“Stake money” or “prize money” paid by race clubs to horse owners won’t attract TDS under Sec. 194B

The issue that arose before the High Court was:

Whether the assessee was liable to deduct tax at source under Section 194B on making payment of ‘stake money’ to the owners of the horses?

The High Court held as under:

1) A cursory look of the Finance Act, 2001 introduced with effect from 01.04.2002 and particularly section 194B would indicate that it was introduced to tax deduction at source on winning from ‘card games and other games of any sort’. Explanation to Section 224)(ix) was simultaneously introduced along with the words inserted in section 194B where under the card games and other games of any sort was introduced with the ambit of tax deduction along with lotteries and cross-word puzzles.

2) Game show involving prize money being telecast through electronic media and said prize money had not found its place in the definition of clause “income” under the income-tax Act (I-T Act’). The Legislature had introduced Explanation (i) and (ii) to Section 2(24)(ix) so as include such prize money also under definition of “income”, since in those events people would compete with each other to win prizes. This position would become clear from budget speech of the Finance Minister herein below: “Winnings from lotteries, crossword puzzles etc., are currently taxed at 40%. As the marginal personal income-tax rates have now stabilized at 30%. Television game shows are very popular these days. I wish the winners well. At the same time, I propose that income-tax at the rate of 30% will be deducted at source from the winnings of these and all similar game shows”

3) Thus, amendment brought by the Finance Act, 2001 to Section 2(24) and section 194B would have no bearing on the income earned from ‘owning and maintaining horses’. The term ‘any other similar game’ found in Explanation (ii) to Section 2(24)(ix) is inclusive definition and has to be read ejusdem generis and as such, activity of owning and maintaining horses cannot by any stretch of imagination fall in the definition of ‘card game or other game of any sort’ found in section 194B.

4) Therefore, the “stake money” or “prize money” paid by race clubs to horse owners would not attract the provisions of Section 194B of the IT Act. - Bangalore Turf Club Ltd. v. Union of India [2014] 52 taxmann.com 290 (Karnataka)

Sec. 80-IB relief available even if buyer can convert flats into duplexes in excess of built-up limit after acquisition

Where supplying design to merge flats into a duplex in excess of limit of built-up area constituted only a marketing strategy to boost sale of flats and assessee constructed flats in accordance with plan approved by authorities it was entitled to deduction under section 80-IB.

Facts:

a) The assessee had formed an AOP for developing a property with two wings and each wing was to have 96 flats. All the flats were approved to be with the built up area of less than 1000 sq. ft. as prescribed in clause (c) of Explanation to section 80-IB(10).

b) There was a survey action under section 133A and the officers noted that flats were constructed in such a way that the said flats could be conveniently combined with the lower 1-BHK flats vertically in order to generate spacious duplex flats.

c) The built up area of each of the said duplex flat exceeded the stipulated area. Accordingly, the revenue officers opined that the assessee intended to sell 1 BHK flats as duplex flats. Thus, the AO held that the assessee was not eligible for Section 80-IB relief as it had violated the condition relating to the maximum stipulated area of the flat. Further, the CIT(A) upheld the opinion of AO.

On appeal, the Tribunal held in favour of assessee as under:

1) Impounding of the brochure with details of method of merger of 1-BHK flats into a duplex, could not be used against the assessee as it only provided the design of merger. The fact was that the assessee got the approval for constructing impugned flats from the authorities and completed the construction as per the approved plans. In the instant case, from the approval stage till the stage of issuance of the completion certificate, there was no violation by the developer.

2) There was no evidence to suggest that it was the developer who had planned and generated duplex flats out of the 1-BHK flats and, then sold as such to the buyers.

3) The AO undertook the exercise of verification under section 133(6) and all the flat buyers responded to the said queries. Not even a single flat owner stated that the developer (‘assessee’) constructed those duplex flats.

4) The discrepancy of mere providing a hole for intended staircase for flat buyers and supplying of the design to merge flats into a duplex flat constituted a marketing strategy to boost the sale of the 1-BHK.

5) Thus, such a marketing strategy would not come in the way of granting deduction under Section 80-IB. Therefore, the assessee was entitled to deduction in respect of the profits attributable to all the 1-BHK flats of the projects. – Poddar & Ashish Developers v. ITO [2014] 51 taxmann.com 505 (Mumbai - Trib.)

No clubbing of interest-free loan given by 'Shahrukh Khan' to his wife from whom she had purchased assets

'Shahrukh Khan' gave interest-free loan to his wife, Gauri Khan, who in turn, purchased a residential house and jewellery from said loan amount. The department clubbed the value of loan amount in the net wealth of 'Shahrukh Khan'. Extending cash loan, to wife does not come within the definition of asset as provided under Section 2(ea) of the wealth tax Act, thus, it could not be said that there was a transfer of asset; the impugned loan amount was not includible in net wealth of assessee.

Facts:

a)Shahrukh Khan (assessee) gave interest free loan to his wife, Gauri Khan, who, in turn, purchased residential house and jewellery in her name from such loan amount.

b)The Assessing Officer ('AO') opined that the loan given by the assessee to his wife would be treated as indirect "transfer of asset" within the meaning of section 4(1)(a)(i) of the Wealth Tax Act. Accordingly, he clubbed the value of loan amount in the net wealth of the assessee.

c)On appeal, the CIT(A) affirmed the view of the AO against which the assessee had filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)Section 4(1)(a)(i) of the Wealth-tax Act, 1957 provides as under: In computing the net wealth of an individual, there shall be included, the value of any asset which are held by spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart.

2)Extending cash loan, to wife does not come within the definition of asset as provided under Section 2(ea) of the wealth tax Act, thus, it could not be said that there was a transfer of asset as alleged by the department.

3)The instant case was not of tax avoidance as in the instant case assessee gave the loan to his wife and the same was duly declared. There is distinction between the term "transfer" and "loan". In act of transfer, some legal interest is created in the transferee over the subject matter of transfer, whereas in case of lending, except a possessory interest, which may be momentary also, no other interest is created.

4)In the instant case, the wife of assessee was having independent source of income, filing her return and even subsequently repaid part of the loan. Therefore, there was no "transfer of asset" or "colourable device", as assessee was not the owner of "any asset" which was transferred to the wife, rather a new property was purchased from a third party out of the interest free cash loan taken by the wife from her husband.

5)The CIT(A) had opined that it amounts to indirect transfer of asset within meaning of Section 4(1)(a)(i) of the Wealth Tax Act. This angle of CIT(A) was on weak footing as in the instant case there was no transfer of asset rather interest-free loan was given by the assessee to his wife.

6)Thus, the impugned loan amount was not includible in wealth of assessee. Accordingly the order of CIT(A) was to be reversed- Shah Rukh Khan v. Assistant Commissioner of Wealth Tax (2014) 52 taxmann.com 252 (Mumbai - Trib.)

Call centre services to recipients located abroad were export of services even when Indian TelCos were involved

When call centre services were provided electronically to recipient located outside India, data had to be delivered to telecom authorities for transmission abroad and merely because of involvement of telecom authorities in India, it could not be said services were not exported.

The issues that arose for the consideration of the CESTAT was:

a) Whether call centre services provided by assessee to recipients located outside India would be deemed as 'exports' if they were not directly exported from premises of assessee but were routed through telecom service provider?

b) Whether the use of leased telecom lines for exporting call centre services electronically was 'input service' and, thus, was eligible for credit?

The CESTAT held in favour of assessee as under:

1) When data was transmitted through electronic medium, it had to be first transmitted to a server of telecom authorities in India and, thereafter, up-linked/transmitted to foreign service recipient. In the instant case, foreign service recipient had received output service and had made payment in convertible foreign exchange to assessee. Hence, said activity was export of service.

2) Exports were undertaken electronically and to undertake export, assessee needed dedicated lines from their office premises to telecom authorities. Without these dedicated lines, assessee could not deliver output service and therefore, leasing of telecom lines by telecom authorities was an eligible input service. - WNS GLOBAL SERVICES (P.) LTD. V. COMMISSIONER OF CENTRAL EXCISE (2014) 52 taxmann.com 131 (Mumbai - CESTAT)

Entity set-up for providing housing and other infra facilities is charitable in nature; entitled to registration

Facts:

a) The assessee ('Jaipur Development Authority') was wholly owned and controlled by Government of Rajasthan.

b) It was formed for planning, coordinating and supervising proper, orderly and rapid development of the areas in Jaipur region and of executing plans, projects and schemes for such development, so that housing, community facilities, civil amenities and other infrastructural facilities were created in such region.

c) The registration was granted to the assessee under section 12AA. During the relevant year, the CIT withdrew the registration by observing that the objects of the assessee were not charitable but came under the purview of last limb of section 2(15) of the Act, i.e., 'Advancement of any other object of general public utility'.

The Tribunal held in favour of assessee as under:

1) The Jaipur Development Authority was a tool of State Government for coordinated and planned development in Jaipur region. In practical, the main work of Jaipur Development Authority was construction of roads, sewerage, parks, play grounds, provide plots for educational, health and cultural institution for over all development of the community.

2) By making planned development it provides smooth transportation so that air pollution can be minimized and save time of the public. If it would be left in the hands of private operator, these facilities would not be provided on similar price as provided by the Jaipur Development Authority. The intention of the institution was not to earn profit but recover the cost of the establishment as well as other expenditure to implement its objects.

3) The CIT can cancel the registration in two situations, viz, if the activities of the institution are not genuine and if the activities assessee not carried out in accordance with the objects of the institution.

4) In the instant case, as the assessee was a government authority, its object was to prove civil amenities and infrastructure and no trade or business, therefore, withdrawal of registration by the CIT was not justified. - Jaipur Development Authority v. CIT (2014) 52 taxmann.com 25 (Jaipur - Trib.)

"Umbrella" of combined entity level TNMM can't be used to benchmark separate transactions on combined basis

The Tribunal held as under:

1) Transfer pricing legislation contemplates determination of arm's length price ('ALP') of an international transaction, which means for each transaction separately. The term 'transaction' has been defined in Rule 10A(d) to mean 'a number of closely linked transactions.'

2) ALP is required to be determined in respect of each international transaction separately. If, however, there are a number of closely linked transactions, then such closely linked transactions can be considered as a single transaction for the purposes of benchmarking. To put it conversely, the transactions which are not closely linked, should be processed under the transfer pricing regime independently and not on a consolidated basis.

3) In the instant case, the clubbing of royalty payment with other international transactions for processing them in a combined TNMM approach, would defeat the mandate of the transfer pricing legislation.

4) When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be usurped by the income from the other international transaction giving higher income on transacted value. That was why the legislature provided for determining the ALP of each international transaction separately.

5) As the international transaction of royalty payment was separate transaction and not closely linked with the other transactions (i.e., import of raw materials, service spares and export of finished goods, etc.) with which the assessee had merged it, such merger could not be allowed for the purposes of the determination of its ALP on entity level under TNMM. - LG ELECTRONICS INDIA (P.) LTD. V. ACIT (2014) 52 taxmann.com 240 (Delhi - Trib.)

ITAT invokes MFN clause to import make available clause from India-Portugese DTAA into the India-Sweden DTAA

Swedish-company could claim Fee for Technical Services ('FTS') received from its Indian subsidiaries as tax-exempt if 'make available' condition was not satisfied, as India-Sweden DTAA contained Most Favoured Nation clause ('MFN' clause) as per which make available clause in India-Portugese could be imported into the India-Sweden DTAA.

The issue that arose for consideration of the ITAT was:

Whether the assessee, a Swedish-company could be given benefit of India-Portuguese DTAA on principle of MFN clause?

The ITAT held in favour of assessee as under:

1) An MFN clause can direct more favourable treatment available in other treaties only in regard to the same subject matter, same category of matter or same clause of the matter.

2) The MFN clause in the protocol attached to the treaty takes care of a situation wherein either of the contracting states enter into a DTAA with another sovereign state and where the same subject matter has been given more favourable treatment by way of a definition or mode of tax.

3) The parties can claim the benefit on the recognized principle of MFN clause. On the basis of protocol to India-Sweden DTAA, a Swedish-company could claim the benefit of 'make available' condition in India-Portugal treaty to claim tax-free status for FTS received from its Indian Subsidiaries.- Sandvik AB v. Dy. DIT (International Taxation) (2014) 52 taxmann.com 211 (Pune - Trib.)

Commission paid to affiliate on import of furnace oil was illegal as it was purchased in breach of law

Where purchases of furnace oil from sister concern, its storage and consequent sale were in complete breach of Solvent, Raffinate & Slop [Acquisition, Safe, Storage & Prevention of Use in Automobiles] Order, 2000, payment made by assessee to sister concern could not be allowed under section 37(1).

Facts:

1) The assessee entered into a contract with a foreign company for purchase of furnace oil. It failed to get licence for storage and sale of solvents, as required by the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000 (‘SRS order’).

2) After realizing that any import in absence of valid license would attract criminal/penal proceedings, it approached its sister concern who had said licence. It transferred the contract of import in the name of its sister concern and made payment for said purpose by claiming it as commission.

3) The AO disallowed the commission.

4) On appeal CIT(A) allowed said payment which was subsequently reversed by the Tribunal. Further the High Court upheld the order of Tribunal. The assessee filed the Special leave petition before Supreme court against impugned order of High Court.

The Supreme Court dismissed the Special Leave Petition against the order of High Court, wherein the High Court held as under:

1) When the SRS order prohibits importation of goods, its acquisition, storage and sale, without a valid licence, assessee could not import such furnace oil without issuance of requisite licence.

2) Even assuming that the sister concern had a licence for importing the furnace oil, the assessee diverted its contractual obligation for averting the payment of damages, yet nothing was brought on the record to explain as to how the sum termed as 'commission' for performing the contractual obligation was needed to be paid to the sister concern.

3) It also emerged from record that not only the assessee got contract executed through its sister concern even by a valid licence held by the sister concern, the subsequent purchases from the sister concern of the very furnace oil, its storage and consequent sale appeared to be in complete breach of the SRS Order.

4) Even the nomenclature used as 'Commission' was not taken into consideration and if the character of payment in substance was to be looked at, nowhere it emerged that there was any valid claim for allowing the impugned sum (paid as commission) which was a consideration for transfer of contractual obligation.

5) Even if there was no loss to the revenue because the revenue had recovered tax on the said amount from the sister concern, then also, when from the record itself, it showed that the transaction was in contravention of SRS order and entire modus was also apparent from the paper book produced by the assessee, disallowance by the Tribunal invoking its statutory power required to be sustained. - Overseas Trading & Shipping Co. (P.) Ltd. v. ACIT [2014] 51 taxmann.com 374 (SC)

No penalty for inadvertently filling 'no' response in column seeking info about tax audit

Where assessee-company at time of filing its e-return had inadvertently filled column regarding details of audit under section 44AB wrongly as 'No', penalty could not be levied under section 271B.

Facts:

a) The assessee-company e-filed its return of income. In the said return of income, the assessee was required to answer whether it was liable for audit under section 44AB and if yes, it was required to furnish certain information regarding same.

b) The Assessing Officer noticed that the assessee had answered the said question as 'No' and, consequently, it did not furnish the details relating to auditor. Hence, he took the view that the assessee did not get its accounts audited under section 44AB and, accordingly, he initiated penalty proceedings under section 271B.

Sale on principal-to-principal basis to be included in 'turnover' for purpose of tax audit under sec. 44AB

Sale of gas cylinders to consumers was to be included in turnover for purpose of Section 44AB when assessee was appointed as a distributor on principal-to-principal basis for sale of such cylinders.

Facts:

a) The assessee was a distributor of Indian Oil Cooking Gas and was also engaged in sale of gas stoves and spare parts.

b) The assessee did not include the turnover from sale of cylinders for computing the threshold limit prescribed under section 44AB. By including such sales, the turnover of assessee would exceed the threshold limit prescribed under section 44AB.

c) Thus, the Assessing Officer (AO) issued a show-cause notice to assessee on the ground that it did not get its accounts audited under section 44AB.

d) The assessee contended that it had sold gas cylinders on commission basis as the ownership of same remained with the Indian Oil Corporation. Therefore, sale of gas cylinders could not be included in its turnover to compute the threshold limit prescribed under section 44AB. The Assessing Officer did not agree with assessee's reply and imposed a penalty on it under section 271B.