Perpetual transfer of satellite rights of a film for 99 years is a sale; excluded from definition of ‘royalty’

Transfer of satellite right to assessee under an agreement for a period of 99 years is a sale and, therefore, excluded from definition of 'royalty' under clause (5) of Explanation 2 to section 9(1)(vi).

Facts:

a) The assessee was dealings in film satellite rights by taking them on assignment basis and reassigning to channels.

b) He did not deduct tax at source on purchase of copyright of film as he was of the view that such purchase was neither covered under section 194J nor under section 194C. However, the Assessing Officer held that the payments debited as purchase warranted TDS under section 194J and worked out disallowance under section 40(a)(ia).

c) The CIT(A) allowed the appeal of assessee by holding that the consideration paid did not attract section 194J.

d) On appeal, the Tribunal held that the payments made would fall within the definition of 'royalty' and as the assessee had failed to deduct tax under Section 194J rigour of section 40(a)(i) stood attracted. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1) Perusal of the facts and circumstances of the instant case and case of Mrs. K. Bhagyalakshmi v Dy.CIT [2013] 40 taxmann.com 350 (Madras) would show that the substantial question of law raised were the one and same in both the cases.

2) The earlier division bench of this court in case of Mrs. K. Bhagyalakshmi (supra) after considering the perpetual transfer of rights for a period of 99 years [in terms of Section 26 of Copy Right Act and also the definition under clause (5) to Explanation 2 to section 9(1)] held that it was a sale and, therefore, excludible from definition of royalty.

3) Following the decision rendered in the case of Mrs. K. Bagyalakshmi (supra) it was to be held that transfer of satellite right to assessee under an agreement for a period of 99 years would be a sale and excludible from definition of 'royalty'. Therefore, the Tribunal had erred in concluding that the payment made by the assessee was royalty and not sale. - S.P.Alaguvel v. DY. CIT [2014] 52 taxmann.com 231 (Madras)

HC nods to capital reduction scheme approved by majority of shareholders as it wasn't prejudicial to creditor’s rights

Where reduction of share capital was approved by majority of shareholders and did not involve any cash outflow to prejudice rights of creditors, same was to be confirmed

Facts:

a) The petitioner filed petition under section 101(1) of the Companies Act, 1956 for confirming the reduction of share capital account.

b) It was submitted that after the proposed reduction of the equity share capital by adjusting with debit balance and profit and loss account, financial statements of the company would exhibit realistic picture of the company's financial position.

c) The company also had no secured or unsecured creditors and, hence, there was no question of interest of the company's creditors to be adversely affected.

d) Further, the shareholders had unanimously passed the special resolution approving of the reduction of capital in extraordinary general body meeting. The petitioner also sought liberty of the Court for dispensing with the words 'and reduced' as contemplated in section 102(3) of the Companies Act, 1956.

The High Court of Madras held as under:

1) Since reduction of share capital was purely a commercial decision which was approved by majority of shareholders and reduction did not involve any cash out flow to prejudice rights of creditors with procedure laid down under section 100 of the Companies Act, 1956 having been fully complied with, reduction of share capital as resolved by company in its special resolution was to be confirmed and also the prayer for dispensing with the words 'and reduced' as contemplated in section 102(3) of the Companies Act, 1956 was to be allowed..-----Comtec Components Ltd., In re [2014] 52 taxmann.com 173 (Madras)

Bombay High Court: Service tax on services of advocate/arbitral tribunal is constitutional

Levy of service tax on services provided by advocates and arbitral tribunal is constitutionally valid and not violative of Article 19(1)(g); further, exemption to services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs is based on intelligible differentia and not violative of Article 14.

Facts:

The petitioner, a practicing advocate, filed writ petition for declaration that section 65(105) (zzzzm) of the Finance Act, 1994 as inserted by the Finance Act, 2011 providing for service tax on services by advocates is null and void and ultra vires the Constitution of India.

The High Court held in favour of revenue as under:

1) There is no basis or foundation in the complaint by petitioner inasmuch as imposition of such levy does not burden the litigant or the consumer of justice. There is no substance in the complaint that the profession of advocates and legal profession itself has been treated on par with commercial or trading activities or dealings in goods and other services. Merely because of the role of the advocate, it does not mean that his position as an officer of the Court and part and parcel of administration of justice is in any way undermined, leave alone interfered with.

2) The Advocates and legal practitioners are known to pay professional taxes and taxes on their income. They are also brought within the purview of service tax because their activities in legal field are expanding in the age of globalization, liberalization and privatization. They are not only catering to individuals but business entities too. If it is found that the advocates are catering to affluent and rich class of litigants and recipients of legal services, then, the tax on the services rendered to them is definitely within the permissive sphere of legislation. That cannot be faulted.

3) Hence, activities carried out by advocates for consideration by way of fees, etc., amounts to 'service' and can be charged to service tax. Similarly, arbitration is also carried out for hefty fees and levy of service tax on services by arbitral tribunal is not invalid.

4) Levy of service tax is not violative of Article 19(1)(g) of Constitution, as it is a reasonable restriction and similar to income-tax and professional tax being paid by advocates. Since services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs stands exempted, it does not deny justice to poor and needy. Further, such exemption to individuals and small businessmen does not transgress doctrine of equality under Article 14 of Constitution of India, as such exemption is based on intelligible differentia/classification.

5) Moreover, since service tax on non-exempt services provided by advocates/arbitral tribunal is payable by service recipients under reverse charge on and from 1-7-2012, such advocates/arbitral tribunal can no longer complain of levy of service tax. Even for period prior thereto when there was no reverse charge, levy of service tax could not be regarded as invalid and arguments that 'reverse charge be treated as retrospective' was to be set aside. - P.C. Joshi v. Union of India [2014] 52 taxmann.com 311 (Bombay)

“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.)