(118.1 KiB, 1,696 DLs)

Appointment of Vice President of the ITAT is by merit-based selection and not seniority. No reservation for OBC

Shri. B. R. Mittal & Shri. Sunil Kumar Yadav, Members, ITAT, filed petitions challenging the selection process for appointment to the three posts of Vice-President, ITAT.

Shri. Mittal contended that he had been wrongly superceded to the post of Vice-President (VP) by Shri. Tyagi, a junior Member. It was claimed that appointment to the post of VP was only a designation which had to go by seniority and that even if it were regarded as a promotion, an incumbent having requisite benchmark had necessarily to be promoted and could not be superseded by his juniors. On merits, it was contended that the Member who had been selected as VP was “under cloud” and these facts were not placed before the selection committee. It was also pleaded being under the administrative and financial control of a junior Member would be embarrassing.

Shri. Sunil Kumar Yadav contended, relying on the judgement of the CAT in G. E. Veerabhadrappa vs. UOI that as appointment to the post of Vice-President is by of direct recruitment, two (out of nine) posts of VP had to be reserved for OBC and that he, being OBC, should be appointed VP. HELD dismissing both petitions:

(i) Re B. R.Mittal: The scheme of the ITAT (Members) Rules, 1963 makes it clear that the post of a Member is different from that of Vice-President. While appointment of Member is by way of direct recruitment open to all who answer the eligibility criteria, appointment to the post of Vice-President has to made from amongst the Members by the method of selection. It cannot be said that a senior Member should automatically be appointed Vice-President. (G. E. Veerabhadrappa vs. UOI followed). In a selection, supersession is possible as the best person suited for the job has to be found irrespective of seniority;

(ii) The selection committee would have considered aspects relating to the efficiency, performance, capacity to work, quality of judgments and other attributes of the Members in the zone of consideration for selection. The fact that a chart of comparison was not prepared does not mean that comparative merit was not considered by the selection committee. Mention of comparative merit need not be made as it could be counter-productive and lead to bitterness. A citizen must have faith in the system rather than crying foul when he has not been able to make it on merits;

(iii) On facts, the challenge to the selection of the junior Member on the basis of adverse material is not acceptable because all that happened was that the said Member was issued a show cause and asked to remedy certain defects. After reply to the notice, no action was taken against him. A legitimate presumption can be made that the said Member improved after that incident;

(iv) Re SK Yadav: The appointment to the post of President and VP is by way of selection based on merit and not by way of promotion. No reservation can apply where the appointment is not by way of direct recruitment. Observations made in G.E. Veerabhadrappa vs. UOI that the appointment of VP is by way of direct recruitment are obiter and of no legal effect.

(292.7 KiB, 2,012 DLs)

Difference between Operating Lease, Finance Lease & Hire-Purchase explained

S. 65(12) & 65(105)(zm) of the Finance Act, 1994 levies service tax on leasing and hire purchase transactions. The constitutional validity of the said provisions was challenged primarily on the ground that as under Article 366(29A) of the Constitution hire-purchase and leasing transactions are deemed to be a ‘sale’ and liable to sales-tax, only the State Legislature has jurisdiction to impose tax and not Parliament. HELD dismissing the challenge:

(i) The circulars and guidelines issued by RBI read with AS-19 “Accounting for Leases” issued by the ICAI show that the equipment leasing and hire-purchase are activities undertaken by NBFCs and banks are regulated as para-banking activities by the RBI. Such activities of leasing & hire-purchase are financing activities and that fall within the meaning of the words “banking and other financial services” for purposes of service tax. The taxable event is rendition of service and it is not a tax on material or sale;

(ii) In a hire-purchase, there is a hire of goods with the option to purchase. If that is the real effect of the agreement there is no contract of sale until the hirer has made the required number of payments and he remains a bailee till then. But some so-called hire-purchase agreements are in reality contracts to purchase; the price to be paid by installments and in those cases the contract is a contract of sale and not of hiring. However, if the intention of the financing party in obtaining the hire-purchase and the allied agreements is to secure the return of the loan advanced to its customer the transaction would be merely a financing transaction;

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(451.9 KiB, 3,552 DLs)

Income from supply of ‘shrink-wrapped’ software assessable as ‘royalty’. A tax-treaty can be unilaterally overridden

Till 31.12.1998, Microsoft Corporation directly entered into agreements with Indian distributors for sale of Microsoft products being “off the shelf”/ “shrink wrapped” software, on principal to principal basis. The Indian Distributors, in turn, sold these Microsoft products to re-sellers/consumers. The business model was changed w.e.f. 1.1.1999. Microsoft Corp granted an exclusive license to its 100% subsidiary Gracemac Corp, USA, to manufacture and distribute in the territory the MS retail software products. Gracemac in turn, entered into a license agreement with Microsoft Operations Pte Ltd, Singapore (“MO”), under which it granted the latter a license to manufacture and distribute (reproduce) Microsoft software in Singapore in consideration of a royalty ranging from 30% to 40% of the selling price (in India). MO in turn entered into a distribution agreement with Microsoft Regional Sales Corporation, USA (“MRSC”), appointing the latter as distributor for selling the Microsoft software which were manufactured by MO. MRSC, in turn, entered into agreements with various distributors in various countries including India. The distributors distributed copies of software in their respective countries. MO sold the software copies to MRSC in Singapore. The Microsoft software copies are delivered by MRSC to the Indian Distributors “ex-warehouse” in Singapore. The distributor sold the products to re-sellers in India who, in turn, sold them to end users. Microsoft Corp entered into agreements with end users to use the software products licenced to them as per terms of agreement.

In the case of Microsoft Corp (till the change), the assessee accepted that income from licensing software to OEMs was “royalty” though it argued that income from licensing software to distributors was “sale of a copyrighted article” and not assessable in India for want of a PE. In the case of Gracemac (after the change), it was argued that as the royalty was received from a Singapore company (MO), the source of the royalty (though based on sales in India) was not in India and consequently not assessable in India. In the case of MRSC, it was argued that revenue was derived from sales of software to independent distributors and not from licensing and the revenue was not assessable to tax in India for want of a PE. The AO & CIT (A) took the view that the revenue received by all three parties was assessable as “royalty” under s. 9(1)(vi) as well as Article 12 of the India-USA DTAA. On appeal to the Tribunal, HELD:

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(81.6 KiB, 1,362 DLs)

While interest u/ss 234A to 234C are applicable to settlement commission proceedings, it is payable only up to the s. 245D(1) order and cannot be levied u/s 154

In the light of the divergent judgements of the Supreme Court in Anjum Ghaswala 252 ITR 1, Hindustan Bulk Carrier 259 ITR 449 and Damani Brothers 259 ITR 475, a reference was made to the Full Bench of the Supreme Court to answer the questions (i) whether ss. 234A, 234B & 234C were applicable to Settlement Commission proceedings, (ii) whether such interest is payable up to the date of the s. 245D(1) order or up to the date of the s. 245D (4) order and (iii) whether the Settlement Commission can re-open its concluded proceedings by having recourse to s. 154 so as to levy interest u/s 234B, if it was not done in the original proceedings?

HELD by the Full Bench:

(i) Though Chapter XIX- A is a self-contained Code, the procedure to be followed by the Settlement Commission u/s 245C and 245D is nothing but assessment or computation of total income which takes place at the s. 245D(1) stage. In that computation, provisions dealing with a regular assessment, self-assessment and levy and computation of interest for default in payment of advance tax, etc. are engrafted. Accordingly, ss. 234A to 234C are applicable;

(ii) Interest under ss. 234A to 234C is payable only up to the date of the s. 245D (1) order and not up to the date of the s. 245D (4) order. In a case where 90% of the assessed tax is paid but on the basis of the Commission’s order u/s 245D(4) the advance tax paid turns out to be less than 90% of the assessed tax as defined in the Explanation to s. 234B(1), no interest is payable for shortfall. The Legislature has not contemplated levy of interest between the s. 245D (1) stage and the s. 245D (4) stage. Interest u/s 234B is chargeable only till the order of the Settlement Commission u/s 245D(1), i.e., admission of the case;

(iii) In view of s. 245I which provides that the order of the Settlement Commission shall be final and conclusive and also in view of the controversy as to liability for interest, the Settlement Commission cannot re-open concluded proceedings by having recourse to s. 154 to levy interest u/s 234B if it was not done in the original proceedings.

(274.3 KiB, 1,039 DLs)

Q whether notional interest on interest-free security deposit is includible in ‘house property’ income referred to Full Bench

The assessee let out property on a rent of Rs. 90,000 per month and also received interest-free security deposit of Rs. 8.58 crores. The property was not subject to the Rent Control Act. The assessee claimed that only the rent could be taken into account for determining the ‘annual value’ of the property and not the notional interest on the deposit. The AO determined the ‘annual value’ u/s 23(1)(a) by adding Rs. 30 lakhs of notional interest. The CIT (A) and Tribunal deleted the addition by holding that the rateable value as determined by the MCD had to be taken as the “fair rent” u/s 23(1) (a) and the notional interest could not be added either u/s 23(1)(a) or u/s 23(1)(b). On appeal by the department HELD:

(i) Though in J. K. Investors 248 ITR 723 (Bom), it was held that notional interest could not be considered for s. 23(1)(b), the question with regard to s. 23(1)(a) was left open. Also, the property there was covered by the Rent Control Act. In Satya Co. Ltd 140 CTR (Cal) 569 it was held that the fair rent fixed under the municipal law takes into consideration everything and it is not permissible to add the notional interest either u/s 23(1)(a) or u/s 23(1)(b). In Asian Hotels 215 CTR (Del) 84 it was held that notional interest could not be included u/s 23(1)(a);

(ii) However, the moot question is that when it is found that such rateable value fixed by the Municipal authorities may not represent the correct value, would that still be taken as a yardstick for s. 23(1)(a). The huge interest-free deposit of Rs. 8.58 crores does not appeal to reason when the rent is a meager amount of Rs. 90,000 per month. The AO might ultimately form an opinion that there would be reasonable expectation that the property would fetch higher rent than the contractual rent, even when the contractual rent is more than the annual value fixed by the MCD. The question would be as to whether in such circumstances, he may ignore the annual value fixed by the Municipal authorities and come to a conclusion that the property would reasonably fetch a rent, which is more than the actual rent received? To put it otherwise, can the AO, in such circumstances, take into consideration the notional interest to arrive at the same which the property might reasonably be accepted to let for year to year? If so, the next question would be whether it can be done in all cases or in some glaring cases like the present one where security deposit is not equivalent to six months to three years of rent but completely disproportionate to the actual contractual rent? Even if the notional interest is not to be added, can such a huge interest free security deposit (which does not appear to have any rationale with the agreed rent) be totally ignored while determining the “fair rent” which the property might reasonably be expected to yield? Or else, in a case like this, can it be inferred that the tenant paid part rent by giving interest-free deposit and agreed rent is not what reflected in the lease deed, but part of it is hidden in the form of security?

(iii) These aspects were not considered in the earlier judgements as such abnormal circumstances did not exist in those cases. The issue should accordingly be referred to the Full Bench to consider the aspects touching the interpretation that needs to be given to s. 23(1) (a).

(695.4 KiB, 1,510 DLs)

If AO does not assess income for which reasons were recorded u/s 147, he cannot assess other income u/s 147

In the department’s appeal, the Court had to consider the question whether if the AO issues a notice u/s 148 to assess/ reassess a particular item of income but does not assess/reassess that income, is it open to the AO to assess any other item of income. HELD dismissing the appeal:

(i) S. 147 provides that the AO may assess the income which has escaped assessment “and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section”. Explanation 3 to s. 147 inserted by F (No. 2) Act, 2009 w.r.e.f 1.4.1989 provides that the AO “may assess or reassess the income in respect of any issue … notwithstanding the reasons for such issue have not been included in the reasons recorded …”

(ii) The words “and also” indicate that reassessment must be with respect to the income for which the AO has formed an opinion and also in respect of any other income which comes to his notice subsequently. However, if the AO accepts the objection of the assessee and does not assess the income which was the basis of the notice, it is not open to him to assessee income under some other issue independently;

(iii) Explanation 3 to s. 147 was inserted to supersede the judgements in Vipin Khanna 255 ITR 220 (P&H) & Travancore Cements 305 ITR 170 (Ker) where it was held that the AO could not assess income in respect of issues unconnected with the issue for which the notice was issued. However, Explanation 3 does not affect the judgements in Shri. Ram Singh 306 ITR 343 (Raj) & Atlas Cycle Industries 180 ITR 319 (P&H) where it was held that if the AO accepted that the reasons for which the notice was issued were not correct, he would cease to have jurisdiction to proceed with the reassessment;

(iv) Explanation 3 lifts the embargo inserted by judicial interpretation on the making of a s. 147 assessment in respect of items not referred to in the recorded reasons. However, it does not and cannot override the substantive part of s. 147 that the income for which the notice was issued must be assessable.

(537.9 KiB, 1,285 DLs)

Non-residents are not liable to pay interest u/s 234B. S. 234D applies from AY 2004-05 and is not retrospective

The assessee, a foreign company, filed a return declaring income of Rs.96 lakhs. Pursuant to the assessment, the AO levied interest u/s 234B on the ground that the assessee had not paid adequate advance-tax. The AO rejected the submission of the assessee that as the payer was liable to deduct tax at source, the assessee was not liable to pay advance tax. The AO also levied interest u/s 234D despite the assessee’s claim that s. 234D only applied from AY 2004-05 and not for earlier years. The assessee’s appeal was allowed by the CIT (A) and the Tribunal. On appeal by the department, HELD dismissing the appeal:

(i) U/s 209(1)(d), the tax “deductible or collectible at source” has to be reduced from the advance-tax payable. S. 195 puts an obligation on the payer to deduct tax at source. Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payee to the non-resident. The non-resident recipient is not liable to pay advance-tax. Though in Anjum Ghaswala 252 ITR 1 it was held that s. 234B is mandatory, the present is a case where s. 234B does not apply at all. Accordingly, it is not permissible for the Revenue to charge interest u/s 234B. Sedco Forex International Drilling Co. Ltd 264 ITR 320 NGC Network Asia 313 ITR 187 (Bom) followed;

(ii) S. 234D inserted by the FA 2003 w.e.f. 1.6.2003 is in the nature of a substantive provision and applies only for the AY 2004-05 and onwards and is not retrospective. A provision by which an authority is empowered to levy and collect interest, even if construed as forming part of the machinery provisions, is substantive law for the simple reason that in the absence of contract or usage interest can be levied under law and it cannot be recovered by way of damages for wrongful detention of the amount. ITO vs. Ekta Promoters 305 ITR 1 (SB) (Del) approved)

(86.8 KiB, 997 DLs)

As S. 234D was inserted w.e.f. 1.6.2003, it is not retrospective

In answer to the question raised by the department as whether interest u/s 234D can be charged in respect of refunds granted prior to 1.6.2003 it was held that as s. 234D came on the statute w.e.f. 1.6.2003, it did not have retrospective effect.

(37.5 KiB, 1,274 DLs)

Under Art 26(3) of India-USA DTAA payments to Non-Residents are equated with payments to Residents & so s. 40(a)(i) disallowance not valid

The assessee made payments to Master Card and VISA Card, international credit card companies, based in USA, for services in respect of credit cards issued by the assessee. As the assessee had not deducted tax at source on payments made, the AO disallowed the claim of deduction u/s 40(a)(i). The CIT (A) upheld the disallowance on the ground that VISA & Mastercard had a permanent establishment in India through the networking computers and leased telephone lines and the sums paid to them were taxable in India. In appeal before the Tribunal, the assessee raised the alternative argument that even if the income of Master Card and VISA was taxable in India, no tax was required to be deducted in view of Article 26(3) of the India-USA DTAA which protects the non residents against any discrimination vis-à-vis residents. HELD allowing the appeal:

Article 26(3) of the India-USA DTAA protects the interest of non residents vis-a-vis residents. Article 26(3) provides that payment made to a non-resident will be deductible under the same conditions as if the payment were made to a resident. The exceptions provided in Article 26(3) are not applicable on facts. As per s. 40(a)(i), no disallowance can be made in respect of payments to residents on the ground of non-deduction of tax at source. Therefore, in view of Article 26(3), no disallowance can be made even in case of payments to non-residents even if the amount is found taxable in India in their hands. Herbal Life International 101 ITD 450 (Del) followed.

(153.0 KiB, 831 DLs)

Non-occupancy charges are exempt on ground of mutuality even if in excess of limits

In Mittal Court Premises Co-op Society vs. ITO 320 ITR 414, the Bombay High Court held that non-occupation charges paid by a member to a commercial co-op society was covered by the principle of mutuality and so was not chargeable to tax. In the last paragraph of the judgement, the Court held that even if the charges were in excess of the limits imposed by the notification issued by the Government, still the principles of mutuality would apply.

Though the judgement is reported in 320 ITR 414, the said last paragraph has been omitted to be printed therein. The said last paragraph reads as follows:

“Apart from that even assuming that these Government Notifications were applicable if the society could not have charged excess amount it will have to be refunded to the members. A member is not prohibited from gifting any amount to the society for the objects of the society. The principle of mutuality would not cease on account of these aspect. At the highest, authorities under the Co-operative Societies Act and Rules if any action is taken may direct an additional amount to be refunded. In our opinion, therefore, contribution by way of non occupancy charges, principle of mutuality would apply and consequently,”