(19.2 KiB, 692 DLs)

Tech-savvy Supreme Court directs Service by E-Mail to avoid delay

HELD vide order dated 26th July 2010:

In various Courts, the statistical data indicates that, on account of delay in process serving, arrears keep on mounting. In Delhi itself, the input indicates that fifty per cent of the arrears in Courts particularly in commercial cases is on account of delay in process serving.

 

For the above reasons, the following directions, as mentioned hereinbelow, are given:

 

[i] In addition to normal mode of service, service of Notice(s) may be effected by E-Mail for which the advocate(s) on-record will, at the time of filing of petition/appeal, furnish to the filing counter a soft copy of the entire petition/appeal in PDF format;

 

[ii] The advocate(s) on-record shall also simultaneously submit E-Mail addresses of the respondent(s) Companies/Corporation(s) to the filing counter of the Registry. This will be in addition to the hard copy of the petition/appeal;

 

[iii] If the Court issues notice, then, in that event alone, the Registry will send such an additional notice at the E-Mail addresses of the respondent(s) Companies/Corporation(s) via E-Mail;

 

[iv] The Registry will also send Notice at the E-Mail address of the advocate(s) for respondent(s) Companies/Corporation(s), who have filed caveat. Advocate(s) on-record filing caveat shall provide his/her E-Mail address for effecting service; and

 

[v] Within two weeks from today, Cabinet Secretariat shall also provide centralized E-Mail addresses of various Ministries/Departments/ Regulatory Authorities along with the names of the Nodal Officers, if already appointed, for the purposes of service.

 

Clarification: The above facility is being extended in addition to the modes of service mentioned in the existing Supreme Court Rules. This facility, for the time being, is extended to commercial litigation and to those cases where the advocate(s) on-record seeks urgent interim reliefs.

(86.5 KiB, 1,393 DLs)

S. 115JB (MAT) not applicable to foreign company without presence in India

The assessee, a foreign company, without a presence or PE in India, earned long-term capital gains which were exempt u/s 10(38). The assessee applied for a ruling on whether it was liable to pay Minimum Alternate Tax (MAT) u/s 115JB on the said gains. HELD ruling in favour of the assessee:

(i) In P.No. 14 of 1997 (234 ITR 335) the AAR held that s. 115JA (akin to s. 115JB) applied to every “company” and as the term “company” was defined in s. 2(17) to include a “foreign company”, there was no reason to presume that the legislature did not intend s. 115JA to apply to a foreign company. This ruling is not applicable because:

(a) It was rendered in the case of an assessee who was doing business and had a PE in India. Its income was being assessed under the head “income from business and profession”. It was required to maintain accounts under section 44AA of the IT Act and prepare accounts under ss. 591 & 594 of the Companies Act;

 

(b) S. 591 of the Companies Act applies only to foreign companies who have established a place of business within India and requires the preparation of a balance sheet and P&L A/c as per s. 594. The obligation in s. 115JA(2) to prepare P&L Account in accordance with Parts II and III of Schedule VI can apply only to a foreign company which has a place of business within India. As the applicant does not have a place of business in India, its preparation of P&L Account in accordance with Parts II & III of Schedule VI cannot be complied;

 

(c) In the ruling, the AAR has not taken into account the Budget Speech, Memorandum & Notes on Clauses explaining the purpose behind introduction of s. 115JA which makes the legislative intent clear that MAT was not intended to apply to foreign companies;

 

(d) Though s. 2(17) defines a “company” to include a “foreign company”, the context of the definition has to be seen. Income, which does not have a source in India, cannot be made part of the book profits. The annual accounts, including the P&L Account, cannot be prepared as per s.115JB(2) in respect of the world income and laid before the company at its AGM in accordance with s. 210 of the Companies Act. The speech of the Finance Minister and the Memorandum explaining the provision also become out of sync if the meaning of “company” appearing in s. 115JB is adopted as ‘foreign company”. Any other meaning would take away force and life from the true intent of the makers of the Act. The contention of the department that there is no demarcation between a ‘domestic company’ and a ‘foreign company’ while applying s. 115JB is not acceptable. As the applicant did not have a place of business in India and was not required to prepare its accounts under s. 594 r.w.s. 591 of the Companies Act, it could not have prepared its accounts in accordance with the provisions of Part II and III of Schedule VI of the companies Act, 1956.

(ii) Accordingly, s. 115JB is not designed to apply to a foreign company which has no presence or PE in India.

(74.1 KiB, 2,446 DLs)

Default u/s 194C does not result in s. 40(a)(ia) disallowance if TDS paid before due date of filing ROI

The assessee made payments to sub-contractors during the previous year and though s. 194C requires TDS at the stage of payment/credit, did not do so. The tax was, however, deducted on 31st March and paid over in Sept before the due date for filing the return. The AO took the view that while the payment made to the sub-contractor for March was allowable, the payments for the earlier months was disallowable u/s 40(a)(ia). This was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal:

Failure to deduct or deposit tax as per s. 194C or Chapter-XVII makes the assessee liable to the consequences provided under the said Chapter-XVII. However, s. 40(a)(ia) is in addition to Chapter XVII. S. 40(a)(ia)(A) provides that if tax is deducted during the last month of the previous year and paid on or before the due date of filing of return as per s. 139(1), then such sum shall be allowed as deduction. In cases where tax is deducted other than the last month of previous year but is deposited before the last day of the previous year, then it will be allowed as deduction. Therefore, the conditions for allowability of deduction are prescribed u/s 40(a)(ia) itself and Chapter-XVII and s. 194C are not relevant. If the condition of deduction and payment prescribed u/s 194C / Chapter XVII are held applicable for disallowance of deduction u/s 40(a)(ia), then s. 40(a)(ia) will be rendered meaningless, absurd and otiose. Since the assessee had (belatedly) deducted tax in the last month of the previous year i.e. March 2005 and deposited the same before the due date of filing the return u/s 139(1), deduction had to be allowed u/s 40(a)(ia) (A).

(47.8 KiB, 1,355 DLs)

Failure to follow High Court’s order is contempt of court

The AO passed an assessment order in which he declined to follow the judgement of the Bombay High Court in CST vs. Pee Vee Textiles 26 VST 281 on the ground that the said judgement “is not accepted by the Sales Tax Department and legal proceeding is initiated against the said judgment”. On a Writ Petition filed by the assessee, the High Court has taken the view that as the said judgement in Pee Vee Textiles is not stayed, “the refusal to follow and implement the judgment of this Court by Mr.Dubey in our considered view prima facie amounts to contempt of this Court”. The Court directed issue of a show-cause notice to the AO as to why action under the Contempt of Courts Act should not be initiated against him.

(137.3 KiB, 1,419 DLs)

If brokerage offered to tax, the principal debt qualifies as a “bad debt” u/s 36(1)(vii) r.w.s. 36(2)

The assessee, a broker, claimed deduction for bad debts in respect of shares purchased by him for his clients. The AO rejected the claim though the CIT (A) upheld it. On appeal by the Revenue, the matter was referred to the Special Bench. Before the Special Bench, the department argued that u/s 36(2), no deduction on account of bad debt can be allowed unless “such debt or part thereof has been taken into account in computing the income of the assessee”. It was argued that as the assessee had offered only the brokerage income to tax but not the value of shares purchased on behalf of clients, the latter could not be allowed as a bad debt u/s 36(1)(vii). HELD rejecting the claim of the department:

(i) In Veerabhadra Rao 155 ITR 152 the Supreme Court held in the context of a loan that if the interest is offered to tax, the loan has been “taken into account in computing the income of the assessee” and qualifies for deduction u/s 36(1)(vii). The effect of the judgement is that in order to satisfy the condition stipulated in s. 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. This principle applies to a share broker. The amount receivable on account of brokerage is a part of debt receivable by the share broker from his client against purchase of shares and once such brokerage is credited to the P&L account and taken into account in computing his income, the condition stipulated in s. 36(2)(i) gets satisfied. Whether the gross amount is reflected in the credit side of the P&L A/c or only the net amount is finally reflected as profit after deducting the corresponding expenses or only the net amount of brokerage received by the share broker is reflected in the credit side of the P&L account makes no difference because the ultimate effect is the same;

(ii) The argument that the loss was suffered owing to breach of SEBI Guidelines framed to safeguard the interest of brokers in respect of amount receivable from the clients against purchase of shares is irrelevant. If the broker chooses not to follow the guidelines, it is a decision taken by him as a businessman having regard to his business relations with the client. The loss cannot be equated to expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. (CIT vs. Pranlal Kesurdas 49 ITR 931 (Bom) followed where bad debts on account of forbidden vayada transactions were held allowable);

(iii) The contention of the Revenue that the sale value of the shares remaining with the assessee should be adjusted against the amount receivable from the client so as to arrive at the actual amount of bad debt should be raised, if permissible, before the Division Bench.

(458.4 KiB, 6,128 DLs)

Professional Firms can have a ‘service PE’. The words “indirectly attributable to the PE” encompass the “force of attraction” principle and even services rendered offshore for Indian projects are assessable in India

The assessee, a UK based law firm, rendered services to clients with operations / projects in India. The assessee did not have an office in India and to render the services, its’ partners and employees visited India. The assessee took the view that as it did not have a permanent establishment (PE) or fixed base in India, its income was not assessable to tax under Articles 7 or 15 of the India-UK DTAA. The AO took the view that as the assessee had furnished services in India for more than 90 days, it had a PE under Article 5(2)(k) of the DTAA. On the quantum, he held that the entirety of the invoices raised by the assessee was assessable in India. On appeal, the CIT (A) upheld the existence of the PE though he held that only the income attributable to the PE was assessable to tax. On appeal to the Tribunal, HELD:

(a) As regards taxability under the domestic law, the argument on the basis of Ishikawajima 288 ITR 408 (SC) & Clifford Chance 318 ITR 237 (Bom) that only services rendered in India are assessable is not acceptable in view of the retrospective amendment to s. 9(1) by the Finance Act, 2010. The result of the amendment is that utilization of the services in India is sufficient to attract taxability in India. The said judgements are no longer good law. (Concept of territorial nexus and source rule discussed);

(b) As regards the DTAA, the question whether a partnership being a “fiscally transparent entity” is entitled to the benefits under the DTAA is entitled to be raised for the first time by the Tribunal suo moto though not raised by the AO or CIT (A). Under Rule 11 of the Tribunal Rules, while the Tribunal cannot enlarge the scope of ‘subject matter of appeal’ inasmuch as a disallowance or addition not made by the lower authorities cannot be made by the Tribunal, within the subject matter of appeal, the Tribunal can examine any aspect of the matter irrespective of whether the same has been examined by the lower authorities or not. There are no restrictions on the Tribunal as to on what grounds the Tribunal decides the appeal provided it hears the affected party before doing so. (Tata Telecommunications 121 ITD 384 (SB) & Morgan Stanley 39 DTR 240 followed);

(c) On merits, though a UK partnership is a “person” under Article 3(2), the question is whether it is a “resident of UK”. Article 4(1) defines a “resident of a Contracting State” to mean a person “liable to tax in that State by reasons of domicile, residence, place of management or any other criterion of similar nature”. According to the OECD Report on Partnerships, mere computation of income at the level of partnership is not sufficient to hold that the partnership firm is ‘liable to taxation’ in the residence country. However, this view is not correct and has also been rejected by India. A partnership is eligible to the benefits of the DTAA provided the entire profits of the firm are taxed in UK – whether in the hands of the firm (after determining taxable income in relation to the personal characteristics of the partners) or in the hands of the partners directly. (International law on the subject discussed in detail);

(d) The argument that a PE cannot be constituted under Article 5(2)(k) if the basic conditions of Article 5(1) are not fulfilled is not acceptable. While clauses (a) to (i) of Article 5(2) are illustrative of the basic rule of a PE (fixed place of business), clauses (j) and (k) are an extension of the basic rule. The items included in the said clauses (j) & (k) are such as would not constitute a PE under the basic rule of Article 5(1), and it is only on account of the deeming fiction provided in Article 5(2)(j)/(k), that it can be treated as a PE;

(e) The argument that the term “furnishing of services” in Article 5(2)(k) of the DTAA does not cover “rendering of services” by lawyers is not acceptable because both terms are used interchangeably in normal course of business;

(f) The argument that as Article 5 refers to commercial and industrial establishments, it cannot cover the rendition of professional services is not acceptable. The Commentary on the OECD Model Convention shows that income derived from professional services or other activities of independent character have to be dealt with under Article 7 as business profits. Accordingly, even professional services are covered by Article 5(2)(k);

(g) The argument that income from professional services can only be taxed under Article 15 (which applies to individuals and not firms) and in case chargeability under Article 15 fails, it cannot be assessed under Article 7 is not acceptable. While professional services rendered by an individual are governed by Article 15, professional services rendered by an enterprise are governed by Article 5(2)(k) read with Article 7. This view is supported by the UN Model Convention Commentary;

(h) As regards the quantum of profits attributable to the PE, the argument that by virtue of Article 7(2), the PE must be assessed by taking the value of services rendered by the PE at the market value of such services in India and not the price at which the assessee billed its’ clients is not acceptable. The fiction of hypothetical independence in Article 7(2) is confined to a PE’s transactions with its head office and branches and does not extend to transactions with third parties. The fiction of hypothetical independence has no role to play in adjusting actual revenues with independent entities. The arms length principle in Article 7(2) is relevant only for intra organization transactions or transactions with associated enterprises. Accordingly, the revenues earned by the assessee are to be taken at actual figures and no adjustments are permissible in the same;

(i) Further, as regards the quantum of profits attributable to the PE, Article 7 (1) provides for the taxability of profits “directly or indirectly attributable” to the PE. The words “profits indirectly attributable to the PE” incorporates the “force of attraction” principle. To give effect to the “force of attraction” principle, in addition to taxability of income in respect of services rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the PE is also to be taxed in India in the hands of the assessee – irrespective of whether such services are rendered through the PE or directly by the GE. There cannot be any professional services rendered in India which are not, at least indirectly, attributable to carrying out professional work in India. This indirect attribution is enough to bring the income from such services within ambit of taxability in India. The two conditions to be satisfied for taxability of related profits are (i) the services should be similar or relatable to the services rendered by the PE in India; and (ii) the services should be ‘directly or indirectly attributable to the Indian PE’ i.e. rendered to a project or client in India. The result is that the entire profits relating to services rendered by the assessee, whether in India or outside, in respect of Indian projects is taxable in India.

(134.9 KiB, 1,499 DLs)

Royalty paid by non-resident does not “arise” in India if there is no “economic link” between the PE and the royalty

The assessee, a Singaporean company with a PE in India, obtained rights from the Global Cricket Council, Singapore, for telecast of cricket matches in India. The AO took the view that the payment for the said rights constituted “royalty” in the hands of GCC u/s 9(1)(vi) & Article 12(7) of the India-Singapore DTAA and that it had arisen in India on the ground that the payer had a PE in India and there was a direct nexus between collection of advertisement revenue in India and payment for the rights. The assessee was held liable u/s 201 for failure to deduct tax u/s 195. On appeal, the CIT (A) disagreed with the AO. On appeal by the department to the Tribunal, HELD dismissing the appeal:

Assuming the payment for obtaining cricket telecast rights is “royalty”, under the first limb of Article 12(7) of the DTAA, royalties can be said to have arisen in India only if the payer is a resident of India. This condition is not fulfilled as the assessee was a non-resident. Under the second limb of Article 12(7), payments made by a non-resident are deemed to arise in India if the non-resident has a PE in India with which the liability to pay the royalties is incurred and such royalties are borne by the PE. This condition is also not fulfilled because the mere existence of a PE in India does not mean that royalties arise in India. In addition to the existence of PE, it is essential that liability to pay such royalties has been “incurred in connection with” and is “borne by” the PE of the payer in India. There must be an “economic link” between the liability for payment of such royalties and PE. As there was no economic link between the payment of royalties and the PE of the assessee in India, the payments to GCC are not incurred “in connection” with the PE in India. Further, the PE was also not involved in any way with the acquisition of the right to broadcast the cricket matches, nor did the PE bear the cost of payments to GCC. Thus the payments to GCC were not “borne by” the PE in India.

(292.3 KiB, 1,092 DLs)

Transfer Pricing TNMM must be applied to transaction margins and not to enterprise level margins. Adjustments must be confined to international transactions

The assessee, engaged in the business of manufacture and export of diamonds and jewellery, claimed that having regard to the nature of the product, none of the transfer pricing methods were applicable for benchmarking the international transactions with associated enterprises. The TPO rejected the argument on the ground that the Transactional Net Margin Method (TNMM) was applicable and made an adjustment by comparing the enterprise level operating margins. This was upheld in principle by the CIT(A). On appeal to the Tribunal, HELD:

(i) It is mandatory for an assessee to follow one of the methods prescribed in Rule 10B and demonstrate that the international transactions entered into by it with an associated enterprise are at arms’ length. The argument that no method is applicable is unsustainable;

(ii) However, the TPO is wrong in adopting the enterprise level margins as the TNMM. U/s 92F (ii) r.w.s. 10B(e), TNMM requires comparison of net profit margins realized by an enterprise from an international transaction(s) and not comparison of operating margins of enterprises;

(iii) Further, the adjustments arising due to computation of ALP should be restricted only to the international transactions and not to the entire turnover of the assessee. No addition can be made to local transactions under Chapter X of the Act.

(319.8 KiB, 1,906 DLs)

DEPB sale proceeds cannot be bifurcated into “profits” and “face value”. The entire amount is “profits” for s. 80HHC r.w.s. 28(iiid)

S. 28 (iiid) provides that “any profit on the transfer” of the DEPB shall be business profits. Under Explanation (baa) to s. 80HHC, 90% of “the sum referred to in s. 28(iiid)” has to be reduced from the business profits. Under the third Proviso to s. 80HHC (3), in the case of an assessee having an export turnover exceeding Rs. 10 crores, the profits referred to in s. 80HHC (3) can be increased by 90% of “the sum referred to in s. 28 (iiid)” only if two conditions are satisfied. If the said conditions are not satisfied, no relief on account of DEPB can be granted u/s 80HHC. In Topman Exports vs. ITO 318 ITR 87 (Mum)(SB)(AT) the Special Bench of the Tribunal held that “the sum referred to in s. 28(iiid)” meant only the “profits” on transfer of the DEPB and not the entire sale proceeds. The Tribunal held that the amount received on account of DEPB had to be bifurcated into the “face value” of the DEPB and the “profit” and that while the “face value” was assessable u/s 28(iiib), the “profit” was assessable u/s 28(iiid). The consequence was that only the “profit” suffered the rigors of the third Proviso to s. 80HHC (3) and not the “face value“. On appeal by the Department, HELD reversing the Special Bench:

The argument that s. 28(iiid) covers only the “profit” (difference between sale consideration and face value of the DEPB credit) and that the “face value” is assessable u/s 28(iiib) is not correct. The entire amount received on transfer of the DEPB credit is “profits” and falls under s. 28(iiid). There was no basis or justification for the Tribunal to hold that the face value of the DEPB credit can be reduced from the sale consideration. It is not permissible to bifurcate the proceeds of the DEPB into “face value” and “excess of face value”. The approach of the Tribunal is misconceived and unsustainable. As the assessee had an export turnover exceeding Rs.10 crores and did not fulfill the conditions set out in the third proviso to s. 80HHC (3), it was not entitled to a deduction u/s 80HHC on the amount received on transfer of DEPB.

(193.7 KiB, 3,396 DLs)

Even exempt income is taxable under MAT / s.115JB

The assessee credited its P&L A/c with an amount of Rs. 149.77 crores being the profit on sale of assets to its wholly owned subsidiary. As the said profits were not chargeable to tax u/s 47(iv), the assessee took the view that the same had also to be reduced from the “book profits” u/s 115JB. The Special Bench had to consider whether exempt income could be excluded from the computation of “book profits” u/s 115JB. HELD deciding against the assessee:

(i) The AO can alter the “book profit” only in two circumstances (a) if the P&L A/c is not drawn up in accordance with Parts II & III of Schedule VI to the Companies Act or (b) If accounting policies & standards, method & rate of depreciation have been incorrectly adopted for preparation of the P & L A/c. Except for the said two cases, the AO has no power to alter the net profit shown in the P&L A/c. Under (a), the AO cannot disturb the Net Profit shown by the assessee where there are no allegations of fraud or misrepresentation but only a difference of opinion as to whether a particular amount should be properly shown in the P&L A/c or Balance sheet;

(ii) Parts II & III of Schedule VI to the Companies Act do not permit the exclusion of capital gain from the P & L A/c. The P & L A/c is required to disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature including capital profits (Veekaylal Investments 249 ITR 597 (Bom) followed). Items referred to in the Notes are a part of the P&L A/c (Sain Processing 221 CTR 493 (Del) followed;

(iii) The assessee had included the said capital gains in the P & L A/c and it was not its’ case that same was not includible. The fact that the capital gains was exempt u/s 47(iv) does not mean it can be excluded from the “book profit” because no such exclusion was permitted under the Explanation to s. 115JB. The taxability of capital gain is relevant only for the purpose of computation of income under the normal provisions and has nothing to do with the computation of “book profits”. {N.J. Jose & Co 217 CTR 479 (Ker) (capital gains exempt u/s 54E) followed};

(iv) The argument that as s. 115JB (4) provides that “save as otherwise provided in this section all other provisions of the Act shall apply” does not mean that the exemption provisions of s. 47(iv) can be read into s. 115JB. This only means that while the computation has to be as per s. 115JB, anything over and above that will be subject to other provisions of the Act. Frig Sales 4 SOT 376 (Mum) overruled);

(v) Accordingly, in the absence of any provision for exclusion of exempted capital gain in the computation of book profit u/s 115JB, the assessee is not entitled to the exclusion claimed.