(40.0 KiB, 330 DLs)

Even State Govt. Undertakings need COD clearance

In the light of the judgement of the Supreme Court in ONGC vs. CIDCO (2007) 7 SCC 39 and that of the Madras High Court in Tamilnadu Warehousing Corp Ltd vs. DCIT (2008) 15 DTR 67, even appeals involving State Government undertakings require approval of the Committee on Disputes. The appeal can be proceeded with only if the appellant is either able to obtain the requisite COD clearance or file satisfactory evidence to prove that a COD to deal with State – Centre disputes has not been formed.

Note: The judgement of the Special Bench in DCIT vs. Maharashtra State Road Transport Corporation 100 ITD 187 is no longer good law in view of the judgements referred to above.

(2.4 MiB, 756 DLs)

No TDS Liability on payer beyond 6 years & if payee not assessed

Where the assessee floated a GDR issue and made payments to the foreign lead manager by way of management and underwriting commission etc and the AO took the view that the said payments was chargeable to tax in the hands of the recipient u/s 9 (1)(vii) as “fees for technical services” and that the assessee ought to have deducted tax thereon u/s 195 and on account of its failure to do so was liable to be treated as an “assessee in default” u/s 201 and the question arose whether the said order u/s 201, having been passed after the expiry of four years from the end of the relevant financial year, was barred by limitation, in the absence of any provision in the Act HELD:

(a) The argument that s. 201(1) (pre amendment by the FA 2008 w.r.e.f 1.6.2002) applies only where there is a failure to deposit the deducted tax and not where there is a failure to deduct tax and that it is only after the amendment that a failure to deduct tax is covered is not acceptable as the amendment is clarificatory of the legislative intent;

(b) Though s. 201 (1) does not impose any time limit for the initiation of proceedings or the passing of an order, a reasonable time limit would have to be read in as otherwise the authorities would have an indefinite period to take action and the sword of uncertainty would hang forever over an assessee;

(c) A ‘reasonable period’ would have to be determined bearing in mind the fact that an order u/s 201 is to be treated as akin to an assessment order and that it is dependent on the outcome of the assessment of the payee. Accordingly, the maximum time limit for initiating and completing proceedings u/s 201 (1) has to be on par with the time limit for initiating and completing reassessment proceedings u/s 147;

(d) Accordingly, following the time limits imposed by s. 149, s. 201 proceedings should be initiated within six years from the end of the relevant assessment year if the income by virtue of sums paid without deduction of tax at source by the payer chargeable to tax in the hands of the payee is equal to or more than one lakh rupees. If such amount is less than Rs. 1 lakh then the proceedings must be initiated within four years from the end of the relevant assessment year. By the same logic the proceedings u/s 201 (1) must be completed by passing an order within one year from the end of the financial year in which proceedings u/s 201(1) were initiated. These time limits apply to s. 201 (1A) as well;

(e) Though the Delhi High Court has held in CIT vs. NHK 305 ITR 137 that the period of four years was a reasonable period, the same is not binding as it is of a non-jurisdictional High Court and also because there is no unanimity on the subject amongst the Courts;

(f) The underlying principle behind tax deduction at source is the presumption that the amounts paid are chargeable to tax in the hands of the payee. In order to treat the payer as an assessee in default, it is of utmost importance that the sums paid are capable of being brought within the purview of the tax net and an assessment can lawfully be made on the payee. On facts, as no assessment was made on the payee and as the time limit for making an assessment u/s 147 had expired, the order u/s 201 (1) / 201 (1A) passed on the payer was invalid;

(g) “Payment” to or crediting the account of non-resident u/s 195( 1) also covers retention of the amount by non-resident where only net amount is remitted to the Indian party;

(h) Fees for technical services u/s 9(1)(vii) read with Expl 2 covers management commission and selling-commission allowed to the non-resident in respect of the GDR issue. Underwriting commission does not fall within the definition of ‘fees for technical services’ u/s. 9(1)(vii). Reimbursement of expenses is not income;

(i) The term “make available” in Art. 13 of the DTAA means to provide something to one which is capable of use by the other. Such use may he for once only or on a continuous basis. However, if the non-resident uses all the technical services at his end then though the benefit of that directly and solely flows to the payer of the services, the services cannot be said to have been “made available” to the payer.

(452.7 KiB, 224 DLs)

Disqualification of Ex-Members practicing before CESTAT is constitutional

Where s. 129 (6) of the Customs Act inserted by the FA 2007 w.e.f 11.05.2007 provided that the President, VP and Member of the Customs Excise Service Tax Appellate Tribunal (CESTAT) were not permitted to appear before that Tribunal after demitting office and the question arose whether the said provision was violative of Articles 14, 19(1)(g) and 21 of the Constitution, HELD, dismissing the Petition that:

(a) The provision is salutary and in public interest. Its rationale is to strengthen the administration of justice;

(b) The contention that Article 14 is violated is not tenable. The fact that the evil or mischief which is sought to be remedied by insertion of the impugned provision is not identified with empirical data is not acceptable because the common law principle is that justice must not only be done but must be seen to be done and disqualification is incurred even when there is only a suspicion or likelihood of bias. It is a question of public perception and confidence. The provision seeks to remove perceived bias;

(c) The contention that there is discrimination on the basis that Members of the ITAT and ATFE are not subject to the same disability is also not tenable because s. 129 (6) is reformative and marks a beginning (of what the law should be);

(d) The contention that Article 19(1)(g) is breached because the right to practice as an advocate is taken away is not acceptable because firstly, an advocate does not have an unbridled or absolute right to practice before all Courts and Tribunals. Secondly, the provision imposes a restriction with regard to a forum and does not completely prohibit them from practicing their profession. The Ex-Members can practice before superior forums;

(e) The provision is in public interest as it helps to develop and foster entry of fresh blood and talent at the level of the tribunals and at the same time makes available much needed expertise of the Ex-Members in the superior forums;

(f) The contention that Article 21 is violated is also untenable because there is no deprivation of right to livelihood and there are several avenues open to the Ex-Members to earn their livelihood;

See Also: Old is Gold! where it was observed:

“When a retired member appears before the authorities lower to the Tribunal, the institution of the Tribunal loses the respect of the people. The High Court judges after retirement never appear before High Court or lower courts, this has enhanced the respect of the judiciary. It is essential that the service rules may be amended or by convention the retired members may not be permitted to appear at the place of retirement or any forum lower to the Tribunal”

(504.5 KiB, 332 DLs)

TDS required even on commission retained by agent

Where the assessee-airline supplied blank tickets to the travel agent, on terms that the same be sold at a minimum price and the difference between the said minimum price and the price at which the tickets were sold to the passenger was retained by the travel agent and the question arose whether the amount so retained by the agent was “commission” and whether the assessee was required to deduct tax thereon u/s 194-H of the Act, HELD, reversing the decision of the Tribunal:

(a) The relationship between the airline and the travel agent was that of a principal and agent as all the requirements of s. 182 of the Contract Act were fulfilled by the PSA. By the acts of the travel agent, a legal relationship was created between the airline and the passenger;

(b) The monies retained by the travel agent in the form of supplementary commission is not a “discount” because the travel agent never obtains proprietary rights to the tickets and has never paid a “price” for the same. Instead, the same is “commission” because it is received for services rendered on behalf of the assessee-airline and the airline ought to have deducted tax u/s 194-H;

(c) The argument that the assessee-airline is unable to deduct tax at source since it is unaware of the commission retained by the agent till a billing analysis is done is not acceptable because once an obligation is cast, it is for the assessee-airline to retrieve the necessary information from the travel agent and put itself in a position to deduct tax. The assessee cannot take up the stand that the machinery for deduction of tax has failed;

(d) However, in respect of the issue of “concessional” tickets to the agents, the difference between the full value and the concessional price was not “commission” because though it was a reward for services, title to the ticket passes to the agent and the relationship was that of a principal to principal. The difference was a “discount”.

(16.5 KiB, 190 DLs)

Note: The Bombay High Court has taken a contrary view in CIT Quatar Airways.

(24.0 KiB, 467 DLs)

Lawyers not liable under consumer Act: SC

The State Commission, Delhi, held that services rendered by a Lawyer would not come within the ambit of s. 2(1)(o) of the Consumer Protection Act, 1986, as the client executes the power of attorney authorizing the Counsel to do certain acts on his behalf and there is no term of contract as to the liability of the lawyer in case he fails to do any such act. The State Commission held that it is a unilateral contract executed by the client giving authority to the lawyer to appear and represent the matter on his behalf without any specific assurance or undertaking.

This verdict was reversed by the National Consumer Disputes Redressal Commission on the ground that lawyers are rendering a service. They are charging fees. It is not a contract of personal service and that there was no reason to hold that they are not covered by the provisions of the Consumer Protection Act, 1986. It was held that though a Lawyer may not be responsible for the favourable outcome of a case as the result/out come does not depend upon only on lawyers’ work, but, if there was deficiency in rendering services promised, for which consideration in the form of fee is received by him, then the lawyers can be proceeded against under the Consumer Protection Act.

The said judgement of the NCDRC has now been stayed by the Supreme Court.

(266.2 KiB, 1,327 DLs)

Foreign Exchange fluctuation losses are allowable on accrual basis

Where the assessee carrying on the mercantile system of accounting claimed that:

(i) The additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes was allowable as deduction u/s 37(1) in the year of fluctuation in the rate of exchange and not in the year of repayment of such loans; and

(ii) The actual cost of imported assets acquired in foreign currency is entitled to be adjusted u/s 43A (prior to the amendment by the FA 2002) on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied liability HELD approving the claim that:

(a) The term “expenditure” in s. 37 covers an amount which is a “loss” even though the said amount has not gone out from the pocket of the assessee. The “loss” suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure u/s 37(1) ;

(b) Profits and gains are required to be computed in accordance with commercial principles and accounting standards (AS-11);

(c) Accounts and the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits;

(d) The fact that the department taxed the gains on fluctuation on the basis of accrual while disallowing the loss is important and indicates the double standards adopted by the Department;

(e) U/s 43A (pre-amendment), the change in the rate of exchange subsequent to the acquisition of asset triggers the adjustment in the actual cost of the assets. Actual payment of the liability as a consequence of the exchange variation is not required. The amendment of s. 43A by the FA 2002 w.e.f. 1.4.2003 is not clarificatory.

Note: The judgement of the ITAT Special Bench in ONGC vs. ITO 83 ITD 151 has the unique distinction of being affirmed by the Delhi High Court in Woodward Governor 294 ITR 451 and being reversed (after being termed “perverse”) by the Uttaranchal High Court in CIT vs. ONGC 301 ITR 415. With the present verdict of the apex court, the judgement of the Special Bench stands approved and that of the Uttaranchal High stands impliedly overruled.

(185.6 KiB, 422 DLs)

High Court stays 5 Member Special Bench judgement on transfer pricing

In admitting the appeal filed under section 260A against the judgement of the 5 Member Special Bench of the Tribunal in Aztec Software vs. ACIT 294 ITR (AT) 32 / 107 ITD 41, the High Court has granted stay of “the operation and all further proceedings” of the said judgement until further orders.

Note: The judgement of the Special Bench deals with various Transfer Pricing issues. No reasons are given in the High Court’s order on why stay was granted.

See Also: Transfer Pricing: A definitive Guide.

(387.2 KiB, 1,153 DLs)

On a rationalized interpretation of s. 80-IB (10),

“Housing Projects” held to include commercial area.

Where the assessee constructed a project in Pune in which the percentage of commercial area to the total area was 20.83% and the said project was approved by the Pune Municipal Corporation as a “New/ Residential + Commercial project” (and not as a “housing project”) and the question arose whether prior to the amendment of s. 80 IB (10) w.e.f. 1.4.2005 (to the effect that the commercial area in a housing project should not exceed the lesser of 5% of the built up area or 2,000 sq ft), the assessee’s project was a “housing project” eligible for deduction u/s 80-IB (10), HELD:

(i) S. 80 IB (10) is aimed at promoting construction of housing projects so as to address the problem of shortage of dwelling units. It cannot be said that the object is to encourage house building activity per se, irrespective of whether these are dwelling or commercial units;

(ii) However, given that under the DC Rules (of Pune) there cannot be a pure residential project and it is incumbent on the developer to reserve a part of the plot for shopping, commercial use of area must be regarded as an integral part of a housing project and does not vitiate the character of a housing project;

(iii) The fact that the 2005 amendment placed a restriction on commercial user also shows that commercial user was permissible even prior to that;

(iv) On the question as to the extent to which commercial use in a “housing project” is permissible, the approval by the local authority of a project as a “housing project” is conclusive and no further enquiry is required;

(v) Where the local authority does not grant approvals to “housing projects” but instead grants approvals to “residential and residential cum commercial projects”, one will have to adopt the doctrine of purposive interpretation to draw a “lakshman rekha” and ensure that the basic character of the project continues to remain in harmony with the object of the tax incentive i.e. augmenting affordable dwelling units. Applying the said doctrine of purposive interpretation, cases where commercial built up area does not exceed 10% of the total area are eligible for the benefit as such projects are predominantly residential in nature;

(vi) Cases where the commercial area is more than 10% will not be eligible for deduction unless it can be shown that income from the residential dwelling units can be worked out separately and even after excluding the commercial use of plot, the project satisfies all the requirements of section 80IB (10).

Harshad Doshi 109 TTJ 335 and Saroj Sales 115 TTJ 485 approved.

Arun Excello 108 TTJ 71 partly approved.

Laukik Developers vs. DCIT 105 ITD 657 (Mum) overruled (Note: It was not even the Revenue’s case before the Spl. Bench that a housing project can have no commercial area at all).

See Also: Treatise on the law of Real Estate Development Contracts

(127.7 KiB, 688 DLs)

Ishikawajima Harima (SC) doubted / distinguished

Where the assessee, an Australian company, entered into an agreement with Reliance and it was agreed that the consideration thereof constituted “royalty” but the assessee claimed (i) that the said royalty was “effectively connected” with a permanent establishment (PE) and consequently assessable as business profits, (ii) that the portion of such “profits” as was not “attributable” to the PE was not assessable to tax in India and (iii) that even otherwise the royalty was not assessable to tax in view of Ishikawakima 288 ITR 408 (SC) where it was held that fees for technical services (and royalty) was not assessable to tax u/s 9(1)(vii) (9(1)(vi)) if it was not rendered and utilized in India, HELD:

(i) In order to be “effectively connected”, the PE should be engaged in the performance of royalty generating services. There must be a real and intimate connection and clear co-relation between the services giving rise to royalty and the PE. A connection between the PE and the contract is not enough;

(ii) On facts, as the bulk of the work was done outside India, the royalty was not “effectively connected” with the PE so as to qualify as business income. The fact that the said work was done based on inputs from India and the end-product was delivered and utilized in India was not relevant as that was pursuant to a different agreement;

(iii) Ishikawajima cannot be read to mean that the mere existence of a PE is enough to trigger the exclusion clause and cause royalty income to be assessed as business income. It does, however, imply that there may be situations where though the royalty may be “effectively connected” with the PE, still it may not be “attributable” to the PE;

(iv) It is not clear why in Ishikawajima reference has been made to s. 9(1) (vii) (c) instead of s. 9 (1) (vii) (b) even though the two deal with different situations and why it was stated that s. 9 (1)(vii) (c) requires that the services have to be rendered as well as utilized in India in order to be taxable in India even though the word “rendered” is not to be found even in the inapplicable clause (c). Though it is difficult to find an answer, the dicta has to be respected without invoking the doctrine of per incuriam as far as possible;

(v) Further, though in Ishikawajima it was observed that “the legal fiction created by s.9 should be construed having regard to the object which it seeks to achieve”, it was not indicated as to what is the object of the said provision that deters the legal fiction being carried to the extent specifically provided by the language of the section. The object of s. 9(1) is to deem certain incomes as accruing or arising in India so as to widen the net of taxation and this object will not be defeated if the legal fiction enacted by s. 9 is taken to its logical extent (other judgements of SC referred to where it was held that a fiction has to be given full effect);

(vi) Though in Ishikawajima it was held that the location of the source of income within India would not render sufficient nexus to tax the income from that source, this cannot be construed to mean that the age-old test of source of income should be eschewed altogether while considering territorial nexus (other judgements of SC on territorial nexus referred to);

(vii) There is a doubt why Ishikawajima proceeded on the basis that the offshore services performed by the contractor executing a turn key project as a step-in-aid to the execution of the project and deploying those services in India had no real connection to the Indian territory even though it gave rise to a ‘live link’ with the Indian territory and why it was felt that the income arising therefrom did not accrue or arise in India, not to speak of deemed accrual;

(viii) A decision not expressed and accompanied by reasons and not proceeded on a conscious consideration of issue cannot be deemed to be a law having binding effect as is contemplated under Art.141 of the Constitution. That which has escaped in the judgment is not the ratio decidendi;

(ix) Though the AAR has to give full effect to the law laid down in Ishikawajima vis-à-vis s. 9 (1) (vii) and territorial nexus, on facts, there was territorial nexus and a “live link” because a part of the services were rendered in India. The extent and magnitude of services is not decisive.

See Also: Clifford Chance (Bom), Siemens AG (Bom) and Taxability of royalties and fees.

(342.6 KiB, 1,199 DLs)

TDS on foreign salary is reqd even though assessee is not the payer

Where the assessee-employer obtained expatriate-employees from a foreign company and the said employees, continuing to be employees of the foreign company, received salary and allowance in their home country in foreign currency and the question arose whether the assessee was obliged to deduct tax thereon at source u/s 192 and the High Court held that the assessee was not obliged to deduct tax at source on the ground that the payment was by the foreign company and not by the assessee, HELD, reversing the High Court that:

(i) Though the payment of salary to the expatriate was made by the foreign company outside India, the TDS provisions did apply as the Act had extra-territorial operation as there was a nexus between the said salary and the rendering of services in India;

(ii) U/s 9 (1) (ii), salary received abroad is deemed to arise in India if it is for services rendered in India. This charging provision has to be read with the machinery provision of s.192 and both are part of an integrated code;

(iii) S. 192 requires the employer to deduct tax after “estimating” the salary payable to the employee. The act of “estimation” is akin to computation of income. In making the estimate, s. 9 (1) (ii) has to be taken into account;

(iv) On facts, as it was found that the salary paid by the foreign company was for services in India the same was deemed to accrue in India u/s 9 (1) (ii) and the assessee ought to have deducted tax u/s 192 though it was not the payer;

(v) Levy of interest u/s 201 (1A) is mandatory and has to be calculated from the date of default to the date of payment either by the assessee or the payee-employee;

(vi) However, levy of penalty u/s 271C is not mandatory or compensatory or automatic. Penalty can be levied only if there is no good and sufficient reason for the failure to deduct tax at source. On facts, as the issues were controversial and the assessees acted bona fide, penalty could not be imposed.

Note: The judgement of the High Court is reported as CIT vs. Eli Lilly 297 ITR 300 (Del).