(25.1 KiB, 597 DLs)

No “succession of business” u/s 170 even on 100% sale of shares

S. 170 provides that where there is a “succession of business”, the predecessor has to be assessed in respect of the income upto the date of succession and the successor has to be assessed thereafter. 100% of the assessee’s shares were sold by the existing shareholders to another person. The CIT in revision took the view that the result of the said transfer of shares was that there was a “succession” and that the loss incurred prior to the date of succession could not be allowed to the “successor” assessee. The assessee’s appeal was allowed by the Tribunal. On appeal by the Revenue, HELD dismissing the appeal:

(1) The term “succession” in s. 170 has a somewhat artificial meaning. The tests of change of ownership, integrity, identity and continuity of a business have to be satisfied before it can be said that a person “succeeded” to the business of another;

(2) Even if it is accepted that by a transfer of shares u/s 2(47), there is a transfer in the right to use the capital assets of the company, still s. 170 is not attracted because there is no “transfer of business”. A company is a juristic person and owns the business. The share holders are not the owners of the company. By a transfer of the shares, there is no transfer so far as the company is concerned.

(423.8 KiB, 3,681 DLs)

Fee for use of satellite is “royalty” under Act & DTAA

The assessee, a foreign company, was engaged in operating geostationary telecommunication satellites with transponder capacity which were provided to telecasting companies in India for a fee. The question arose whether the said fee was “consideration for … the use of any … secret formula or process …” so as to constitute “royalty” under Expl. 2 to s. 9 (1)(vi) and corresponding definition under the DTAA.

In Asia Satellite 85 ITD 478 the Tribunal held that the said receipts were taxable as ‘royalty’ having been paid in respect of a “process”. However, in PanAmSat 9 SOT 100 it was held that as in the term “royalty” in Art. 12 of the India-USA DTAA there was a ‘comma’ after the words “secret formula or process”, it was only a ‘secret process’ which would qualify as royalty and not what was provided by the assessee. To resolve the conflict, the issue was referred to the Special Bench. HELD, reversing PanAmSat:

(i) The provision of the transponder through which the telecasting companies are able to uplink the desired images/data and downlink the same in the desired area is a “process”. To constitute “royalty”, it is not necessary that the process should be a “secret process”. The fact there is a ‘comma’ after the words “secret formula or process” in the DTAA does not mean that a different interpretation has to be given to the DTAA as compared to the Act;

(ii) The argument that there is no “use” of the satellite by the payer as it has no control or possession of the satellite is not acceptable. To constitute “royalty”, it is not necessary that the instruments through which the “process” is carried on should be in the control or possession of the payer. The context and factual situation has to be kept in mind to determine that whether the process was “used” by the payer. In the case of satellites physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The fact that the telecasting companies are enabled to telecast their programmes by uplinking and downlinking the same with the help of that process shows that they have “use” of the same. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process;

(iii) The consideration paid by telecasting companies to satellite companies is for the purpose of providing “use of the process” and consequently assessable as “royalty” under the Act and the DTAA.

(405.6 KiB, 713 DLs)

No penalty under Expl. 7 to s. 271 (1) (c) for bona fide transfer pricing adjustments

Expl. 7 to s. 271 (1) (c) provides that in the case of an assessee who has entered into an international transaction, any amount added or disallowed in computing the total income u/s 92C (4) shall for purposes of s. 271 (1) (c) be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars furnished unless the assessee shows that the s. 92C computation was made in good faith and with due diligence.

The assessee, a call centre, adopted the Transactional Net Margin Method (“TNNM”) and showed an operating profit to operating cost at 10.12% on the basis of comparables. The assessee, however, showed a loss of Rs. 4.27 crs from the international transaction after making adjustment for (i) cost relating to first year operation, (ii) cost relating to excess capacity and (iii) provision for doubtful debts towards sums due from the parent company. The adjustments were made on the ground that these were extraordinary costs and required to be excluded in computing the arms’ length price under Rule 10B (e) (iii) which provides that the net profit margin arising in comparable uncontrolled transactions can be adjusted for differences between the international transaction and the comparable transaction or between the enterprises entering into such transactions which could materially affect the amount of net profit margin in the open market. The TPO rejected the third adjustment on the ground that it being an ordinary item of expenditure did not qualify for adjustment. On merits, the assessee accepted the addition though it challenged the levy of penalty. The CIT (A) allowed the appeal on the ground that the treatment of the provision for doubtful debts as an extraordinary item and not as operational cost was justified. On appeal by the Revenue, HELD dismissing the appeal:

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(327.7 KiB, 1,018 DLs)

S. 54 relief allowable even if new house purchased from borrowed funds

S. 54 provides that if an assessee has LTCG on transfer of a residential house and he purchases or constructs a residential house within the specified period then the amount appropriated towards the new house shall be deducted from the LTCG. The assessee sold a house and used the sale proceeds to buy commercial property. Subsequently (but within the specified period) he borrowed funds and purchased a new house. The AO denied deduction u/s 54 on the ground that the new house had been purchased out of borrowed funds and not out of the consideration received for the old house. On appeal, the Tribunal and High Court upheld the claim on the ground that s. 54 merely required the purchase of the new house to be within the specified period. The source of funds for the purchase was irrelevant.

(47.0 KiB, 824 DLs)

Non-reference by ITAT of cited judgements is not an apparent mistake

The assessee claimed deduction u/s 80-IB (10) which was rejected by the AO but allowed by the CIT (A). On appeal by the department, the Tribunal ruled against the assessee and held that it was not eligible for deduction. The assessee filed a MA u/s 254 (2) pointing out that it had cited a judgement of the Kolkota Bench of the Tribunal (which had been considered by the CIT (A)) and a judgement of the Kolkota High Court which had not been considered by the Tribunal when deciding the appeal and the same was a ‘mistake apparent from the record’. The MA was rejected on the ground that the issue was discussed and there was no mistake. To challenge the MA order a writ was filed by the assessee urging that the Tribunal ought to have recalled the appeal order and reheard the appeal. HELD dismissing the Petition:

(i) The writ petition against the MA order was maintainable because the assessee has no alternative remedy. An appeal u/s 260A can be filed only against an order passed u/s 254 (1) and not against one passed u/s 254 (2);

(ii) On merits, even though it was true that in the original order the Tribunal had not referred to the order of co-ordinate Bench of the Kolkata Tribunal and the subsequent decision of the Calcutta High Court, the substance of the same has been discussed in detail. The assessee had a right of appeal and therefore the application for rectification u/s 254(2) was misconceived;

(iii) A decision of the High Court of different jurisdiction is not binding on the Tribunal. Non-consideration of the same is not a “mistake” u/s 254 (2).

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(248.3 KiB, 954 DLs)

Depreciation allowable even if asset not used at all for entire year

The assessee, engaged in shipping business, owned a barge which was included in the block of assets. The barge met with an accident and sank on 6.3.2000 (AY 2000-01). As efforts to retrieve the barge were uneconomical, the barge was sold on as-is-where-is in May 2001 (AY 2002-03). As the barge was non-operational and not used for business at all in AY 2001-02, the AO denied depreciation. The CIT (A) upheld the stand of the AO. On appeal by the assessee, the Tribunal took the view that after the insertion of the concept of “block of assets” by the T. L. (A) Act, 1988 w.e.f 1.4.1988 individual assets had lost their identity and only the “block of assets” had to be considered. It was held that the test of “user” had to be applied upon the block of assets as a whole and not on individual assets. On appeal by the Revenue, the High Court dismissed the appeal holding that the issue was squarely covered in favour of the assessee by its earlier judgements in Whittle Anderson 79 ITR 613 and G. N. Agrawal 217 ITR 250.

(288.6 KiB, 777 DLs)

An order passed without discussion is liable for reopening. Kelvinator 256 ITR 1 (Del) (FB) dissented from

In respect of AY 2000-01, the assessee filed a ROI. In the accompanying balance sheet it was disclosed that prior period expenditure of Rs. 5,41,850 was debited to the P&L A/c and that interest of Rs. 8,34,720 receivable from a particular party had not been accounted for as income. The AO passed an order u/s 143(3) in which he did not make any addition on account of the aforesaid two items. Subsequently (within four years), he issued a notice u/s 148 in which he took the view that income had escaped assessment as the prior period expenditure was not allowable as a deduction and the interest on advances was assessable. The assessee filed a writ petition on the ground that there being a disclosure of the material facts and the implied acceptance of the stand of the assessee vide the s. 143 (3) order, the reopening was based on a change of opinion. HELD, dismissing the Petition:

(i) Reassessment is permissible where the AO has passed an assessment order without any application of mind. If the order of assessment does not contain any discussion on a particular issue, the same may be held to have been rendered without any application of mind. On facts, as there was no discussion by the AO in the s. 143 (3) order about the prior period expenditure and the non-offering of interest income, there was no application of mind by the AO and he was entitled to reopen;

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(39.7 KiB, 1,041 DLs)

Proviso to s. 2(15) does not apply to incidental services rendered without profit motive

The assessee, a statutory Board, was set up for prevention of pollution of streams and wells in the State and other allied activities. It derived income from various testing charges etc. The CIT granted registration u/s 12AA of the Act on the basis that the activities of the assessee constituted a “charitable purpose” u/s 2 (15) and that its’ income was eligible for exemption u/s 11. S. 2 (15) was amended by the FA 2008 w.e.f AY 2009-2010 to provide that the term ‘advancement of any object of general public utility’ would not constitute a “charitable purpose” if “it involves the carrying out of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to such trade, commerce or business, for a cess or fees or any other consideration, irrespective of nature of use or application of the income from such an activity”. Pursuant thereto, the CIT withdrew the registration granted u/s 12AA on the ground that (i) the assessee was a ‘regulatory agency’ and not engaged in a ‘charitable activity’ and (ii) the activities were carried out in a commercial manner with a view to earn profits and so were excepted from the definition of the term “charitable purpose”. On appeal by the assessee, HELD reversing the CIT:

(1) The fact that the assessee is a regulatory body does not mean it cannot pursue an ‘object of general public utility’ which qualifies to be a charitable activity u/s 2(15). The scope of the expression ‘any other object of general public utility’ is very wide, though it excludes objects of private gain such as an undertaking for commercial profit even though the undertaking may subserve general public utility. On facts, as the assessee was engaged in the activities of “prevention, control or abatement of pollution”, its objects were of general public utility;

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(1.2 MiB, 597 DLs)

TPAs are required to deduct tax u/s 194J on payment to hospitals

The assessee, a Third party Administrator (“TPA”) licensed by IRDA, was engaged in providing “cashless” health insurance claim services. The insurance company issued cashless medi-claim policies (that were serviced through TPAs) under which it assured the policy holder of free treatment up to the assured amount. The TPA issued an identity card to the insured pursuant to which he could approach any network hospital to avail of cashless treatment. Upon treatment, the hospital sent the bill to the TPA and the same would be paid by the TPA to the hospital. The payment would be made from funds made available by the insurance company to the TPA. The assessee also entered into MOUs with hospitals and nursing homes by which it undertook to reimburse / settle the bills of the policy holders. The AO took the view that as the hospitals had rendered professional (‘medical’) services the assessee ought to have deducted tax at source u/s 194J at the time of payment. The assessee filed a writ petition to challenge the said order on the ground that it was not “responsible” for making the payment. HELD, dismissing the petition:

(1) Under the arrangement, it is the TPA who is responsible for making payments to the hospital. The TPA can be termed as an “agent” of the insurance company. The TPA was given unbridled power and had taken over a part of the work of the insurance company. Its decision as to the payment of bill and sending the insured to the accredited hospitals was final and the Insurance company was not in touch with the insured at all;

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