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.)

No IT relief to trust if its business receipts exceeded threshold; yet its registration couldn't be revoked

Where gross receipts of a charitable institution from its business exceeds prescribed limit, it will not be entitled for exemption or other admissible tax benefits for relevant year only; however its registration as charitable institution will continue.

Facts:

a)  The assessee, a textile promotion council, was registered as a charitable trust. Its activities were falling under the category of 'advancement of any other objects of general public utility' as per definition of 'charitable purpose' given under section 2(15);

b)  The Director (Exemption) had cancelled the registration of assessee as he noticed that the assessee was carrying out activities in the nature of trade, commerce or business, etc., and its gross receipts therefrom were in excess of prescribed limit.

c)  The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  Merely because income of a registered charitable trust from ancillary activities of business crosses prescribed limit, that by itself cannot be a ground for cancellation of its registration invoking section 12AA(3);

2)  If income arising out of the activities is not in accordance with the objects of the trust, the assessee may not get the exemption under section 11.

3)  Thus, for the previous year, during which the gross receipt of income of trust crossed the prescribed limit, it would not get exemption or benefit of its being charitable in nature despite its charitable activities;

4)  Therefore, the impugned order of the Director (Exemptions) was to be set aside and the registration granted to assessee under section 12A was to be restored.- Cotton Textiles Exports Promotion Council v. DIT (Exemption) [2014] 44 taxmann.com 168 (Mumbai - Trib.)

Higher salary bill couldn't be disallowed on pretext of odd trend if it was genuinely incurred for business

Genuine hike in salary expense incurred for the purpose of business couldn’t be disallowed merely on pretext of odd trend

Facts

a)   The assessee filed its return of income claiming certain expenditure in respect of payment of salaries.

b)   The Assessing Officer issued show-cause notice with reference to inflation in salary expenditure, which the assessee had justified by furnishing relevant details.

c)   Without any further notice, AO disallowed a part of salary expense by applying the ratio of salary expense to domestic turnover in earlier year.

d)   The CIT (A) confirmed disallowance made by AO to a substantial extent. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)   The backward calculation made by AO to disallow salary expenditure couldn’t be accepted in the absence of any allegation against assessee about non-maintenance of books, non-furnishing of vouchers, non-compliance of the notices, as section145 could be applied only when conditions specified therein were satisfied.

2)   Expenditure under section 37(1) could be disallowed only when Assessing Officer could show that expenditure was not incurred wholly and exclusively for the purpose of business. There was no such finding in this order as assessee had justified the expenditure by explaining the change of business profile and also by furnishing necessary statements and vouchers before the authorities.

3)   Without examining these relevant documents, Assessing Officer and Commissioner (Appeals) had erred in resorting to mathematical jugglery so as to deny the expenditure claimed by the assessee. There was no basis for disallowance of the so-called inflated expenditure. Commissioner (Appeals) also did not apply his mind in restricting the amount of disallowance on an ad hoc basis. At least, he should have examined the contentions made by the assessee and proved that they were not correct.

4)   This sort of disallowance of expenditure claimed by the assessee could not be accepted or justified. There should have been no hesitation in cancelling the so-called disallowance of expenditure resorted by the Assessing Officer- IIC Systems (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle -2(1), Hyderabad [2014] 44 taxmann.com 169 (Hyderabad - Trib.)

Trust activities couldn't be tainted as commercial even if it had earned profits from its charitable activities

Assessee-trust was not hit by proviso to section 2(15) if its aims and objects were charitable and profit earned from said activities was incidental in nature.

Facts:

a)  The assessee-trust was created with object to breed the cattle and to improve the quality of the cows and oxen.

b)  During the course of assessment, the Assessing Officer (‘AO’) denied benefit of section 11 to assessee-trust on ground that considerable income was generated from the activity of milk production and sale and therefore, trust was directly hit by the proviso to section 2(15).

c)  On appeal, the CIT (A) had confirmed the order of the AO. On further appeal, the Tribunal held in favour of assessee. The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)  The proviso to section 2(15) applies only to cases of advancement of any other object of general public utility, if the conditions provided under the proviso are satisfied. However, for the application of the proviso, what is necessary is that the entity should be involved in carrying on activities in the nature of trade, commerce or business.

2)  Many activities of genuine charitable purposes, which are not in the nature of trade, commerce or business, may still generate marketable products. The law does not expect the trust to dispose of its produce at any consideration less than the market value;

3)  If there is any surplus generated at the end of the year, that by itself would not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating 'surplus' is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature.

4)  The objects of the trust clearly established that the same was for general public utility and were for charitable purposes. Profit making was neither the aim nor object of the Trust. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, it would not render the activity as in the nature of trade, commerce or business;

5)  The proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of 'public utility'. Thus, the Tribunal had not committed any error in directing the Assessing Officer to provide exemption under section 11 and holding that the proviso to section 2(15) was not applicable to this case. – DIT (Exemption) v. Sabarmati Ashram Gaushala Trust [2014] 44 taxmann.com 141 (Gujarat)

TDS refund couldn't denied if delay in issue of TDS certificates caused delay in filing of refund claim

Facts:

a)  The Land Acquisition Officer (‘LAO’) acquired assessee’s lands and paid compensation to assessee in installments from financial year 2000-01 to 2005-06. He had deducted tax at source on the entire compensation and remitted the same to the department. 

b)  However, TDS certificate was issued in favour of petitioner only in financial year 2005-06. The petitioner filed application for refund of the tax so deducted.

c)  The Commissioner rejected the said application on ground that the petitioner had not prayed for refund within a period of six years i.e. 2000-01 to 2005-06. The aggrieved-assessee filed the instant petition.

The High Court held in favour of assessee as under:

1)  The TDS certificate was issued in favour of the petitioner only on 10-2-2005. Only thereafter, petitioner came to know that certain sum was deducted at source from the compensation;

2)  The petitioner filed the returns in the year 2005 itself. Thus, there was no delay on the part of the petitioner. No tax deduction was required be made under section 194-L(2) from any payment made on or after June 1, 2000;

3)  Thus, deduction made by the LAO towards tax, out of the compensation awarded was illegal. Therefore, the amount so deducted was to be refunded to the petitioner. - Ashok B. Jadhav v. CIT [2014] 44 taxmann.com 102 (Karnataka)

ITAT rejects working of PLI when TPO took FOB value of goods as 'total cost' instead of cost incurred by assessee

While working out PLI 'total cost' has to be taken as costs incurred by assessee and not the FOB value of goods.

Facts:

a) The assessee had provided 'Sourcing Support services' to its associated enterprises and it was compensated at cost plus markup of 5 per cent.

b) It adopted Transactional Net Margin Method (TNMM) as the most appropriate method with Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC).

c) The assessee declared its OP/TC and claimed that its margin was within tolerable range of 5 per cent range and, hence, the transactions to be considered at ALP.

d) T.P.O. applied markup on the FOB value of goods between third party enterprises instead of assessee's cost. The DRP did not change the cost base but reduced the percentage of markup applied by the TPO.

The Tribunal held as under:

1) In the preceding year, the Transfer Pricing officer (‘TPO’) had applied the same base of 'total cost' as in the year under consideration, which got the approval from the Tribunal;

2) The assessee had assailed the Tribunal's order before the High Court and, the High Court had reversed the Tribunal's order by holding the FOB value of goods between the third party enterprises, sourced through the assessee, could not be accepted.

3) Thus, the markup (on FOB value of goods) applied by TPO and approved by the DRP could not be accepted. Therefore, the 'total cost' being the denominator in the PLI of OP/TC, was to be taken as the cost incurred by the assessee and not the FOB value of goods between third party enterprises. - Li & Fung (India) (P.) Ltd. v. DY. CIT [2014] 44 taxmann.com 125 (Delhi - Trib.)

Methodologies in Return Form don’t prevail over I-T Act; MAT credit to be given after computing surcharge and SHEC

Tax has to be computed on the total income as assessed under normal provisions of the Income-tax Act as increased by applicable surcharge and education cess, MAT credit to be granted thereafter.

Facts:

a)  The Assessing officer made certain additions during assessment of the assessee. 

b)  The assessee contended that the MAT credit should be allowed before calculation of surcharge and education-cess, as per the methodology provided in the form for filing of return of income.

c)  The CIT(A) rejected such contention and held against the assessee. The aggrieved-assessee filed the instant appeal.

The Tribunal held as under:

1)  In an issue before the Madras High Court in Chemplast Sanmar Ltd. [2009] 180 Taxman 335 as to whether the form for filing return of income, which lays down the manner of computing the total tax, prevails over the provisions of the Act, the Court held that rule 12(1)(a) of Income-tax Rules and Form for filing of return couldn’t go beyond the provisions of the Act;

2)  The Supreme Court in the case of CIT v. K Srinivasan, [1972] 83 ITR 346 held as under:

a)  The meaning of ‘surcharge’ is to charge in addition or to subject to an additional or extra charge. The additional charges form a part of the income-tax and Super-tax. The word ‘surcharge’ has been used in article 271 for the purposes of distributing the proceeds between the Union and the States.

b)  The proceeds of the surcharge are exclusively assigned to the Union. Even in the Finance Act it is expressly stated that the surcharge is meant for the purpose of Union;

3)  The income-tax includes surcharge which is a receipt in the nature of additional income-tax. The assessee’s argument that the term ‘tax’ has been defined under section 2(43) and it includes only income-tax and not surcharge, goes against the proposition laid down by the Supreme Court. The only requirement is that the levy should have been under the Income-tax Act itself as there is no reference to any Central Act in the proviso or in section 158 BA(2). [Merit Enterprises v. DCIT (Hyd.)(SB).

4)  Thus, the impugned tax is to be computed on the total income as assessed under normal provisions of the Income-tax Act as increased by applicable surcharge and education cess, thereafter credit of MAT is to be granted.- 3F Industries Ltd. v. JCIT [2014] 44 taxmann.com 200 (Visakhapatnam - Trib.)