(174.6 KiB, 2,379 DLs)

Despite Retro Law By Finance Act 2012, “Royalty” Not Taxable as DTAA prevails

The assessee, a Mauritius company, made payment to Panamsat, USA, for hire of a “transponder satellite”. The AO held that the said hire charges constituted “royalty” and that the assessee ought to have deducted TDS u/s 195 and that as it had not done so, the amount was to be disallowed u/s 40(a)(ia). Before the Tribunal, the department argued that though as per Asia Satellite 332 ITR 340 (Del), the hire charges were not assessable as “royalty”, this verdict was no longer good law in view of the amendment to s. 9(1)(vi) by the Finance Act 2012 w.r.e.f. 1.4.1976 to provide that such hire charges shall be assessable as “royalty”. HELD by the Tribunal:

(i) In Asia Satellite 332 ITR 340 (Del) it was held that in order to constitute “royalty”, the payer must have the right to control the equipment. A payment for a standard service would not constitute “royalty” merely because equipment was used to render that service. A similar view was taken in Skycell Communications 251 ITR 53 (Mad). In De Beers (Kar) & Guy Carpenter (Del) it was held that to “make available” technical knowledge, mere provisions of service was not enough and the payer had to be enabled to perform services himself. The department’s argument that the amendments by the Finance Act, 2012 changes the position is not acceptable because there is no change in the DTAA between India and USA and the DTAA prevails where it is favourable to the assessee;

(ii) Even otherwise as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, s. 195 will not apply as held in Vodafone International Holdings B.V. 341 ITR 1 (SC). As s. 195 did not apply, no disallowance can be made u/s 40(a)(i);

(iii) Further, as prior to the insertion of s. 40(a)(ia) in AY 2004-05, payments to a resident did not require TDS, under the non-discrimination clause in the DTAA, the disallowance u/s 40(a)(i) in the case of non-residents cannot be made as held in Herbalife International 101 ITD 450 (Del), Central Bank of India & Millennium Infocom Technologies 21 SOT 152 (Del).

(195.5 KiB, 998 DLs)

Tax implications of a “Dependent Agent Permanent Establishment” explained

The assessee, a Mauritius company, was engaged in telecasting TV channels. It had an advertisement collection agent in India who collected revenue from time slots given to Indian advertisers. The assessee claimed that its profits from India were not chargeable under the DTAA because (i) it did not have a PE and (ii) assuming the agent was a PE, the agent had received an arms’ length fee from the assessee and further profits could not be attributed. The department relied on DHL Operations B.V. 142 TM 1 (Mum) and claimed that as the assessee was dependent on the Indian agents, the Indian agents constituted a “Dependent Agent PE” and that despite arms’ length fee to the agents, profits were attributable to the DAPE. HELD by the Tribunal:

(i) Under Article 5(4) of the DTAA, an “agent” (other than one of independent status) is deemed to be a PE if he “habitually exercises” the authority to conclude contracts. On facts, the agent was not the decision maker and had no authority to conclude contracts or to fix the rate or to accept an advertisement. It merely forwarded the advertisement to the assessee. Accordingly, there was neither legal existence of authority, nor evidence to show “habitual exercise” of authority.

(ii) Under Article 5(5), an agent is deemed not to be of independent status when his activities are devoted exclusively or almost exclusively to the non-resident enterprises. Though in DHL Operations B.V. 142 TM 1 (Mum) it was held that the question whether the agent is “dependent” has to be seen from the perspective of the non-resident principal, this view cannot be followed because it is contrary to the language of Article 5(5). The wordings refer to the activities of an agent and its devotion to the non-resident and not the other way round. The perspective should be from the angle of the agent and not of the non-resident. As the income from the assessee was only 4.69% of the agent’s income, the agent was not a “dependent agent” (Morgan Stanley 272 ITR 416 (AAR) & Rolls Royce (Del) followed);

(iii) Even assuming that there was a DAPE, as the agent had been remunerated at arms’ length basis, no further profit is attributable to the PE as per Circular No. 742 dated 2.5.1996, Set Satellite 307 ITR 205 (Bom) & BBC Worldwide 203 TM 554 (Del)

(314.0 KiB, 1,971 DLs)

S. 194A TDS: Discounting Charges Is Not “Interest”

The assessee paid Rs. 3.97 Crores to an associate concern in Singapore on account of discounted charges for getting the export sale bills discounted. The AO held that that the discounting charges was “interest” u/s 2(28A) and that as there was no TDS, the expenditure had to be disallowed u/s 40(a)(i). This was reversed by the CIT (A) and Tribunal. The High Court (335 ITR 94 (Del) included in file) relied on Circular No.65 dated 2.09.1971, Circular No.674 dated 22.03.1993 & Vijay Ship Breaking 219 CTR 639 (SC) held that as the discounting charges were not in respect of any debt incurred or money borrowed and were merely discount of the sale consideration on sale of goods, it was not “interest” u/s 2(28A) and there was no obligation to deduct TDS thereon. On appeal by the department to the Supreme Court, HELD

Delay condoned. The special leave petitions are dismissed.

(402.2 KiB, 1,773 DLs)

S. 194H: TDS Defaulter is liable only for interest & penalty & not the tax

The assessee, a publisher of newspapers, gave 10-15% trade discount to advertising agencies as per rules of the Indian Newspaper Society. The AO held that the said discount constituted “commission” and that the assessee ought to have deducted TDS u/s 194H and was liable as assessee-in-default u/s 201. The assessee filed a Writ Petition to challenge the said order. HELD by the High Court:

(i) Though the assessee has an alternate remedy of appeal against a s. 201 order, a writ is maintainable if the authority has wrongly assumed jurisdiction. Also, a huge demand has been raised and multiplicity of proceedings will increase the assessee’s sufferings even though s. 194H is clearly not applicable;

(ii) To constitute “commission or brokerage” u/s 194H, it is necessary that person receiving payment should be acting as agent and rendering services. The relationship between the assessee and the advertising agency in accordance with the INS Rules is that of a principal to principal because (a) the assessee has no control over the advertising agency, (b) the advertising agency is responsible for payment even if the advertiser has not paid the advertising agency, (c) the advertising agencies are rendering service to the advertisers/ customers & other terms. The “discount” was not “commission”;

(iii) The deductor cannot be treated an assessee in default till it is found that the assessee (recipient) has also failed to pay such tax directly. To declare a deductor who failed to deduct the tax at source as an assessee in default, condition precedent is that assessee has also failed to pay tax directly. However, even then, the short deducted tax cannot be realised from the deductor and he is at best liable for interest and penalty only;

(iv) The Department’s practice of hurriedly passing assessment orders shortly before the limitation period is about to expire and justifying this practice by saying that there was shortage of time and hence facts could not be verified properly is not appreciated because it puts citizens to great harassment as exorbitant demands are raised and it breaches the principles of natural justice.

(194.6 KiB, 1,616 DLs)

S. 9(1)(vii)(b): Export sales is not a “source of income outside India”. Expenditure on fully convertible debentures is deductible

The assessee, an Indian company, paid Rs. 14.71 lakhs to a US company for ‘KEMA’ certification which was necessary to enable it to sell its products in the European markets. The assessee claimed that though the said amount was ‘fees for technical services’ u/s 9(1)(vii), it was paid “for the purpose of earning income from a source outside India” (i.e. the exports) and so it was not taxable in India u/s 9(1)(vii)(b). The AO & CIT (A) rejected the claim though the Tribunal upheld it. On appeal by the department, HELD reversing the Tribunal:

(i) S. 9(1)(vii)(b) provides that fees for technical services payable by a resident in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India shall not be taxable in India. The term “source” means not a legal concept but one which a practical man would regard as a real source of income. It is a spring or fount from which a clearly defined channel of income flows. The assessee manufactured goods in India and concluded the export contracts in India. The source of income is created the moment the export contracts are concluded in India. The customer located outside India is not the source of the income though he is the source of the monies received. There is a distinction between the source of income and the source of receipt of monies. In order to fall u/s 9(1)(vii)(b), the source of the income, and not the receipt, should be situated outside India. Further, though the profits arise both from the manufacturing activity and from the sale, bifurcation of the fees is not permissible (Aktiengesellschaft 262 ITR 513 (Mad) not followed);

(ii) Also held that expenditure on fully convertible debentures could not be treated as expenditure on equity and was deductible even though the time and conversion price was fixed (Secure Meters Ltd 321 ITR 611 (Raj) (SLP dismissed) followed)

(34.8 KiB, 960 DLs)

Sale & Lease Back transactions are not “sham” transactions

The assessee purchased an igni-fluid boiler from its sister concern and on the same day leased it back. The AO & CIT(A) relied on McDowell 154 ITR 148 and held the sale and lease back arrangement to be a sham & camouflage for a loan by the assessee to the sister concern and rejected the assessee’s claim for depreciation. However, the Tribunal allowed the claim on the ground that the transaction was not a “sham”. On appeal by the department, HELD dismissing the appeal:

(i) Though the machinery was embedded and was in possession of the seller, the assessee took constructive delivery of the machinery. As the law recognises constructive delivery as an acceptable mode of delivery and possession, physical possession is not necessary. Thus there is no material on record to show that the sale was a sham transaction and so its genuineness cannot be questioned. As regards the lease, the fact that some part of the funding came from Wipro Finance & that the lessee paid directly to Wipro in satisfaction of the assessee’s obligation does not make the agreement a sham because it is a matter of pure commercial understanding between the parties as to the modalities of lease rental payment. Given the freedom to enter into agreements with parties and guided by commercial considerations, even to invoke the theory of tax evasion, the Revenue must have sufficient material to draw an inference of what had been shown as an understanding on an agreement between the parties, is not, in fact, so.

(ii) In Vodafone International Holdings 341 ITR 1 (SC), McDowell was considered extensively and it was held that there is no conflict between McDowell and Azadi Bachao Andolan 263 ITR 706 (SC) & Mathuram Agarwal 8 SCC 667. It was pointed out that the task of the Revenue/Court is to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt a dissecting approach. It was pointed out that “the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the “look at” test to ascertain its true legal nature. Genuine strategic tax planning has not been abandoned by any decision of the English courts till date.” It was held that while colourable devices cannot be a part of tax planning, it cannot be said that all tax planning is illegal/ impermissible. Applying this ratio, the mere fact that what had been purchased had been leased out to the vendor or that vendor had undertaken to pay the hire charges on behalf of the assessee to the hire purchase company does not per se lead to a conclusion that the transaction is a sham one.

(22.4 KiB, 759 DLs)

Dept hauled up for CPC Fiasco & unnecessarily harassing assessee but spared of costs on the ground that AO & CIT(A) were “only doing their duty”

The assessee filed an e-return disclosing income of Rs. Nil which was arrived at after setting off against the current year’s income of 9.53 crores, the brought forward losses of Rs. 12.43 crores. In the electronic processing, the loss set off was shown at Zero and a demand of Rs. 3 crores was raised. The assessee filed a rectification application u/s 154. The AO rejected the application on the ground that the assessee had “not claimed any loss” while the CIT (A) rejected it on the ground that “set off of losses cannot be a matter of rectification”. The assessee filed an appeal before the Tribunal and demanded costs u/s 254(2B) for the hardship. HELD by the Tribunal:

(i) The AO & CIT (A) were not justified in rejecting the assessee’s claim because as the losses had already been determined in the earlier years, the same were required to be allowed as set off against current income of the assessee. The CPC itself later issued a rectification order setting off losses of Rs. 9.53 crores though it still did not mention carry forward of losses. The assessee’s plea for costs u/s 254(2B) for “unnecessary hardship” cannot be accepted because the lower authorities were only “doing their duty”.

(ii) As regards the CPC, observed:

We would like to take this opportunity to bring to the notice of CBDT that after the procedure of Central processing of returns, many issues have come before various forums where unnecessary demands have been raised due to non-grant of TDS, wrong computation of income, adjustment of the previous year demand which have already been deleted by the jurisdictional assessing officer. Therefore, we would like to urge the CBDT to take up this matter urgently and establish proper coordination between the assessing authority and Central Processing Authority so that these problems are immediately solved and unnecessary litigation can be avoided. Copy of this order should be forwarded to the Chief Commissioner of Income-tax, Chandigarh and Chairman of CBDT for necessary action.

(279.3 KiB, 2,400 DLs)

Entire law on what is “Additional Ground” & power of Tribunal to admit it reviewed

The assessee filed an appeal before the Tribunal in which it raised the ground (in Form 36) that u/s 153A, the AO was not entitled to make additions which were not based on incriminating material found during the search. This ground was not raised before the AO or the CIT (A). Before the Special Bench, the department argued that as the ground was not raised before the lower authorities, it was an additional ground and could not be entertained. HELD by the Special Bench:

(i) The assessee’s argument that as the ground was taken in the memorandum of appeal, it was not an “additional ground” for which leave was required from the Tribunal is not acceptable because s. 253(1) permits an assessee “aggrieved” to file an appeal. A person can be “aggrieved” only if a ground had been raised and it is decided against him. S. 253(1) bars a ground which was not raised and not decided by the CIT(A) because there can be no grievance in respect of a matter which is not raised at all (Pokhraj Hirachand 49 ITR 293 (Bom) followed);

(ii) On the question whether such a ground can be raised for the first time before the Tribunal, the subject matter of an appeal consist of three elements (a) the grounds taken in the memorandum of appeal, (b) the grounds for which leave is allowed by the Tribunal and (c) grounds taken by the respondent for supporting the order of the CIT(A). The Tribunal is not confined only to issues arising out of the appeal before the CIT(A) but has the discretion to allow a new ground to be raised. If a pure question of law arises for which facts are on record of the authorities below, the question should be allowed to be raised if it is necessary to assess the correct tax liability. The submission that the ground could not be raised earlier as the assessee did not have the services of an advocate at its command is reasonable and bona-fide (NTPC 229 ITR 383 (SC) followed).

(21.3 KiB, 2,071 DLs)

High Court Takes Notice of TDS Refund Harassment by Dept & Demands Answers

One Anand Parkash, FCA, addressed a letter dated 30.4.2012 to the High Court in which he set out the numerous problems being faced by the assesses across the Country owing to the faulty processing of the Income Tax Returns and non-grant of TDS credit & refunds. He claimed that because of the department’s fault, the assessees were being harassed. The High Court took judicial notice of the letter, converted it into a public interest writ petition and directed the CBDT to answer each of the allegations made in the letter. In addition, the Court demanded an answer to the following issues:

(1) Whether procedure under Section 245 of the Income Tax Act, 1961 is being followed before making adjustment of refunds and whether assessees are being given full details with regard to demands, which are being adjusted.

 

(2) Whether the Revenue is taking caution and care to communicate rejection of TDS certificates and intimation under Section 143(1) in case any adjustment or modification is made to taxes paid, either as advance tax, self assessment tax or TDS.

 

(3) Whether and what steps are taken to verify and ascertain that the old demands against which adjustment is being made was communicated to the assessee?

 

(4) What steps have been taken to ensure that the deductors correctly upload the TDS details/particulars on the Income Tax website?

 

(5) What is the remedy available to the assessee and can he/she approach the Department in case the deductor fails to correctly upload the particulars in his/her cases?

 

(6) Whether an assessee can get benefit of TDS deducted or/and paid but not uploaded by the deductor and procedure to claim the said benefit?

(240.1 KiB, 963 DLs)

S. 234A, 234B & 234C interest, though mandatory, is not payable if AO does not direct it to be charged in assessment order

The AO passed a s. 143(3) assessment order in which he omitted to direct that interest u/s 234A, 234B & 234C should be levied. The Tribunal, relying on Ranchi Club Ltd 247 ITR 209 (SC) held that in the absence of a specific direction, interest was not leviable. Before the High Court, the department relied on the larger bench decision in Anjum M.H Ghaswala 252 ITR 1 (SC) and argued that as interest u/s 234A, 234B & 234C was mandatory, there was no need for the assessment order to specifically direct that interest should be charged. HELD dismissing the appeal:

In CIT vs. Ranchi Club Ltd 247 ITR 209 (SC) it was held that the order of the AO in the assessment order to charge interest has to be specific and clear and the assessee must be made to know that the AO after applying his mind has ordered charging of interest. In Anjum M.H. Ghaswala 252 ITR 1 (SC), it was held, in the context of whether the Settlement Commission could waive interest, that the levy was mandatory and could not be waived. Subsequently, in Insilco Ltd 278 ITR 1 (SC), the Supreme Court remanded the matter to decide whether the law laid down in Ranchi Club had been changed by Anjum M.H. Ghaswala or not. Ranchi Club Ltd has not been expressly overruled nor has a different view been taken in Anjum M.H. Ghaswala‘s case. There is also no force in the department’s argument that even if assessment order or computation sheet does not provide for interest, since interest is mandatory, it can be charged in the demand notice which is signed by the AO. Even if a provision of law is mandatory and provides for charging of tax or interest, the view taken in Ranchi Club Ltd is that such charge by the AO should be specific and clear and assessee must be made to know that the AO has applied his mind and has ordered charging of interest. The mandatory nature of charging of interest and the actual charging of interest by application of mind and the mention of the proviso of law under which such interest is charged are two different things. Consequently, if the assessment order is silent, interest u/s 234A, 234B & 234C cannot be levied.