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SNK Newsletter December 2013

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DIRECT TAXES …...

1 - 12

Issue 12 Issue 09 1111

December, 2013 September, 2013

INDIRECT TAXES …….

13 - 15

IMPORTANT DUE DATES… 15

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DIRECT TAXES
Judicial pronouncements
Rajshri Production Pvt. Ltd. Vs. Addl CIT [TS-570-ITAT2013(Mum), ITAT Mumbai Bench, dtd. 22.10.2013, in favour of assessee] Cogent reasons recording AO's dissatisfaction mandatory for invoking Sec 14A disallowance For invoking Sec 14A, AO should indicate ‘cogent reasons’ that he is not satisfied about the claim of the assessee; The AO did not record any reason that he was not satisfied with the explanation by the assessee; Mere mention of AO's dissatisfaction not sufficient; Matter remitted to the AO with direction to pass a reasoned and speaking order; Relied on Delhi HC ruling in Maxopp Investment Varsha R. Taurani Vs. ACIT [TS-552-ITAT-2013(Mum), ITAT Mumbai Bench, dtd. 30.10.2013, in favour of revenue] Disallows 'interest' expense u/s 14A though actual dividend income not received Upholds CIT(A)’s order disallowing deduction for interest expenditure u/s 14A; Assessee utilised borrowings to acquire preference shares, dividend income from which was exempt; Marginal note to Sec. 14A clearly states that expenditure incurred in relation to income not “includible” in total income, actually earned or not, shall be disallowed; Interest not allowable as deduction against 'income from other source', though no dividend income was earned; Relies on Delhi ITAT ruling in Ever Plus Securities & Finance Ltd.; Distinguishes SC ruling in Rajendra Moody Prakash Vasantlal Golwala Vs. ACIT [Corrigendum in ITA No. 558/Ahd./2013, ITAT Ahmedabad bench, dtd. 29.10.2013, in favour of revenue] Law of jurisdictional High Court is not binding if there is a later contrary judgement of non-jurisdictional High Court.

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Sec. 22: Property used by firm in which assessee-owner is partner is not used for assessee’s business & not entitled for exemption The assessee, a partner in a firm, was the owner of a house property. He claimed that the house property was used by the employees of a firm in which he was a partner and that it should be considered to have been used for a business carried on by him. The assessee relied on CIT v/s. Rasiklal Balabhai 119 ITR 303 (Guj) where it was held that the annual letting value (ALV) of a godown owned by the assessee and used for the business carried on by him in partnership was not liable to be included in his total income u/s 22. However, the AO & CIT(A) relied on the contrary judgement in Prodip Kumar Bothra 244 CTR 366 (Cal) where it was held that house property income is not taxable only if the property is used for the assessee’s one’s own business and is not exempt if used for the business of the firm in which the assessee is a partner. On appeal by the assessee to the Tribunal, dismissing the appeal, ITAT held that 1. Though the jurisdictional High Court in Rasiklal Balabhai 119 ITR 303 held that the annual letting value of house property owned by the assessee and used for the business carried on by him in partnership was not liable to be included in his total income u/s. 22, the Calcutta

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DIRECT TAXES
Judicial pronouncements
High Court has dissented from this view in Prodip Kumar Bothra244 CTR 366 and held that the exemption in respect of house property cannot be allowed to assessee if the property is used by the partnership firm because the owner of the house property and the occupier of the property must be the same person. The Karnataka High Court in K.N. Guruswamy 146 ITR 34 (Kar) and the Allahabad High Court in Shiv Mohan Lal 202 ITR 60 (All) & Mustafa Khan 276 ITR 602 (All) has taken the same view as the Calcutta High Court that user by a partnership firm/ HUF is not user by the assessee-owner for business purposes. In view of the divergent views expressed by the High Courts, the thumb rule that the latest decision of the High Court is required to be followed to maintain judicial discipline. As the judgement of the (jurisdictional) Gujarat High Court is earlier in point of time and the judgement of the (nonjurisdictional) Calcutta and other High Courts is later in point of time, the view expressed by the Revenue Authorities has to be affirmed and the assessee’s ground dismissed; 2. Also, a litigant, especially the learned counsel, who is an expert, is expected to place before the Court all decisions either in favour or against him. We are constrained to note that this fair approach was not adopted in this case. Oracle India P. Ltd. Vs. CIT [ITA no. 25/2012, 287/2008, 417/2009, 447/2009, 461/2009, 683/2009, Delhi High Court, dtd. 25.11.2013, in favour of assessee] Sec. 37(1): Expenditure on acquiring master copy of software subject to obsolescence is deductible as revenue expenditure The assessee entered into a license agreement with Oracle Corp under which it acquired a non-exclusive & nonassignable right to duplicate software products which were owned by Oracle Corp and to sub-license the same to parties in India. The assessee paid recurring royalty of 30% for the said right. In addition to the royalty, the assessee periodically paid an amount towards “expenditure on import of software master copy”. The said master copy was used to replicate the software. The assessee claimed that the said master copies were versions of Oracle’s new product offerings which had very accelerated obsolescence and that at any point of time it was not possible to say whether the version will be current for one day or one month. The AO allowed a deduction for the recurring royalty but held that the expenditure for acquiring the software master copy was capital expenditure. On appeal, the CIT(A) reversed the AO on the ground that owing to obsolescence, there was no enduring benefit as there were frequent corrections and up-gradation of the software. On appeal by the department, the Tribunal reversed the CIT(A) and held that the expenditure was capital in nature on the ground that the master copy was an asset of enduring benefit. On appeal by the assessee, reversing the Tribunal, Delhi high Court held that the assessee’s claim that the master copies had high accelerated obsolescence and that even at the point of time of import it was difficult to say whether the version would be replaced by a new or updated version after one day or a month had not been disproved. Also the facts showed that there were periodical imports of the master copies and that the average price per copy was minimal. This was not a case where the master copies contained operating or system software, which normally did not require frequent up-gradation or changes. It is

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also not the case of an assessee which is the end user of software. It is a case where the assessee is required to repeatedly pay for the master copy media in view of frequent newer or updated versions of the application software from time to time. Once newer or better version of the application software is available, the earlier version is not saleable and does not have any market value for the seller i.e. the assessee. Also, as per the “matching concept” in accountancy, while determining whether expenditure is capital or revenue in nature, the question whether the expenditure would create an asset which is of value in further assessment periods and should be amortised (i.e. depreciated) as long as it has value (subject to the statutory provisions) requires to be considered. If the expenditure does lead to creation of an asset but of a limited or short life, it has to be treated as a liability and not as a fixed asset. The said expenditure cannot be valued for price for future financial years (Oracle Software 320 ITR 546 (SC),Ashahi India Safety Glass 346 ITR 329 (Del), G.E. Capital Services 300 ITR 420 (Del), O.K. Play 346 ITR 57 (P&H), IAEC Pumps 232 ITR 316 (SC) referred) London Star Diamond Company (I) P. L.td. Vs. DCIT [ITA No. 6169/M/2012, ITAT Mumbai bench, dtd. 11.10.2013, in favour of assessee] Loss on foreign exchange forward contracts is incidental to the exports business and not a “speculation loss“. However, if the contract is prematurely cancelled, the assessee has to justify the loss The assessee, an exporter of diamonds, entered into forward contracts with Banks to hedge the exchange loss, if any, in respect of the outstanding receivable in foreign currency. The assessee suffered a loss of Rs. 4.69 crore on account of the maturity & premature

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Judicial pronouncements
169 (Cal), Badridas Gauridu 261 ITR Steel 256 215 (Bom), Panchamahal 140 (Guj) Taxman

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capital contribution on his retirement from the firm. The assessee claimed that the said sum was a capital receipt not chargeable to tax. However, the AO held that the retirement had resulted in a relinquishment of his preexisting rights in the partnership firm and, therefore, the same was in the nature of capital gain on transfer of goodwill and liable to tax under sec. 45 read with sec. 2(47)(i) & (ii) of the Act. The CIT(A) and Tribunal reversed the AO on the ground that when a partner retires from the firm and receives his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there is no transfer of interest of the partner in the goodwill, and no part of the amount received is assessable as capital gain u/s 45 of the Act. It was also held that the decision of the Bombay High Court in Tribhuvandas G Patil 115 ITR 95 followed in N A Mody 162 ITR 420 has been reversed by the Supreme Court in Tribhuvandas G Patel 236 ITR 515 (SC) and that this legal position had been noted in Prashant S Joshi 324 ITR 154 (Bom). On appeal by the department to the High Court, dismissing the appeal, High Court held that the Tribunal has correctly referred to the fact that N.A. Mody 162 ITR 420 (Bom) followed Tribhuvandas G. Patel 115 ITR 95 and that the same has been reversed by the Apex Court in Tribhuvandas G. Patel263 ITR 515. This Court in Prashant S. Joshi 324 ITR 154 (Bom) has also referred to the decision of Tribuvandas G. Patel rendered by this Court and its reversal by the Apex Court. Moreover, the decision of this Court in Prashant S. Joshi placed reliance upon the decision of the Supreme Court in CIT v/s. R. Lingamallu Rajkumar 247 ITR 801 wherein it has been held that amounts received on retirement by a partner is not subject to capital gains tax.

and Friends and Friends Shipping (Guj) followed; contrary view in S. Vinodkumar Diamonds (ITAT Mum) referred); cancellation of the said forward contracts. The AO & CIT(A) held that the forward contracts constituted a “speculative transaction” u/s 43(5) and that the loss suffered thereon was a “speculation loss” which could not be set-off against the other income. On appeal by the assessee to the Tribunal, ITAT held that1. Though a forward contract for purchase or sale of foreign currency falls in the definition of “speculation transaction” u/s 43(5) as it is settled otherwise than by the actual delivery or transfer of the commodity, it cannot be regarded as constituting a “speculation business” under Explanation 2 to s. 28. A forward contract, entered into with banks for hedging losses due to foreign exchange fluctuations on the export proceeds, is in the nature of a “hedging contract” and is integral or incidental to the export activity of the assessee and cannot be considered as an independent business activity. Therefore, the losses or gains constitute business loss or gains and do not arise from speculation activities. The fact that there is a premature cancellation of the forward contract does not alter the nature of the transaction. There is also no requirement in the law that there should be a 1:1 correlation between the forward contracts and the export invoices. So long as the total value of the forward contracts does not exceed the value of the invoices, the loss has to be treated as a business loss (Sooraj Mull Magarmull 129 ITR 2. On facts, the loss arising on cancellation of matured forward contracts is allowable as it is attributable to the genuine failure of the trade debtors to comply with the credit terms and conditions. As regards the loss arising on account of premature cancellation of the forward contracts, the assessee requires to explain the reason for the premature cancellation. The explanation that the maturity of date of some of such premature cancelled forward contracts fell during the week-end and therefore they were cancelled three days prior to the due date is acceptable and the loss is allowable. The explanation that some other forward contracts were prematurely cancelled due to business reasons and to avoid higher loss requires to be examined by the AO. The correspondence with the banks and the RBI guidelines on the issue as well as the accounting treatment by the banks also requires to be examined. The assessee’s alternative argument that the said loss is “damages” payable to the banks for breach of contracts or settlement of the contracts also requires examination by the AO. CIT Vs. Riyaz A. Sheikh [ITA No. 1969 of 2011, Bombay High Court, dtd. 26.02.2013, in favour of assessee] Amount received by partner on his retirement is not chargeable to tax as capital gains The assessee, a partner in a firm, received Rs. 66 lakhs over and above his

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DIRECT TAXES
Judicial pronouncements
CIT Vs. M/s. Dynamic Enterprises [ITA No. 1414/2006, Karnataka High Court, dtd. 16.09.2013, in favour of assessee] Sec. 45(4) does not apply if the retiring partner takes only money towards the value of his share and there is no distribution of capital assets among the partners The assessee partnership firm was constituted on 09.01.1985 with Anurag Jain and Nirmal Kumar Dugar as its partners. On 13.04.1987, Nirmal Kumar Dugar retired from partnership and L.P. Jain entered the partnership and contributed capital for purchase of land to construct a housing complex. The assessee-firm purchased land for a consideration of Rs.2.5 lakhs. Another reconstitution took place on 1.7.1991 by which L.P. Jain retired from the firm and Pushpa Jain and Shree Jain were induc ted as par tners . Later , on 28.04.1993, five partners belonging to the Khemka Group were inducted. Prior to the induction of the Khemka Group, the assets of the firm were revalued. The three old partners retired through deed of retirement dated 01.04.1994 and received the enhanced value of the property in FY 1994-95. The AO held that the introduction of the Khemka Group and the retirement of the old partners was a device adopted to transfer the immovable property and to evade capital gains tax and stamp duty. He assessed the firm on capital gains. This was upheld by the CIT(A) though reversed the Tribunal. The Tribunal held that as the land continued to remain with the assessee-firm, there was no transfer u/s 2(47) and that the retiring partners had merely withdrawn the amounts standing to their credit in the capital account. On appeal by the department to the High Court, it was felt that tween ther e was a c onf lic t beMangalore Ganesh Beedi Works 265 ITR 658 and Gurunath Talkies 328 ITR 59 and the issue was referred to the Full Bench. The Full Bench held that: 1. Sec. 45(4) deals with a distribution of capital assets on the dissolution of a firm or other AOP or BOI or otherwise and provides that if in the course of such distribution of capital asset there is a transfer of a capital asset by the firm, the firm shall be chargeable to tax on capital gains. In order to attract sec. 45(4), the conditions precedent are (1) there should be a distribution of capital assets of a firm; (2) such distribution should result in transfer of a capital asset by firm in favour of the partner; (3) on account of the transfer there should be a profit or gain derived by the firm and (4) such distribution should be on dissolution of the firm or otherwise. In other words, the capital asset of the firm should be transferred in favour of a partner, resulting in firm ceasing to have any interest in the capital asset transferred and the partners should acquire exclusive interest in the capital asset. On facts, the partnership firm purchased the property and it was not in the name of any partner. No partner brought that capital asset as capital contribution into the firm. Also, there was no dissolution of the firm because the firm continued to exist even after the retirement of some partners. What was given to the retiring partners is cash representing the value of their share in the partnership. No capital asset was transferred on the date of retirement. In the absence of distribution of a capital asset and in the absence of transfer of capital asset in favour of the retiring partners, no profit or gain arose in the hands of the partnership firm and so the question of the firm being assessed u/s 45(4) would not arise;

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2. The department’s argument that the transaction by which the five incoming partners brought money into the firm and the three erstwhile partners retired by taking money (leaving the capital asset in the firm) is a device adopted to evade payment of profits or gains is not acceptable because it proceeds on the premise that the immovable property belongs to the erstwhile partners and that after the retirement the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs to the partnership firm and not to the partners. The partners only had a share in the partnership asset when they retired and took their share in cash, they were not relinquishing their interest in the immovable property. What they relinquished is their share in the partnership. Therefore, there is no transfer of a capital asset and no capital gains or profit arises (Ganesh Beedi Works 265 ITR 658 approved;Gurunath Talkies 328 ITR 59 reversed; Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300, Malbar Fisheries Co 120 ITR 49 (SC), Sunil Siddharthbhai 156 ITR 509 (SC), A.N. Naik Associate 265 ITR 346 (Bom) referred). Siddhivinayak Kohinoor Venture Vs. ACIT [TS-590-ITAT-2013(PUN), ITAT Pune Bench, dtd. 31.10.2013, in favour of assessee] Part of municipality approved housing project also eligible for Sec 80IB deduction Part project (comprising of row houses) treated as independent ‘housing project’ and Sec 80-IB deduction allowed; ‘Housing project’ not defined in Income Tax Act nor in local authority’s Development Control Rules; Rejects Revenue’s

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DIRECT TAXES
Judicial pronouncements
stand that project should mean as approved by ‘local authority’ (comprising of row houses as well as flats); Application for completion filed with municipal authority before cut-off date; Delay in issuing completion certificate could not be attributed to assessee and deduction cannot not be denied. CIT Vs. NR Portfolio Pvt. Ltd. [TS-593 -HC-2013(DEL), Delhi High Court, dtd. 22.11.2013, in favour of revenue] HC reverses Tribunal ruling, taxes unexplained money pre 2012 HC reverses CIT (A) and ITAT ruling and confirms income addition u/s 68 on account of share application money received without establishing genuineness of investor; Highly implausible that an unknown person made substantial investment in a private limited company without adequately protecting investment and ensuring appropriate returns; Assessee adopted prevaricate and noncooperative attitude before AO during assessment; Identity, creditworthiness or genuineness of transaction not established by merely showing that transaction was through banking channels. ITO Vs. Zinger Investments (P.) Ltd. [(2013) 38 taxmann.com 388 (Hyderabad - Trib.), ITAT Hyderabad Bench, dtd. 21.08.2013, in favour of assessee] Where no monetary consideration was involved in transfer of manufacturing division along with all its assets and liabilities under amalgamation scheme, same could not be considered as slump sale under section 50B. The assessee transferred its manufacturing division to NIL under a scheme of amalgamation as per which all the assets and liabilities of the assessee were vested in NIL. The assessee in return received certain investments held by share application NIL besides allotment of equity shares to the shareholders of the assessee. The Assessing Officer held that the transfer of the manufacturing division to NIL would tantamount to a 'slump sale' attracting liability of capital gains under section 50B. On appeal, the CIT(A) deleted the order of Assessing Officer. The aggrieved revenue filed the instant appeal.The Tribunal held in favour of assessee as under: 1. To qualify as slump sale two conditions have to be satisfied, viz., (A) there must be transfer of one or more undertakings as a result of sale, and (B) the sale should be for a lump sum consideration without values being assigned to the individual assets and liabilities; 2. In the instant case it was not disputed that there was no monetary consideration involved for transfer of the assets and liabilities of the manufacturing division to NIL, though there might have been transfer of an undertaking; 3. Since there was no monetary consideration involved in transferring the m anuf ac tur ing divis ion under scheme of amalgamation approved by the High Court, it couldn’t be considered to be a slump sale so as to attract the liability of the capital gain under section 50B. ACIT Vs. Prathima Educational Society [TS-561-ITAT-2013(Hyd), ITAT Hyderabad Bench, dtd. 08.11.2013, in favour of assessee] Uncorroborated excel sheets seized during search, not sufficient evidence Unsigned Excel sheets recovered from the computer during search & seizure cannot be considered as sufficient evidence to confirm collection of capitation fee; Unsigned Excel sheets whose author is not identified was not further sup-

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ported by independent corroboration; Not sufficient evidence to reflect that capitation fees was actually collected; CIT is empowered to grant or refuse the registration only on the two conditions laid down under Sec. 12AA(3); Sheets were dumb documents and cannot form reason to cancel registration; Relied upon Madras HC ruling in Sarvodaya Ilakkiya Pannai Kathiroor Service Co Operative bank Ltd. Vs. CIT [Civil Appeal No. 7460 of 2013, The Supreme Court of India, dtd. 27.08.2013, in favour of revenue] Sec. 133(6): AO empowered to

launch fishing and roving enquiry with a view to detect tax evasion The ITO issued a issued a notice u/s 133(6) to the assessee-bank u/s 133(6) of the Act calling for general information regarding details of all persons who have made cash transactions and time deposits of Rs. 1,00,000/- and above for the period of three years between 01.04.2005 and 31.03.2008. The assessee claimed that sec. 133(6) does not empower the ITO to conduct a roving or fishing enquiry into the affairs of the assessee or regarding the deposits made by its customers. It was also contended that the AO can only seek “case specific” or “area specific” information u/ s 133(6). The High Court dismissed the Writ Petition. On appeal by the assessee to the Supreme Court, dismissing the appeal, The Supreme Court held that the legislative intention behind sec. 133(6) was to give wide powers to the income-tax department to gather general particulars in the nature of survey and store those details in the computer so that the data so collected can be made use of for checking evasion of tax effectively. It would not fall under the restricted domains of being “area specific” or “case specific.” S. 133(6) does not refer to any enquiry about any particular person or assessee, but pertains to information in relation to “such points

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Judicial pronouncements
or matters” which the assessing authority issuing notices requires. This clearly illustrates that the information of general nature can be called for and names and addresses of depositors who hold deposits above a particular sum is certainly permissible (Karnataka Bank Ltd vs. Government of India (2002) 9 SCC 106 followed; M.V. Rajendran vs. ITO 260 ITR 442 (Ker) approved). Maharashtra Housing & Area Development Authority Vs. ADIT [Stay Application No. 293/Mum/2013, ITAT Mumbai Bench, dtd. 25.11.2013, in favour of assessee] AO’s action of recovering outpowers and a gross violation of the directions laid down by the Courts as well as the basic rule of law and principles of natural justice. Accordingly, we direct the Revenue to refund the entire amount of Rs. 159.84 crore to the assessee within 10 days from the receipt of this order (Mahindra & Mahindra Ltd UOI 59 ELT 505, Mahindra & Mahindra W.P. 2164/2007, UTI Mutual Fund 345 ITR 71 (Bom), RPG Enterprises 251 ITR 20 (Mum) & MSEB 81 ITD 299 (Mum) followed). CIT Vs. Great Value Food [TS-580-HC -2013(P&H), of assessee] Default in payment of 234B/ C interest does not trigger penalty u/s 221 No penalty u/s 221 can be levied for default in payment of interest u/s 234B and 234C; Penalty u/s 221 leviable only when assessee is in default for making payment of "tax"; Definition of 'tax' u/s 2 (43) does not include penalty or interest; Tax, penalty and interest are different concepts under the Act; Relied on Calcutta HC ruling in Shreeniwas & Sons; Distinguished Kerala HC ruling in E.K.Varghese DIT Vs. Alcatel Lucent USA Inc. [ITA No. 327/2012, 330/2012, 338/2012 & 339/2012, Delhi High Court, dtd. 07.11.2013, in favour of revenue] Sec. 234B: A non-resident assessee which does not admit income chargeable to tax must be inferred to have induced the Indian payer not to deduct TDS and so it is liable for advance-tax interest The assessee, a USA company, supplied telecom equipments to customers in India. It claimed that it did not have a PE in India and that the income was not chargeable to tax. The AO rejected the claim and attributed 2.5% of the sale proceeds of the hardware as profit atPunjab and Haryana High Court, dtd. 29.10.2013, in favour

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tributable to the PE in India. He also levied interest u/s 234B for failure to pay advance-tax. Before the CIT(A), the assessee accepted that the income was chargeable to tax but argued, relying on Jacabs Civil Incorporated 330 ITR 578 (Del), that as it was a foreign company and the income was liable for TDS, it was not liable to pay advance-tax. The CIT(A) and Tribunal accepted the assessee’s contention. On appeal by the department to the High Court, allowing the appeal, High Court held that:

standing taxes without affording reasonable time to take remedial steps is a misuse of powers and a gross violation of the directions laid down by the Courts. AO has to refund the taxes recovered The assessee received the order of the CIT(A) on 16.11.2013. It filed an appeal before the Tribunal on 18.11.2013 which was the next working day. The assessee also filed an application before the Tribunal requesting stay of demand. The said application was fixed for hearing on 22.11.2013. However, the AO, without awaiting the outcome of the stay application, attached the assessee’s bank account u/s 226(3) on 18.11.2013 and withdrew Rs. 159.84 crore. The assessee argued before the Tribunal that the coercive action of the AO was wrong because (i) the AO had taken coercive action before the expiry of time of filing the appeal against the order of the CIT (A), (ii) the action was taken even prior to the disposal of the stay application by the Tribunal and (iii) no prior notice was given to the assessee before taking the recovery action u/s 226(3). The Tribunal held that the action of the AO in recovering the outstanding without affording the assessee minimum reasonable time to take remedial steps is a misuse of

1. There is a distinction between a case where the assessee admits that it has income chargeable to tax in India but does not pay advance tax on the basis that the Indian payer ought to have deducted tax at source u/s 195. In such a case (as was the fact situation in Jacabs), the assessee is entitled to take credit for the tax which was “deductible” by the Indian payer while computing its advance tax liability even though no tax was in fact deducted. However, in a case where the assessee does not admit any income in the return, this benefit is not available. An inference or presumption can be drawn that the assessee had represented to its Indian telecom dealers not to deduct tax from the remittances made to it even though there is no positive or direct evidence to that effect; 2. The argument that the Indian parties should have discharged their TDS obligations u/s 195 despite the presumed request of the assessee is one of convenience or despair and

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Judicial pronouncements
not acceptable because in a practical view of the matter, the Indian payers could not have resisted the assessee’s request given future business prospects and the need to keep the assessee in good humour; 3. Also, having denied its tax liability and leading the Indian payers to believe that no tax was deductible it is inequitable & unfair on the assessee’s part to shift the responsibility to the Indian payers & expect them to deduct tax from the remittances. The assessee must take responsibility for its volte face. Once liability to tax is accepted, all consequences follow; they cannot be avoided; 4. Also, applying equitable principles, as the assessee deprived the revenue of the advance tax, it must pay compensation by way of interest. Dattani & Co. Vs. ITO [Tax Appeal No. 847 to 849 of 2013, Gujarat High Court, dtd. 21.10.2013, in favour of assessee] ITAT duty-bound to deal with all judgements cited during hearing of appeal The assessee filed an appeal against an addition for alleged bogus purchases/sales which was dismissed by the Tribunal. The assessee filed an appeal before the High Court claiming that he had relied on the judgement in CIT vs. President Industries 258 ITR 654 in the verbal and written submissions and that the Tribunal had not considered it. The High Court remanding the case to the Tribunal for fresh consideration, held that whenever any decision has been relied upon and / or cited by the assessee and / or any party, the authority / tribunal is bound to consider and / or deal with the same and opine whether in the facts and circumstances of the particular case, the same will be applicable or not. In the instant case, the Tribunal has failed to consider and / or deal with the aforesaid decision cited and relied upon by the assessee. Under the circumstances, all these appeals are required to be remanded to the Tribunal to consider the addition made by the AO towards alleged bogus purchases/sales and to take appropriate decision in accordance with law and on merits and after considering the decision of this Court in the case of CIT vs. President Industries 258 ITR 654. Paresh S. Shah Vs. ITO [M.A. 721 & 722/Mum/2012 arising out of ITA No. 7149 & 7150/Mum/2008, ITAT Mumbai Bench, dtd. 20.09.2013, in favour of revenue] Failure to comply with the criterion necessary to represent the matter before the Tribunal, in time, renders appeal liable for dismissal The assessee filed an appeal before the Tribunal but repeatedly sought adjournments. He also did not file a letter of authority authorizing his CAs to appear in the appeal. The Tribunal dismissed the appeal on the ground that the assessee is not interested in pursuing the appeal. Thereafter, the assessee filed a Miscellaneous Application seeking restoration of the appeal. The Tribunal restored the appeal even though no power of attorney was filed even at this stage. Even after recalling the appeals the assessee continued to seek adjournments on one pretext or the other. The Tribunal dismissed the appeals and also awarded costs. The assessee again filed a Miscellaneous Application seeking restoration of the appeal. At the hearing of the MA, the power of attorney of the Counsel was not filed. The Tribunal, dismissing the MA held that1. It deserves to be noticed here that in Mumbai, despite repeatedly pointing

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out in each and every case, learned counsels rarely follow the practice of filing the power of attorney and many Members of the Tribunal, who do not believe it be their obligation to verify the availability of power of attorney, may not point out the same to the counsels and it results in counsels appearing without filing a power of attorney. There are equal numbers of occasions where several other Members, including Members of this Bench, have had occasion to point out that there was no power of attorney and counsels filed xerox copies or take further time to file power of attorney. In fact some would go to the extent of stating that they assumed that the power of attorney is on record and when we verify the file (though it is their duty to file power of attorney) and inform the counsel that there is no power of attorney then fresh power of attorney is filed. Particularly in the bench which is presided over by the Vice President, the registry notes on the file that the power of attorney of a person, who is representing the matter, is not on record and then the power of attorney is filed, notwithstanding the fact that before filing the power of attorney the same counsel or Chartered Accountant must have already taken adjournments on several occasions. 2. On facts, there is no sufficient cause for restoration of the appeal under the proviso to Rule 24. The power of attorney has not been filed. The appeals were dismissed twice as adjournments were sought on spurious grounds. The assessee and his counsels have done lackluster attempt to represent the matters by not fulfilling the entire criterion necessary to represent the matter before the Tribunal, in time.

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DIRECT TAXES
Judicial pronouncements (International Taxation)
Cadbury India Ltd. Vs. ACIT [ITA No. 7408/Mum/2010, ITAT Mumbai bench, dtd. 13.11.2013, partly in favour of assessee] Transfer Pricing: ALP of royalty for trademark usage and technical knowhow fee can be determined as per TNMM. Approval of RBI & Govt. means payment is as at arms length The assessee entered into an agreement with its parent company, Cadbury Schweppes, pursuant to which it agreed to pay royalty for the use of trademarks and royalty for the use of technical know -how at 1.25% each of the net sales. This was approved by the RBI and the SIA (Government). The assessee adopted the Transaction Net Margin Method (“TNMM”) for computing the ALP of the international transactions by comparing the net margin of the company at entity level with that of companies engaged in food products, beverages and tobacco business. The TPO held that the transactions pertaining to payment of royalty for trademarks and technical know-how fee had to be separately and independently bench-marked using the Comparable Uncontrolled Prices (“CUP”) method. He held that the ALP of royalty and technical know-how fee should be computed at 1% of sales the instead of at 1.25% of the sales. This was reversed by the CIT(A) who held that the royalty and technical knowhow fee paid by the assessee were at ALP. On appeal by the department to the Tribunal HELD dismissing the appeal: DIT The assessee has been paying royalty on technical know-how to its parent AE since 1993. Other group companies across the Globe are also paying the same royalty. Also, the payment is as per the approval given by the RBI and the SIA. Hence there cannot be any scope of doubt that the royalty payment on technical know-how is at arms length. As regards the royalty on tradeNon-exclusive & non-transferable license to use customized software not taxable as “royalty” under Article 12 of India-USA DTAA The assessee, a USA company, set up a branch office in India for the supply of software called “MX”. The software was Vs. Infrasoft Ltd. [ITA No. 1034/2009, Delhi High Court, dtd. 22.11.2013, in favour of assessee] Verizon Communications Singapore Pte Ltd. Vs. ITO [(2013) 39 taxmann.com 70 (Madras), Madras High Court, dtd. 07.11.2013, in favour of revenue] In view of FA 2012 retro amendments, IPLC charges from Indian party is taxable as "royalty" under section 9(1)(vi) & DTAA In view of retrospective amendments made to the definition of "royalty" in section 9(1)(vi) by the Finance Act,2012 by inserting Explanations 4 and 5 with effect from 1-6-1976, bandwidth payments made by Indian party to non-resident for International Private Leased Circuit (IPLC) for providing end–to-end internet connectivity outside India (where connectivity for Indian leg provided by VSNL due to Indian regulatory requirements) is taxable as 'royalty' under section 9(1)(vi) of the Act as well as under article 12(3) of Indo-Singapore DTAA. mark usage, the assessee is in fact paying a lesser amount if the payment is compared with the payment towards trademark usage by other group companies using the brand “Cadbury” in other parts of the world. Accordingly, the royalty payment on trademark usage is also within the arms’ length and does not call for any adjustment (Lumax Industries (ITAT Del) (attached) followed). The Department’s request for a remand to the TPO to examine the AMP expenses in the light of Maruti Suzuki 328 ITR 210 (Del) (and L. G. Electronics 140 ITD 41 (Del)(SB)) rejected

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customized for the requirements of the customer (not “shrink wrap”). The Indian branch imported the software package in the form of floppy disks or CDs and delivered it to the customer. It also installed the software and trained the customers. The AO & CIT(A) held that the software was a “copyright” and the income from its license was assessable as “royalty” under Article 12 of the IndiaUSA DTAA. On appeal by the assessee, the Tribunal held, following Motorola 270 ITR (AT) (SB) 62, that the income from license of software was not taxable as “royalty”. Before the High Court, the Department argued that in view of CIT vs. Samsung Electronics 345 ITR 494 (Kar), the right to make a copy of the software and storing it amounted to copyright work u/s 14(1) of the Copyright Act and payment made for the grant of a license for the said purpose would constitute royalty. HELD by the High Court dismissing the appeal: In order to qualify as a royalty payment under Article 12(3) of the India-USA DTAA, it is necessary to establish that there is a transfer of all or any rights (including the granting of any licence) in respect of a copyright of a literary, artistic or scientific work. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose

8

DIRECT TAXES
Judicial pronouncements (International Taxation)
of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/ customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially coextensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by Article 12 because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. Consequently there is no transfer of any right in respect of copyright by the assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income-tax Act or under the DTAA (Ericson AB 343 ITR 370 Metro & Metro Vs. ACIT [ITA No. 393/ Agra/2012, ITAT Agra bench, dtd. 01.11.2013, in favour of revenue] Law on taxation of fees for technical services u/s 9(1)(vii) & Article 12 and disallowance u/s 40(a)(i) for failure to deduct TDS explained The assessee paid Rs 52 lakhs towards “leather testing charges” to TUV Product Und Umwelt GmbH, a tax resident of Germany, without deduction of tax at source. The AO & CIT(A) disallowed the expenditure u/s 40(a)(i) on the ground that the assessee had failed to deduct tax at source. Before the Tribunal, the assessee argued that (a) as Article 12 of the India-Germany DTAA does not provide that India “shall” tax fees and royalties, the same cannot be taxed in India; (b) as the services were not rendered by the foreign company in India, the income was not chargeable to tax in India u/s 9(1)(vii); (c) as the services were rendered by an automated process and there was no human intervention, it did not constitute “fees for technical services” as defined in sec. 9(1)(vii); (d) as the services were used for a 100% EOU whose products were sold outside India, the “source” of the income was outside India and so the exception in sec. 9(1)(vii) (b) applied; (e) disallowance u/s 40(a)(i) was confined to amounts “payable” as at the end of the year as held by the jurisdictional High Court in Vector Shipping in the context of sec. 40(a)(ia) and (f) as the taxability (Del) & Nokia Networks OY 25 taxmann.com 225 followed; Samsung Electronics 345 ITR 494 (Kar) not followed).

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of the services was brought in by a retrospective amendment, the disallowance u/s 40(a)(i) could not be made. The Tribunal held that: 1. The argument that as Article 12(1) of the India-German DTAA provides that the source State (“India”) “may” (and not “shall”) tax ‘fees for technical services’, the income is not chargeable to tax in India is not acceptable because the DTAA does not provide for taxation of any income. It allocates the right to tax income amongst the Contracting States. Once it enables the Contracting State to levy tax (by the use of the word “may”), the domestic law of the State come into play. Article 12 of the DTAA permits India to levy tax on fees for technical services and royalty though the rate of tax cannot exceed 10% (Pooja Bhatt 2008 TIOL 558 ITAT Mum referred); 2. the argument that as the services have been rendered outside India, the fees thereof cannot be assessed u/s 9(1)(vii) is not acceptable in view of the retrospective amendment to sec. 9(1) by the Finance Act 2010 (Ashapura Minichem 131 TTJ 291, GVK Industries 332 ITR 130 & Clifford Chance 154 TTJ 537 (Mum) (SB) referred; 3. the argument that sec. 9(1)(vii) does not apply because the entire testing process is automated and does not involve human skills and interplay is not acceptable. While in principle it is correct that if there is no human intervention in a technical service, it cannot be treated as a technical service u/s 9(1)(vii), there is nothing on record to demonstrate the precise process of leather testing adopted by the German company. Further, the wider observations in Siemens (ITAT Mum) that if there is not much human involvement, it cannot be termed as

9

DIRECT TAXES
Judicial pronouncements (International Taxation)
rendering of technical services is not correct. It is a question of presence of or absence of human involvement and not a question of more of, or less of, human involvement (Right Florists 154 TTJ 142, Siemens Ltd, Bharti Cellular 319 ITR 139 (Del) & 330 ITR 239 (SC) referred); 4. the argument that as the assessee is a 100% EOU, the fees should be considered to have been used for a source of income outside India and therefore not taxable u/s 9(1)(vii)(b) is not acceptable because even though the business is a 100% EOU, it is still a business carried on in India. Even if the entire products are sold outside India, the fact of such export sales by itself does not make the business having been carried outside India. A customer is not the source of income. But if the manufacturing facilities are outside India and the customers are also outside India, the source will be outside India and the exception in sec. 9(1)(vii)(b) will apply; 5. the argument that sec. 40(a)(i) applies only to amounts “payable” as at the end of the year and not to amounts already “paid” as held in Merlyin Shipping 136 ITD SB 23 (Vizag) as approved (by the jurisdictional High Court) inVector Shipping Services is not acceptable because that was in the context of sec. 40(a) (ia) and not sec. 40(a)(i). Sec. 40(a) (i) cannot be interpreted in such a manner so as to restrict the scope of section to only amounts remaining payable at the end of the year; 6. However, the argument that disallowance u/s 40(a)(i) cannot be made as the amount has been made taxable by the retrospective amendment to sec. 9 is acceptable. An assessee cannot be penalized for not performing the impossible task of deducting TDS in accordance with the law which was brought in subsequently (Channel Guide139 ITD 49 & Sterling Abrasives (Ahd) followed). CIT Vs. Siemens Public Communication Networks Ltd. [TS-591-HC-2013 (KAR), Karnataka High Court, dtd. 09.10.2013, in favour of revenue] Karnataka HC holds subvention receipt taxable, breaks ranks with other Courts Subvention payment received from Siemens AG (Principal shareholder) treated as 'revenue' receipt; Amounts paid by shareholder, not only to make good losses, but also to help assessee run more profitably; After receiving subvention from Siemens AG, assessee turned business from loss to profit; Applies 'purpose' test to hold that payment made as recurring expenses/working capital; HC reverses ITAT ruling; If financial assistance extended for repayment of loan for setting up new unit or expansion, such aid could be treated as capital receipt; Reliance placed on SC rulings in Ponni Sugars & Chemicals Ltd and Sahney Steel and Press Works. Vodafone India Services Pvt. Ltd. Vs. UOI [Writ petition no. 1877 of 2013, Bombay high Court, dtd. 29.11.2013, partly in favour of assessee] Existence of income is a jurisdictional requirement for the applicability of T. P. provisions. AO must deal with it after giving personal hearing before making reference to TPO. The dept should not treat the assessee as an adversary who has to be taxed, no matter what The assessee, an Indian company, issued equity shares at the premium of Rs.8591 per share aggregating Rs.246.38 crores to its holding company. Though the transaction was reported as an “international transaction” in Form 3 CEB, the assessee claimed

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that the transfer pricing provisions did not apply as there was no income arising to it. The AO referred the issue to the TPO without dealing with the preliminary objection. The TPO held that he could not go into the issue whether income had arisen or not because his jurisdiction was limited to determine the ALP. He held that the assessee ought to have charged the NAV of the share (Rs. 53,775) and that the difference between the NAV and the issue price was a deemed loan from the assessee to the holding company for which the assessee ought to have received 13.5% interest. He accordingly computed the adjustment for the shares premium at Rs. 1308 crore and the interest thereon at Rs. 88 crore. The AO passed a draft assessment order u/s 144C(1) in which he held that he was bound u/s 92-CA(4) with the TPO’s determination and could not consider the contention whether the transfer pricing provisions applied. The assessee filed a Writ Petition challenging the jurisdiction of the TPO/AO to make the adjustment. On the merits of the adjustment, the assessee filed objections before the DRP. Before the High Court the assessee argued that (i) it was a precondition before the transfer pricing provisions apply that there has to be income arising to the assessee. As the allotment of shares at a premium does not give rise to income, the transfer pricing provisions do not apply, (ii) there was a breach of natural justice because neither the TPO nor the AO had heard the assessee on, or decided, the fundamental issue as to whether the transfer pricing provisions applied at all, (iii) the DRP does not offer an alternative remedy because the DRP has no power to quash the draft assessment order even if it is satisfied that the same is without jurisdiction & (iv) the DRP cannot take an unbiased view because one of its members is the DIT (TP). The High Court held that:

10

DIRECT TAXES
Judicial pronouncements (International Taxation)
1. The assessee’s contention that the DRP does not offer an alternative remedy because it does not have the power to quash the assessment order even if it is satisfied that the same is without jurisdiction is not acceptable because in Vodafone 37 taxmann.com 250 it was held that the DRP’s power to confirm would include the power not to confirm and to annul the draft assessment order; 2. It is clear from sec. 92(1) that there must be income arising/ potentially arising by an international transaction for the application of the transfer pricing provisions. This is a jurisdictional requirement and has to be dealt with by the AO when specifically raised by the assessee before making reference to the AO. Grant of personal hearing before referring the matter to the TPO has to be read into s. 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee (Veer Gems 351 ITR 35 (Guj) disagreed with to the extent it holds that no hearing is required at the stage of reference to the TPO even on jurisdictional issues). If, after the hearing the assessee, the AO holds that there is an international transaction, that would be binding on the TPO; 3. The department’s contention, based on CBDT Instruction No.3 dated 20.05.2003, that the action of the AO in referring the international transaction is a mere administrative act is not acceptable. The AO is bound to hear the assessee in respect of jurisdictional issues before making the reference. The failure to do so is an illegality; 4. The assessee’s contention that the DRP would not give a fair hearing as one of its members is the DIT (TP) is not acceptable because it overlooks the fact that these are not appeal proceedings but to finalize the draft assessment order. Also, the DIT(TP) who approved the TPO’s order is not on the panel; 5. The Revenue should keep in mind the sage advice of Nani Palkhivala that the department should not cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of palpable injustice. In this case it would be natural for the assessee to feel harassed as neither the AO nor the TPO gave a hearing or dealt with the preliminary objection. It is hoped that the revenue will be more sensitive to the just demands of the assessee and not treat the assessee as an adversary who has to be taxed, no matter what; 6. The DRP should decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. In case the DRP’s decision on the preliminary issue is adverse, the assessee shall be entitled to challenge it in a writ petition if it can show that the DRP’s decision on the preliminary issue is patently illegal notwithstanding the availability of alternate remedy before the ITAT. English Indian Clays Ltd. Vs. ACIT [(2013) 39 taxmann.com 50 (Cochin Trib.), ITAT Cochin Bench, dtd. 18.10.2013, in favour of revenue] Payment made to a foreign company for marketing survey and identifying potential foreign customers for assessee's product was only for consultancy services and it was taxable in India as FTS The assessee engaged a foreign company ‘SR’ as marketing agent for South East Asian countries. SR had to study the market situation in South East Asia for the products manufactured by the assessee and it had to market the prod-

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ucts of the assessee in those countries. The CIT(A) found that payment made to SR was consultancy charge, therefore, tax had to be deducted. Accordingly, it confirmed the disallowance made by the Assessing Officer. Aggrievedassessee filed the instant appeal. The Tribunal held in favour of revenue as under: 1. The work of SR was to identify the potential customers and file a report regarding the market strategy and developmental studies; 2. The agreement did not enable SR to market the products of the assessee in South East Asian countries. The company SR only had to do survey and file a report so that the assessee could market its products after considering the report filed by the foreign party; 3. Therefore, the payment made to SR was only consultancy charge. It was not a case of marketing the products in the foreign country. The CIT (A) had rightly confirmed the order of the Assessing Officer. Thus, the order of the lower authority holding assessee liable for TDS was to be confirmed. US Technology Resources (P.) Ltd. Vs. ACIT [(2013) 39 taxmann.com 23 (Cochin – Trib), ITAT Cochin Bench, dtd. 27.09.2013, in favour of revenue] Where assessee-company was making use of advice, input, experience and assistance rendered by US based company in its decision making process of financial and risk management, etc., services so rendered would be technical services under India-US DTAA. The assessee-company, engaged in providing software development services to the customers in India, claimed deduction of payment made to US based company (foreign company) towards management services rendered

11

DIRECT TAXES
Judicial pronouncements (International Taxation)
by it. In course of assessment, the Assessing Officer opined that the payment made by the assessee to foreign company would come within the ambit of consultancy fees and, therefore, the it was liable to deduct tax on these payments under section 195. Since assessee failed to deduct tax at source, the Assessing Officer disallowed payments made by assessee by invoking provisions of section 40(a)(ia). Further, the CIT (A) confirmed said disallowance. The aggrieved-assessee filed the instant appeal. The Tribunal held in favour of revenue as under: 1. The assessee was making use of the advice, input, experience and assistance rendered by the foreign company in its decision making process of financial and risk management, etc; 2. The foreign company was also giving training to the assessee's employees in making use of the inputs, experience, experimentation, assistance and advice rendered by them for taking a better possible decision in order to achieve the desired objectives; 3. Decision making process is a highly complicated and technical one, unless the assessee gets a technical input and advice from financial and risk management experts it may be difficult to select a right process for the growth of the company; 4. It was not the case of the assessee that in given set of facts/problem, the foreign company gave its solution or advice. The solution or decision was, admittedly, taken by the assessee on the basis of the advice/service rendered by the foreign company; 5. Therefore, the technical knowledge, experience, skill possessed by the foreign company with regard to financial and risk management was made available in the form of advice or service which was used by the assessee in the decision making process not only in management affairs but also in financial matters; 6. Therefore, such service rendered by the foreign company was technical in nature as per India-USA treaty. Poompuhar Shipping Corporation

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case where physical possession is not with the transferee or the lessee or the hirer, the payment made for the use of or right to use of equipment would not constitute ‘royalty‘ is not acceptable. Under clause (iva) of Explanation 2 to s. 9(1)(vi) ‘royalty‘ means the consideration paid for “the use or right to use“. Irrespective of whether there is any transfer or not, the consideration paid for use or right to use simpliciter is sufficient for the consideration being called as ‘royalty‘. The presence or absence of possession, effective/general control and custody with the assessee, even though may be matters of agreement, are not of any relevance to decide the character of payment. The same result applies under Article 12 of the DTAA (Gosalia Shipping 113 ITR 307 (SC), OECD Commentary referred); 2. Explanation 5, inserted by Finance Act, 2012, w.r.e.f. 01.06.1976 clarifies that irrespective of control or possession or use or location in India such right, property or information with the payer; the payment is taxable as royalty. The Revenue does not need the assistance of Explanation 5 because even if the possession of the ship is with the owner, he has parted with the “right to use” the ship and the consideration thereof constitutes “royalty” even without Explanation 5; 3. The assessee’s argument that ship is not an “equipment” for purposes of s. 9(1)(vi) is not acceptable. The word ‘any‘ preceding an equipment clearly points out the need for construing ‘equipment‘ widely so as to embrace every article employed by the employer for the purposes of his business. A ship is “plant” u/s 43(3). “Plant” includes ‘all equipment’ used by a business man for carrying on

Ltd. Vs. ITO [T.C. (A) Nos. 2206 to 2208 of 2006, Madras High Court, dtd. 09.10.2013, in favour of assessee] Sec. 9(1)(vi) / Article 12 : Equipment rental is taxable as “royalty” even if payer does not have control. The retrospective insertion of Explanation 5 to sec. 9(1)(vi) is purely clarificatory The High Court had to consider the following issues in the context of a bareboat charter of a shipping vessel from a foreign party, the income whereof was held assessable as “royalty” u/s 9(1)(vi) & Article 12 in the hands of the foreign party: (i) whether the expression ‘use or right to use‘ in clause (iva) of Explanation 2 to s. 9(1)(vi) & Article 12 of the DTAA requires that there should be a “transfer of effective control for use” in favour of the lessee?, (ii) what is the impact of the retrospective insertion of Explanation 5 to s. 9(1)(vi) on the taxability of equipment royalty?, (ii) whether a ship can be regarded as “equipment”?, (iii) whether if the ship is used for plying between coastal waters, it can be said to be used for “international traffic”?, (iv) whether the two berths reserved for the ships chartered by the assessee can be said to be a “permanent establishment” of the foreign owner? & (v) whether a person who is treated as an “agent” u/s 163 can also be proceeded against u/s 201 for failure to deduct TDS? The High Court held that: 1. The assessee’s argument that in a

12

DIRECT TAXES
Judicial pronouncements (International Taxation) / Circulars / Notifications / Instructions
his business. As a ship is used to carry on business, it is “equipment”; 4. The argument that a ship used for plying between coastal lines on the Indian shore is used in “international traffic” is not acceptable in view of the OECD Commentary; cance only for assessment purposes (Premier Tyres 134 ITR 17 (Bom) noted) Diageo India (P.) Ltd. Vs. DCIT [(2013) 34 taxmann.com 284 (Trib. Mumbai), ITAT Mumbai bench, dtd. 19.06.2013, in favour of revenue] Advertisement, marketing and sales promotion expenses incurred by assessee, resulting in brand promotion of foreign AE is an international transaction, triggering transfer pricing mechanism The main issue for adjudication is whether the amount spent on advertise5. On the question of permanent establishment, a moving ship is a place of business in the place where the ship is docked. The fact that the ship moved from one point to another is the result of the nature of business contract and the movement is an integrated one having business and geographical coherence. Accordingly, the foreign enterprise has a permanent establishment in India when its ships are in India and the berths are reserved for it. However, the royalties paid are not “effectively connected” or attributable to such permanent establishment. Accordingly, the payment falls for consideration only under Article 12 and not under Article 7; 6. The assessee’s argument that a person who is treated as an “agent” u/s 163 cannot be proceeded against u/s 201 for failure to deduct TDS is not correct because the two provisions operate in different spheres. S. 195 casts an obligation on TDS on any person responsible for paying, whereas s. 163 is for assessment purposes. Proceedings u/s 201 has nothing to do with the status of the assessee as an agent u/s 160 and 163 which would assume signifiment and brand promotion expenses, can be held to be giving rise to benefit to the A.E., treating it as an international transaction within the ambit of section 92B. With regard to the issue that such a nature of transaction is an international transaction within the ambit of section 92B read with section 92F, it has been settled by the Special Bench in case of L.G. Electronics India (P.) Ltd. v. Asstt. CIT [2013] 140 ITD 41/29 taxmann.com 300 (Delhi-Trib), that it does fall within the realm of international transaction and, hence, transfer pricing mechanism is triggered. Cost/value of the international transaction of brand promotion through advertisement, marketing and promotion expenses incurred by the Indian A.E. for the brand owned by the foreign entity has to be determined on the basis of principle laid down by the Special Bench in LG Electronics India (P.) Ltd. wherein detailed guidelines and factors have been laid down for determining the cost/ value of such international transactions. Therefore, this issue needs to be remanded back to the file of the TPO/ Assessing Officer. However, while applying the ratio of the decision in L.G. Electronics India (P.) Ltd., the TPO should keep in mind following aspects which are relevant in the present case-

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1. Income from bottling arrangement will form part of the sales for the purpose of computing ratio of advertisement expenses and net sales; 2. Sales related expenditure should be excluded while determining the cost/ value of international transactions, as held by the Special Bench that the expenditure in connection with the sales, which do not lead to brand promotion cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of such transactions with the A.E 3. Insofar as applicability of methodology is concerned, the DRP has applied CUP method and, therefore, the TPO will apply CUP method after selecting the comparables which are involved in similar type of business, and if required, fresh comparables should also be looked into from the same genus of comparables and other relevant factors such as products, market share, assets employed, functions performed and other similar attributes. Suitable adjustment if required should also be made in naturalising the effect of difference, if any; and lastly, 4. In assessee's case, CUP method has been applied for making adjustment on account of advertisement and brand promotion expenses and no mark-up has been applied either by the TPO or by the DRP. Thus, the TPO will consider this aspect while applying the ratio of Special Bench in L.G. Electronics India (P.) Ltd.

Circulars / Instructions
Notification 01.11.2013

Notifications
No. 86/2013,

/

dtd.

Vide the above notification, Cyprus has been notified as notified jurisdictional area under Sec. 94A.

13

INDIRECT TAXES
Judicial pronouncements / Circulars / Notifications / Instructions
Commissioner of Central Excise, Jalandhar Vs. Kay Kay Industries [(2013) 38 taxmann.com 336 (SC), The Supreme Court of India, dtd. 26.08.2013, in favour of assessee] Requirement of taking "reasonable steps" does not mean that assessee is required to verify from department whether duty stands paid by supplier because that would be practically impossible and would lead to transactions getting delayed; therefore, assessee is entitled to credit even if supplier has not paid duty to department In the instant case the assessee took deemed Modvat credit benefit under Notification No. 58/97-CE(NT) on basis of invoices issued by supplier of inputs, but on verification it was found that supplier had not paid duty. The Department opined that since rule 57A(6) required the assessee to take all reasonable steps to ensure that duty had been paid, no credit could be allowed if duty had not been paid on inputs supplied. The Supreme Court held in favour of assessee as under: 1. In this case supplier of inputs had given declaration indicating that excise duty had been paid on said inputs. Fact that supplier had not discharged duty was a lapse on part of seller; it was different and not a condition or rather a precondition postulated in Notification; 2. When there was a prescribed procedure and that had been duly followed by the assessee, it could not be said that the assessee had not taken reasonable steps as prescribed in notification; 3. Due care and caution were taken by the assessee and it was not stated by Department what further care and caution could have been taken. Requirement of "reasonable care" does Hindustan Coca-Cola Beverages (P.) Ltd. Vs. UOI [(2013) 37 taxmann.com 329, Gujarat High Court, dtd. 02.04.2013, in favour of assessee] If department unjustly withholds not mean verification from department whether duty stands paid by supplier because that would be travelling beyond notification and practically impossible and would lead to transactions getting delayed; 4. Thus, the Assessee was entitled to deemed credit under the Notification No. 58/97-CE(NT).

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interest, at 6 per cent per annum, on amount of interest so quantified.

Circulars / Instructions
Notification 21.11.2013 No.

Notifications
15/2013-ST

/

dtd.

The Central Government vide the above notification has amended Notification No. 12/2013Service Tax dated July 1, 2013. Notification 12/2013 exempts the services on which service tax is leviable under section 66B of the Finance Act, 1994 from the whole of the service tax, education cess, and secondary and higher education cess leviable thereon received by a unit located in a Special Economic Zone (“the SEZ Unit”) or Developer of SEZ (“the Developer”) and used for the authorised operations. In terms of para 3, sub para

(II) clause (d) of the Notification 12/ 2013, SEZ Unit or the Developer had to furnish a quarterly statement, in Form A-3, to the jurisdiction Superintendent of Central Excise providing the details of specified services received by it without payment of service tax to avail ab initio exemption on the specified services received and used exclusively for authorised operations. The Notification has amended the above condition to provide for the time period by which such quarterly statement is to be filed. Accordingly, the SEZ Unit or the Developer shall furnish a quarterly statement in Form A-3 to the jurisdictional Superintendent of Central Excise providing the details of the specified services received by it without
th

rightfully earned Cenvat credit, assessee is entitled to interest and department cannot cite absence of any specific provision The Gujarat High Court held that on assessee's application for transfer of credit, Department was duty bound to decide same within reasonable time by either granting it or issuing show-cause notice with a view to reject it. However, no such action was taken and assessee had to approach High Court twice over. Amount to which assessee was rightfully entitled was retained without any authority/reasoning of law, Department cannot be permitted to unjustly hold on assessee's money for nearly 5 years without any interest at all, as it would amount to Revenue benefiting from its own wrong. Accordingly, department was directed to pay interest at 9 per cent per annum for delayed payment and, further simple

payment

of

service

tax

by 30 of the month following the particular quarter.

14

INDIRECT TAXES
Judicial pronouncements / Circulars / Notifications / Instructions
Further, the Notification states that Form A-3 pertaining to the period July, 2013 to September 2013 shall be furnished by December 15, 2013. Notification 22.11.2013 At present, it is mandatory to make eNo. 16/2013-ST dtd. payment of service tax in case of assesses who have paid service tax of Rs. 10,00,000 or more in the preceding financial year. But vide the above notification, the said threshold limit of Rs. 10 lakhs has been change to Rs. 1 lakh w.e.f. 01.01.2014.

SNK
Notification No. 15/2013-Central Excise (NT), dtd. 22.11.2013 Vide the above notification, the threshold limit of Rs. 10 lakhs for e-payment has been change to Rs. 1 lakh w.e.f. 01.01.2014.

Due Dates of key compliances pertaining to the month of December 2013:
5th December 6 December 7th December 10th December 15 December 15th December 21st December
th th

Payment of Service Tax & Excise duty for the month of November Payment of Service tax & Excise duty paid electronically through internet banking for the month of November TDS/ TCS Payment of November Excise Return ER1/ER2/ER6 PF Contribution for the month of November Due date for payment of 3rd installment for corporate and 2nd installment for non corporate assessee of advance Tax. ESIC payment of for the month of November

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The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any individual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information presented herein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business decisions. This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.

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