(1.6 MiB, 874 DLs)

S. 132: Cash seized in search has to be adjusted against “Advance Tax”

Pursuant to a search u/s 132, cash was seized from the assessee and third parties and assessed as the assessee’s income. Though the assessee requested that the said seized cash be treated as payment of “advance tax”, the AO ignored the same and levied interest u/s 234A, 234B & 234C on the basis that advance tax had not been paid. On appeal, the CIT (A) relied on Central Provinces Manganese 160 ITR 961 (SC) and held that the ground was not maintainable. It was also held that cash seized from third parties could not be treated as the assessee’s payment of advance tax. On appeal by the assessee, HELD allowing the appeal:

(i) S. 246 permits an appeal to be filed when the assessee “denies his liability to be assessed”. The levy of interest u/s 234A to 234C is a part of the process of assessment. The expression “denies his liability to be assessed” does not mean a total denial of liability. Even a partial denial of the assessment i.e. of the liability to pay interest is covered and the appeal is maintainable (C. P Manganese 160 ITR 961 (SC) explained, Kanpur Coal Syndicate 53 ITR 225 (SC) & JK Synthetics 119 CTR 222 (SC) followed);

(ii) On merits, s. 132B (1) provides that the assets seized u/s 132 may be adjusted against the amount of any “existing liability” and the liability determined on completion of the assessment. The expression “existing liability” cannot be ascribed a restricted meaning. The liability to pay advance tax is an “existing liability” and so the cash seized ought to have been adjusted against that liability. The cash seized from third parties, having been assessed in the assessee’s hands, retains the same character as cash seized from the assessee (Sudhakar Shetty 10 DTR (Mum) 173 followed).

(328.8 KiB, 947 DLs)

Amount paid for non-compete rights while acquiring business is capital expenditure

The assessee acquired the mailing business of Kilburn Office as a going concern on a slump sale basis pursuant to a Business Transfer Agreement. The consideration for the transfer was Rs. 18.92 crores which included Rs. 5.94 Crores by way of non-compete fee for a period of 5 years. In the accounts, the expenditure was treated as a capital payment though a deduction was claimed in the computation u/s 37(1). The AO disallowed the claim though the CIT (A) allowed it as deferred revenue expenditure. On appeal by the department, the Tribunal reversed the CIT (A) following Tecumesh India 132 TTJ 129 (Del) (SB) though it directed the AO to consider whether the payment was an “intangible asset” for purposes of depreciation. On appeal by the assessee, HELD dismissing the appeal:

In the books, the assessee treated the non-compete expenditure as capital in nature. Warding off competition in business even to a rival dealer will constitute capital expenditure. It is not necessary that the non-compete fee has to be paid to create monopoly rights. The non-compete agreement was to last for 5 years, which period is sufficient to give enduring benefit (Tecumesh India 132 TTJ 129 (Del) (SB) approved; Eicher Ltd 302 ITR 249 (Del) distinguished; Q whether depreciation is eligible left for determination by AO).

(562.3 KiB, 1,503 DLs)

S. 9: Profits from offshore supply of equipment & software not taxable in India

The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment and software. The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The equipment was not to be accepted by the customer till the acceptance test was completed (in India). The assessee claimed that the income arising from the said activity was not chargeable to tax in India. The AO & CIT (A) held that the assessee had a “business connection” in India u/s 9(1)(i) & a “permanent establishment” under Article 5 of the DTAA. It was also held that the income from supply of software was assessable as “royalty” u/s 9(1)(vi) & Article 13. On appeal, the Special Bench of the Tribunal (Motorola Inc 95 ITD 269 (Del)) held that as the equipment had been transferred by the assessee offshore, the profits therefrom were not chargeable to tax. It was also held that the profits from the supply of software was not assessable to tax as “royalty”. On appeal by the department to the High Court, HELD dismissing the appeal:

(i) The profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed installation service in India. The fact that the contracts were signed in India could not by itself create a tax liability. The nomenclature of a “turnkey project” or “works contract” was not relevant. The fact that the assessee took “overall responsibility” was also not material. Though the supply of equipment was subject to the “acceptance test” performed in India, this was not material because the contract made it clear that the “acceptance test” was not a material event for passing of the title and risk in the equipment supplied. If the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a “business connection” in India. The question whether the assessee had a “Permanent Establishment” was not required to be gone into (Ishikawajma Harima 288 ITR 408 (SC), Skoda 172 ITR 358 (AP) & Mahavir Commercial 86 ITR 147 followed);

(ii) The argument that the software component of the supply should be assessed as “royalty” is not acceptable because the software was an integral part of the GSM mobile telephone system and was used by the cellular operator for providing cellular services to its customers. It was embedded in the equipment and could not be independently used. It merely facilitated the functioning of the equipment and was an integral part thereof. The fact that in the supply contract, the lump sum price was bifurcated is not material. There is a distinction between the acquisition of a “copyright right” and a “copyrighted article” (Tata Consultancy Services 271 ITR 401 (SC) Sundwiger EMFG 266 ITR 110 & Dassault Systems 229 CTR 125 (AAR) followed).

(33.5 KiB, 1,142 DLs)

S. 147: If AO disputes Audit objection, she cannot use that as “reason to believe”

The Revenue Audit raised an objection that the assessee had made remittances to foreign parties without deduction of TDS u/s 195 and that the expenditure ought to have been disallowed u/s 40(a)(i). In reply, the AO wrote back stating that as the amounts remitted to the foreign parties were not chargeable to tax in India, the assessee was under no obligation to deduct tax u/s 195 and that the expenditure was not disallowable u/s 40(a)(i). However, she still issued a notice u/s 147 and reopened the assessment to disallow the said expenditure. The assessee filed a Writ Petition to challenge the reopening. HELD allowing the Petition:

U/s 147, it is only the AO’s opinion with respect to the income escaping assessment which is relevant for the purpose of reopening an assessment. While it is true if the audit party brings certain aspects to the notice of the AO and thereupon, the AO forms his own belief, it may be a valid basis for reopening assessment, the mere opinion of the Audit Party cannot form the basis for the AO to reopen an assessment. On facts, the AO had categorically come to the conclusion that the objection of the audit party was not valid and that the assessee’s explanation with respect to non-requirement of collection of TDS was required to be accepted. Accordingly, the AO could have no “reason to believe” that income had escaped assessment and so the s. 148 notice was without jurisdiction (P. V. S. Beedies 237 ITR 13 (SC) & Indian & Eastern Newspaper 119 ITR 996 (SC) distinguished; Lucas TVS 249 ITR 306 (SC) followed).

(157.2 KiB, 810 DLs)

S. 245R(2): Pendency of question in payee’s hands disbars payer’s application

The Applicant, a PSU, entered into an offshore services contract with a Russian company for setting up a power plant. The Applicant claimed that the income arising to the Russian company from offshore supply of equipment was not chargeable to tax in India and that it was not liable to deduct/ bear TDS thereon u/s 195. However, as in the assessment of the Russian company, the AO had already taken the view that the income from offshore supply was chargeable to tax u/s 44BBB and the issue was pending before the Tribunal, the question arose whether the application was maintainable in view of clause (1) of the Proviso to s. 245R(2) which provides that an application is not maintainable if the question raised in it “is already pending before any income-tax authority or Appellate Tribunal, or any Court.” The Applicant claimed that the pendency in the case of the recipient did not affect the maintainability in the context of the payer’s obligation to deduct tax u/s 195. HELD rejecting the application:

The argument that the pendency of the question in the case of the recipient cannot bar the application in the case of the payer is not acceptable because an “advance ruling” is a determination in relation to a “transaction”. A “transaction” always involves the payer and payee. It is not possible to separate an applicant from a transaction while he is seeking a Ruling, since the Ruling relates to a transaction undertaken by him or to be undertaken by him. A ruling also cannot be divorced from a transaction. The question posed before the income-tax authorities in the case of the recipient and before the AAR in the case of the payer is the same, namely, whether the income is assessable to tax. Consequently, the bar in s. 245R(2) applies and the payer’s application is not maintainable. The contrary view taken by the AAR in Airports Authority of India In re 168 Taxman 158 is not correct (Foster (AAR No. 975 of 2009) followed).

(36.3 KiB, 948 DLs)

S. 147: AO cannot assess other “escaped income” if reason for issue of s. 148 notice dropped

The AO reopened the assessment u/s 148 on the ground that certain income had escaped assessment. However, in the reassessment order, the AO did not assess the income which was referred to in the reasons but instead assessed other income which had escaped assessment. The Tribunal quashed the reassessment order on the ground that if the AO did not assess the income for which he had reopened the assessment, he had no jurisdiction to assess other escaped income. The Department challenged the Tribunal’s order by relying on Explanation 3 to s. 147 & Sun Engineering 198 ITR 297 (SC). HELD dismissing the appeal:

If the AO does not assess the income in respect of which the s. 148 notice was issued, it means there was no ‘reason to believe’ that income had escaped assessment. If so, the AO has no jurisdiction to assess any other escaped income that comes to his notice during the reassessment proceedings. Though in Sun Engineering 198 ITR 297 (SC), it was held that the AO had jurisdiction to assess other income, it was not a case where the AO had not assessed the income in respect of which the s. 148 notice was issued. Explanation 3 to s. 147 also contemplates that the income in respect of which the s. 148 notice is issued is assessed (Jet Airways 331 ITR 236 (Bom) & Ranbaxy Lab 60 DTR 77 (Del) followed).

(26.5 KiB, 829 DLs)

S. 153A: Assessments pending in appeal do not abate

For AY 2002-03, an addition of Rs. 99 lakhs was made by the AO & confirmed by the CIT (A). During the pendency of the appeal before the Tribunal, a search under s. 132 was conducted and s. 153A proceedings were initiated. The Tribunal held that in view of the s. 153A notice, the assessments of the six preceding assessment years prior to the date of search abated and that assessments pending in appeal would stand merged in the fresh assessment to be made by the AO u/s 153A pursuant of the search. The AO was directed to reconsider the additions in the s. 153A assessment. On appeal by the department, HELD reversing the Tribunal:

The second proviso to s. 153A provides that “assessments relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search u/s 132 shall abate“. The words “pending on the date of initiation of search” has to be assigned simple and plain meaning. If the assessment is finalized, there are no “pending proceedings” to be abated. The pendency of an appeal does not mean that the assessment proceedings are pending. The word ‘abatement‘ refers to something, which is pending or alive and its suspension or termination. Proceedings which are complete are not liable for abatement (Circular No.7 of 2003 dated 5.9.2003 referred)

(542.7 KiB, 1,368 DLs)

S. 194-I TDS: To be “Rent”, payee must have “control” over asset

The assessee, a SEB, entered into an agreement with NTPC for purchase of power and another with Power Grid Corporation for transmission of the power from NTPC’s ‘bus bars’ to the delivery point. The AO & CIT (A) took the view that the transmission charges paid by the assessee to Power Grid was “rent for use of plant” and tax ought to have been deducted u/s 194-I. The argument that as the payee had been assessed, no recovery could be made from the payer was also rejected. The assessee was held liable for failure to deduct TDS. On appeal by the assessee, HELD allowing the appeal:

(i) S. 194-I defines “rent” to include any payment, by whatever name called, under any lease, agreement or arrangement “for the use of” any machinery or plant. For a payment to be construed as “rent”, it is a condition precedent that the payer should have some control over the asset. There is a distinction between ‘the use of an asset’ and the ‘benefit derived from an asset’. In a transaction of hire/ leasing, the possession of the goods and its effective control is given to the customer and the customer has the freedom and choice of how to use the asset. On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the owner, the control of the asset remains with the owner and there is no “use” by the customer (Asia Satellite 332 ITR 340 (Del) followed, Japan Airlines 325 ITR 298 (Del) & Krishna Oberoi 257 ITR 105 (AP) distinguished;

(ii) On facts, the transmission lines were under the possession & control of Power Grid. The assessee was merely enabled to use the services of transmission of electricity and not the use of transmission wires per se. The assessee was not involved in the in the actual operations of the transmission lines. The transmission wires were also used by other customers of Power Grid. Consequently, the payments were not “rent” u/s 194-I;

(iii) Under the Explanation to s. 191, a person can be treated as an assessee in default u/s 201(1) only when, apart from the lapse in deduction of tax at source, the recipient of income has failed to pay such tax directly. S. 201(1) imposes vicarious (and not penal) liability on the payer to make good the shortfall in tax collection. If the tax liability is discharged by the recipient of income, the vicarious liability cannot be invoked.

(208.4 KiB, 1,969 DLs)

S. 194-I: Distinction between “hire of vehicles” & “transportation contract”

The assessee paid “hire charges” for hiring helicopter & aircraft services and deducted TDS at 2% u/s 194C. The AO & CIT (A) held that the assessee ought to have deducted TDS at 22.44% u/s 194-I on the ground that “vehicles” were “plant and machinery” and the assessee had “hired” the vehicles and not merely taken services for carrying passengers or goods. The assessee was held liable to pay the deficit u/s 201. On appeal by the assessee, HELD allowing the appeal:

The department’s argument that the assessee has hired helicopter/air craft/vehicle is not correct because these were not hired on a periodic basis or on day-to-day basis. Instead, the transport services provided by the transporters were availed of. The assessee paid charges on the basis of flying hours, cost of landing charges and refuelling charges, etc. The crew, fuel, maintenance operation licences, etc. were all under the control of the service providers and not under the control of the assessee. If the assessee does not enjoy control over the vehicles and if the running and maintenance expenditure is borne by the transport service providers, the contract is not one for the “hiring” but is merely for availing transportation services. Payment for transportation services is not covered by s. 194-I (Accenture Services 44 SOT 290 (Mum), Tata AIG 43 SOT 215 (Mum) and Ahmedabad Urban Development Authority followed).

(188.1 KiB, 1,239 DLs)

S. 2(22)(e) does not apply to “non-gratuitous” advances to substantial shareholder

The assessee, a substantial shareholder in a closely held company, let out his flat to the company and also permitted it to place it on mortgage. In consideration, the company passed a resolution authorizing the assessee to obtain from the company an interest-free deposit up to Rs.50 lakhs. He also received an amount by way of “security deposit”. The AO assessed the said “advances/ deposits” as “deemed dividend” u/s 2(22)(e). The CIT (A) deleted the addition though the Tribunal upheld it. On appeal by the assessee, HELD reversing the Tribunal:

The phrase “by way of advance or loan” s. 2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares. If such loan or advance is given to such share holder as a consequence of any further consideration received from the shareholder, then such advance or loan cannot be said to be “deemed dividend” u/s 2(22)(e). Thus, while gratuitous loan or advance given by a company to a substantial shareholder comes within the purview of s. 2(22)(e), a case where the loan or advance is given in return to an advantage conferred upon the company by the share holder does not. On facts, as the advance was in lieu of the company being permitted to mortgage the assessee’s falt, it was not “gratuitous” and so not assessable as “deemed dividend” (Creative Dyeing 318 ITR 476 (Del) & Nagindas Kapadia 177 ITR 393 (Bom) followed).