TPO couldn't apply 'benefit test' while determining ALP of royalty payments: HC

Facts:

a) Assessee had entered into an agreement with its UAE based Associated Enterprise (AE) for payment ofroyalty equivalent to 3% of the net ex-factory sale price of the products on both domestic and export sales.

b) Transfer pricing (TP) study by the assessee in relation to this component was by adoption of Transaction Net Margin Method.

c) Transfer Pricing Officer (TPO) found that substantial expenditure had been incurred by the assessee on advertisement and marketing and it were these efforts which had yielded increased revenue and profit. Thus, he held that assessee had to satisfy the 'benefit test' to justify payment of royalty and as it had failed to do so, royalty payment was pegged at 2% instead of at 3%.

d) On appeal, the Tribunal rejected the application of the 'benefit test' adopted by the TPO. Revenue filed instant appeal before the High Court.

The High Court held in favour of assessee as under:-

1) TPO did not undertake any analysis in fixing the arm's length price of the royalty payment made by the assessee to the AE. TPO had also not adopted any of the methods prescribed under Section 92CA of the Act of 1961, read with Rule 10B of the Income Tax Rules, 1962.

2) TPO determined that the reason for the improvement in the net sales and profit of the assessee was increased marketing along with offer of discounts. Thus, there was no justification for payment of royalty at 3% to the AE by the assessee.

3) This reasoning was without legal basis of law as it was not for the TPO to decide the best business strategy. It was not for the TPO to determine as to what could be the other reasons for increase in the assessee's sales and profit.

4) Therefore, TP additions made on account of royalty payment by reducing rate of payment amounted to an arbitrary and unbridled exercise of power by TPO. - [2017] 78 taxmann.com 230 (Andhra Pradesh)

No FTS when global telecom facility provided to shipping agents helped them to discharge their functions

Facts:

a) The foreign shipping company had 3 agents in India who were acting as clearing agents.

b) In order to help agents, assessee had set up and was maintaining a global telecommunication facility called “Maersk Net”. Agents were paying for said facility on pro-rata basis to the assessee.

The issue before the Supreme Court was as under:

Whether the income from the use of Global Telecommunication Facility called 'Maersk Net' can be classified as fees for technical services?

The Supreme Court held in favour of assessee as under:-

1) “Maersk Net” was a facility which enables the agents to access several information like tracking of cargo of a customer, transportation schedule, customer information, documentation system and several other information.

2) Maersk Net System was an integral part of the shipping business which was allowed to be used by agents in order to enable them to discharge their role more effectively.

3) Neither the AO nor the CIT (A) had stated that there was any profit element embedded in the payments received by the assessee from its agents in India.

4) It was in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems.

5) Therefore, payments made by the agents for use of that Maersk Net System could not be treated as “Fees for Technical Services”. - [2017] 78 taxmann.com 287 (SC)

No response for suspicious deposits may invite tax dept. at your doorstep – 10 things to know

The Income-Tax department had identified around 18 lakh taxpayers in its first phase who had made cash deposits during demonetization. These taxpayers were required to submit online response till 15th February 2017.

Now, the tax department has initiated verification of such accounts. It has issued the following Standard Operating Procedure for verification of cash transactions of taxpayers. 

1) In case of individuals, not having any business income, no verification shall be made by Assessing Officer ('AO') if the cash deposits do not exceed Rs 2,50,000.

2) In case of taxpayers above 70 years of age, the threshold limit shall be Rs 5,00,000. The source of such deposits can be either household savings or savings from the past. 

3) Wherein online response has not been submitted the tax authorities may initiate survey. During survey, tax dept. can check CCTV recording at cash counters of banks where there is suspicion of back dating transaction or fictitious cash transactions.

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No sec. 54F relief if newly acquired house is instantly demolished: Chennai ITAT

Facts:

a) Assessee sold two shops and a residential building for certain amounts. These amounts were deposited in the capital gains scheme account in a nationalized bank. Later on, the assessee withdrew this amount and purchased a residential plot and claimed the benefit of section 54F.

b) Assessing Officer (AO) disallowed claim of the assessee on the ground that the new asset purchased was instantly demolished by the assessee and, further, he had proceeded to construct a shopping complex.

c) CIT (Appeals) affirmed the order of the AO. Aggrieved assessee filed the instant appeal before the Tribunal.

Tribunal held in favour of revenue as under:

1) The Parliament in its wisdom had enacted section 54F in the Finance Act, 1982 with a view to encourage housing construction. Thus, the intention of the legislation was not for destruction of residential building but for promoting the construction of the residential housing units.

2) If the benefit of section is extended where the new residential building is demolished without constructing another residential building within the time limit prescribed under the Act, then the purpose of the Act is defeated.

3) In the case CIT v. V. Pradeep Kumar [2006] 153 Taxman 138 (Madras), it had been categorically held that "the burden is on the assessee to prove that he had actually constructed a new residential house for the purpose of the exemption under section 54F. Section 54F emphasizes construction of residential house. The construction must be a real one. It should not be a symbolic construction. Mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated under section 54F."

4) Since assessee had demolished the newly acquired residential house instantly for the purpose of construction of a six floored shopping complex, exemption under section 54F was rightly disallowed. - [2017] 78 taxmann.com 177 (Chennai - Trib.)

Limitation of Relief clause can’t be invoked to deny tax exemption to Singaporean Shipping Company

Facts:

a) Singapore based company was engaged in the business of operation of ships in international waters. It had a shipping agent in India in the form of a wholly owned subsidiary ‘ALP India Pvt. Ltd.’

b) In return of income, assessee sought to claim benefit of article 8 of India-Singapore DTAA for its gross freight earnings collected from India.

c) Assessing Officer (AO) noted that the assessee could not produce ship registration certificates and copies of charter party agreements of few ships so he denied benefit of article 8 of DTAA in respect of such operating ships.

d) Further, CIT (Appeals) denied entire benefit by invoking the limitation clause of article24 of India-Singapore DTAA. Aggrieved-assessee filed the instant appeal before the Tribunal.

Tribunal held in favour of assessee as under:

1) As per the remittance basis of taxation under Singapore law, income arising outside the country is taxable only when that income is remitted to and received in the Singapore. However, any income accruing in or derived from Singapore is taxable on accrual basis under Singapore law.

2) For applicability of limitation of benefit clause, two conditions needs to be satisfy, firstly, income earned from the source state (here in this case, India) is exempt from tax or is taxed at a reduced rate; and secondly, under the laws in force of the resident State (Singapore), such income is subject to tax by reference to the amount thereof which is remitted to or received in the resident State and not by reference to the full amount  thereof. If both the conditions are satisfied, then only the exemption is allowed or the reduced rate of tax is levied on the amount so remitted.

3) In the instant case, the income of assessee-company from shipping operations was not taxable on remittance basis under the laws of Singapore, albeit it was liable to be taxed in-principle on accrual basis by virtue of the fact that this income under the income tax laws of Singapore is regarded as 'accruing in or derived from Singapore'.

4) Thus, the condition of article 24 couldn’t be satisfied in the present case. Therefore, CIT (Appeals) was not justified in denying the benefit of article 8 by invoking the limitation of benefit clause. - [2017] 78 taxmann.com 240 (Mumbai - Trib.)

Key Takeaways from 10th Meeting of GST Council: State Compensation Law Approved

The GST Council failed to approve all GST related Bills in its 10th meeting at Udaipur, Rajasthan and it has only finalised legally vetted State Compensation law. The following are the key takeaways of the meeting:

a) State Compensation Law Approved: The Council has approved the legally vetted Draft of State Compensation Law. According to 101st Constitution Amendment Act, 2016 the Centre will compensate State for first five years of GST implementation in case any loss revenue accrues to State on account of GST Implementation. The Draft Law provides that base year for calculation of compensation would be financial year 2016 and growth in revenue would be taken as 14 percent calculated on compounding basis. The Draft bill will now laid before the Cabinet and after approval of same it will be presented before the Parliament.

b) Central GST, State GST and Integrated GST: The Finance Minister said that there were some contentions issues pending on Model GST Laws. Some of them are as under:

1) Composition of Tribunal members and their eligibility

2) Exemptions during transition phase to Industry (E.g. Extension of time for return filling, etc.)

3) Classification of Works Contract as goods or Services

4) Definition of Agriculture, etc.

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Advocate’s laxity to obtain receipt from Police for transfer of bounced cheque isn’t misconduct

Client has filed a complaint before Bar Council of India alleging that cheque handed over to the appellant – Advocate to initiate criminal action against defaulter under Section 138 of the Negotiable Instrument Act was not returned to him. On the basis of complaint received, a disciplinary proceeding was initiated against Advocate and found him guilty of professional misconduct. Further, An Advocate has filed appeal to the Apex Court against the order of disciplinary committee.

The Apex Court held that it is only a case of negligence and not a case of 'gross negligence' and hence the Advocate is not guilty of professional misconduct as Advocate handed over the original bounced cheque to police given by his client and failed to obtain any acknowledgement from them. - [2017] 78 taxmann.com 220 (SC)

CST won't accrue to that State where BrahMos Missile was stored only for warhead integration

Assessee, a joint venture company between Russia and India, had been established for purpose of design, development, production and sale of Brahmos Cruise Missile weapon system. The Indian Armed Forces awarded contract to the assessee for manufacture and supply of Brahmos Cruise Missiles.

A manufacturing unit of the assessee had been set up at Hyderabad. The missiles manufactured at Hyderabad unit were sent to Nagpur unit for the purpose of integration of warhead. Subsequently such missiles were dispatched to the Indian Armed Forces from Nagpur as directed by the Hyderabad office.The assessee treated the said transactions as inter-state sales of Missiles affected from its Hyderabad unit and, accordingly, charged and collected CST and paid the same to its assessing authority at Hyderabad. The State of Maharashtra demanded tax from assessee on the ground that was a local sale affected from Nagpur and hence State VAT would be levied. 

The High Court held as under:

It denied the demand of Maharashtra VAT department and held that the sale of missile occur from the Hyderabad and not from the Nagpur. There was branch transfer of missile between Nagpur and Hyderabad for their War head integration. The Nagpur would not be treated as a place from where sale occasioned first for delivery.

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Rs 30 lakhs black money seized by Punjab Police eligible for PMGKY scheme; High Court

Facts:

a) Assessee was travelling in a cab from Delhi carrying Rs. 30 lakhs. Such cash amount was seized by Punjab police and handed over to the Income-tax Officers.b) Assessee filed writ petition seeking unconditional release of amount with a further prayer to avail of the remedy under 'Pradhan Mantri Garib Kalyan Yojana, 2016' (PMGKY) by depositing the aforesaid amount, tax, surcharge and penalty.

High Court held in favour of assessee as under:

1) A person having unaccounted cash can avail of the benefit of the PMGKY scheme by submitting the Form 1 at any time on or before 31-3-2017 provided he does not fall under the list of excluded cases.

2) In the exclusion, it is mentioned that the scheme shall not apply in relation to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, etc.

3) The use of the words "in relation of prosecution of any offence" instead of "in relation to investigating for any of the offence" clearly shows legislative intent that provisions would apply only if the chargesheet or complaint is filed for prosecuting any person under any of the aforementioned provisions of the Act and not merely when investigations are going on.

4) In the instant case, no complaint or chargesheet was pending against assessee. The alleged un-disclosed seized cash had been handed over to the Income-tax department and summons had already been served upon the petitioner.

5) Assessee was not trying to project undisclosed income as duly accounted for availing of the remedy. Since he was not amongst the persons who weren’t eligible for availing of the PMGKY Deposit Scheme, the Income-tax Officer could not deny the benefit of PMGKY. - [2017] 78 taxmann.com 172 (Punjab & Haryana)

Harsh Punitive action will be taken against shell companies: FinMin

Departments to review the functioning of ‘Shell Companies’ in India, so as to prevent their misuse for money laundering and tax-evasion, especially in the context of unearthing black money post demonetization. In the initial analysis, it has been found that ‘Shell Companies’ are characterized by nominal paid-up capital, high reserves & surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover & operating income, nominal expenses, nominal statutory payments & stock in trade, minimum Fixed Asset

It has been found that 559 beneficiaries have laundered money to the extent of Rs.3900 Crore with the help of 54 Professionals who have been identified. These information has been shared with SIT, Income Tax Department, Enforcement Directorate, SEBI and the ICAI. Harsh punitive actions will be taken against the deviant shell companies which will include freezing of Bank Accounts, striking off the names of dormant companies, invocation of Benami Transactions (Prohibition) Amendment Act, 2016 – Press Release dated, 10-02-2017