Where the assessee had converted stock-in-trade into investments at their book value and later sold them and offered to tax the difference between the indexed book value and the sale proceeds as capital gains and the AO took the view that the difference between the book value and the FMV on the date of conversion had to be assessed as business income, Held:

(a) Section 45 (2) of the Act does not apply as it only deals with the reverse case;

(b) In the absence of a statutory provision, a rational basis has to be evolved to determine taxable profits;

(c) Of the two formulas available, the formula adopted by the assessee, i.e. of taking the difference between the indexed book value on the date of conversion and the sale proceeds as long-term capital gains, being beneficial to the assessee, should be adopted. No part of the gains can be assessed as business income.

Where the AO had granted deduction under sections 80HH & 80-I in the year of formation of the new industrial undertaking, he could not, in a subsequent year, deny the deduction on the ground that the conditions are not fulfilled, if he has not withdrawn the deduction granted in the earlier year.

Where the assessee had a ‘Dependent Agency Permanent Establishment’ (‘DAPE’) (“SET India”) in India and it was admitted by the Revenue that the assessee had paid ‘arms length’ remuneration to the said dependent agent but the Tribunal still held (106 ITD 75) that notwithstanding the taxability of the said dependent agent in accordance with domestic law, the assessee had to be assessed in respect of the profits attributable to the said DAPE, held, reversing the judgement of the Tribunal that:

(a) In Circular No. 23 dated 23.7.1969, the CBDT had clearly laid down that where a non-resident’s sales to Indian customers was rendered through the services of an agent in India, the assessment in India of the income arising out of the transaction shall be limited to the profit attributable to the agent’s services. This Circular was binding on the Revenue.

(b) The effect of Article 7 (1) of the DTAA and Circular No. 23 dated 23.7.1969 is that the income of a non-resident which is neither directly nor indirectly attributable to the PE cannot be brought to tax.

(c) As the Tribunal had not considered the findings of the CIT (A) based on Circular No. 23, its entire rational and reasoning had to be set aside.

(d) The effect of the judgement of the Supreme Court in DIT vs. Morgan Stanley 292 ITR 416 is that if the correct arms’ length price is applied and paid nothing further would be left to be taxed in the hands of the foreign enterprise.

See Also: Amadeus Global Travel vs. DCIT (ITAT Delhi), Galileo International Inc vs. DDIT (ITAT Delhi) (6.1 MB), & Rolls Royce Plc vs. DDIT.

Where the assessee had earned freight income by transporting cargo in international traffic through ‘slot charter’ arrangements on ships owned by other enterprises and the question arose whether such profits arose from “operation of ships”, held: that in view of the OECD Commentary, Article 9 of the India-UK DTAA must be interpreted as applying not only to income arising directly from the operation of ships but also to income arising from ancillary operations such as transportation of cargo through ships owned by other enterprises.

Where the applicant had entered into a joint venture with two Indian companies for providing consultancy services for the development of tunnels and the question was whether the JV constitutes an ‘Association of Persons’, HELD:

(i) An ‘AOP’ is one in which two or more persons join in a common purpose or common action with the object of producing income, profits or gains. The control and management must be unified.

(ii) On facts, as the client had entered into a contract with the ‘consortium’ and each of the companies was made ‘jointly and severally’ liable and the other provisions revealed unity of action, common management and planned coordination among the JV partners, there was an AOP.

(iii) The fact that the contract distributed duties and responsibilities and that no member could bind the other did not affect the integrity of the association;

(iv) Also, the fact that there is no sharing of profit or loss and each member of JV makes its own investment and maintains its own accounts and receives payment directly from the client (pursuant to a consolidated invoice) does not detract from the existence of an AOP. Ruling in Van Oord 248 ITR 399 distinguished on facts.

Where the applicant entered into a contract with Raytehon USA for the acquisition of hardware and customized software and the title to the hardware was to pass outside India and all activities under the contract (except for installation and support activities) were to be performed by Raytheon outside India, HELD:

(i) The profits on sale of hardware are not assessable to tax in India in the absence of a PE;

(ii) As regards the profits from supply of documents and software, as there was a mere right to use and not an outright sale of the same, it constitutes “royalty” u/s 9 (1) (vi) and Article 12 of DTAA;

(iii) The judgement of the Supreme Court in Tata Consultancy Services that once software is put on a CD it becomes a sale of goods is not applicable as it is rendered under the sales-tax Act. Under the I. T. Act, right to use software is ‘royalty’ irrespective of the fact that it is on a CD.

(iv) Profits from installation, testing and training services are chargeable as “fees for technical/included services”.

Where the applicant entered into an arrangement with BTA USA for obtaining telecom bandwith for two-way transmission of voice and data through sub-sea cables, HELD:

(i) The agreement was for rendering a ‘service’ and did not involve consideration for the ‘use or right to use equipment’ and not ‘royalty’ u/s 9 (1) (via). The consideration was not a ‘rental’ as the payee was not in custody or control of the equipment of BTA. The meanings of the words “use” and “right to use” explained in detail. It is also not ‘royalty’ u/s 9 (1) (iii). It is also not “fees for included services” under Article 12 (4) of the DTAA.

(ii) The argument that as the applicant’s business consists of revenue from offshore customers, it must be considered to have earned income from a source outside India is not correct as the entire operations are carried out in India. Source is referable to the starting point or the origin or the spot where something springs into existence.

(iii) Question as to whether there is a PE left open for want of facts.

Agricultural Produce Marketing Committee is not a “local authority” after insertion of the Explanation in Section 10(20) vide Finance Act, 2002 w.e.f. 1.4.2003 and is consequently not entitled to the benefit under Section 10 of the 1961 Act.

With regard to the sting operation carried out by NDTV regarding the role of a defense lawyer (R. K. Anand) and the Special Public Prosecutor (I. U. Khan) in an ongoing Sessions trial commonly called the “BMW case” and the suo motu criminal contempt action undertaken by the High Court, the Court passed strictures against two senior advocates and directed that they should be prohibited from appearing before the Court and subordinate courts for four months and that they should be stripped of their designation as senior advocates. The case discusses important aspects of the law as to when abuse of an advocate and when abuse by an advocate can constitute contempt of the law.

Where the assessee was a co.op society and it and its members entered into a development agreement with a builder pursuant to which Tranferable Development Rights (TDR) entitled to be received under the Development Control Regulations was assigned to the developer for the repairs and redevelopment of the building and the construction of additional floors, held that the TDRs were owned by the flat owners individually and as no consideration for the transfer of the TDRs was received by the assessee society nor any area in the constructed portion was allocated to the assessee society, it was not chargeable to tax. Noted that even in the case of flat owners the Mumbai Bench had held in Jethalal D. Mehta vs. DCIT (2005) 2 SOT 422 that the receipts on sale of TDRs were not chargeable to tax in their hands.