AO directed to decide “jurisdictional issue” as a “preliminary issue” and assesee entitled to challenge the same.

Against the judgement of the High Court, the assessee filed a SLP. In dismissing the SLP it was held:

In view of the assessee submitting copies of the agreements (which had not been submitted earlier before the AO or the High Court) and the law laid down in Management of Express Newspapers vs. Workers AIR 1963 SC 569 that the High Court should ordinarily not embark upon deciding questions of fact which require appreciation of evidence, the question in regard to “the jurisdictional issue” should be decided by the AO as a “preliminary issue” and the assessee shall be entitled to question the decision of the AO on that preliminary issue before the High Court. The question of law “to that extent” remains open.

Click here to see the judgement of the High Court

Even an Indian company can claim the benefits of non-discrimination under the DTAA

Where the assessee was an Indian company and more than 51% of its equity share capital was held by a German company (Daimler Benz AG) and pursuant to an offshore merger the said shares came to be held by another German company (DaimlerChrysler AG) and there being a change of more than 51% of the beneficial interest in the shares, the question arose whether section 79 of the Act (pre-amendment) applied and the loss suffered by the assessee in the earlier years was not eligible for carry forward & set-off – HELD:

(1) Under Article 24 (4) of the India-Germany DTAA, Enterprises of India, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of Germany, cannot be subjected in India to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of India are or may be subjected;

(2) Accordingly, the fact that the assessee is an Indian company and not a resident of Germany is not a bar to its claiming the benefit of the non-discrimination provision of the DTAA;

(3) The term “other similar enterprises of India” means a company which is subsidiary of a domestic company and not a company which is a subsidiary of a foreign company (judicial precedents from Germany, United States and France followed);

(4) S. 79 read with s. 2(18) is discriminatory to the Indian subsidiary of a German company as compared to the Indian subsidiary of an Indian company because while the latter qualifies as a “company in which the public are substantially interested” by virtue of the holding company being listed on an Indian stock exchange, the former is not even though its holding company is listed on a German stock exchange. There is no rational basis for this differentiation in treatment. Consequently, section 79 cannot apply to the assessee;

(5) On the question whether double taxation was necessary to invoke the DTAA and whether the non-discrimination provisions of the DTAA could, prior to the insertion of s. 90 (1) (a)(ii), be said not to be protected by treaty override, HELD the ground reality in today’s world is that the role of tax treaties is not only confined to avoiding double taxation or to giving relief in respect of an income taxed twice but it is an instrument of fostering economic relations, trade and investment. Consequently, treaty override, even before the 2004 amendments in Section 90(1), covered all provisions of the tax treaties, including the provisions relating to non discrimination;

(6) Held also that though judicial precedents from foreign judicial bodies do not have any binding value, it is desirable that the interpretation assigned to the expressions found in the bilateral tax treaties should be in harmony with the judicial opinion abroad and, where there is a divergence of judicial opinion abroad, it should at least be in harmony with the judicial opinion in the treaty partner country. This approach will bring uniformity of interpretation of expressions used in global treaty networks.

Automated Securities vs. ITO (ITAT Pune)118 TTJ 619 distinguished.

Non-residents are not liable to pay interest u/s 234B and 234C for shortfall/deferment in advance-tax

A non-resident whose income is liable to deduction of tax at source under s. 195 is not liable to pay advance tax u/s 209 (1)(d). Consequently, there can be no liability on such assessee u/s 234B for shortfall in advance tax.

See Also: CIT vs. Revathy Equipment (Madras High Court)

Gains on sale of TDR are not chargeable to tax if cost of acquisition is not ascertainable

Where the assessee, a Co.op Housing Society became entitled, by virtue of the Development Control Regulations, to Transferable Development Rights (TDR) and the same were sold by it for a price to a builder and the question arose whether the transaction of sale receipt could be taxed, HELD that though the TDR was a ‘capital asset’, there being no ‘cost of acquisition’ for the same, the consideration could not be taxed.

Note: ITO vs. Lotia Co.op Hsg. Soc. (ITAT Mumbai) was followed.

The assessee is entitled to take advantage of reassessment proceedings to re-raise issues that have not attained finality

Where the AO reopened the assessment to rework the book profits u/s 115JA and in an appeal against such order the assessee raised other issues unconnected with the reassessment and the preliminary point arose as to whether in the light of the judgement of the Supreme Court in CIT vs. Sun Engineering 198 ITR 297, the assessee was entitled to raise such issues, HELD that:

(i) The judgement in Sun Engineering had to be confined to a case where the issue had attained finality in the original proceedings. Such an issue could not be permitted to be agitated by the assessee in reassessment proceedings. However, as the facts showed that the issue had not attained finality in the original proceedings, there was no bar in the assessee raising such issues in the reassessment proceedings.

(ii) In an appeal by the assessee, the respondent-department, having not filed any appeal or cross-objection against the order of the CIT (A), is not permitted to raise a ground which will work adversely to the assessee.

Noted: NTPC Ltd vs. CIT 229 ITR 383 (SC) distinguished.

In rendering services to the subsidiary, there is no “permanent establishment” under DTAA

Where the assessee, a German company, rendered services to its Indian subsidiaries in respect (a) product marketing and sales support services and (b) information and technology support services and the AO claimed that as the assessee had a permanent establishment in India to which the said services were “effectively connected”, the business profits had to be computed on a gross basis by applying s. 44D, HELD, rejecting the stand of the Revenue that:

(i) As a tax treaty is an alternative taxation regime in the sense that it allocates taxing rights between two competing tax jurisdictions, it is useful to first check whether the receipt is chargeable to tax under the DTAA before considering its taxability under the Act;

(ii) The concept of PE is a result of compromise between residence rule and source rule of taxation, and it constitutes ‘home’ of a foreign enterprise abroad. In order to constitute a PE, there should be (a) a fixed place of business in the source jurisdiction and (b) the business of the foreign enterprise should be carried on through such a fixed place of business in the source jurisdiction.

(iii) Under Article 5(7), while the existence of a subsidiary or parent company in the source jurisdiction by itself does not constitute a PE; the parent or subsidiary can be a PE of each other if the business of the foreign enterprise is carried out by the PE. This depends on the facts of the each case.

(iv) On facts, the assessee had rendered support services to its subsidiaries and some employees of the latter had worked under the guidance of the assessee, but the work so done by the employees was for the business of the Indian subsidiaries and not for the assessee. There is a distinction between business of the foreign company and that of its Indian subsidiaries. What was done by the employees of the Indian subsidiaries was running the business of the Indian subsidiaries with the guidance of the assessee. The work done by the employees of Indian subsidiaries did not mean that these employees were doing business of the foreign principal unless the work so done by these employees entitled the assessee for rewards of the work so done. The situs and manner of rendering of services, by anyone other than the employees or sub-contractees of the foreign principal, cannot govern whether or not the foreign principal will have a PE in India.

(v) Further, a non-resident having a PE in India, by itself, does not lead to taxability in India; there must be some profit attributable to such a PE which alone could be taxed in India because of the existence of the PE. When the PE carries on an activity which does not serve overall purpose of the foreign enterprise, or which does not contribute to profits of the enterprise, the existence of such a PE is wholly academic and does not have any tax implications in the source jurisdiction.

(vi) For purposes of the exclusion clause in Article 12 (5) to apply and for royalties and fees for technical services to be taxable on gross basis u/ss 44D and 115A, it will have to be demonstrated that the royalties and fees for technical services have a live economic nexus with the PE. The mere fact that there is a PE is not sufficient.

Premises of a CA cannot be surveyed and clients’ books cannot be impounded

Where the ITO conducted a survey u/s 133A of the Act on the premises of the Petitioner, a practicing Chartered Accountant, and impounded books of account /documents belonging to the Petitioner and retained such books of account/documents and the Petitioner filed a Writ Petition to challenge the same, HELD, allowing the Petition:

(i) The precondition for conducting survey u/s 133A in the premises of a Chartered Accountant, lawyer, Tax, Practitioner in connection with survey of the business place of their client is that the client in course of survey must state that his books of account/documents and records are kept in the office of his CA etc. Unless this precondition is fulfilled, the I.T. authority has no power to enter the business premises/office of the CA etc;

(ii) Under Explanation (a) to s. 133A (6) it is only the authorities specified therein who can exercise the power of survey u/s 133A. The ITO (HQ) was not a competent authority for this purpose;

(iii) U/s 133A(3)(ia) an Income-tax authority cannot impound any books of account or other documents except after inspecting the same and recording reasons for doing so. ‘Inspection’ and recording of reasons involves intelligent application of mind to the facts;

(iv) Under proviso (b) to s. 133A (3)(ia) books of account or other documents cannot be retained for a period exceeding ten days without obtaining the approval of CCIT / DG. Retention of impounded books of account beyond ten days involves application of mind by the authorities. It is the duty of the Revenue to communicate to the person concerned not only the Commissioner’s approval but also the recorded reason on which the same has been approved. The communication should be made as expeditiously as possible after passing the order of approval. In default of such expeditious communication, any further retention of seized books becomes unlawful;

(v) U/s 133A(3)(ia)(b) the CCIT or DGIT is not required to give a personal hearing to the person whose books of account are intended to be retained for a period exceeding ten days before any approval for such extended period of retention is granted. If such hearing is given, the entire purpose for which s. 133A (1) is enacted will be frustrated. Rajesh Kumar v. DCIT 287 ITR 91 (SC) and Sahara India (Firm) v. CIT 300 ITR 403 (SC) distinguished;

(vi) The impounding of books of account belonging to the client does not amount to breach of privileged communication by the CA and he is not entitled to any protection on that score. The CA shall not be right in preventing or non-co-operating the statutory authorities while they are discharging their official duty. The code of ethics requires not to shield a client from the consequences of his tax frauds but it is a guiding principle of professional conduct to discourage tax evasion;

(vii) Though on facts the survey was illegal, the materials collected during the course of illegal survey can be used for making additions. Accordingly, the authorities were entitled to take copy of the documents and books of account before returning the same.

Tests to distinguish shares held as “stock-in-trade” and as “investments”

Where the assessee was a stock broker but it was consistently following the practice of holding some shaes as ‘stock in trade’ and other shares as ‘investments’ and the question arose whether the profits on the sale of shares held as investments constituted a capital gain or business profits, HELD:

(i) The assessee had been consistent in its practice of treating some shares as stock and others as a capital asset. While the shares held as capital asset were valued at cost in the accounts, the shares held as stock-in-trade were valued at the lower of cost or market value;

(ii) There is no bar on a stock broker holding shares as an investment. The mere fact that the assessee is an expert in share trading does not mean that he cannot hold shares as a capital asset. The magnitude of the transaction does not change the nature of the transaction.

Note: ACIT vs. Motilal Oswal was followed.

See Also: Circular No. 4/2007 dated 15.06.2007 and Taxation of Securities Transactions by CA Gautam Nayak

S. 292 BB held to be prospective and applicable only w.e.f 1.4.2008

(1) S. 292BB, inserted by the F.A. 2008 w.e.f. 01.04.2008, creates a legal fiction and takes away the right of an assessee to claim that in case of invalid notice the whole proceedings taken pursuant to that notice would be void ab initio and will have no legal consequences;

(2) However, the rule of interpretation of statutes is that a provision creating a new disability or obligation and imposing a new duty in respect of completed transactions cannot be construed to be retrospective;

(3) Though the issue and service of notice relates to procedural law S. 292-BB takes away the valuable right of an assessee to challenge the validity of assessment during the course of appellate proceedings and creates a new disability on the assessee by debarring him from challenging the validity of the same;

(4) Consequently, s. 292-BB cannot be construed to be retrospective and has to be applied prospectively in respect of AY 2008-09 and subsequent years.

Note: ITO vs. Varia Pratik (ITAT A’bad) is impliedly overruled.

See Also: Zeus Air Services vs. DCIT (ITAT Mumbai)

The Q whether the Proviso to s. 113 is retrospective or prospective referred to Full Bench

In CIT vs. Suresh N. Gupta 297 ITR 322, the Supreme Court held that the Provio to s. 113 (which imposes surcharge on block assessments), though inserted only with effect from 1.6.2002, was applicable to searches conducted prior to that date as it was ‘clarificatory’ and ‘curative’ in nature.

HELD, however, by another Division Bench that as the said proviso was introduced with effect from 1.6.2002, i.e. with prospective effect “we are of the opinion that keeping in view the principles of law that the taxing statute should be construed strictly and a statute, ordinarily, should not be held to have any retrospective effect, it is necessary that the matter be considered by a larger Bench”.

See Also: The bane of retrospective amendments by N. M. Ranka, Advocate and Interpretation of Statutes by Sorabh Soparkar, Advocate.