CBEC issues clarification to facilitate implementation of new provision mandating pre-deposit

The Finance (No. 2) Act, 2014 has made amendments to Section 35F of the Central Excise Act, 1944 and Section 129E of the Customs Act, 1962 to prescribe mandatory pre-deposit as a percentage (10% notified) of the duty demanded where duty demanded is in dispute or where duty demanded and penalty levied are in dispute.

The Finance (No. 2) Act, 2014 has also made amendments to Section 355FF and Section 129EE of the Central Excise Act, 1944 and Customs Act, 1962, respectively, to provide for payment of refund along with interest at the prescribed rate (6% notified). Some of the clarifications issued by CBEC on the aforesaid sections are as under:

1)Quantum of pre-deposit:

a)New provisions stipulate payment of pre-deposit [i.e., 10% of the duty or penalty payable in pursuance of the order of Commissioner (Appeals)]. Thus, it has been clarified that in the event of appeal against the order of Commissioner (Appeal), 10% is to be paid on the amount of duty demanded or penalty imposed by the Commissioner (Appeals).

b)In a case where penalty alone is in dispute and penalties have been imposed under different provisions of the Act, the pre-deposit would be calculated based on the aggregate of all penalties imposed in the order against which appeal is proposed to be filed.

2)Payments made during investigation: Payment made during the course of investigation or audit, prior to the date on which appeal is filed (to the extent of 7.5% or 10%, subject to the limit of Rs 10 crores) can be considered as pre-deposit. Further, the date of filing of appeal shall be deemed as date of pre-deposit.

3)Refund of pre-deposit: Pre-deposit cannot be deemed as payment of duty. Hence, process of refund as stipulated under Section 11B of the Excise Act or Section 27 of the Customs Act will not be applicable for refund of pre-deposit. Therefore, where the appellate authority has decided the matter in favour of the appellant, refund alongwith interest should be paid to the appellant within 15 days of the receipt of the letter of the appellant seeking refund.

SC discusses on evils of retro law; proviso to sec. 113 levying surcharge in block assessment cases held prospective

SC discusses on the evils of retrospective law while upholding the principle "that unless a contrary intention appears, a law is presumed to be prospective”.

Facts:

The question of law that arose for consideration before the Supreme Court was as to whether the proviso to Section 113 inserted by the Finance Act, 2002 was to operate prospectively or was clarificatory and curative in nature and, therefore, had retrospective operation?

The Supreme Court held as under:

1)Of the various rules guiding how legislation had to be interpreted, one established rule was that unless a contrary intention appeared, legislation was presumed not to be intended to have a retrospective operation. The idea behind the rule was that a current law should govern current activities. Law passed now could not apply to the events of the past.

2)If we do something today, we do it keeping in view the law in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law was founded on the bed rock that every human being was entitled to arrange his affairs by relying on the existing law and would not find that his plans had been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward.

3)The basis of the principle against retrospectivity is the principle of 'fairness‟, which must be the basis of every legal rule. There could not be imposition of any tax without the authority of law. Such a law had to be unambiguous and had to prescribe the liability to pay taxes in clear terms.

4)If the concerned provision of the taxing statute was ambiguous and vague and was susceptible to two interpretations, the interpretation which favoured the subjects, as against there the revenue, had to be preferred. This was established principle of statutory interpretation, to help finding out as to whether particular category of assessee was to pay a particular tax or not?.

5)No doubt, with the application of this principle, Courts made endeavour to find out the intention of the Legislature. At the same time, this very principle was based on "fairness" doctrine as it laid down that if it was not very clear from the provisions of the Act as to whether the particular tax was to be levied to a particular class of persons or not; the subject should not be fastened with any liability to pay tax. Thus, the proviso to Section 113 imposing a surcharge was held to be prospective with effect from 01.06.2002 – CIT v. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249 (SC)

CCI orders investigation against 'ICAI' as it was creating entry barriers to outsiders providing CPE seminars

Investigation was to be conducted against Institute of Chartered Accountants of India for abusing its dominant position in creating entry barrier to outsiders in providing CPE seminars.

Facts:

a)The informant was a qualified Chartered Accountant while opposite party was the Institute of Chartered Accountants of India (ICAI).

b)The Informant alleged that ICAI introduced CPE Scheme for its existing members, however, it did not allow any outside organization to provide CPE seminars other than program organizing units (‘POUs’)recognized by it.

c)The informant contended that ICAI had created an entry barrier for the others using its dominant position in the relevant market of organizing CPE seminars. Thus, informant had challenged the CPE policy of ICAI, being discriminatory and abusive in terms of section 4 of Competition Act, 2002 (‘the Act).

On appeal, the Competition Commission of India held as under:

1)There seemed to be force in the allegations of the informant that the restriction put in by ICAI in not allowing any other organization to conduct the CPE seminars for CPE credits, created an entry barrier for the other players in the relevant market.

2)Further, the choice of the members of ICAI in this case was limited. The members of ICAI had no option, but to attend the seminars organized by ICAI (whatever be the quality of seminars) to get the requisite CPE credits.

3)The restriction put on by ICAI did not meet the objectives sought to be achieved by its policy. There are hundreds of seminars and conferences organized every month across India by reputed chambers of commerce like CCI, FICCI, ASSOCHAM, NASSCOM, etc.

4)However, these seminars/conferences were not recognized by ICAI for CPE credits. Prima facie, it appeared to be an unreasonable restraint and the members of ICAI were left with no option but to compulsorily attend seminars organized by ICAI and its organs.

5)While ICAI, as a regulator of the accounting profession, had all the powers to prescribe a policy for continuous upgradation of its member through the CPE policy and recognition of POUs, however, on its non-regulatory function of organizing CPE seminars, restricting the same only to itself and its organs, prima facie appeared to be an arbitrary exercise of its powers and thus in contravention of the provisions of section 4 of the Act.

6)Therefore, the Director General was to be directed to investigate into allegation of misusing dominant position by ICAI.– ARUN ANANDAGIRI V. INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA [2014] 48 TAXMANN.COM 298 (CCI)

High Court interprets word ‘substantially’; lays down 50% threshold limit for indirect transfer of capital assets

Gains arising from sale of a shares of a company incorporated overseas, which derives less than 50 per cent of its value from assets situatedd in India would not be taxable under section 9(1)(i), read with Explanation 5 thereto.

Facts:

The issue that arose for consideration of the High Court was: Whether the sale of shares of an overseas company which derives only a minor part of its value from the assets located in India could be deemed to be situated in India by virtue of Explanation 5 to section 9(1)(i)?

The High Court held in favour of assessee as under:

1)A plain reading of Explanation 5 to section 9(1)(i) suggests that it was always the intention of the Legislature that an asset, which derived its value from assets in India, had to be considered as one, which was situated in India. The clear object of section 9(1)(i) was, inter alia, to cast the net of tax also on income which arose from transfer of assets in India, irrespective of the residential status of the recipient of the income. Explanation 5 introduced a legal fiction for the limited purpose of imputing that assets which substantially derive their value from assets situatedd in India would also be deemed to be situated in India;

2)It is trite law that a legal fiction would be restricted to the purpose for which it was enacted. The object of Explanation 5 was not to extend the scope of section 9(1)(i) to income, which had no territorial nexus with India, but to tax income that had a nexus with India, irrespective of whether the same was reflected in a sale of an asset situated outside India. There would be no justification to read Explanation 5 to provide recourse to section 9(1)(i) for taxing income which arises from transfer of assets overseas and which do not derive bulk of their value from assets in India.

3)In this view, the expression 'substantially' occurring in Explanation 5 would necessarily have to be read as synonymous with 'principally', 'mainly" or at least 'majority'. The 'United Nations Model Double Taxation Convention between Developed and Developing Countries' and the 'OECD Model Tax Convention provide that the taxation rights in case of sale of shares are ceded to the country where the underlying assets are situated only if more than 50 per cent of the value of such shares is derived from such property.

4)In view of the above, gains arising from sale of a share of a company incorporated overseas, which derives less than 50% of its value from assets situated in India would certainly not be taxable under section 9(1)(i), read with Explanation 5 thereto.

5)Thus, in the instant case, even if the transaction had been structured in the manner as suggested on behalf of the Revenue, the gains arising to the shareholders would not be taxable under Section 9(1)(i), as their value could not be stated to be derived substantially from assets in India. – DIT (International Taxation) v. Copal Research Ltd., Mauritius [2014] 49 taxmann.com 125 (Delhi)

All directors other than promoters can't be deemed as willful defaulters; RBI's master circular is arbitrary-HC

Facts:

a)The notices were issued by the respective banks, calling upon the all the petitioners-directors of Company to show-cause as to why they should not be declared as willful defaulters in terms of the RBI’s Master Circular DBOD No. CID-BC 1/20.16.2003/2011-12, dated 2-7-2012.

b)Thus, the instant writ was filed to challenge the legality and validity of a Master Circular dated July 2, 2012 issued by the RBI in respect of 'willful defaulter'.

The High Court held as under:

1)Having regard to object with which RBI had issued Master Circular to declare promoters of company as wilful defaulters, it could not be said that same was an unreasonable restriction violating Article 19(1)(g) of Constitution of India.

2)All directors could not be held liable due to default in repayment of loan by a company which might have been for varied reasons even beyond the control of such directors. Therefore, some element of arbitrariness was found in policy of RBI.

3)A director of a company (other than promoter or a direct borrower of loan from bank) could also be a director who had a limited role to play and he was not directly or indirectly responsible for company going in a debt. Such directors could not be restrained from approaching a bank for financial assistance, if they wanted to start a business or a new venture.

4)Apart from a social stigma, it was a direct infringement on right of such a director to carry on trade or business under Article 19(1)(g) of Constitution of India. Thus, Master Circular, so far as it was sought to be made applicable to all directors of company, was arbitrary and unreasonable.

5)Thus, that part of Master Circular was declared as ultra vires powers of RBI and was violative of Article 19(1)(g) of Constitution of India. Master Circular sought to paint all directors with same brush.

6)Provisions in circular shattered concept of identity of a company being different and distinct from its directors without providing any safeguards. Therefore, Show cause notice issued by bank to petitioner-directors for declaring them as wilful defaulters on basis of RBI’s Master Circular was bad – IONIC METALLIKS V. UNION OF INDIA [2014] 49 TAXMANN.COM 222 (GUJARAT)

Erecting bus queue shelters by advertising Co. isn’t preoperative exp. even if they aren’t yet ready for advertisement

Facts:

a)The assessee was incorporated to carry on the business of advertisement, consisting of street furniture (such as advertising on bus shelters, public utilities, parking lots, etc.). The first contract was awarded to it by NDMC in March, 2006 for construction of Bus Queue Shelters (BQSs) on Build-Operate-Transfer basis.

b)In consideration, the assessee was allowed to commercially exploit the space allotted in these BQSs by means of display of advertisement, etc., for a period of 15 years. In assessment year 2007-08, the assessee had claimed deduction of certain revenue expenditure incurred on construction of BQSs. The AO refused to allow deduction on the ground that the business of the assessee had not commenced.

c)The AO further held that the business would commence only when the BQSs would be ready for providing space for advertisement to the assessee, being the very reason for which the assessee company entered into an agreement with the NDMC. On appeal, the CIT (A) upheld the order of AO. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)In the instant case, the assessee had started the execution of contract in the preceding year itself (i.e., previous year 2005-06) by taking steps such as, entering into manufacturing agreement with a third person for manufacture and installation of BQSs.

2)Thus, it could be said that the project of NDMC for construction of BQSs was not set-up, yet the assessee had commenced its business with the execution of contract awarded by NDMC. The authorities had tagged the setting-up of business with the provision of space for advertisement by NDMC. This was certainly a post-commencement business stage of the assessee.

3)Such an event would mark the generation of actual income on commencement of business and it could not be construed as the setting-up of business. Thus, the assessee's business was set up when it prepared itself for undertaking the activity of building BQSs on receipt of contract from NDMC. It could not be related to the completion of construction of BQSs.

4)Thus, it was to be held that the business was set up in the preceding year. Hence, deduction of impugned expenditure was to be allowed to the assessee.- JCDECAUX ADVERTISING INDIA (P.) LTD. V. DY.CIT [2014] 49 taxmann.com 149 (Delhi - Trib.)

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)