Law on taxation of fees for technical services u/s 9(1)(vii) & Article 12 and disallowance u/s 40(a)(i) for failure to deduct TDS explained

The assessee paid Rs 52 lakhs towards “leather testing charges” to TUV Product Und Umwelt GmbH, a tax resident of Germany, without deduction of tax at source. The AO & CIT(A) disallowed the expenditure u/s 40(a)(i) on the ground that the assessee had failed to deduct tax at source. Before the Tribunal, the assessee argued that (a) as Article 12 of the India-Germany DTAA does not provide that India “shall” tax fees and royalties, the same cannot be taxed in India; (b) as the services were not rendered by the foreign company in India, the income was not chargeable to tax in India u/s 9(1)(vii); (c) as the services were rendered by an automated process and there was no human intervention, it did not constitute “fees for technical services” as defined in s. 9(1)(vii); (d) as the services were used for a 100% EOU whose products were sold outside India, the “source” of the income was outside India and so the exception in s. 9(1)(vii) (b) applied; (e) disallowance u/s 40(a)(i) was confined to amounts “payable” as at the end of the year as held by the jurisdictional High Court in Vector Shipping in the context of s. 40(a)(ia) and (f) as the taxability of the services was brought in by a retrospective amendment, the disallowance u/s 40(a)(i) could not be made. HELD by the Tribunal

Law of jurisdictional High Court is not binding if there is a later contrary judgement of non-jurisdictional High Court. S. 22: Property used by firm in which assessee-owner is partner is not used for assessee’s business & not entitled for exemption

Though the jurisdictional High Court in Rasiklal Balabhai 119 ITR 303 held that the annual letting value of house property owned by the assessee and used for the business carried on by him in partnership was not liable to be included in his total income u/s 22, the Calcutta High Court has dissented from this view in Prodip Kumar Bothra 244 CTR 366 and held that the exemption in respect of house property cannot be allowed to assessee if the property is used by the partnership firm because the owner of the house property and the occupier of the property must be the same person. The Karnataka High Court in K.N. Guruswamy 146 ITR 34 (Kar) and the Allahabad High Court in Shiv Mohan Lal 202 ITR 60 (All) & Mustafa Khan 276 ITR 602 (All) has taken the same view as the Calcutta High Court that user by a partnership firm/ HUF is not user by the assessee-owner for business purposes. In view of the divergent views expressed by the High Courts, the thumb rule that the latest decision of the High Court is required to be followed to maintain judicial discipline. As the judgement of the (jurisdictional) Gujarat High Court is earlier in point of time and the judgement of the (non-jurisdictional) Calcutta and other High Courts is later in point of time, the view expressed by the Revenue Authorities has to be affirmed and the assessee’s ground dismissed

Loss on forward foreign exchange contracts is incidental to the exports business and not a “speculation loss“. However, if the contract is prematurely cancelled, the assessee has to justify the loss

Though a forward contract for purchase or sale of foreign currency falls in the definition of “speculation transaction” u/s 43(5) as it is settled otherwise than by the actual delivery or transfer of the commodity, it cannot be regarded as constituting a “speculation business” under Explanation 2 to s. 28. A forward contract, entered into with banks for hedging losses due to foreign exchange fluctuations on the export proceeds, is in the nature of a “hedging contract” and is integral or incidental to the export activity of the assessee and cannot be considered as an independent business activity. Therefore, the losses or gains constitute business loss or gains and do not arise from speculation activities. The fact that there is a premature cancellation of the forward contract does not alter the nature of the transaction. There is also no requirement in the law that there should be a 1:1 correlation between the forward contracts and the export invoices. So long as the total value of the forward contracts does not exceed the value of the invoices, the loss has to be treated as a business loss (Sooraj Mull Magarmull 129 ITR 169 (Cal), Badridas Gauridu 261 ITR 256 (Bom), Panchamahal Steel 215 Taxman 140 (Guj) and Friends and Friends Shipping (Guj) followed; contrary view in S. Vinodkumar Diamonds (ITAT Mum) referred)

A Co-op Hsg Society is not a mutual association because its members can earn income from its property. The transfer fee and TDR premium charged by the Society from its members is a commercial transaction and not eligible for exemption on grounds of mutuality

There are three objections to treating a co-op housing society as a mutual concern. The first objection is that while a mutual concern cannot lead to any profit for the members, a member of a co-op housing society can earn income from the property such as by letting. The contributors, by virtue of their membership, obtain a valuable capital asset in their own hands, i.e., the leasehold right in the plots allotted to them, as well as the interest in the super structure. They may encash or capitalize on or even trade on the property. Such valuable rights that inure to the members are separate and distinct from the rights that vest in them as a part of the class of contributors and militates against the very notion of mutuality, which in its concept and operation cannot yield any income to them in their individual capacity. The second objection is that the assessee’s activities of charging premium at one half the amount of the premium received by the transferor-member from the transferee-member is a commercial transaction. As such, not only does the arrangement lead to creation and holding of wealth/property by the individual-members, it allows them to encash or otherwise exploit it, paying the society its share. That is, the society also partakes of the profit arising on the subsequent transfer by a member, to the extent of 50% thereof. The third objection is that the policy of allowing the individual members to purchase TDRs from outside and load them on to their existing structures and of allowing non-members residing in the flats built by the members on their plots to have access to and enjoy the common facilities means that there is a break-down in the identity between the contributors and participants and violates another basic condition of mutuality that there must be no dealings with the non-members