Banks can treat guarantors as willful defaulters on their refusal to honour claim even if they have ability to pay

The RBI has issued following clarification with regard to guidelines on ‘willful defaulters’ as provided under master circular DBOD No.CID.BC.3/20.16.003/2014-15, dated 01.07.2014:

1)Inclusion of name of guarantors in the list of willful defaulters: It has been clarified that where a banker has made a claim on the guarantor on account of the default made by the principal-debtor, the liability of the guarantor is immediate. Thus, if said guarantor refuses to comply with the demand made by the banker despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter.

However, this clarification would apply only prospectively and not to cases where guarantees were taken prior issuance of this clarification. Thus, Banks/Financial institutions (FIs) have been advised to ensure that this position is made known to all prospective guarantors at the time of accepting guarantees.

2)Terms ‘Unit’ and ‘Lender’ have been defined: Paragraph 2.1 of the master circular lists out various events when a “willful default” would be deemed to have occurred. Thus, in order to define the scope of definition of willful defaults, the terms Unit and Lender have been defined as under:

a)Lender: The term ‘lender’ includes banks/FIs to which any amount is due, provided that the due amount should have arisen on account of banking transaction, which includes off balance sheet transaction such as derivatives, guarantee and letter of credit.

b)Unit: The term ‘unit’ includes – individuals, juristic persons and all other forms of business enterprises (whether incorporated or not).

Value of derivative transactions in commodities at MCX won’t be included in turnover for tax audit purposes

Value of sale transactions of commodity through MCX without delivery could not be considered as turnover for purpose of section 44AB.

Facts:

In the instant case, the controversy revolved around as to whether online transactions of future commodities made at MCX would form a part of turnover for purpose of tax audit under section 44AB?

The Tribunal held in favour of assessee as under:

1)In the case of CIT v. Growmore Exports Ltd. (IT Appeal Nos. 18 to 20) instant Tribunal’s co-ordinate had dealt with requirement to get the accounts audited under section 44AB. In that case, the assessee was engaged in the speculative transaction of sale and purchase of units without taking delivery and the account was settled by crediting the difference. The Tribunal held as under:

i)After considering section 18 of the Sale of Goods Act, 1930 it was observed that no property in the said units was passed on to the assessee as the assessee never acquired the property in the units as the units contracted to be bought were future unascertained goods.

ii)Similarly, it could not pass on the property to the party to whom the units were contracted and, therefore, there was no 'sale' or 'turnover' effected by the assessee in the legal sense for the purposes of getting the accounts audited under section 44AB.

2)In the instant case also, the transaction of buying and selling of commodities was a speculative activity where no physical delivery was taken or given. Thus, following the case of Growmore Exports Ltd. (supra), it was to be held that the value of the sale transactions of commodity through MCX without delivery could not be considered as turnover for the purpose of section 44AB.

3)Accordingly, the penalty levied under section 271B was to be deleted, as the transactions carried out by the assessee would not fall under the ambit of turnover for the purpose of section 44AB.- OM STOCK & COMMODITIES (P.) LTD. V. DY. CIT [2014] 48 taxmann.com 186 (Mumbai - Trib.)

Distinction between renting and hiring of cab is illusory; both are liable to service-tax

Supplying cars/vehicles under a rate contract basis, depending upon distance, time and usage of vehicles amounts to 'rent-a-cab service' and is liable to service tax and for this purpose difference between renting and hiring of a cab is an illusory distinction.

Facts:

a)The assessee obtained registration as a rent-a-cab scheme operator and was supplying cars/vehicles to BSNL on a rate contract basis, depending upon distance, time and usage of vehicles supplied to BSNL. Fuel and drivers were provided by assessee and vehicles were to be used at discretion of BSNL.

b)In some cases the assessee hired vehicles from other owners and provided these vehicles to BSNL under the terms of agreements between the parties.

c)The assessee argued that impugned services were not liable to service tax under 'rent-a-cab services', as domain, possession and control of vehicles always remained with assessee. Since he was under the bona fide belief that it had not provided rent-cab-service, no penalty had to be imposed.

The CESTAT held in favour of revenue as under:

1)The scope of the taxable rent-a-cab service was considered in detail by this Tribunal in Ajai Kumar Agnihotri v. CCE [2013] 37 taxmann.com 355/[2014] 43 GST 164 (New Delhi – CESTAT). It was concluded that activities substantially similar to those of the assessee herein constituted the taxable rent-a-cab service and the contrary contention of there being a substantial difference between renting and hiring of a cab was an illusory distinction.

2)Assessee's services constituted taxable rent-a-cab service. Hence, demand was to be confirmed invoking extended period with penalty.– ANIL ENGINEERING V. C.C.E. [2014] 47 taxmann.com 305 (New Delhi - CESTAT)

Sum paid to Singaporean-Co. for logistic services wasn’t ‘FTS’ as it didn’t satisfy make available clause of DTAA

Where a Singaporean company rendered logistic services to assessee, without making available its technical knowledge, experience or skill, there was no liability to deduct tax at source from impugned payments under India-Singapore DTAA.

Facts:

a)The assessee entered into a logistics services agreement with its Singaporean associated enterprise ('S'). In terms of agreement, 'S' was required to provide distribution management and logistics services to the assessee.

b)The Tribunal held that, as 'S' was not having any permanent establishment in India and that it had not made available the technical knowledge, experience or skill to the assessee, the payments made by assessee to 'S' were not taxable in view of Articles 7 and 12 of India-Singapore DTAA.

c)The aggrieved revenue filed the instant appeal

The High Court held in favour of assessee as under:

1)This Court had an occasion to consider relevant DTAA in the case of CIT v. De Beers India Minerals (P.) Ltd. [2012] 21 taxmann.com 214 (Kar.), wherein it was held that:

a)If along with technical services rendered, the service provider also made available the technology, which it had used in rendering services, then payment for said services would fall within the definition of "fees for technical services" as contained in DTAA.

b)However, if technology was not made available along with technical services, what was rendered was only technical services; the technical knowledge was withheld, then such a technical service would not fall within the definition of "technical services" in DTAA.

2)From the facts of the instant case, it was clear that S had not made available to the assessee the technology or the technological services, as it was required to provide the distribution, management and logistic services.

3)When once it was held the technical services had not been made available, then in view of the law declared in case of De Beers India Minerals (supra), there was no liability of assessee to deduct tax at source. Therefore, payment made to Singaporean-Co. for logistic services was not ‘Fee for Technical Services’ as it didn’t satisfy make available clause of India-Singapore DTAA.- DIT.(INTERNATIONAL TAXATION) V. SUN MICROSYSTEMS INDIA (P.) LTD [2014] 48 taxmann.com 93 (Karnataka)

Fees paid to consultant-doctors under contract for service would attract sec. 194J TDS and not sec. 192 TDS

Facts:

a)The assessee-company was engaged in the business of running a super specialty hospital. A survey was carried out to ascertain the deduction of tax at source on the amounts paid to doctors engaged as consultants.

b)The assessee-company had been deducting tax at source under section 194J on payment made to doctors by treating them as professionals. The AO applied the provisions of section 192 on payments made to doctors, and raised a demand for an amount under section 201(1) and interest under section 201(1A).

c)On appeal, the CIT(A) set aside the order passed by the AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)In the instant case, the terms of appointment of doctors clearly indicated the appointment of professionals for providing consulting services and not their appointment as an employees. The doctors were not precluded from pursuing the professional pursuits elsewhere as long as there was no conflict of interest;

2)Once the doctors achieved some seniority and standing, their remuneration was a percentage of fees collected from patients consulting them. These terms clearly indicated a contract for service and not contract of service.

3)Normally the services rendered by a doctor should be considered as a professional service unless the contracts of service categorically states and the conditions are clearly and indubitably that of employment.

4)The doctors or professional consultants working under contract for rendering professional services and the payments made by the assessee-company to the professional doctors does not constitute salary and, hence, the assessee would not be responsible for deducting tax at source on the said payments treating them as (salaries) in terms of section 192(1).

5)Thus, on perusal of the terms of contract for services entered into with the Doctors, it was to be opined that the services rendered by the them were classifiable as professional services and, therefore, assessee had correctly deducted tax at source from payment to Doctors under section 194J. – DY. CIT V. QUALITY CARE INDIA LTD [2014] 48 taxmann.com 88 (Hyderabad - Trib.)

MCA abolished concept of maximum useful life of asset; allows flexible life supported by technical advice

Ministry of Corporate Affairs has made amendment to Schedule II of the Companies Act, 2013. The Schedule II stipulates useful life of various assets for computation of depreciation. The amendment provides as under:

i)An option to adopt flexible useful life of assets: The existing schedule II provided that useful life of an asset shall not be longer than useful life specified in part C. Further, that if a company opts a useful life longer than that provided in Part C, then in that case it is required to make disclosure in its financial statements. The amended Schedule II provides that if a company adopts useful life different from Part C, the financial statements shall disclose such difference and provide justification supported by technical advice.

ii)Determination of useful life of significant part of assets separately, mandatorily with effect from April 1, 2014: The Schedule II also requires that where cost of part of asset is significant to total asset and useful life of such part is different from useful life of remaining parts of asset then, in such cases useful life of significant part shall be determined separately.

The amended schedule provides that such requirement shall be adhered to voluntarily by companies for financial year commencing on or after April 1, 2014 and it has to be mandatorily adhered to by companies for financial years commencing on or after April 1, 2015.

Payments to non-resident for his translation services shall not be deemed as 'fees for technical services'

Translation services involving translation of text from one language to another were not technical services and, therefore, payment made by assessee to non-resident translators would not fall within scope of 'fees for technical services’.

Facts:

a)The assessee-company was engaged in the business of providing translation services through Web. During assessment, the AO noted that assessee had not deducted tax at source in respect of payments made to overseas translators.

b)The A.O. held that translation services were technical in nature and the assessee was liable to deduct tax at source on impugned payments. He, accordingly, disallowed such payments made to non-resident translators.

c)On appeal, the CIT(A) upheld the findings of the AO and confirmed the disallowance made under Section 40(a)(i). The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)In the instant case, the assessee was getting the translation of the text from one language to another. The only requirement for translation was the proficiency of the translators in both the languages, i.e., the language from which the text was to be translated and the language in which text was to be translated.

2)The translator was not contributing anything more to the text, which was to be translated. He was not supposed to explain or elaborate upon the meaning of the text. Apart from the knowledge of the language, the translator was not expected to have the knowledge of applied science or the craft or the techniques in respect of the text, which was to be translated.

3)A bare perusal of Explanation 2 to Section 9(1)(vii), which explains "fees for technical service" and the dictionary meaning of the word "technical" made it clear that translation services were not technical services. Therefore, the payment made by the assessee to the non-resident translators would not fall within the scope of "fees for technical services”. Thus, the disallowance made under Section 40(a)(i) was to be deleted. - COSMIC GLOBAL LTD. V. ASSTT. CIT [2014] 48 taxmann.com 365 (Chennai - Trib.)

Income generated from sale of carbon credits won't be eligible for sec. 80-IA relief

Even though income on sale of Certified Emission Reduction/carbon credit would form part of profits and gains of business, yet it cannot be treated as profit 'derived from' industrial undertaking and, therefore, assessee would not be entitled to deduction under section 80-IA in respect of said income.

Facts:

a)The assessee received certain amount from sale of carbon credit issued by United Nations Framework Convention on Climate Change under Kyoto Protocol, generated in the gas turbine unit.

b)The assessee claimed that the income earned on sale of carbon credit was directly and inextricably linked to generation of power, therefore, the assessee was entitled to relief under section 80-IA.

c)The Assessing Officer and the DRP found that the income was not derived from eligible business, consequently, they held that the assessee was not eligible for deduction under section 80-IA. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)The income on sale of carbon credit was attributable to the business of the assessee. Since the carbon credit was conferred on the assessee under the scheme promoted by United Nations Framework Convention on climate change under Kyoto Protocol.

2)But it was not the direct source of income from the industrial undertaking of the assessee. At best, it could be said that it had a nexus with the business of the assessee or was attributable to the business of the assessee.

3)Therefore, the income on sale of carbon credit would form part of the profits and gains of business. However, it could not be treated as profit 'derived from' the industrial undertaking. Thus, the assessee was not entitled to deduction under section 80-IA.- APOLLO TYRES LTD. V. ASSTT. CIT [2014] 47 taxmann.com 416 (Cochin - Trib.)

CCI imposes Rs 2,500 crore penalty on Car Cos for indulging in unfair trade practices in spare part markets

Competition Commission of India imposed Rs 2,500 crore penalty on Car Companies for indulging in practices resulting in denial of market access to independent repairers.

Facts:

a)The informant approached the Commission alleging anti-competitive conduct by Car manufactures (i.e., opposite parties). It was alleged that opposite parties abused their dominance by restricting the supply of genuine spare parts of automobiles.

b)The informant pleads before the commission to hold an enquiry against opposite parties. The Competition Commission of India held as under:

1)Each ‘original equipment manufacturer’ (OEM) was a 100 per cent dominant entity in aftermarket for its genuine spare parts and correspondingly for repair services for its brand of automobiles.

2)In most cases, the owners of various brands of automobiles are completely dependent on authorized dealer’s network of OEMs and they are not in a position to exercise option of availing services of independent repairers.

3)OEMs used their dominance in relevant market of supply of spare part to protect other relevant market namely after sales services and maintenance thereby violating section 4(2)(e) of Competition Act, 2002 (‘the Act’).

4)OEM’s have contravened provisions of sections 3 and 4 of the Act. They had to allow Original Equipment Suppliers to sell spare parts in open market without any restriction, including on prices.

5)The opposite parties may develop and operate appropriate systems for training of independent repairer/garages, and also facilitate easy availability of diagnostic tools.

6)Thus, penalty of around Rs 25,00 crore was imposed on opposite parties (computed as percentage of total turnover of respective opposite parties in India) – SHAMSHER KATARIA V. HONDA SIEL CARS INDIA LTD. [2014] 48 TAXMANN.COM 300 (CCI)

Revenue could recover excise dues of lessor by detaining excisable goods belonging to lessee

Section 11 of Central Excise Act read with section 142 of Customs Act empower authorities to attach/detain excisable goods belonging to defaulting-assessee including transferee/lessee/buyer of its business.

Facts:

a)The assessee (lessor), engaged in manufacture of tea, had failed to pay certain excise dues. The assessee leased out tea garden/factory to two petitioners (lessees). Department attached and detained goods (tea) to recover excise dues from lessor.

b)The lessees argued that duty was already on tea owned by them and, therefore, such tea could not be detained for recovery of dues of lessor.

c)The assessee further argued that only Commissioner could issue order of attachment/detention and not Deputy Commissioner.

The High Court held in favour of revenue as under:

1)Officers who signed attachment/detention orders were 'Central Excise Officer' under section 2(b) ibid and were empowered to issue impugned orders.

2)Moreover, once provisions relating to detention/attachment contained in Customs Act were made applicable for recovery of dues under Central Excise Act, all provisions of Central Excise Act including section 2(b) would apply for recovery.

3)Furthermore, section 11 read with section 142 empower authorities to raise demand and also to issue attachment/detention orders to detain goods belonging to defaulting assessee including his transferee who stepped into his shoes to carry on business either by purchasing said business or otherwise. Hence, impugned demands/orders were valid. – BOGIDHOLA TEA & TRADING CO. (P.) LTD. V. UOI [2014] 47 taxmann.com 221 (Gauhati)