;

2)    When an assessee extends an assistance to the Associated Enterprise (AEs), which does not cost anything to the assessee, such an assistance or accommodation will not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B(1).

3)    Corporate guarantees issued for the benefit of AEs do not cost anything to the issuing enterprise and yet it might provide certain comfort levels to the parties dealing with the AEs;

4)    These guarantees do not have any impact on profits, income, losses or assets of the enterprise. Therefore, corporate guarantees do not fall within the scope of the term 'international transaction' even after insertion of Explanation to section 92B by Finance Act, 2012 with retrospective effect from 1-4-2002.- Bharti Airtel Ltd. v. ACIT [2014] 43 taxmann.com 150 (Delhi - Trib.)

Income of Malaysian branch of Indian Co. not taxable in India if it was taxable in Malaysia on existence of PE

Facts:

a)  The assessee, an investment company, had a branch in Malaysia. It had admitted foreign income from Malaysian branch in its return of income and had claimed exemption on as per India-Malaysia DTAA.

b)  Thus, the issue that arose before the Tribunal was whether the Malaysian Branch of the assessee-company had a permanent establishment in Malaysia?.

c)  The levy of tax on the income of Malaysian Branch entirely hinges on the aforesaid question. In case the answer to above question was in affirmative, the income arising from foreign Branch would be exempt from tax in view of DTAA between India and Malaysia.

The Tribunal held as under:

1)  The order passed by Tribunal in earlier assessment year relating to assessee's own case was as under:

a)  There was nothing on record to deny the Malaysian branch of assessee-company the status of a permanent establishment operating in Malaysia;

b)  There was no dispute that the taxability of the income of the assessee and its Malaysian branch was governed by the India-MalaysiaDTAA (‘treaty’);

c)  As far as the income attributable in the hands of the assessee's Malaysian branch was concerned, the income was to be taxed in Malaysia;

d)  The income generated in the hands of the Malaysian branch of the assessee company was rent and interest income. They were generated from assets of assessee situated outside India;

e)  Therefore, the income of Malaysian branch of assessee-company was liable for taxation in Malaysia. Once it was liable for taxation in Malaysia, treaty made it clear that the said income was not subjected to the jurisdiction of Indian taxation.

2)      Thus, following the aforesaid order, it was held that the Malaysian Branch of the assessee was having a permanent establishment in Malaysia and the income arising there from was not taxable in India in view of treaty.

3)      Thus, the appeal of revenue was to be dismissed. – ACIT v. Sivagami Holdings (P.) Ltd [2014] 42 taxmann.com 418 (Chennai - Trib.)

Survey party's promise of non-selection of case in scrutiny won't invalidates cases selected as per set norms

Even where petitioner disclosed additional income on assurance of survey party that his case would not be taken-up for scrutiny; Assessing Officer was still empowered to select petitioner’s case for scrutiny assessment.

Facts:

a)  Pursuant to survey carried out by Income-tax department, the statement of petitioner had been recorded in which he had disclosed additional income;

b)  The petitioner contended that he had signed said statement after an assurance had been given by survey party that his return of income would not be taken-up for scrutiny;

c)  Subsequently, the petitioner was served with notice under section 143(2) informing him that his case was selected for scrutiny assessment. In the instant writ, the petitioner had challenged the legality and validity of scrutiny assessment.

The High Court held as under:

1)  The Assessing Officer is empowered to select a particular case for scrutiny assessment in view of guidelines fixed for selection of cases for income tax scrutiny;

2)  The Assessing Officer recorded reasons for selection of petitioner's case, sought approval of approving authority, who approved selection and, thereafter, assigned case for assessment;

3)  Thus, the requisite procedure was followed which was necessary before issuing notices under sections 143(2) and 142(1). Hence, the petition was to be dismissed. – Ajay v. Dy.CIT [2014] 42 taxmann.com 210 (Bombay)

ITES can’t be classified into BPO and KPO services; Cos providing ‘high end’ and ‘low end services’ not comparable

The Tribunal held as under:

1)  Classification of ITES into low-end BPO services and high-end KPO services for comparability analysis would not be fair and proper;

2)  The companies providing mainly high-end services by using specialized knowledge and domain expertise couldn’t be considered as comparable for assessee-company, which was engaged in providing low end back office support services (like voice or data processing services) to its AE;

3)  Therefore, these entities (i.e. companies providing high end services) could not be taken as comparable to the assessee-company which was mainly involved in providing low-end services. - Maersk Global Centres (India) (P.) Ltd. v. ACIT [2014] 43 taxmann.com 100 (Mumbai - Trib.) (SB)

3)

ESOP exp. is an employee cost; ITAT allows deduction for difference between market price and issued price

Facts:

a)  The assessee was a wholly owned subsidiary of NNAS. As per the plan developed by NNAS, its employees and employees of its affiliates  were entitled to purchase its shares at a price, lesser than the market price

b)  In pursuance of aforesaid plan, assessee framed ESOP, as per which, the difference between fair market value of shares of parent company and price at which those shares were issued by assessee to its employees was reimbursed to its parent company;

c)  The sum so reimbursed was claimed as expenditure by assessee as an employee cost. The AO rejected the claim of the assessee on ground that it resulted in capital building of the parent company.

d)  The CIT(A) confirmed the order of the AO. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The shares were acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the assessee who in turn paid it to the parent company;

2)  The difference between the fair market value of the shares and the price at which shares were issued to the employees was met by the assessee. This factual position was not disputed at any stage by the revenue;

3)  Thus, there was no basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company;

4)  The impugned expenditure was wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company was also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1);

5)  Thus, the appeal of the assessee was to be allowed. - Novo Nordisk India (P.) Ltd. v. Dy.CIT [2014] 42 taxmann.com 168 (Bangalore - Trib.)

HC agrees to keep confidentiality of 2G spectrum report; non-disclosure to assessee won’t vitiate reassessment

The High Court held as under:

1)  The law only requires that the information on which the AO records his or her satisfaction that income has escaped assessment, is communicated to the assessee, without mandating the disclosure of any specific document;

2)  Where the reasons recorded had been communicated and it provided (independent of the 2G Report referred to in the reasons) details of the new and tangible information that support the AO's opinion, non-supply of 2G Spectrum report prepared by DIT(Inv) to the assessee on the grounds of confidentiality would not vitiate the proceedings initiated under section 147;

3)  There is no legal proposition that mandates the disclosure of any additional document. However, the AO could not, in all cases, refuse to disclose documents relied upon by him on account of confidentiality;

4)  The principle denying privilege or confidentiality would operate when no material is provided in addition to the mere assertion of the subjective satisfaction of the AO;

5)  Even then, the claim for privilege may still prevail in that the Court may consider the manner in which the documents were to be inspected, but such question did not arise in the instant case, where concrete and specific details (which supported the belief under section 147/148) were communicated to the assessee;

6)   Thus, the non-disclosure of the 2G Spectrum Report did not affect the impugned notice. - Acorus Unitech Wireless (P.) Ltd. v. ACIT [2014] 43 taxmann.com 62 (Delhi)

Partners not liable to pay taxes on share of profits received from firm even if such profits included exempted income

Partners are entitled to claim exemption under Section 10(2A), on the share of profit received from the firm even if it includes that income which was exempted in the hands of the firm under various provisions of Section 10.

Facts:

a)  The assessee, a private Ltd. company, was partner in the partnership firm. Its case was selected for scrutiny and the show-cause notice was issued to it as to why exempt income of the firm would not be excluded while computing the exemption to the assessee under Sec.10(2A);

b)  Assessee challenged the explanation to Section 10(2A) on the ground that it was discriminatory and in violation of Articles 14 and 265 of the Constitution.

c)  Further, a declaration was sought by the assessee that it was entitled to claim exemption under Section 10(2A) in respect of its total share of profit received as partner of the firm which would include the income exempted from tax in the hands of the firm.

The High Court held as under:

1)  Although the dividends income and income derived from mutual funds were not includible in the taxable income of the firm yet they were nevertheless part of its profits;

2)  The expression total income of a firm in the Explanation to section 10(2A) would not mean taxable income of the firm but gross total income of a firm which included exempted income as well;

3)  The Assessing Officer had lost sight of this aspect and had held that ‘total income’for the purpose of Explanation to Sec. 10(2A), as defined in Section 2(45), would mean the total amount of income as referred to in Sec. 5,computed in the manner laid down in the Act;

4)  Therefore, the AO was not right in holding that the income which was excluded from the total income of the firm under Sec. 10, would have to be taxed in the hands of the partners on the reasoning that only income which was taxed in the hands of the firm would be exempted from tax in the hands of the partner;

5)  The Explanation to section 10(2A) would not call for any striking down in the hands of this Court. The Explanation could not be given a literal interpretation, so as to defeat the object of the amendment made to the Act. The object of the amendment was to make it clear that the distribution of profits and gains of a firm in the hands of the individual partners shall not be considered to be income of the partners and therefore, not includable while computing the total income of the partner under the Act;

6)  Thus, the assessee was entitled to claim exemption under Section10(2A), on the share of profit of the firm,inclusive of the income, which is exempted under sub-sections (34), (35) and (38) ofSection 10, as the total income referred to in Section 10(2A), includes exempted income of the partnership firm. - Vidya Investment & Trading Co. (P.) Ltd. v. Union of India [2014] 43 taxmann.com 1 (Karnataka)

Charitable trust can’t avail of Sec. 24(a) relief

A charitable trust, claiming exemption under section 11(1)(a), could only claim deduction of expenditure actually incurred to earn rental income. However, its claim for standard deduction under section 24(a) could not be allowed.

Facts:

a)  The assessee, a charitable trust, was engaged in various objects such as promotion of education, medical relief, etc. It filed return claiming exemption under section 11(1)(a). ;

b)  It also claimed deduction under section 24(a). The Assessing Officer (‘AO’) held that the net income of trust was to be considered for exemption under section 11 and no separate deduction under section 24 would be available;

c)  The CIT (A) upheld the order of AO. Aggrieved-assessee filed the instant appeal.

The Tribunal held as under:

1)  The income of a charitable trust, subject to its application for charitable purposes, is exempt from tax under Chapter III (sections10 to13B). The said income does not form part of the total income of the entity to which it arises or accrues or is received;

2)  It is only the income forming part of the total income which would be subject to the computational provisions of Chapter IV (sections 14 to 59) of the Act;

3)  An income exempt under Chapter III of the Act, not forming part of the total income, would not enter the computation process to determine the quantum of income under the relevant head of income, each of which has its own computational provisions;

4)  Only the income as reflected in the accounts of the trust, is to be applied or deemed to have been applied for charitable purposes, and which, therefore, has to be computed in the commercial sense;

5)  This was even otherwise patent inasmuch as a trust could only apply the income as available with it, i.e., as arrived at following the accepted principles of commercial accounting. The computational provisions of the Act do not come into play, so that the said computation of the income would be de hors the same;

6)  Thus, accordingly, the assessee-trust could not claim standard deduction under section 24. – ACIT v. Nandlal Tolani Charitable Trust [2014] 42 taxmann.com 154 (Mumbai - Trib.)

Organizing 'sankirtan' and 'bhandara' is charitable in nature; HC allows sec. 12AA registration to trust

Facts:

1)  The assessee-trust had filed application before CIT for purposes of registration under section 12AA and approval under section80G ;

2)  The CIT held that the objects like Akhand Naam Sankirtan, Thakur Sewa of Shri Girdhari Ji and organization of bhandaras on all important religious festivals were purely religious objects in nature and not in accordance with section 2(15);

3)  Accordingly, its registration application under section 12AA and approval request under section 80G were rejected. On appeal, the Tribunal held in favour of assessee. Aggrieved-CIT filed the instant appeal.

The High Court held in favour of assessee as under:

1) From the objects of the trust it could not be said that the object and purpose of establishment of trust was not genuine and that activities as delineated in the object were not carried out by the trust;

2)  'Akhand Naam Sankirtan' is one type of meditation and yoga and activity like bhandara are for providing food to persons, irrespective of any caste or religion, thus, unless it was proved that it was for any particular community or group of persons, registration under section 12AA could not be rejected;

3) Thus, no error of law was found in finding of Tribunal. – CIT v. Sri Radha Raman Niwas Trust [2014] 42 taxmann.com 77 (Allahabad)

Period of existence of independent project offices shall not be clubbed to determine PE in India

Facts:

a)    The assessee, a Japanese company, had established project offices in connection with three Projects. In some of the contracts assessee received supervision fees (‘FTS’) from the Maruti Udhyog Ltd for supervising the installation of machinery and equipments supplied by it;

b)    The assessee contended that it did not have any PE in India to tax the supervision income as business income under Article 7 of India-Japan DTAA. Therefore, it would be taxable as FTS under Article 12(2) of such DTAA;

c)    The Assessing Officer (‘AO’) held that if the enterprise had a PE it was not necessary that each project should have a separate PE. He further contended that the supervision period of all the contracts had to be aggregated and the same was more than six months to constitute a PE in India;

d)    Accordingly, the AO held that supervision fees received under contract was effectively connected with a PE and brought it to tax under section 115A.