Provision for bad and doubtful debts cannot be added to the “book profits” for purposes of section 115JA because they merely represent the dimunition in the value of an asset and are not a provision for an unascertained liability.

Note: The judgements in Echjay Forgings 251 ITR 15 (Bom), Amines & Plasticizers 296 ITR 727 (Gau) and Usha Martin 104 ITD 249 (Kol) (SB) stand impliedly approved while that in Beardsell 244 ITR 256 (Mad) stands impliedly overruled.

Where the assessee, a US company, claimed that non-grant to it of deduction u/s 80HHE on the ground that it was a non-Indian company violated the non-discrimination provision in Article 26 of the India-USA DTAA, HELD, rejecting the claim that:

(i) In order to attract the non-discrimination clause in Article 26, mere differential treatment is not enough. The assessee has to show that not only has it been subjected to differential treatment vis-à-vis others but also that the ground for this differentiation in treatment is unreasonable, arbitrary or irrelevant and that the basis of differentiation lacks any coherent relationship with the object sought to be achieved by that provision.

(ii) Though s. 80HHE is available only to Indian companies and not to foreign companies, the differentiation is on the basis of residential status of the assessee and not on the place of incorporation. Further, though other fiscal incentives for exports like ss. 10A and 10B as well as deductions u/ss 80-I and 80-HH are available to non-residents as well, the denial of deduction u/s 80HHE cannot be said to be unreasonable. The differentiation on the basis of residential status cannot be said to be arbitrary or irrelevant and it has a reasonable relationship with the object sought to be achieved by the incentive deduction. Accordingly, though there is a differentiation, there is no discrimination.

(iii) The OECD Model Convention Commentary has a limited role to play in view of the Technical Explanation on the India-USA DTAA. The Technical Explanation is of significant persuasive value and is the best guide for interpreting this DTAA. If there is a conflict between the OECD Commentary and Technical Explanation, the latter will prevail.

(iv) The fact that different tax treaties have different words and phrases does not necessarily mean that a different interpretation is warranted in view of the fact that treaties are, unlike a statute, the result of bilateral negotiations and the wordings thereon depend on the comfort levels of the treaty partners.

As the 3rd Provio to s. 245 (2A) {restricting the right of the Tribunal to grant stay beyond 365 days even if the delay is not attributable to the assessee} comes into force on 1.10.2008, there is no bar on the Tribunal before that date to grant stay beyond 365 days.

Note: Narang Overseas 295 ITR 22 (Bom) was followed.

Where the assessee bought units of a mutual fund, received tax-free dividend thereon and immediately thereafter redeemed the units and claimed the difference between the cost price and redemption value as a loss and the same had been upheld by a Five Member Special Bench of the Tribunal as a genuine loss, HELD affirming the order of the Special Bench that:

(i) S. 94(7) was inserted prospectively w.e.f. 1.4.2002 to disallow dividend stripping losses. If the argument of the Revenue that even transactions prior to s. 94(7) can be disallowed is accepted, it will render s. 94(7) redundant and also lead to anomalous results.

(ii) CBDT Circular No. 14 of 2001 makes it clear that prior to s. 94(7) the loss was allowable. This Circular is binding on the revenue and they cannot argue contrary to that.

(iii) Even otherwise it was not established that the motive was to earn a loss. The allegation that there was complicity between the mutual funds, the brokers and the assessee was also without merit. Mc Dowell 154 ITR 148 (SC) and Azadi Bachao Andolan 263 ITR 706 (SC) considered.

(iv) The alternative argument that the loss should be treated as expenditure incurred to earn dividend and disallowed u/s 14A is also without merit.

While computing normal profits which do not involve Ch VI-A relief, an assessee is entitled not to claim depreciation. However, where deduction under Ch VI-A is claimed depreciation is mandatory.

Vahid Paper Mills 98 ITD 165 (SB) (Ahd) approved.

See also: Scoop Industries (Bom-Goa).

Where the Government formulated a scheme of subsidy to encourage the setting up of sugar factories and to make them viable under which new sugar factories were entitled to a subsidy in the form of enhancement of free sale sugar quota and excise duty rebate thereon which could only be used for repayment of loans taken for the unit and the question arose whether such subsidy was taxable HELD, in determining whether the subsidy is capital or revenue, the “purpose” test had to be adopted. The source of the subsidy, its form and the point of time when it is paid are irrelevant. On facts, held, following Sahney Steel 228 ITR 253 that the subsidy was capital in nature.

Where the assessee had filed a SLP in the Supreme Court to challenge the ruling of the AAR without first filing a writ petition in the High Court, it was directed to withdraw the SLP and file a writ petition.

Note: In other challenges to AAR rulings in the past, the SC had entertained SLPs without insisting that the High Court route be exhausted.

Click here for the ruling of the AAR.

Where the applicant sought an advance ruling on the question whether the tax payable on the sale of listed equity shares would be 10 per cent of the amount of capital gains as per the proviso to s. 112(1) and the CIT filed a strong objection to the application on the ground that as the ADIT had already passed an order u/s 197, entertaining the application would amount to “subverting the ordinary process of judicial determination prescribed under the Act” and create ‘judicial disarray’, HELD castigating the CIT that:

(i) The s. 197 proceedings did not create any embargo because the order had worked itself out and in any event the s. 197 order was a tentative measure for TDS and did not in anyway fetter the jurisdiction of the AAR.

(ii) The CIT had attempted to denude the AAR of its undoubted jurisdiction by raising a bogey of creating “judicial disarray” even when it was seeking to exercise its legitimate jurisdiction. This was not in keeping with healthy traditions. The CIT’s attempt to belittle the role of the AAR in the statutory scheme of adjudication could not be countenanced. Dismay expressed over the language adopted by the CIT.

Where the assessee conducted sophisticated and technical bioanalytical tests for its clients but did not reveal to them as to how it conducts those tests or the inputs that have gone into it, so as to enable them to carry out those tests themselves in future and the question arose whether the fees received for such services could be assessed as “fees for technical services” or as “royalty” under the India-Canada DTAA, HELD

(i) In order to consider the meaning of the term “make available” in Article 12 of the India-Canada DTAA, one can have regard to the India-USA DTAA. The term requires that the service provider should also make his technical knowledge, experience, skill, know-how etc., known to the recipient of the service so as to equip him to independently perform the technical function himself in future, without the help of the service provider. In other words, payment of consideration would be regarded as ‘fee for technical / included services’ only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.

(ii) On facts, as the tests carried out by the applicant did not enable the applicant’s client to derive requisite knowledge to conduct the tests or to develop the technique by itself, it could not be considered to “make available” technical knowledge, skill etc to the payer;

(iii) The fees were also not chargeable to tax as “royalty” because the applicant used its experience and skill itself in conducting the bioequivalence tests, and provided only the final report containing conclusions to its clients and the information concerning scientific or commercial experience of the applicant or relating to the method, procedure or protocol used in conducting bioequivalence tests was not imparted to the clients.

(iv) what distinguishes a contract for provision of know-how from a contract for rendering advisory services is the concept of ‘imparting’. An adviser or consultant, rather than imparting his experience, uses it himself. All that he imparts is the conclusion that he draws from his own experience.

See Also: Diamond Services International Ltd. vs. UOI (Bom)

(i) The exchange rate gain difference pertaining to exports is an integral part of the exports and export turnover and cannot be treated as income from other sources.

(ii) However, where such gain relates to exports made in an earlier year, the deuction u/s 80HHC is allowable only in the year in which the exports are made and not in the year of realisation of the gain.

(iii) As it would not be permissible to assess the exchange gain in the year of realisation while allowing s. 80HHC deduction in an earlier year, the AO was directed to exclude the exchange gain from the total income of the current year and to include it in the income of the year of exports and allow deduction u/s 80HHC accordingly.