KPMG Highlights for 2012

KPMG HighlightsKPMG IN INDIA KPMG Tax Highlights 31 December 2012 Table of Contents 1 Overseas Mergers & Acquisition 14 Applicability of 14A disallowance 2 Software Taxability 15 Principle-agent relationship 3 Tax Residency Certificate 16 Taxability of partnerships under the tax treaty 4 Fees for Technical Services 17 Secondment arrangement 5 Permanent Establishment 18 GAAR and Indirect Transfer 6 Residuary Article under the tax treaties 19 Transfer Pricing 7 Depreciation on Goodwill 20 Miscellaneous 8 Non-compete fees 21 Excise 9 Composite Contracts 22 Customs 10 Carbon Credits 23 Service tax 11 Sham Transactions & tax avoidance 24 25 Foreign Trade Policy VAT 12 Mergers & Acquisition 13 Slump Sale 1 Overseas Mergers & Acquisition Apex Court ruling in the case of Vodafone The Apex Court in the case of taxpayer has ruled on the jurisdiction of the Indian tax authorities. The tax authorities had alleged that Vodafone International Holdings B.V., Netherlands failed to withhold tax on the payment of consideration to Hutchison Telecommunications International Limited (HTIL) for acquisition of a controlling interest in an Indian company which is now a part of the Vodafone group. The controlling interest was obtained by acquiring the shares of a Cayman Island company that indirectly held more than 50 percent of the shares of the Indian company. In this context, the Apex Court, inter alia, observed and held as follows: Interpretation of Section 9(1)(i) of the Act • Charge to capital gains under Section 9(1)(i) of the Act arises on existence of three elements, viz, transfers, the existence of a capital asset and the situation of such asset in India. • Section 9(1)(i) of the Act does not have ‘look through’ provisions, and it cannot be extended to cover indirect transfers of capital assets/property situated in India. • Accordingly, the transfer of the share in CGP (which was not situated in India) did not result in the transfer of a capital asset situated in India, and thus the gains from this transfer could not be subject to Indian tax. Extinguishment of HTIL’s interests • The tax authorities argued that the rights of HTIL over the control and management of the Indian company constituted ‘property’ in the hands of HTIL. Accordingly, the extinguishment of such rights under the Share Purchase Agreement (SPA) resulted in a taxable transfer of a capital asset situated in India. • The Supreme Court held that extinguishment took place because of the transfer of the Cayman Island share and not by virtue of the various clauses of the SPA. Role of Cayman Islands company in the transaction • The sole purpose of the Cayman Island company was not only to hold shares in subsidiary companies but also to enable a smooth transition of business. Therefore, it could not be said that the Cayman Island company had no business or commercial substance. Rights and entitlements • As a general rule, in a case where a transaction involves transfer of shares, such a transaction cannot be broken up into separate individual components, assets or rights. The present transaction was a ‘share sale’ and not an ‘asset sale’ and concerned sale of an entire investment. • A controlling interest is an incident of ownership of shares in a company which flows out of the holding of shares and hence is not an identifiable or distinct capital asset independent of the holding of the shares. • In essence, the character of the transaction was an alienation of shares, and when the parties had agreed on a lump sum consideration; there was no question of any allocation of such consideration for the transfer of any other rights or entitlements. Applicability of Section 195 of the Act • The question of withholding tax at source would not arise as the offshore transfer between the two non-residents was not liable to capital gains tax in India. • For the purposes of Section 195 of the Act, tax presence has to be viewed in the context of the transaction that is subjected to tax, and not with reference to an entirely unrelated matter. Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 (SC) For further details please refer to our Flash News dated 20 January 2012 available at this link Buy-back of shares held by Mauritian Company held to be a colourable device to avoid taxes in India The Board of directors of the applicant, a closely held public limited company, proposed a scheme of buy-back of its shares in accordance with Section 77A of the Company Act, 1956. Only one shareholder, A Mauritius accepted the offer of buy-back. 2 The question before the AAR, inter alia, was whether capital gains that would arise to A Mauritius would be exempt from tax in India under the India-Mauritius tax treaty and whether the Applicant had any liability to withhold tax at source on the remittance of buy-back proceeds to A Mauritius? In connection with the above, the AAR observed and held as follows: • No dividends were paid by the applicant after the introduction of Section 115-O of the Act. The applicant had allowed its reserves to accumulate. • There was no proper explanation on the part of the taxpayer as to why no dividends were declared subsequent to the introduction of Section 115-O of the Act while the company was making regular profits and while dividends were being distributed before its introduction. • Other shareholders have not accepted the offer of buyback because it would have been taxable in India in their hands as capital gains. • The proposal of buy-back was a scheme devised for tax avoidance and was a colorable device for avoiding tax on distributed profits under Section 115-O of the Act. • Therefore, the distribution in question would satisfy the definition of dividends under the Act and consequently would be taxable under the Act as well as under Article 10 of the India-Mauritius tax treaty, and liable to deduction of tax at source. A Ltd [2012] 343 ITR 455 (AAR) For further details please refer to our Flash News dated 5 April 2012 available at this link Legal ownership prevails over beneficial ownership for determining capital gains CRL Mauritius, a company based in Mauritius sold its entire holding in CRIL, India to Moody’s Analytics Inc, Cyprus (M Cyprus). Further, CMRL Mauritius sold its entire holding in Exevo US (E Inc) to another US company, Moody’s US (M US). The question posed by the Moody’s and Copal Group (Group entity included CRL, CMRL) for consideration before the AAR, inter alia, was whether the capital gains arising on direct and indirect transfer of shares in Indian companies (i.e. sale of shares of CRIL by CRL Mauritius to M Cyprus and sale of shares of E Inc by CMRL Mauritius to M USA) would be chargeable to tax in India under the provisions of the India-Mauritius tax treaty. The revenue contended before the AAR that the transaction was a scheme for avoidance of tax in India for the following reasons: • The place of effective management of CRL Mauritius and CMRL Mauritius was the UK, for the reason that the whole transaction under consideration was left to the discretion and management of an individual, a resident of the UK, who was the CEO of CPL Jersey and was also a common director of E Inc and CRIL. • The beneficial ownership of shares rested with CPL Jersey, since the shares in Indian companies were held by it through its wholly owned subsidiaries. The AAR, based on the facts of the case, observed and held as follows: • The role of the resident of UK did not appear to be a role in connection with the running of business of CRL Mauritius and CMRL Mauritius. Also, as there is no sufficient or cogent material to deny that the control and management of these companies is with their board of directors, it cannot be concluded that the place of effective management of these companies is not in Mauritius. • The AAR is bound by the decision of the Supreme Court in the case of Azadi Bachao Andolan, wherein it was held that what is relevant in the context of a tax treaty is not whether the income is actually taxed in Mauritius, but whether in terms of the tax treaty, it can be taxed in Mauritius. • Company law recognizes the recorded owner of the shares and not the person on whose behalf it may have been held. The theory of legal ownership prevails over the apparent legal ownership. Therefore, the benefit of tax treaty to the Applicant cannot be denied and the capital gains on sale of shares by Mauritian companies cannot be taxed in India. 3 Moody's Analytics Inc. [2012] 24 taxmann.com 41 (AAR) For further details please refer to our Flash News dated 7 August 2012 available at this link Transfer of shares in Indian company by a Mauritius holding company to a Singapore company as a part of internal re-structuring is not liable to capital gains tax under the India-Mauritius tax treaty The Applicant, a company incorporated in Mauritius, holds investments in a listed company in India viz., Glaxo Smithlkine Pharmaceuticals Limited (Indian company). As a part of the group restructuring exercise, the Applicant proposes to transfer its holding in Indian company by way of off-market sale to its group company in Singapore. The question for consideration before the AAR, inter alia, was whether the gains arising on sale of shares of the Indian company would be chargeable to tax in India under the provisions of the India-Mauritius tax treaty and whether Section 115JB of the Act would be applicable to foreign companies. The AAR, based on the facts of the case, observed and held as follows: • In terms of the India’s tax treaty with Mauritius and the decision of the Supreme Court in the case of UOI v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), the capital gains on sale of shares of an Indian company by a Mauritius company will not be taxable in India; • The term ‘company’ used in Section 2(17) of the Act includes a company incorporated outside India. Also, Section 115JB of the Act on its wording makes no distinction between a resident company and a non-resident company. Hence, Minimum Alternate Tax (MAT) provisions would equally apply to foreign companies and this would be irrespective of the existence of a PE of the foreign company in India. In this regard, the AAR has deviated from its earlier ruling in the case of Timken Co. [2010] 326 ITR 193 (AAR). • Also, the application of Section 115JB of the Act cannot be limited to domestic companies for the reason that there are practical difficulties for the foreign companies to prepare their accounts in terms of Schedule VI of the Companies Act, 1956 (Companies Act). Castleton Investment Limited [AAR No. 999 of 2010 dated 14 August 2012] For further details please refer to our Flash News dated 22 August 2012 available at this link No capital gains on transfer of Indian shares if foreign companies are merged without consideration The Applicant, a company incorporated in Switzerland, was a wholly owned subsidiary of another company incorporated in Switzerland (Company C). Pursuant to the proposed merger of the Applicant with Company C, all the assets and liabilities of the Applicant would be assumed by Company C, including its holding in a subsidiary in India (Indian company). On merger, no consideration would pass to the Applicant. The question for consideration before the AAR, inter alia, was whether on merger, any capital gains under Section 45 of the Act would arise to the Applicant and whether such capital gains would be exempt under Section 47(via) of the Act. In connection with the above, based on the facts and arguments of the case, the AAR, inter alia, observed and held as follows: • The change of ownership of the shares of the Indian company from the Applicant to Company C would involve the transfer of shares and be within the inclusive definition of ‘transfer’ given under Section 2(47) of the Act; • The transaction does not fulfill the condition specified under section 47(via) of the Act i.e. at least 25 percent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company. This is because the shareholders of the Applicant merging with Company C will not or cannot become shareholders of Company C, as Company C is the only shareholder of the Applicant; • As the gain, if any, in the instant case is not determinable within the scope of Section 45 and Section 48 of the Act, no capital gains arises to the applicant as a result of the merger. Credit Suisse (International) Holding AG [2012] 210 Taxman 412 (AAR) For further details please refer to our Flash News dated 11 September 2012 available at this link 4 • Accordingly. all intermediaries between the foreign company and the assets in India may be ignored. • Relying on the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd v. should be applied prospectively. • Even in the case of one composite contract. [2012] 343 ITR 370 (Delhi). • The Bombay High Court in the case of CIT v. DIT [2007] 288 ITR 408 (SC).org For further details please refer to our Flash News dated 10 October 2012 available at this link Software Taxability Taxability of supply of equipment comprising hardware and software The taxpayer. Nokia India Private Limited (NIPL) under independent contracts with the Indian telecom operators. on the high seas). Ericsson A.e. the income from the supply of equipment would not be taxable in the hands of the taxpayer in India. the Delhi High Court. the equipment was manufactured outside India. a tax resident of Finland. may be clarified as representing a ‘look through’ approach. 2012. Whether payments for software constitute royalty • The language of the tax treaty differs from the language in the amended section 9(1)(vi) of the Act. the relevant factor would be as to where the property in the goods passes. DIT v. used in Explanation 5 to Section 9(1)(i) of the Act. supplied GSM equipment comprising both hardware and software to Indian telecom operators under independent buyer-seller agreements. offshore supply is to be segregated from installation. • The phrase ‘directly or indirectly’. Source: www. • In its earlier decision in the case of DIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Bom) has held that the amendments in the Act cannot be read into the treaty. • The word ‘substantially’.com 225 (Del) 5 . The installation activities were undertaken by the wholly owned subsidiary of the taxpayer. and • Interest and penalty should not be charged/ levied under the provisions of the Act in cases where a tax demand is raised on account of a retrospective amendment relating to indirect transfer of assets.B. and the sale had taken place outside India. the High Court concluded that where the property in goods passed to the buyer outside India (i. inter alia. for determination of value of share of a foreign company. which had a similar fact pattern as that of the taxpayer. should be defined as a threshold of 50 per cent of the total value derived from the assets of the company or entity. used in Explanation 5 to Section 9(1)(i) of the Act. observed and held as follows: Whether payments for supply of equipment are taxable • In a transaction relating to the sale of goods. This implies that. The key recommendations made by the committee are as follows: • Amendments relating to taxation of indirect transfer of assets made by the Finance Act.itatonline. it was held that a copyrighted article does not fall within the purview of ‘royalty’.Expert Committee issues draft report on retrospective amendments relating to indirect transfer The expert committee constituted by the Prime Minister of India has issued its draft report on retrospective amendments relating to indirect transfer on 9 October 2012. Based on the facts of the case. The issue for consideration before the Delhi High Court was whether the consideration received by the taxpayer for the supply of hardware and software would be chargeable to tax in India under the Act and the India-Finland tax treaty. the payment for software was held to be not taxable as ‘royalty’ in India. Nokia Networks OY [2012] 25 taxmann. the AAR held that the subscription payments are taxable as ‘royalty’ on account of 6 . ACIT v. and therefore. • All the equipment and machines relating to the services provided to the taxpayer were under the control of Rackspace USA and situated outside India. the Mumbai Tribunal observed and held as follows: • Rackspace USA provided web hosting services with all backup. The Tribunal relied on the decision of Solid Works Corporation wherein the Mumbai Tribunal relying on the Delhi High Court’s decision in the case of Ericsson A. The Tribunal held that though the decision of Solid Works Corporation was rendered in context of tax treaty. as well as under the India-USA tax treaty. Ltd held that payments made to Indian residents for purchase of software are not treated as royalty. the payments made for procuring the services of Rackspace USA cannot be treated as ‘royalty’ under the Act as well as the tax treaty.For further details please refer to our Flash News dated 15 September 2012 available at this link Payment for use of dedicated servers does not amount to Royalty The taxpayer. is engaged in providing social media monitoring service for companies. Therefore. Based on the facts of the case. the ratio is equally applicable to the definition of royalty under the Act. 2180/Mum/2009] For further details please refer to our Flash News dated 22 March 2012 available at this link Payments for purchase of software is not royalty The Mumbai Tribunal in the case of Sonata Information Tech. ITO v. tax was not liable to be deducted on the aforesaid payments under Section 194J of the Income-tax Act. The clients who subscribed for the Applicant’s service could login to its website to do a search on what is being spoken about different brands on various blogs. social networking sites etc.3 held that the consideration received by the taxpayer was not royalty and therefore. 1961 (the Act). People Interactive (I) P Ltd [ITA No. • Therefore. The question for consideration before the AAR was whether the subscription fee received by the Applicant from its Indian customers was taxable in India. • Direct and unlimited access to live experts and guaranteed 100 percent network uptime and hardware replacement guarantee. security and uninterrupted services. a tax resident of Singapore. forums.B. Sonata Information Tech. • The taxpayer could not operate nor had any physical access to the equipment that provides service. Based on the facts of the case. Ltd [ITA No. the taxpayer was not using the equipment but was only availing the services provided by Rackspace USA. The taxpayer. • Bandwidth of 100 GB per server which was increased based on the usage rate. was the owner/ host of a website where individuals could register and exchange relevant information for matrimonial alliances. the business income of the taxpayer could not be taxed in the absence of a Permanent Establishment (PE) in India.4446/Mum/2011 (AY 2007-08)] For further details please refer to our Flash News dated 11 May 2012 available at this link Payments for subscription services amounts to royalty The Applicant. an Indian company. no tax was required to be deducted from the payments made by the taxpayer to Rackspace USA. • High level of security for the data stored on the servers including backups and restorations The Assessing Officer (AO) treated the payment made by the taxpayer to Rackspace USA as ‘royalty’ under the Act. • Accordingly. availed the following services from Rackspace USA: • Dedicated servers and a support team for the taxpayer. brands or products. inter alia. such payment could not be taxed in India both under the Act and under the India-Saudi Arabia tax treaty.O.No. and consequently. where(i) The software is acquired in a subsequent transfer and the transferor has transferred the software without any modification. to the Applicant. • In view of the clarificatory amendment in Section 9(1)(vi) of the Act. Thought Buzz Pvt. Ltd. experience and skill. The issue for consideration before the AAR was whether the payment made by the Applicant to STC for acquisition of the cable capacity would be chargeable to tax in India. property in or title to the capacity. Dishnet Wireless Limited [2012] 24 taxmann. [2012] 346 ITR 345 (AAR) For further details please refer to our Flash News dated 18 May 2012 available at this link Payments made towards acquisition of cable capacity taxable as ‘royalty’ The Applicant is an Indian company engaged in the business of providing telecommunication services in India. commercial or scientific experience. dated 13-6-2012] 7 . In connection with the above. the AAR observed and held as follows: • No right of ownership. (ii) Tax has been deducted. The Applicant entered into an agreement with a Saudi Arabian Company (STC) for transfer. Notification No. by the transferee for acquisition of software. being a resident. 21/2012 [F. The applicant contended. inter-alia. 1323(E). as the amounts payable to STC represented payment made for acquiring a ‘capital asset’ which was entirely situated outside India.the following: • The Applicant was engaged in the business of gathering. based on the facts and arguments of the case. the payment received from the subscribers/clients in India would be taxable as ‘royalty’ under the Act. and (iii) The transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor.(a) Under Section 194J on payment for any previous transfer of such software. facilities or network infrastructure. or (b)Under Section 195 on payment for any previous transfer of such software from a non-resident. that.com 298 (AAR) For further details please refer to our Flash News dated 31 August 2012 available at this link No tax to be deducted at source under Section 194J of the Act from 1 July 2012 on software acquired from a resident if such software is acquired without any modifications and tax has already been deducted No deduction of tax shall be made on payment to a transferor. the right to use the capacity in the EIG cable system (Europe India Gateway submarine cable linking Indian subcontinent and the United Kingdom) for a consideration of USD 20 million. for consideration. the payments made by the Applicant to STC for the acquisition of cable capacity were for a right to use a process and a right to use commercial or scientific equipment and would therefore be taxable in India as ‘royalty’. and • The said payment would also qualify as ‘royalty’ under the India-Singapore tax treaty since the payment was for the grant of use or right to use the process or information concerning industrial. collating and making available or imparting information concerning industrial and commercial knowledge. equipment or software was conveyed to or vested in the Applicant.142/10/2012-SO (TPL)] S. • The transfer of capacity by STC to the Applicant amounted to ‘making available’ the right to use the capacity in the EIG cable system. held that the capital gains arising to a Mauritius entity. The AO treated the payment made by the taxpayer to the non-resident for its services as FTS under Article 12 of the India-Netherlands tax treaty and treated the taxpayer as an assessee in default for failure to deduct tax at source. the payment does not satisfy the requirement of FTS under the tax treaty. know how or process which is used by the service provider to render technical service should also be ‘made available’ to the recipient of the services. S. experience.Tax Residency Certificate Capital gains on transfer of shares in Indian company by Mauritius Company holding valid TRC is not chargeable to tax under the India-Mauritius tax treaty The AAR. To attract tax liability under the India-Netherland tax treaty. skill. know how or processes so as to render such technical services. it will be open to the tax department to consider those aspects. high resolution. dated 17 September 2012 For further details please refer to our Flash News dated 26 September 2012 available at this link Fees for Technical Services Provision of services taxable only if ‘made available’ The taxpayer. is engaged in the business of prospecting and mining for diamonds and other minerals. the Central Board of Direct Taxes (CBDT) has issued notification with effect from 1 April 2013 which prescribes that certain details should be included in the Tax Residency Certificate (TRC) to be obtained by the nonresident to claim tax treaty benefit. Further. to conduct the air borne survey for providing high quality. it had not made available the technical expertise in respect of such collection or processing of data to the taxpayer. and geophysical data suitable for selecting probable mining targets. • In the instant case. However. based out of the Netherlands. The Karnataka High Court observed and held as follows: • The service provider. skill. • The use of a product which embodies technology shall not per se be considered to make the technology available. Further. CBDT Notification No. 8 . know how or processes. the non-resident performed the surveys using substantial technical skills. in the case of Dynamic India Fund .O. from a proposed sale of investment in India shall not be taxable in India under Article 13(4) of the IndiaMauritius tax treaty. the CBDT also notifies the Form 10FA and Form 10FB for resident of India to obtain TRC from the Assessing Officer (AO). which expertise the taxpayer could apply independently and without assistance of the non-resident. experience. notwithstanding this ruling. Hence the taxpayer could not be treated as an assessee in default for failure to deduct tax at source. an Indian company. Dynamic India Fund I [2012] 209 Taxman 417 (AAR) For further details please refer to ourFlash News dated 20 July 2012 available at this link CBDT prescribes details to be included in the Tax Residency Certificate to be obtained by non-resident and resident of India Recently. it was held that the provisions of GAAR which are effective from 1 April 2013 are not relevant at this stage. skill. in order to render technical services uses technical knowledge. However. The taxpayer engaged the services of a non-resident. experience. as and when they come into force. that technical knowledge. 2188(E). which holds a valid TRC. so that the recipient also acquires technical knowledge. • Therefore.I. For availing certain support services in connection with its India-specific websites. Section 44DA is broader and more general in nature. In connection with the above. used or to be used. CIT [2011] 46 SOT 105 (Mum). The taxpayer received mobilisation as well as de-mobilisation charges for providing services in connection with the prospecting for extraction or production of mineral oils. • The Indian group companies. However. v.com 500 (Mum) For further details please refer to our Flash News dated 3 October 2012 available at this link Geophysical services are taxable under special provisions (Section 44BB) and not as Fees for Technical Services The taxpayer engaged in the business of providing geophysical services to oil and gas exploration industry entered in to the contract for procuring data. eBay International AG v. the Income-tax Appellate Tribunal (the Tribunal). inter-alia. [2012] 346 ITR 467 (Kar) For further details please refer to our Flash News dated 25 May 2012 available at this link Payment for online advertisement on the portal of a foreign company is not royalty The Mumbai Tribunal has held that the payments made to a foreign company for services rendered relating to uploading and display of the banner advertisement on its portal is not taxable in India as royalty or Fees for Technical Services (FTS). It is a well settled rule of interpretation that if a special provision is made respecting a certain matter. they constitute dependent agents of the taxpayer in India. Ltd. De Beers India Minerals Pvt. in the prospecting for. Ltd. or extraction or production of mineral oils including petroleum and natural gas. the taxpayer is not rendering any managerial. The taxpayer applied for lower withholding tax certificate to the concerned authority under Section 197 of the Act. or supplying plant and machinery on hire. The Authority for Advance Ruling (AAR) accepted the taxpayer’s claim and held the ruling in favour of the taxpayer. • As the Indian group companies provide services exclusively to the taxpayer and have no other source of income. processing and interpreting the data in respect of an offshore exploration block in India.) Ltd v. the activities performed by the India group companies do not satisfy the conditions set out in Article 5(5) of the India-Switzerland tax treaty to constitute a Dependent Agent Permanent Establishment (DAPE) of the taxpayer in India.com 345 (Mum) For further details please refer to our Flash News dated 1 August 2012 available at this link Fees paid to a foreign company for registering on its website are not FTS The taxpayer. cannot be said to be taking any managerial decisions on behalf of the tax payer to qualify as a place of management under Article 5(2) of the tax treaty. performing only marketing support services. However.CIT v. the taxpayer does not have a Permanent Establishment (PE) within the meaning of Article 5 of the tax treaty. However. a tax resident of Switzerland. operated India specific websites for providing an online platform to users based in India for the purchase and sale of goods and services. ITO [2012] 24 taxman. based on the facts of the case. Pinstorm Technologies Pvt. the concerned authority did not grant the same and directed the taxpayer to deduct tax at the rate of 10 percent in respect of all revenues received. the taxpayer also entered into a Marketing Support Agreement (MSA) with its Indian group companies. In rendering this decision. that matter is excluded from the general provision under the rule which is 9 . and • Therefore. the Tribunal has followed its earlier decision in the case of Yahoo India (P. ADIT [2012] 25 taxmann. observed and held as follows: • By making its website available in India to the sellers for displaying their product. The High Court held that Section 44BB of the Act is a special provision applicable to the business of providing services or facilities in connection with. technical or consultancy services to the sellers and therefore the services do not qualify as FTS within the meaning of section 9(1)(vii) of the Act. The taxpayer derived income in the form of a ‘User fee’ from sellers registered on the taxpayer’s website. inter alia. inter alia. In other words. OHM Ltd [2012] 28 taxmann. comprised of worldwide network for data transfer between group companies which would connect to all global applications of Areva France. • The consideration for support services rendered by Areva France under the Agreement would qualify as FTS under the Act as well as the India-France tax treaty. The services. If both the Sections have to be read harmoniously and in such a manner that neither of them becomes a useless lumber then the only way in which the conditions can be given effect to is to understand them as referring only to the computation of profits. once the Agreement comes to an end. and to understand the amendments as having been inserted only to clarify the position. Areva T & D India Ltd [2012] 18 taxmann. to provide information technology support services. Section 44DA of the Act requires that the foreign company should carry on business in India through a PE situated therein and the right. Accordingly. DIT v.com 171 (AAR) For further details please refer to our Flash News dated 29 February 2012 available at this link Subsidiary in India attending to the business of the Multinational Group constitutes a PE in India 10 . such requirement has not been spelt out in Section 44BB of the Act.com 120 (Del) For further details please refer to our Flash News dated 14 December 2012 available at this link Permanent Establishment Mere presence of a computer server in India amounts to existence of a PE in India Areva T & D India SAS France (Areva France) proposed to enter into an Information Technology Sharing Services Agreement (the Agreement) with the applicant. However. Areva France could sub-contract these services either to a third party service provider (Service Provider) and/or to any other subsidiary of the group. inter alia. Where the services are general in nature and fall under the sub-section read with Explanation 2 to Section 9(1)(vii) of the Act. messaging system for all e-mail communication etc. the income by way of FTS would be taxed under Section 44DA of the Act. which.expressed by the maxim ‘Generallia specialibus non derogant’. • As the applicant constitutes a PE in India. at the disposal of Areva France would create a PE for Areva France in India. property or contract in respect of which the royalty or FTS is paid should be effectively connected with the PE. then the taxpayer rendering such services as provided in Section 44BB of the Act cannot claim the benefit of being assessed on the basis that 10 percent of the revenues will be deemed to be the profits as provided in Section 44BB of the Act. services provided by Areva France would make available technical knowledge/experience to the applicant. If both the Sections have to be read harmoniously and in such a manner that neither of them becomes a useless lumber then the only way in which the conditions can be given effect to is to understand them as referring only to the computation of profits. without reference to Areva France. If Section 44DA of the Act covers all types of services rendered by the non-resident that would reduce Section 44BB to a useless lumber or dead letter and such a result would be opposed to the very essence of the rule of harmonious construction. In other words. was whether the payments by the applicant to Areva France were taxable in India under the provisions of the Act and the India-France tax treaty. The question for consideration before the AAR. deals with taxation of FTS when the foreign company has a PE in India. As per the Agreement. intranet and internet traffic. then the taxpayer rendering such services as provided in Section 44BB of the Act cannot claim the benefit of being assessed on the basis that 10 percent of the revenues will be deemed to be the profits as provided in Section 44BB of the Act. and to understand the amendments as having been inserted only to clarify the position. Based on the facts of the case. • The employees of the applicant would be equipped to carry out the activities on their own. Where the services are general in nature and fall under the sub-section read with Explanation 2 to Section 9(1)(vii) of the Act. the AAR observed and held as follows: • Presence of equipment in India. based on the facts of the case. Aramex International Logistics Private Limited [2012] 208 Taxman 355 (AAR) For further details please refer to our Flash News dated 13 June 2012 available at this link Residuary Article under the tax treaties Taxability of income under residuary Articles in tax treaties The taxpayer. and • Therefore. • The Indian company had a fixed place of business and branches in India and business of the Aramex Group was being carried on by the Indian company i. Therefore. • The exception with respect to control over a subsidiary not constituting a PE under Article 5(10) of the tax treaty was not applicable as the whole business in India of the Group was carried on within the geographical contours of India. as the services were used in India. Further. as the consultancy charges were not covered by the scope of FTS under Article 12 of the India-Singapore tax treaty and also as the non-resident did not have a PE in India. a tax resident of Singapore. the Commissioner of Income-tax (Appeals) [CIT(A)] held that. the Indian company constituted a PE of the applicant in India under Article 5 of the tax treaty and the receipt from outbound and inbound consignments attributable to PE in India was liable to tax in India. The applicant entered into an agreement with one of its group company in India for movement of packages to and from India i. the tax department contended that.e. even though the consultancy charges were not taxable in India as business profits under Article 7 or as FTS under Article 12 of the India-Singapore tax treaty. obtaining order. The Kolkata Tribunal. inbound and outbound. observed and held as follows: • The business of the Aramex Group as regards the articles sent to India could not be performed without the association of the Indian company. on the issue of taxability of consultancy charges as residuary income under Article 23 of the India-Singapore tax treaty. inter alia. Before the Kolkata Tribunal. The question for consideration before the AAR.e. Thus. the Indian company was a fixed place PE of the Aramex Group in India under Article 5(1) of the tax treaty. there was no obligation on the taxpayer to withhold tax on the payments made to the nonresident. made payments to a Singapore based company towards consultancy charges without deduction of tax at source on the basis that the services were rendered outside India and therefore not taxable as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income-tax Act. the Indian company was also an Agency PE of the Aramex Group under Article 5(8) of the India-Singapore tax treaty. The AO held that. was engaged in the business of door-to-door express shipments by air and land and performing related transport services. held as follows: • A tax treaty assigns taxing rights of various types of income to the source state upon fulfillment of conditions laid 11 . • The Indian company secured orders in India wholly for the Aramex Group and had the right to conclude contracts for the Group for its express shipment business. 1961 (the Act). the amounts paid to the non-resident were taxable in India as FTS. these amounts were taxable in India as residuary income under Article 23 of the India-Singapore tax treaty. an Indian company engaged in the business of trading and export of sea foods. collecting articles and transporting them to a destination so as to be taken over and delivered by the Group.The applicant. was whether there was a PE of the applicant in India under the IndiaSingapore tax treaty. On appeal. The AAR. mere description of the Indian company as an independent entity or non-exclusive agent was not good enough. in the instant case. The Supreme Court held that the principle of ejusdem generis would strictly apply to the words ‘any other business or commercial rights of a similar nature’ of Explanation 3(b) to Section 32(1) of the Act. Sale of Goodwill and Master Services Agreement. treating it as an intangible asset. The Supreme Court did not dispute the factual finding of the Tribunal and the Commissioner of Income-tax (Appeals) [CIT(A)] that. DCIT v. CIT v. • When a tax treaty does not provide for the taxability of a particular kind of income under the tax treaty provision dealing with that particular kind of income. a share broker vide Deed of Assignment of Business. patents. licences. trademarks. 12 . The AO disallowing the claim for depreciation contended that as no amount was actually paid on account of goodwill it is not an asset falling under Explanation 3(b) to Section 32(1) of the Act. (AFC). assets and liabilities of the Transferor were transferred for a consideration and the difference between the cost of the net assets and the amount paid constituted goodwill. the income from consultancy services which cannot be taxed under Article 12 or Article 7 of the tax treaty because the conditions for taxability specified therein are not satisfied. purchased entire clientele business of Ashmavir Financial Consultants Pvt. The taxpayer claimed depreciation on goodwill under Section 32 of the Act. • Therefore. • Accordingly. Ltd. ‘goodwill’ would be an asset under Explanation 3(b) to Section 32(1) of the Act and depreciation on ‘goodwill’ would be allowable under Section 32 of the Act. copyrights. • Article 23 of the tax treaty begins with the words ‘items of income not expressly covered’ by the provisions of the other Articles. the taxability cannot be invoked under the residuary provisions of Article 23 of the tax treaty. Only when these conditions are satisfied. The CIT(A) upheld the order of the AO.The taxpayer has booked the aforesaid expenditure as purchase of goodwill and has claimed 25 percent of depreciation. [2012] 24 taxmann.com 222 (SC) For further details please refer to our Flash News dated 29 August 2012 available at this link Consideration paid for acquiring the clientele is an ‘intangible asset’ and is eligible for depreciation The taxpayer. does the source state get the right to tax such income. The excess consideration paid by the taxpayer over the value of the net assets acquired from the Amalgamating Company was considered as goodwill arising on amalgamation on account of the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. as a part of the Scheme. cannot be taxed under Article 23 of the tax treaty either. Smifs Securities Ltd. and therefore.down in respective clauses of the tax treaty. duly sanctioned by the High Court. Explanation 3(b) to Section 32(1) of the Act states that the expression ‘asset’ shall mean an intangible asset. franchises or any other business or commercial rights of a similar nature. the assets and liabilities of the Amalgamating Company were transferred to and vested in the taxpayer. the taxpayer is not liable to withhold tax on the payments made to the nonresident. The AO rejected the taxpayer’s claim. being know-how. does not apply to items of income which can be classified under other Articles of the tax treaty whether or not taxable under those Articles. Andaman Sea Food Pvt Ltd [2012] 52 SOT 562 (Kol) For further details please refer to our Flash News dated 13 July 2012 available at this link Depreciation on Goodwill Goodwill in the form of difference between the amount paid and the cost of the net asset acquired from the amalgamating company is an asset eligible for depreciation under the Act Pursuant to a Scheme of Amalgamation of an Amalgamating Company with the taxpayer. Accordingly. The rights under a non-competition agreement cannot be transferred. Japan. The advantage falls in the capital field. DCIT (ITA. A separate consideration was specified for each activity in the agreements. India Capital Markets P Ltd v. Relying on the Supreme Court’s decision in the case of Smifs Securities Ltd and Mumbai Tribunal’s decision in the case of Jyoti India Metal Industries Pvt. a consideration for not competing with it for seven years. including installation and commissioning of thermal power units. Sharp Business System v. alternatively. paid L&T. The purchase of the clientele business by the taxpayer from AFC is a right which can be used as a tool to carry on the business. 14836/2012. entered into contracts with two Indian customers for offshore supply of equipment and onshore supplies and services. dated 5 November 2012] For further details please refer to our Flash News dated 22 November 2012 available at this link Composite Contract Loss making onshore activity does not indicate that the composite contact was artificially split to avoid payment of taxes The taxpayer. that the rights under the non-compete agreement were an ‘intangible asset’ under Section 32(1)(ii) of the Act. as against the world. It also claimed.The Tribunal held that the specific words of Section 32 of the Act reveal the similarity in the sense that all the intangible assets specified are tools of the trade which facilitates the taxpayer to carry on the business. CIT [ITA 492/2012 & CM APPL. The advantage cannot be regarded as being merely for facilitation of business and ensuring greater efficiency and profitability. the expression ‘any other business or commercial rights of similar nature’ would include such rights which can be used as a tool to carry on the business. but for the ownership of the ‘intangible asset’. Further commercial rights gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a certain span of time and the customer associate with such assets. a tax resident of China. The High Court held that the advantage derived by the taxpayer from the non-compete agreement entered into with L&T is for a substantial period of seven years and ensures a certain position in the market by keeping out L&T. The ‘intangible asset’ should be such that.2948/Mum/2010) For further details please refer to our Flash News dated 17 December 2012 available at this link Non-compete fees A ‘non-compete right’ is not an ‘intangible asset’ and therefore not eligible for depreciation The taxpayer. As a result of the above the said right cannot be termed as an ‘intangible asset’. With regard to depreciation on an ‘intangible asset’. Therefore. the same is purely personal.e. eligible for depreciation. 13 . the taxpayer would be unable to either access the advantage or assert the right ‘in rem’ i. The AO rejected the taxpayer’s claim. The taxpayer claimed that the non-compete fee was revenue in nature. and L&T Ltd. a joint venture of Sharp Corp. In the case of a non-competition agreement. the High Court held that the non-compete rights cannot be treated as an ‘intangible asset’ under Section 32(1)(ii) of the Act because the nature of the rights mentioned in the definition of an ‘intangible asset’ spell out an element of exclusivity which inures to the taxpayer as a sequel to the ownership. Ltd it was held that the taxpayer is entitled for the depreciation. it is a right ‘in personam’ where the advantage is restricted and does not confer an exclusive right to carry-on the primary business activity.No. DIT [2007] 288 ITR 408 (SC). That would be the situation in which while offshore supplies showed unreasonable profits. • In the instant case. a tax resident of France. The AAR also held that the applicant along with the other members of the consortium were liable to be taxed as an ‘Association of Person’ (AOP) in respect of the income arising from the contract. • A contract for the installation and commissioning of a project cannot be split up into separate parts as consisting of independent supply of goods and for installation at the work site. 977 of 2010)(AAR)]. the taxpayer claimed a loss vis-à-vis its project office.e. • The AAR relied on the decision of the Supreme Court in the case of Vodafone International Holdings BV [2012] 341 ITR 1 (SC) wherein the Apex Court observed that it is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to ‘look at’ the transaction as a whole and not to adopt a dissecting approach.G. this fact by itself did not indicate that the onshore services and supplies contract was understated so as to avoid tax in India. the matter was remanded to him to examine the taxpayer’s claim regarding overall loss on the project. supply of overseas plant and materials and offshore designing and training of personnel for operation and maintenance would be taxable in India under the provisions of the Act and India-France tax treaty. to tax income from these contracts in India. the AAR observed and held as follows: • The tender floated by BMRC was a composite tender for installation and commissioning of a signaling and communication system. inter alia. Further. Based on the facts of the case. • Since the working of overall losses given by the taxpayer was not examined by the AO.The taxpayer. the onshore supplies and services resulted in unreasonable losses. • The basic principle in interpretation of a contract is to read it as a whole and to construe all its terms in the context of the object sought to be achieved and the purpose sought to be attained by implementation of the contract [relying on the rulings in the case of Linde A. installation. (AAR No. Dongfang Electric Corporation v. there was no profit earned by the taxpayer. Therefore. However. 962 of 2010) (AAR) and in Roxar Maximum Reservoir Performance WLL (AAR No. This clause gave an indication that the ‘offshore supplies’ contract and ‘onshore supplies’ contract had to be viewed as an integrated contract. 14 . the AO made a transfer pricing adjustment for services rendered by the PE in connection with offshore supplies. if both these contracts were put together. there was a ‘cross fall breach clause’ which provided that a breach in one contract would automatically be classified as breach of the other contract. when the overall transaction is split in an unfair and unreasonable manner with a view to evade taxes. was whether the amounts received by the applicant for offshore supply i. and not on a standalone basis. on the basis that the PE in India was not compensated at arm’s length for its services. along with other members formed a consortium and obtained a contract from Bangalore Metro Rail Corporation Limited (BMRC) for design. • Accordingly. claimed that the profit from offshore supply was not taxable in India. Based on the facts of the case. The question for consideration before the Authority for Advance Ruling (AAR). there could not be an occasion. even otherwise. which constituted its Permanent Establishment (PE) in India. the income from the contract had to be taxed as a whole. and • Therefore. • In each set of the contracts. supply. DDIT [2012] 52 SOT 496 (Kol) For further details please refer to our Flash News dated 3 July 2012 available at this link Income from composite contract entered by a consortium including Offshore supplies fully taxable in India considering the Consortium as an AOP The applicant. relying on Ishikawajma-Harima Heavy Industries Ltd v. manufacture. under the Act and the tax treaty. the contract could not be split-up to treat a part of it as confined to offshore supply of equipment not capable of being taxed in India. Kolkata Tribunal observed and held as follows: • The transactions have to be looked at as a whole. As regards the onshore activities. testing and commissioning of signaling/train-control and communication systems. The AO contended that the original contract was for erection of power plants and was split into two parts in such a way that the activities in India would always result in loss. in the present case. My Home Power Ltd. Carbon credit is not in the nature of profit or in the nature of income and it cannot be subjected to tax in any manner under any head of income. The CIT(A) confirmed the order of the AO. Due to that a taxpayer gets a privilege in the nature of the transfer of carbon credits. Reliance was placed on the judgement in the case of Maheshwari Devi Jute Mills Ltd. The Hyderabad Tribunal held that Carbon credit is in the nature of ‘an entitlement’ received to improve the world’s atmosphere and environment by reducing carbon. The AO held the sale proceeds to be a revenue receipt since the CERs were a tradable commodity and even quoted on the stock exchange. or for rendering any service for carrying on the business. It is not generated or created due to carrying on business but it is accrued due to ‘world concern’.Alstom Transport SA [2012] 208 Taxman 223 (AAR) For further details please refer to our Flash News dated 13 June 2012 available at this link Carbon Credits Sale consideration on transfer of carbon credits is a capital receipt. 28. popularly known as ‘Carbon Credits’. The taxpayer had also sold certain equity shares of Rustom Mills and Industries Ltd and claimed long-term capital loss. the AO added the net receipt from the sale to the returned income. DCIT [2012] 27 taxmann.com 27 (Hyd) For further details please refer to our Flash News dated 8 November 2012 available at this link Sham Transactions & tax avoidance Sale of pledged shares at loss to a group company which set-off capital gain arising from the transfer of other shares is not a ‘colourable transaction’ The taxpayer in Assessment Year (AY) 1993-94 sold certain shares of Rustom Spinners Ltd and derived long-term and short-term capital gain. the taxpayer transferred the carbon credits like loom hours to some other concerns for a certain consideration. However. The amount received is not received for producing and/or selling any product or by-product. in the 15 . 45 and 56 of the Act. Accordingly. Transferable carbon credit is not a result or incidence of one’s business and it is a credit for reducing emissions. Carbon credit is entitlement or accretion of capital and hence income earned on the sale of these credits is a capital receipt. Therefore. heat and gas emissions. v. and was a capital receipt. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one’s negative point carbon credit. [1965] 57 ITR 36 (SC) wherein the Supreme Court held that the transfer of surplus loom hours to other mills out of those allotted to a taxpayer under an agreement for control of production was capital receipt and not income. Similarly. it had received Carbon Emission Reduction Certificates (CERs). There is no cost of acquisition or cost of production to get this entitlement. A person who has surplus carbon credits can sell them to others to have the emission commitment capped under the Kyoto Protocol. Carbon credit does not increase profit in any manner and does not need any expense. It was not liable for tax for the year under consideration in terms of Sections 2(24). During AY 2007-08. There is no element of profit and therefore it cannot be taxed under the Act The taxpayer was engaged in the business of power generation through a biomass power generation unit. The AO was of the view that the transfer of shares would be complete only when the share certificates along with duly executed transfer forms are delivered to the purchaser. the receipt of such consideration cannot be considered as business income. for the project activity of switching off of fossil fuel from naphtha and diesel to biomass. The taxpayer sold these CERs to a foreign company and accounted the sale consideration as capital in nature and therefore had not offered the same for taxation. Ltd. Ltd. DCIT [2012] 208 Taxman 45 (Bom) 16 . • Further the taxpayer had converted its loan given to Killick Halco Ltd. a loss making company. However. There is no provision in the Act which would prevent the taxpayer from selling loss making shares. it cannot be considered as a part of tax planning or legitimate avoidance of tax liability The taxpayer provided a guarantee to the extent of INR 1 billion in favour of Vysya Bank Ltd. there was no valid transfer since the share certificates were in the possession of IDBI bank who had lien over such shares. Accordingly the High Court held that the transaction could not be treated as a duly signed transfer forms. which resulted in substantial long term and short term capital losses to the taxpayer. The High Court observed that there was a concurrent finding of the authorities below that the transaction was a colourable device and relying on the Supreme Court ruling in Vodafone International Holdings [TS-23-SC-2012]. • The Bombay High Court held that the share transactions were merely a sham to claim the set-off of artificial capital loss against the capital gains arising out of transfer of land. it would not be possible for the taxpayer to deliver the original share certificates to its purchaser along with the on the legal relation between the taxpayer and IDBI and the purchaser’s right to have shares transferred in its name. On the alternate plea raised by the taxpayer that the value of the land should be allowed as business loss since the guarantee was given in the normal course of business.present case. the AO noted that the purchaser company and the taxpayer were part of the same group of companies. Since Geekay Exim India failed to repay its loan. the shares held in Killick Halco Ltd were sold to Snowcem India Limited (a group company) at INR 83 per shares which again resulted in substantial losses to the taxpayer. Further. In the present case. the transfer of shares was complete by virtue of Section 2(47) of the Act. the bank invoked the guarantee under which the taxpayer agreed to transfer its own land to the Bank. this would not establish that the sale of shares was only a paper transaction and a device contrived by the taxpayer.com 273 (Guj) For further details please refer to our Flash News dated 17 September 2012 available at this link When a transaction is sham. there is no restriction that such a sale cannot be effected with a group company. and Diplomat Trading Pvt. The Gujarat High Court observed that since the taxpayer had entered into the agreement. Simply because such shares were sold during the previous year when the taxpayer had also sold some shares at profit by itself would not mean that this is a case of ‘colourable device’ or that there is a case of tax avoidance. at INR 518 and INR 365 per share in FY 1998-1999 and 19992000 respectively were sold to Snowcem India Limited (a group company) at INR 10 during the year under consideration which again resulted in substantial losses. the shares were pledged to IDBI Bank and therefore. Rathi Group. CIT v. In its return of income for the year under consideration the taxpayer had set off capital gains arising on transfer of land to the bank against the short term as well as long term capital loss arising from sales of shares. at INR 5 in Financial Year (FY) 2000-2001. • The abovementioned shares in four companies (along with other shares already held by taxpayer in these four companies) were sold to Radha Financial Services Pvt. • Further shares acquired in Pelican Paint Ltd. The facts with respect to capital loss on sale of shares are as follows: • The taxpayer has invested INR 480 million (INR 150 per share including premium of INR 140 per share) in its four subsidiary companies during the period 28 March 2000 to 30 March 2000. into equity at a premium of INR 700 per share on 31 March 2000. Therefore. This may have repercussions ‘colourable device’ created for tax avoidance. K. Killick Nixon Limited v. During the year under consideration. the full transaction was intended to create loss to the taxpayer so that its capital gains resulting from the sale of shares of Rustom Spinners Ltd could be set-off. [2012] 24 taxmann. where a transaction is sham and not genuine as in the present case then it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. Rathi Group. Consequently. This amount was received by the taxpayer from a company belonging to G. the High Court remitted the matter back to the Tribunal. K Rathi Group. for extending financial facilities to Geekay Exim India Ltd. The same amount was again reinvested by the above mentioned four subsidiary companies into another group company of G.. Biraj Investment Pvt. it held that a colourable device cannot be a part of tax planning. Geekay Exim India Ltd is a company belonging to G. Ltd. Further. given Power of Attorney and received the full sale consideration from the purchaser company. K. High Energy Batteries (India) Ltd. Spencer and Co. which remained till it was repaid or discharged. The conversion rates for CCDs into equity shares varied depending upon the period of 17 . • In the instant case. Further.V. was whether the gains arising to the Applicant on the sale of shares and CCDs of S Ltd are exempt from capital gains in India under Article 13(4) of the IndiaMauritius tax treaty? Based on the facts of the case. dated 12 July 2012) (Bom) (HC) For further details please refer to our Flash News dated 20 July 2012 available at this link Income from sale of CCD taxable as interest income The applicant. AVM Capital Services Pvt. V exercised this option and proposed to purchase the stake in S from the applicant. gave the option for the conversion into shares at a different price. (Company Petition No. Ltd. per se. a tax resident company of Mauritius. The Madras High Court observed that the AO was not correct in rejecting the taxpayer’s claim on the ground that it had not taken actual possession of boilers.For further details please refer to our Flash News dated 22 March 2012 available at this link Sale & lease back of machinery not a ‘sham’ or ‘colourable’ device to avail benefit of depreciation The taxpayer had purchased igni-fluid boilers from its sister concern for a total consideration of INR 25 million in FY 1994-95. 670 of 2011. observed and held as follows: • Relying on the Supreme Court’s decisions in the case of CWT v. Ltd. Further the fact that the sister concern of the taxpayer had undertaken responsibility to meet the liability of the taxpayer to pay the hire purchase amount was not relevant to decide whether the sale transaction was colourable. the High Court held that while ascertaining the legal nature of the transaction one has to look at the entire transaction as a whole and not to adopt a dissecting approach and hence it was held that the transaction was not a sham or a colourable device just to enable the taxpayer to claim the benefit of depreciation. CIT v. inter alia. [2012] 208 Taxman 213 (Mad) For further details please refer to our Flash News dated 29 May 2012 available at this link Transfer of shares through a legitimate scheme of arrangement is not a ‘Tax avoidance device’ The Bombay High Court while approving the scheme of arrangement in the case of Unichem Laboratories Limited (along with other petitioners) has held that a tax efficient transfer of shares under a scheme of arrangement under Sections 391 to 394 of the Companies Act. Since the law recognized constructive delivery as an acceptable mode of delivery and possession and the fact that the taxpayer had not taken physical possession. [1973] 88 ITR 429 (SC) and Eastern Investments Ltd. It was also observed that in subsequent years the revenue itself had accepted the transaction to be a genuine. The issue before the AAR. The taxpayer paid INR 5 million to its sister concern and for the balance it entered into a finance agreement with Wipro Finance Limited by way of a hire purchase agreement. CCDs did not carry any interest. CIT [1951] 20 ITR 1 (SC). • The income derived from the sale of CCDs would be taxable as interest income since the CCDs were a debt instrument. the AAR. It also reaffirmed that the Income-Tax Authority is not required to be heard while sanctioning the Scheme. but instead. 1956. the AAR observed that the CCDs created or recognised the existence of a debt. v. S Ltd (S) by way of equity shares and CCDs. The High Court further observed that the genuineness of the said transaction could not be questioned as there was no material on record to show that the sale between the taxpayer and its sister concern was a sham transaction. relying on the Supreme Court ruling in the case of Vodafone International Holdings B. did not pronounce anything against the sale that took place between the taxpayer and its sister concern. an Indian company. A call option was also given to V to purchase the said shares and CCDs from the applicant. Prior to the mandatory conversion date. The AO claimed that the sale and lease back arrangement was a sham and colourable device adopted by the taxpayer to avail benefit of depreciation and the alleged purchase by the taxpayer was merely a financial accommodation for its sister concern. the applicant was given the put option to sell shares and CCDs on specified dates to V. inter alia. and V Ltd (V). On the same day the taxpayer entered into a lease agreement with its sister concern for the same boilers. could not be held to be a tax avoidance device just because such transfer would have been liable to capital gains tax if transferred otherwise. made an investment in another Indian company. the AAR held that that sale of Indian company’s shares by a Mauritius company is not exempt under the tax treaty. Z. • A scheme which is supported by adequate commercial rationale may result in the benefit of saving income tax or other taxes. • The amount paid by V was clearly towards the debt that was taken by S from the Applicant. it was held that the cost of acquisition has to be taken as per the book value and not the fair market value as adopted by the AO. In re [2012] 345 ITR 11 (AAR) For further details please refer to our Flash News dated 5 April 2012 available at this link Mergers and acquisitions Gujarat High Court allows appeal of Vodafone Essar Gujarat Limited and approves Scheme of Arrangement for transfer of Passive Infrastructure Assets The Company Judge of the Gujarat High Court rejected the Scheme of Arrangement (Scheme) on the ground that the sole object of the Scheme was to avoid tax. Ltd. Further.holding of these CCDs. On an appeal. more so because the same has been accepted by the tax department in scrutiny proceedings in the earlier years. unless there is something on record to prove that it was a non-genuine arrangement. • Accordingly. the appreciation in the value of CCDs was clearly a payment of ‘Interest’ and was taxable under the provisions of Article 11 of the tax treaty. Euro RSCG Advertising Pvt. held that: • The Scheme is supported by adequate commercial rationale including recommendations of the working group on the telecom sector. • On a perusal of agreement. Ltd. Hence. held that the transfer of shares at cost by an Indian company to an overseas parent company as a part of a group restructuring exercise cannot be treated as a sham transaction or colourable device. • While examining the Scheme each and every objection of a third party cannot be considered by carrying out microscopic examination. Further. • The Court accepted the locus of the tax department to raise objections to the Scheme in its capacity as a creditor of the Company. which itself cannot be a ground for coming to the conclusion that the sole object of framing the Scheme is to defraud the tax authorities. ACIT [2012] 53 SOT 90 (Mum) Note: This case is argued by KPMG in India Tax Dispute Resolution Team For further details please refer to our Flash News dated 20 July 2012 available at this link Gift of shares in an Indian company by a foreign company could be regarded as a genuine transaction 18 . in the case of Euro RSCG Advertising Pvt. v.com 323 (Guj) For further details please refer to our Flash News dated 12 September 2012 available at this link Transfer of shares at cost by Indian company to an overseas parent company as part of a group restructuring exercise cannot be treated as a sham transaction or colourable device The Mumbai Tribunal. is an ‘arrangement’ covered under Section 391 of the Companies Act. DIT [2012] 24 taxmann. it was held that the Indian holding and subsidiary companies are one and the same. the division bench of the Gujarat High Court. • Transfer of an undertaking by way of gift for commercial reasons is tantamount to reconstruction of business and. the entire gains arising to the applicant on the sale of CCDs were not exempt from capital gains tax in India under the tax treaty. Vodafone Essar Gujarat Limited v. The share purchase agreement cannot be brushed aside. while approving the Scheme. hence. The AAR observed that this was ‘Interest’ falling within the meaning of Section 2(28A) of the Act as well as under Article 11 of the tax treaty. 19 . 1882 (TPA). • Under the provisions of the TPA. The Delhi High Court. Further the Tribunal held that the provisions of Section 50B read with Section 2(42C) of the Act and Explanation 1 to Section 2(19AA) of the Act were applicable to the transaction. Based on the facts of the case. know-how. Income Tax Settlement Commission and Ors [2012] 207 Taxman 74 (Del) For further details please refer to our Flash News dated 20 April 2012 available at this link Transfer of tangible and intangible assets pertaining to sealants and adhesive business is a slump sale taxable under Section 50B of the Act The taxpayer sold/transferred/assigned trademarks. 3627/Mum/2012 (Mum) For further details please refer to our Flash News dated 19 October 2012 available at this link Slump sale Delhi High Court holds that transfer of an undertaking under a Scheme is 'Slump sale' taxable under Section 50B of the Income-tax Act The taxpayer had entered into a Scheme of Arrangement under Section 391 to 394 of the Companies Act. based on the facts and arguments of the case. DCIT [2012] ITA No. The main issue for consideration before the Mumbai Tribunal was whether such transaction can be termed as a ‘gift’ within the meaning of Section 47(iii) of the Act. a company incorporated in India. know-how. and • In the instant case. dismissing the writ. In connection with the above. the UK Co was authorised to make such gift as per the laws of the UK and the gift would be a capital receipt in the hands of the taxpayer.9 million received on account of goodwill and non-compete fee. Consideration received on the sale of Trademarks. Therefore. reference could be made to the definition of ‘gift’ under the Transfer of Property Act. The High Court also rejected the contention that Section 2(42C) of the Act deals with a limited category of transactions being ‘sale’ and the broader and wider definition of the term 'transfer' under Section 2(47) of the Act is not applicable to ‘slump sales’. a company can also gift shares. The taxpayer has filed a writ petition challenging the order of the Settlement stating the transfer of the project finance business as taxable under Section 50B of the Act as ‘slump sale’. to the taxpayer during the year 2007. the Tribunal. copyright. provided its Articles of Association permit the making of such a gift. rejected the contention that a transfer under the scheme sanctioned by the Court is not a sale under Section 50B of the Act. assets and goodwill pertaining to the Sealants and Adhesives Business through separate agreements for an aggregate consideration of INR 320 million. the Mumbai Tribunal held that in spite of separate agreement for each asset specifying separate consideration. observed and held as follows: • As the term ‘gift’ is not defined under the Act. DP World Pvt Ltd v. SREI Infrastructure Finance Ltd v. amounting to INR 280 million was not offered for taxation taking the view that same being capital receipt. copyrights. (UK Co) gifted the shares of Hill Park Ltd (HPL). were a 100 percent-owned subsidiary of the same parent company based in the UK. The taxpayer offered to tax sale consideration amounting to INR 18. there is no requirement that a ‘gift’ can be made only between natural persons out of natural love and affection. inter-alia. Both the taxpayer and UK Co. 1956 (the Scheme) pursuant to which it transferred its project finance business and assets-based financing business to its subsidiary for a lump sum consideration. was not taxable. The Scheme had been approved by the Calcutta High Court.British India Steam Navigation Co. the transaction involved the sale of the entire business and therefore was a slump sale. India Advantage Securities Ltd (ITA No 6711/ Mum/2011. The Assessing Officer (AO) computed the disallowance under Section 14A of the Act as per Rule 8D of the Rules and disallowed the expenditure holding that the provisions of Section 14A of the Act were applicable even in relation to the dividend received from the trading shares. if the amount of net worth is positive. Summit Securities Limited [2012] 135 ITD 99 (Mum) For further details please refer to our Flash News dated 9 March 2012 available at this link Applicability of 14A disallowance Section 14A does not apply to shares held as stock-in trade During the year under consideration. that should be reduced from and if it is negative then it should be added to the full value of consideration. The Commissioner of Income-tax (Appeal) [CIT(A)] excluded the stock-in trade from the purview of computation of disallowance of expenditure under Rule 8D of the Rules. It was held that the legislature has very rightly used the words ‘deducting from’ only to make its intention clear that for determining the income chargeable under the head ‘capital gains’. It was further held that. Daga Capital Management P.5 percent to 4 percent. The tax department claimed that the stamp vendors were ‘agents’ of the State Government and that the discount was ‘commission or brokerage’. the taxpayer had shown the shares as stock-in trade and was of the view that such stock-in-trade could not be taken into account while computing the disallowance under Rule 8D of the Income-tax Rules. DCIT v. However. DCIT v. The taxpayer urged that the transaction was for sale of stamps in bulk quantity and the 20 . 1962 (the Rules). ITO [2012] 51 SOT 496 (Mum) For further details please refer to our Flash News dated 4 May 2012 available at this link The Mumbai Tribunal rules that negative net worth cannot be ignored for the purposes of computing capital gains on slump sale of business under section 50B of the Income-tax Act The Special Bench of the Mumbai Tribunal held that the negative figure of net worth of the undertaking should not be ignored for working out capital gains in the case of a slump sale under Section 50B of the Act. liable for tax deduction at source under Section 194H of the Act. there being a direct decision of the Karnataka High Court on this issue. v. the taxpayer did not make any disallowance of expenditure relating to the said exempt income. the taxpayer had received dividend income which was exempt from tax. [2009] 117 ITD 169 (Mum) (SB). bought stamps from the State Government at prescribed discounts ranging from 0. In the books of account. The Special Bench held that to contend that the cost or net worth can never be negative is too wide a proposition to be accepted in the case of a capital asset in the nature of an undertaking.Mahindra Engineering and Chemical Products Ltd. JCIT (2012) 250 CTR 291 (Kar) has held that since the taxpayer had not retained the shares with the intention of earning dividend income. Ltd. the same has to be followed. The Mumbai Tribunal relying on the decision of Karnataka High Court in the case of CCI Ltd. the disallowance of interest in relation to the dividend received from trading shares cannot be made. v. an association of stamp vendors. dated 14 September 2012) For further details please refer to our Flash News dated 12 October 2012 available at this link Principal-agent relationship Supreme Court held that tax should not be withheld on the vendor’s discount since it is not commission or brokerage The taxpayer. in preference to the Special Bench’s decision of the of Mumbai Tribunal in the case of ITO v. • Although the partners of the firm are residents of Switzerland.. in terms of the secondment agreement with Abbey Plc. a company. The issue for consideration before the Bangalore Tribunal was whether such payments constituted FTS under the Act and the India-UK tax treaty. Section 194H of the Act has no application to the transaction and tax is not liable to be deducted from the discount. they cannot invoke the tax treaty to determine the taxability of the legal fees received by the firm since they have not received the legal fees from the Indian company. The firm is engaged in the practice of law in Switzerland and it does not carry out its activities in any other country. • The source of income for rendering professional services to the Indian company is in India. 21 . The Supreme Court ruled in favour of the taxpayer by holding that the discounts in the range of 0. without any deduction of tax at source. The fact that the major part of the services are rendered outside India in respect of a dispute arising in India cannot alter the source of income. Schellenberg Wittmer along with its partners [2012] 210 Taxman 319 (AAR) For further details please refer to our Flash News dated 11 September 2012 available at this link Secondment arrangement Reimbursement under secondment agreement does not qualify as FTS The taxpayer. were for managerial services and would fall within the purview of FTS. body of persons. the payments made by the taxpayer to Abbey Plc. Ahmedabad Stamp Vendors Association [2012] 25 taxmann. observed and held as follows: • The definition of the term ‘person’ provided in the tax treaty includes. reimbursed the salary and other administrative costs relating to the seconded employees to Abbey Plc.5 percent to 4 percent given to the stamp vendors were for purchasing the stamps in bulk quantity and the discount was in the nature of a cash discount. the transaction was regarded a sale. the legal fees received by the firm will be taxable in India. the firm will not be treated as a resident under the tax treaty and will not be entitled to treaty benefits.com 201 (SC) For further details please refer to our Flash News dated 11 September 2012 available at this link Taxability of partnership under the tax treaty Legal fee received by Swiss law firm for adjudication proceedings outside India is taxable in India The Applicant was a Switzerland based partnership firm (the firm) and its partners are tax residents of Switzerland. The AO held that with Abbey Plc. being the legal employer of the seconded employees. Consequently. CIT v. Accordingly. • Accordingly. based on the facts and arguments of the case. The Applicant was appointed by an Indian company for representation in an adjudication proceeding in Switzerland. The firm is not a ‘person’ under the tax treaty for the following reasons:  There is no definition of the term ‘person’ in Swiss Law corresponding to Section 2(31) of the Act which confers the status of a ‘person’ on a partnership firm.discount was nothing but cash discount given to purchasing members. an Indian Company. or any other entity ‘which is taxable under the laws in force in either contracting state’. inter alia. The AAR.  The partnership firm is not a taxable entity in Switzerland. The question posed for consideration before the AAR was whether the firm could be treated as a resident of Switzerland under the India-Switzerland tax treaty and whether the legal fee received by the partnership firm from the Indian company would be taxable in India. Therefore. Abbey Business Services (India) Private Limited v. or obligations. • The Committee has recommended reintroducing the definition of the phrase ‘lacks commercial substance’ as defined in the earlier version of GAAR in the Direct Taxes Code (DTC) Bill. The Committee has also recommended an illustrative list of tax mitigation arrangements or a negative list for not invoking GAAR. the Tribunal. The Committee also recommended that an immediate pre-announcement in this regard be made by the Government to be in synchronization with international practice and in order to remove uncertainty in the minds of taxpayers. • As the taxpayer had reimbursed to Abbey Plc only the actual expenditure incurred without any mark-up. • A monetary threshold of INR 30 million of tax benefit (including tax only. GAAR provisions are not invoked for examination or denial of tax benefit. Target Corporation India Pvt. and • As the agreement was for secondment of employees and not for rendering any services. etc. created in an arrangement are the same as ordinarily created between persons dealing at arm's length. to determine whether or not an arrangement lacks commercial substance. • The AAR relied on its earlier ruling in the case of Centrica India Offshore Private Ltd [AAR No. observed and held as follows: • In terms of the secondment agreement between the taxpayer and Abbey Plc. such reimbursement cannot be treated as FTS under the Act. contrived and artificial. the taxpayer was the real and economic employer of the seconded employees. The said definition gives due regard to the presence of significant business risks or net cash flow impact on any party to the arrangement etc. and the decision in the case of IDS Software Solutions India Private Limited v. GAAR should not be applicable to every tax avoidance arrangement unless it is abusive. even if such payments are held to be taxable under the Act. in view of the fact that: • The applicant does not become the employer of the seconded employee. 856 of 2010] in reaching this conclusion. 2009 and 2010. DCIT [2012] 53 SOT 401 (Bang) Reimbursement of salary of seconded employees to foreign company is income in the hands of the foreign company The AAR has held that the salary reimbursed by the applicant to the foreign parent company under the secondment agreement is income in the hands of the foreign parent company. Ltd. inter alia. the same ought not to be treated as income in the hands of Abbey Plc.Based on the facts and circumstances of the case. 22 . • GAAR should be deferred for 3 years. Tax may include Dividend Distribution Tax (DDT) or Profit Distribution Tax. Further. The key recommendations made by the committee are as follows: • The tax mitigation arrangement should be distinguished from the tax avoidance arrangement before invoking GAAR. ITO [2009] 122 TTJ 410 (Bang). they cannot be taxed under the treaty as the term ‘managerial services’ is not present in Article 13(4) of the India-UK tax treaty and also such services do not satisfy the condition of ‘make available’ under the treaty. [2012] 348 ITR 61 (AAR) GAAR and Indirect Transfer Expert Committee Report on General Anti Avoidance Rules The expert committee constituted by the Prime Minister of India has issued its draft report on General Anti Avoidance Rules (GAAR) on 3 September 2012. and not interest. Furthermore.) to a taxpayer in a year should be used for the applicability of GAAR provisions. • The Assessing Officer (AO) should be able to seek expert opinion in this regard from the Transfer Pricing Officer to ascertain whether rights. • What is paid by the applicant to the foreign parent company could not be construed as reimbursement of salary. • All investments (though not arrangements) made by a resident or non-resident as on the date of commencement of GAAR provisions should be grandfathered so that on exit (sale of such investments). whether in the nature of capital gains or business income. used in Explanation 5 to Section 9(1)(i) of the Act. Singapore). should be defined as a threshold of 50 per cent of the total value derived from the assets of the company or entity. the tax consequences of an ‘impermissible avoidance arrangement’ will be limited to that portion of the arrangement. should be applied prospectively. • The GAAR provisions should not be invoked to look into an aspect/element. For further details please refer to our Flash News dated 3 September 2012 available at this link Expert Committee issues draft report on retrospective amendments relating to indirect transfer The expert committee constituted by the Prime Minister of India has issued its draft report on retrospective amendments relating to indirect transfer on 9 October 2012. the provisions of GAAR shall not apply to such FII.. in case it is found that GAAR provisions are applicable in relation to the remittance during the course of assessment proceedings. The Committee also viewed that such compensation across parties is not desirable since it would diminish GAAR‘s deterrent role and corresponding adjustments across different taxpayers would militate against deterrence. • The AO is empowered to initiate GAAR proceedings only during the course of pending assessment proceedings. The key recommendations made by the committee are as follows: • Amendments relating to taxation of indirect transfer of assets made by the Finance Act. all intermediaries between the foreign company and the assets in India may be ignored. no relief by way of corresponding adjustment should be allowed in the case of any other taxpayer. • It should be clarified that. where only a part of the arrangement is impermissible. where Specific Anti Avoidance Rules (SAAR) is applicable to that particular aspect/element. • The word ‘substantially’.g. the Committee has recommended that tax treaty override should not prevail. For further details please refer to our Flash News dated 10 October 2012 available at this link 23 . In a case where a tax treaty has inbuilt antiavoidance provisions in the form of a Limitation of Benefits (LOB) clause etc. (e. used in Explanation 5 to Section 9(1)(i) of the Act. GAAR can be appropriately considered in cases where a tax treaty does not have an inbuilt anti-abuse provision. corresponding adjustment should be allowed in the case of the same taxpayer in the same year as well as in different years. • The administration of the AAR should be strengthened so that ruling may be obtained by non-residents as well as residents within the time frame of 6 months. if any.• Where CBDT Circular with respect to Mauritius is applicable. • While determining tax consequences of an impermissible avoidance arrangement. However. • While processing an application under Section 195(2) or 197 of the Act the AO Shall not invoke GAAR where the taxpayer submits a satisfactory undertaking to pay tax along with interest. This implies that. 2012. and • Interest and penalty should not be charged/ levied under the provisions of the Act in cases where a tax demand is raised on account of a retrospective amendment relating to indirect transfer of assets. then. • The Government should abolish the tax on gains arising from transfer of listed securities. In order to make the proposal tax neutral. to both residents as well as non-residents. the Government may consider increasing the rate of Securities Transaction Tax (STT) appropriately. GAAR provisions shall not apply to examine the genuineness of the residency of an entity set up in Mauritius. • The phrase ‘directly or indirectly’. for determination of value of share of a foreign company. may be clarified as representing a ‘look through’ approach. Further. • Where a Foreign Institutional Investor (FII) chooses not to take any benefit under a tax treaty and subjects itself to tax in accordance with domestic law provisions. in the show cause to the taxpayer the AO gives a detailed reasoning alongwith the list of specified explanations and this may be prescribed in the rules. (ITA Nos. There were profits at the gross level and the losses at the net level were due to increase in operating costs. The High Court further ruled that whether or not to enter into the transaction is for the taxpayer to decide. no separate / additional allocation is called for on account of location savings. Thus. Tribunal ruled that the tax department has not been able to substantiate that the taxpayer has borne any business risks and how the taxpayer’s routine activities led to development of any valuable supply chain or human asset intangible. With regard to the tax departments’ contention that the taxpayer had generated location savings in India. Taxpayer used Transactional Net Margin Method (TNMM) to substantiate cost plus 15% remuneration to be the ALP. CIT v. 1070/2011) For further details please refer to our Flash News dated 12 April 2012 available at this link Cost plus remuneration model is more appropriate in case the taxpayer is merely a low risk bearing sourcing support service provider and no additional allocation for location savings required. The TPO. The Tribunal agreed with the decision of the CIT(A) that the royalty payment was justified and held that the TPO was wrong in disallowing the same. Arm’s length price (ALP) of royalty expenditure not to be linked with profit/income resulting therefrom The taxpayer was engaged in the business of manufacturing and trading of refrigerators. For Financial Years (FYs) 2001-02 and 2002-03 the Transfer Pricing Officer (TPO) disallowed the transaction of payment of royalty by the taxpayer to its associated enterprise (AE). The quantum of expenditure can be examined by the TPO as per law but he has no authority to disallow the expenditure on the ground that the taxpayer has suffered continuous losses. The TPO disregarded the business and commercial realities of the business of the taxpayer and acted in a mechanical manner. The royalty payments did not enable the taxpayer to achieve profits from its operations and the increase in turnover also did not result in any profit. Commissioner (Appeals) [CIT(A)] ruled that it was imperative for the taxpayer to upgrade its technology due to competition and market dynamics. Royalty payment should have been allowed even if the taxpayer had suffered continuous losses in the business. Thus payment of royalty to the AE was not justified. Assets and Risks (FAR) analysis rejected such approach and held that commission at the rate of 5% on the Free on Board (FOB) value of goods sourced by the AE through Indian vendors was the most appropriate ALP.Transfer Pricing Tax department cannot dictate to the taxpayer whether or not to incur expenditure. washing machines. the Tribunal ruled that location savings arise to the industry as a whole and there is nothing to prove that the taxpayer was the sole beneficiary. Tax department contended that the taxpayer has been incurring huge losses year after year. based on the Functions. The taxpayer only needs to show that the expenditure should have been incurred ‘wholly and exclusively’ for the purpose of business. 1068/2011 & ITA Nos. The High Court relied on various judgments and concluded that it is not necessary for the taxpayer to show that any legitimate expenditure incurred by him was also incurred out of necessity or that the expenditure incurred has actually resulted in profit or income. 24 . EKL Appliances Ltd. The Dispute Resolution Panel (DRP) upheld the TPO/Assessing Officer (AO)’s order. The High Court also relied on the Organization for Economic Co-operation and Development (OECD) Guidelines to substantiate that tax administrations should not disregard and restructure the transactions as actually undertaken by the taxpayer except in exceptional circumstances. The taxpayer was engaged in the business of sourcing of apparel merchandise from India for GAP Group. The High Court ruled that it is not for the tax authorities to dictate to the taxpayer as to how he should conduct his business and what expenditure should be incurred. compressors etc. However. the Tribunal concluded that the taxpayer cannot be held to be entitled to remuneration on the basis of Li & Fung case (i.Tribunal further held that the PLI of percentage of FOB value of goods procured by AE resulted in distorted results. Tribunal held that the taxpayer had placed substantial evidence on record and had been able to establish the nature and benefits of services provided by AE and the tax department had not brought out anything to negate such evidence. The taxpayer is engaged in only one class of business and thus entity level benchmarking using TNMM shall be most appropriate for all international transactions with AE. the appropriate PLI will be net profit / total cost (TC). GAP International Sourcing India P. the taxpayer contended that illustrative documentary evidence was submitted to the TPO substantiating and demonstrating description of services. it cannot be said that no services were received and directed the TPO to verify the costs of services based on appropriate allocation keys. TPO accepted the ALP of all the international transactions using TNMM except management service fee and coordination cost. 5871/Del/2011] For further details please refer to our Flash News dated 19 June 2012 available at this link The concepts of ‘arm’s length price’ and ‘ordinary profit’ are different and any excess profit over arm’s length profit cannot be the basis for denial of tax holiday deduction under Section 10A of the Income-tax Act The taxpayer was engaged in back office operations and enjoyed tax holiday benefits under Section 10A of the Income-tax Act. 1961 (the Act). AO held that the excess profit worked out in the context of TP was not entitled for deduction under Section 10A of the Act and passed a draft order denying deduction under Section 10A of the Act. on FOB value of goods procured). McCann Erickson India Pvt. Tribunal concluded that for non risk bearing procurement facilitating functions. Tribunal further held that only a business expert can evaluate the true intrinsic and creative value of such services. v. v. Taxpayer entered into various international transactions and applied TNMM to determine their ALP. TPO characterized these as intra group services received from the AE and computed the ALP of these payments as 'Nil'. DCIT [2012] 12 ITR 748 (Del) ] the Tribunal held that in the Li & Fung case the taxpayer was not able to establish that the AE was carrying out the critical functions. At the 25 . If a particular PLI results in abnormal results then another method and PLI should be chosen so as to provide rational results. ACIT [ITA No. The term “benefit” to a company in relation to its business has a very wide connotation and it is difficult to accurately measure these benefits in terms of money value separately.Tribunal accepted taxpayer’s suggestion that even if the Li & Fung ruling is applied. Thus. explanation on the type of services received. With regard to the tax department’s reliance placed on the Li & Fung case [Li & Fung India (P) Ltd. 5147/Del2011 & 228/Del/2012 AYs 2006-07 & 2007-08] For further details please refer to our Flash News dated 4 October 2012 available at this link Taxpayer had placed substantial evidence on record and successfully demonstrated benefits received from management services rendered by AE. TPO gave ad hoc relief of 40%. how these services have been received and in what manner and to what extent benefits have been derived by the taxpayer. ACIT [ITA Nos. the facts in the taxpayer’s case (GAP India) are different as all the significant functions are performed by the AE.e. DRP held that due to some evidence submitted. Ltd. Ltd vs. TPO accepted the transactions to be at arm’s length and stated in the transfer pricing order that profit reported by the taxpayer were above the arm’s length profit. Tribunal held that taxpayer’s TP adjustments be made by adopting 32% cost plus mark up of the taxpayer for assessment year (AY) 2006-07 and 2007-08. The payment had been quantified by an allocation methodology adopted by the group companies. the Operating Profit/ TC worked out to 32% and thus. At the CIT(A) level. The DRP confirmed the addition proposed by the AO. Phoenix Mecano (India) Ltd. ACIT (ITA No.2073/Mds/2011) For further details please refer to our Flash News dated 22 May 2012 available at this link Where the TPO fails to show expressly how all or any of the comparables selected by the taxpayer are not comparable. ALP cannot be used to determine ‘ordinary profits’ for the purpose of Section 10A(7) of the Act. CIT(A) eliminated six comparables selected by TPO on account of functional differences. do not state that ‘ordinary profits’ are to be computed with reference to TP provisions. The TPO. the taxpayer contended that the provisions of Section 10A(7) and Section 80-IA(10) of the Act. CIT(A) had rightly rejected the comparables selected by TPO due to functional differences. DCIT [ITA No 7646/Mum/2011] For further details please refer to our Flash News dated 9 January 2012 available at this link 26 . Further. in fact.the anti-avoidance provisions contained in Chapter X of the Act are a separate code enacted for the specific purpose of computing income from international transactions having regard to the ALP. if the Departmental Representative (DR) is allowed to fill in the gaps left by the AO/TPO it would amount to conferring the jurisdiction of the CIT under Section 263 of the Act to the DR. In the final set of comparables. Limited v.Appellate level. applied his own set of comparables and made an adjustment. The CIT(A) is not duty bound to examine the comparables given by the taxpayer to find out whether or not these were. Any adjustment that the AO would like to make with reference to the income would have to be made independent of the order of TPO. The Tribunal further held that the duty of the CIT(A) is to dispose of the appeal on the grounds raised before him and not to redo assessment. Tax department contended that the CIT(A) included comparables selected by the taxpayer without determining whether or not these were comparable. significantly higher turnover and brand value etc.Any irregularity committed by the AO in following the pre-determined procedures does not invalidate the assessment. without giving any cogent reasons for rejecting taxpayer’s comparables. • Difference in concepts of ALP and ‘ordinary profits’ . comparable. It is only an irregularity which is cured once the AO passes an order giving effect to the order of the Tribunal. v. Visual Graphics Computing Services (India) Pvt. • Assessment not vitiated . Tribunal ruled that: • Transfer Pricing regulations are a separate and distinct code . then a presumption has to be drawn that those cases are comparable The taxpayer in its TP Study considered TNMM with Net Cost Plus (NCP) margin as the PLI to benchmark its international transactions with AEs. CIT(A) deleted entire adjustment. CIT(A) included all comparables selected by taxpayer. The ALP has to be determined using the most appropriate method as per the TP provisions whereas ‘ordinary profits’ is a commercial concept.The ALP is determined on the basis of the most appropriate method determined in accordance with the rules. Since the taxpayer’s NCP fell within the permissible +/-5 percent range. controlled transactions. existence of controlled transactions etc. high turnover and brand value. which is not permitted by the statute. then a presumption has to be drawn that those companies are comparable. Tribunal ruled that where the taxpayer furnishes a list of comparable companies and the TPO fails to show expressly how such companies are not comparable. The CIT(A) was duty bound and should have examined the comparables given by the taxpayer. Further information requested must be relevant for levy of income tax and all the domestic means should be exhausted before the initiation of the request. Following are some of the important amendments of newly introduced India-Norway tax treaty: • The Most Favoured Nation (MFN) clause provided under the old tax treaty and which is applicable to Royalty. interest. The new Article 8 provides that profits from operation of ships in international traffic shall only be taxed in the foreign enterprise. to shipping business (Article 8). The amended protocol shall be effective in India in respect of income arising in any fiscal year beginning on or after 1 April 2012. The Protocol rationalises the provisions relating. 24/ 2012.Miscellaneous India notifies the tax treaty with Norway India and Norway signed a revised tax treaty on 2 February 2011. Fees for Technical Services (FTS) and Offshore activities has been deleted and as per the new tax treaty. • The amended tax treaty has reduced the rate of interest to 10 percent from earlier 15 percent. Under the new article information received can be used for other purposes than the levy of the income tax if admissible in both countries and provided that the requested authority agrees. an insurance enterprise.. • Under the present tax treaty if the Indian Government grants better terms to another OECD country with respect to taxes on interest. The following are the key features of the protocol: • Article 26 has been amended to facilitate and strengthen the exchange of information. • The new tax treaty has introduced an Insurance Permanent Establishment (PE) clause which states that. dated 19 June 2012 India notifies protocol amending tax treaty with Switzerland India has notified the second protocol amending the tax treaty with Switzerland which was signed on 30 August 2010. 27 . • The amended tax treaty has reduced the tax rate of dividends to 10 percent in all cases from earlier 15 or 25 percent. Notification No. and royalties and for FTS. dividends. the withholding tax rate shall not exceed 10 per cent of the gross amount of the Royalties or FTS. The revised tax treaty has now been notified and shall be given effect to in India in respect of income and on capital gain arising in any fiscal year beginning on or after 1 April 2012. • The definition of the term ‘resident’ has been amended to include pension funds or a recognised pension scheme of the contracting state. there is now an automatic MFN clause whereby the reduced rate of tax granted to the OECD country is automatically provided under the tax treaty. and Exchange of Information (Article 26). Switzerland and India shall enter into negotiations without undue delay. • The new tax treaty introduced the Article on ‘Limitation of Benefits’ as per which a resident shall not be entitled to the benefits of this tax treaty if one of the main purposes of the transaction undertaken by such a resident was to obtain the benefits under this tax treaty that would not otherwise be available. • The new protocol amended the existing protocol by introducing an anti-conduit provision whereby the beneficial provisions in respect of dividends. taxation of business profits (Article 7). shall be deemed to have a PE in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status. Under the protocol. The ‘conduit arrangement’ has been defined under the protocol. except in regard to re-insurance. FTS and other income shall not apply if the same is paid under or as part of conduit arrangement. • The new protocol has amended Article 8 of the tax treaty to provide the mechanism for taxation of income from operation of ships in international traffic. inter alia. Reliance Industries Ltd. Thus it was held that the redemption of preference shares results into ‘transfer’ under Section 2(47) of the Act and benefit of indexation is also available upon redemption. The key amendments to the tax treaty are as follows: • Article 4 of the tax treaty. The preference shares were issued by a group company. the ‘Dividends’ Article. Further. the AO also denied the benefit of long term capital loss on the ground that the taxpayer as well as issuer company were part of the same group and there was no ‘transfer’ upon redemption of preference shares as per the provisions of the Act. The High Court inter alia relied on the decision of Supreme Court in the case of R.Notification No. For further details please refer to our Flash News dated 9 November 2012 available at this link Indexation benefit under Section 48 of the Act is available on redemption of non-cumulative redeemable preference shares The taxpayer was engaged in the business of share broking and also dealt in shares. but have a settled connotation under the Companies Act. CIT v. that both the taxpayer and the Company of which the taxpayer held redeemable preference shares were juridical entities and the mere fact that both were under common management would not necessarily indicate that the transaction was not genuine. i. Ltd. The Supreme Court reverses the 28 . anti-abuse provisions are included in the ‘Dividends’ Article which provides that if the main purpose of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid is to take advantage of the dividend article. The AO treated non-cumulative redeemable preference shares as ‘bonds or debentures’ since the instrument carried a fixed holding period and fixed rate of return and hence denied the indexation benefit on the said transaction. 62/2011. i. 1956 (Companies Act). Goyal v. dated 28 December 2011 Protocol amending the India-UK and Northern Ireland tax treaty India and UK signed a Protocol on 30 October 2012 amending the Convention for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains. as regards AO’s allegation that it was a sham transaction since the management of the taxpayer company and the issuer company was the same. now provides that the benefits of the tax treaty will apply to income derived by a partnership firm to the extent such income is taxed in the UK either in the hands of the partnership or in the hands of its partners.e. The Bombay High Court relying on the decision of the Supreme Court in the case of Anarkali Sarabhai v.e. after availing the benefit of indexation. [2003] 113 Com Cases 1 (SC) to arrive at the conclusion that there is clear distinction between bond and share capital. then no relief shall be available to the taxpayers. After observing various provisions under Company law. • Further. Enam Securities Private Limited [2012] 345 ITR 64 (Bom) Reduction towards profits on transfer of DEPB under Section 28(iiid) of the Act while computing benefit under Section 80HHC of the Act should be restricted only to surplus. it was held that since the management of the taxpayer company and the issuer company was the same. the High Court observed that there is distinction between bonds or debentures and preference shares. CIT [1997] 224 ITR 422 (SC) held that the redemption of preference shares amounts to ‘transfer’ as per the provisions of Section 2(47) of the Act. the gross amount of dividend will be taxed at the following rates:  15 percent if such dividend is paid out of income derived directly or indirectly from immovable property by an investment vehicle which distributes most of its income annually and whose income from such immovable property is exempt from tax. • According to Article 11 of the tax treaty. the ‘Resident’ Article. The High Court further observed that the terms ‘bonds’ or ‘debentures’ are not defined under the Act. The taxpayer had subscribed to four lakh non-cumulative redeemable preference shares in 1992. Enam Finance Consultants Pvt.D. During AY 2002-03. Further. These shares carried fixed rate of dividend and were redeemable after 10 years. it was held that since the transaction was not questioned by the revenue for over ten years. The tax department did not bring any material on record whatsoever to substantiate the contention that the transaction was sham and it does not give rise to any substantial question of law. and  10 percent in all other cases. the taxpayer redeemed 3 lakh shares at par and claimed a long term capital loss. The change in language between the Bill and the Act was conscious and with a purpose. it applied only to the ‘amount payable’. ACIT [2012] 136 ITD 23 (Visakh) (SB) For further details please refer to our Flash News dated 18 April 2012 available at this link Claim of deduction made by the taxpayer in the assessment and appellate proceedings but not in the income-tax return. However. Merilyn Shipping & Transports v.875 million and commission of INR 243 thousand during the year under consideration. the 29 . The AO while computing deduction under Section 80HHC of the Act reduced the entire sale proceeds of the DEPB as against the difference between sale proceeds and face value of DEPB. During the year under consideration the taxpayer sold the DEPB (Duty Entitlement Pass Book) and DFRC (Duty Free Replenishment Certificate) which had accrued to it on export of its product. In its return of income while computing deduction under Section 80HHC. • It had direct nexus with the cost of import for manufacturing of export product. During the assessment proceedings. The matter was referred to the Special Bench of the Mumbai Tribunal. However. can be entertained and allowed by the appellate authorities During the Financial Year (FY) 2003-04 the taxpayer paid certain fees to the Securities and Exchange Board of India (SEBI) worth INR 4 million for a provision which was made in FY 2001-2002. the taxpayer reduced only the difference between sale proceeds and face value of the DEPB and not the entire sale proceeds of the DEPB from the profit of the 80HHC unit. • The DEPB was a kind of assistance given by the Government of India to the exporter to pay customs duty on imports and therefore it was in the nature of cash assistance under Section 28(iiib) of the Act. CIT [2012] 342 ITR 49 (SC) For further details please refer to our Flash News dated 23 February 2012 available at this link TDS Disallowance applies only to amounts ‘payable’ as at 31st March and not to amounts already ‘paid’ during the year The taxpayer had incurred brokerage expenses of INR 3. The AO disallowed the entire expenditure under Section 40(a)(ia) of the Act. The legislative intent was clear that only the outstanding amount or the provision for expense and not the amount already paid is liable for disallowance if tax at source is not st deducted. The Supreme Court held that the face value of the DEPB was taxable under Section 28(iiib) of the Act and the difference between face value and sale value was taxable under Section 28(iiid) of the Act. No tax was deducted at source on the said expenditure by the taxpayer. • The High Court was not correct in drawing parallel with the sale of license under Section 28(iiia) of the Act wherein entire sale proceeds are treated as profit of business. • The face value of the DEPB was taxable under Section 28(iiib) of the Act in the year in which a person applies for DEPB. However.Bombay High Court ruling in Kalpataru on DEPB issue The taxpayer was a manufacturer and exporter of fabrics and garments. The Supreme Court on a perusal of the Handbook on DEPB and Export and Import policy of the Government of India observed and held as under: • The objective of the DEPB scheme was to neutralise the incidence of customs duty on the import content of the export product. Topman Exports v. it was proposed to make it applicable to any ‘amount credited or paid’. Section 40(a)(ia) of the Act can apply only to expenditure which is ‘payable’ as of 31 March and does not apply to expenditure which has been already paid during the year. one of the members on the bench dissented with the view of the majority. Consequently. • The difference between face value and sale value was taxable under Section 28(iiid) of the Act at the time of transfer of DEPB. when enacted by the Finance Act 2004. The Special Bench of the Tribunal observed that when Section 40(a)(ia) of the Act was proposed to be inserted by the Finance Bill 2004. Further out of this expenditure only INR 178 thousand was payable at the year end and the rest was paid during the year. inadvertently in the return of income the taxpayer claimed deduction of only INR 2 million. The words ‘credited/ paid’ and ‘payable’ had different connotations and the latter referred to an amount which is unpaid. the Mumbai Tribunal. Further. operated in India through its branches which constituted a Permanent Establishment (PE) of the taxpayer in India within the meaning of Article 7 of the IndiaUAE tax treaty. CIT [2006] 157 Taxman 1 (SC). In some cases. the AOs uploaded such disputed demands on the Financial Accounting System portal of Centralised Processing Center. inter alia. etc. considering the genuine hardship faced by taxpayers. This impacted those taxpayers. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. has issued instructions to its subordinate incometax authorities to process the rectification of tax assessments that were otherwise time-barred. dated 20 June 2012 For further details please refer to our Flash News dated 27 June 2012 available at this link Protocol to a tax treaty does not apply retrospectively unless explicitly intended otherwise The taxpayer. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] held that the protocol amending the provisions of Article 7(3) of the tax treaty is clarificatory in nature and is to be applied retrospectively and accordingly disallowed head office expenditure in excess of the restrictions contained in Section 44C of the Act. The CBDT. However. since such demand was already paid or reduced/eliminated in the appeals. when two sovereign nations enter into a tax treaty and have come to an understanding regarding the terms expressed in the tax treaty. The conclusion that the error in not claiming the deduction in the return of income was inadvertent cannot be faulted. They may choose not to exercise their jurisdiction in a given case. it was held that the Supreme Court did not hold anything contrary to what was held in the previous judgments and hence. the CIT(A) allowed a deduction of INR 4 million as per the provisions of Section 43B of the Act. who disputed the figures of arrear of demands. observed and held as follows: • It is a cardinal principle that. The appellate authorities have jurisdiction to deal not merely with additional grounds. it can be made before the appellate authorities. The taxpayer relied on the provisions of Article 7(3) of the India-UAE tax treaty (prior to 1 April 2008) to hold that the restrictions with respect to the allowability of head office expenditure contained in Section 44C of the Act is not applicable to it for periods prior to 1 April 2008. mala-fide. In such cases. the AOs were unable to correct or reconcile such disputed demand on the ground that the rectification order was timebarred. the income from banking operations in India was offered to tax in India after claiming deduction for head office expenditure attributable to the operations in India. but also additional claims not made in the return filed by it. Bengaluru which resulted in adjustment of refund arising out of processing of income-tax returns for other tax years against such arrear demands. The Bombay High Court relying on various judicial precedents held that the taxpayer is entitled to raise additional grounds not merely in terms of legal submissions. 30 . The AO rejected the claim on the ground that he had no authority to allow any relief or deduction which had not been claimed in the return of income. such terms cannot be unilaterally changed. but with additional grounds which were available when the return was filed. which clearly indicate that only actual payments made are to be allowed as a deduction. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. such a rectification was permitted only if it was made within four years from the end of the FY in which the order sought to be amended was passed. etc. CIT v. a banking company incorporated in the UAE. The tax department has not suggested or established that the omission was deliberate. in specific circumstances of such past arrears of demand. The Tribunal upheld the order of the CIT(A). 4 of 2012.taxpayer made a claim of INR 4 million under Section 43B of the Act. even if a claim is not made before the AO. in relation to the tax department’s reliance on the Supreme Court’s decision in the case of Goetze (India) Limited v. However. an income-tax authority can amend any order passed by it with a view to rectify any mistake apparent from the record. In connection with the above. which became available on account of change of circumstances or law. Circular No. However. During the year under consideration. the un-rectified arrears of demand were shown as outstanding in the records of the AOs. barring certain prescribed exceptions. Pruthvi Brokers & Shareholders [2012] 208 Taxman 498 (Bom) For further details please refer to our Flash News dated 11 July 2012 available at this link Extension of time limit to rectify assessments in specific circumstances of past arrears of demand Under the Income-tax provisions. cash or monetary grant from the pharmaceutical and allied health sector industries. travel facility. if this has been incurred for a purpose which is either an offence or prohibited by law. taken to be prospective in operation. • In the instant case. DIT [2012] 23 taxmann. Accordingly. such limitation cannot be read into even impliedly. the SLP is disposed by granting liberty to the petitioner to move the appropriate High Court under Article 226 and/or 227 of the Constitution. Thus. However. the Explanation appended to this sub-section denies claim of any such expense. Further. which is a regulatory body constituted under the Medical Council Act. 226 and 227 of the Constitution are constitutional provisions vesting jurisdiction on the Supreme Court and the High Courts and a provision of the Act of legislature making the decision of the AAR binding could not come in the way of the Supreme Court or the High Courts to exercise jurisdiction vested under the Constitution. Etiquette and Ethics) Regulations. The question before the Supreme Court in this petition was whether the ruling pronounced by the AAR can be challenged by the petitioner or by the tax department before the Supreme Court or the High Court. 2002 on 10 December 2009 imposing a prohibition on medical practitioners and their professional associations from taking any gift. prima facie. Columbia Sportswear Company v. challenging the ruling of AAR. hospitality. The Supreme Court held that AAR is a body exercising judicial power conferred on it under chapter XIX-B of the Act and hence it is a Tribunal within the meaning of Articles 136 and 227 of the constitution of India. Further the Supreme Court overruled the AAR ruling in the case of Groupe Industrial Marcel Dassault [2012] 340 ITR 353 (AAR) and held that to not permit an advance ruling of AAR to be challenged before the High Court under Articles 226 and/or 227 of the Constitution of India would be to negate a part of the basic structure of the Constitution. ADIT [2012] 23 taxmann. It further held that Articles 136. refuse to grant special leave on the ground that the challenge to the advance ruling of the AAR can also be made to the High Court on the same grounds even if good grounds are made out in SLP under Article 136. Abu Dhabi Commercial Bank Ltd. Etiquette and Ethics) Regulations. it has been made to have the retrospective effect. • The parties interpreting the tax treaty get a vested right under existing tax treaty and any such interpretation giving retrospective effect not only impairs the vested right but attracts the new disability in respect of transactions already entered in the past. unless it is expressly or by necessary implication provided to have retrospective operation. it has to be.• Where both the countries had not used the limitation clause for applicability of domestic law in determining the profits and deduction of expenditure of a PE under Article 7(3) of the tax treaty. that such a provision existed. In this SLP. Though Article 136 of the Constitution of India states that the Supreme Court may ‘in its discretion’ grant special leave to appeal against any order passed by any court or Tribunal in the territory of India. and if so filed. by necessary implication. Thus. the claim of any expense incurred in providing above mentioned or similar freebies being in violation of the provisions of the Indian Medical Council (Professional Conduct. the Supreme Court may still. 2002 shall be 31 . v. the amendment brought in Article 7(3) of the tax treaty will not apply retrospectively.com 359 (Mum) For further details please refer to our Flash News dated 2 August 2012 available at this link The Supreme Court held that the AAR ruling can be challenged by way of writ under Articles 226/227 of the constitution. Section 37(1) of the Act provides for deduction of any revenue expenditure from the business income if such expense is laid out/expended wholly and exclusively for the purpose of business or profession. the Supreme Court also held that when an advance ruling of AAR is challenged before the High Court under Articles 226 and/or 227 of the Constitution of India. • When a particular provision in a tax treaty is introduced from a particular date. neither a substantial question of general importance arise nor is it shown that a similar question is already pending before this Court for which the petitioner should be permitted to approach this Court directly against the advance ruling of the AAR. 1956 in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct.com 444 (SC) For further details please refer to our Flash News dated 10 August 2012 available at this link Freebies to doctors violate law and are not allowable as deduction The Medical Council of India. the same should be heard directly by a Division Bench of the High Court and decided as expeditiously as possible. the retrospective operation cannot be taken to be intended unless. in its discretion. the High Court should dispose the same expeditiously The taxpayer has filed SLP before the Supreme Court under Article 136 of the Constitution of India. The taxpayer placed reliance on the decision of Bombay High Court. the appeal was barred by limitation and hence application for condonation of delay was filed. it also held that the remedy of appeal is a statutory right and hence it has to be presented in accordance with the procedure. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other taxpayer which has provided aforesaid freebies and claimed it as a deductible expense in its accounts against income. include compliance with External Commercial Borrowing (ECB) regulations/Reserve Bank of India (RBI) guidelines. which inserted sub-section (2A) in Section 260A of the Act. Jacob and others AIR [1999] SC 1845. ACIT [2011] 138 TTJ 257 (Mum). the manner and within the time prescribed by the statute. The High Court observed that on 11 December 2009. in the case of Tata Communications Ltd v. Ltd. Roy v. Ronuk Industries [2011] 333 ITR 99 (Bom). DCIT (Income Tax Appeal No.II]. In the review petition the taxpayer contended that the High Court has the power to condone the delay in view of insertion of Sub-section (2A) of Section 260A of the Act inserted by the Finance Act. then the view favourable to the taxpayer has to be followed. No. being an expense prohibited by the law. 225/142/2012-ITA. The Delhi Tribunal had to consider whether it was the view of the Bombay High Court and that of the Special Bench had to be followed or that of the Karnataka High Court. dated 1 August 2012 For further details please refer to our Flash News dated 17 August 2012 available at this link CBDT prescribes conditions to avail lower withholding tax at the rate of five percent under Section 194LC of the Act on interest paid on borrowings made in foreign currency The CBDT has issued a Circular granting a blanket approval to all borrowings by way of loan agreement and long term infrastructure bonds that satisfy certain prescribed conditions. The taxpayer then challenged the said order before the Supreme Court by special leave wherein the Supreme Court ordered to expeditiously hear and dispose of the review petition. inter alia.B. The tax department. Further. Mohd. (ITA No. wherein it was held that the Tribunal had jurisdiction to extend a stay beyond 365 days. The prescribed conditions. The Allahabad High Court. 127 of 2006 dated 7 September 2012) (All HC) For further details please refer to our Flash News dated 15 October 2012 available at this link Judicial conflict as to whether Tribunal has power to extend stay beyond 365 days was resolved in the favour of taxpayer The taxpayer was granted a stay of demand on the first occasion by an Order dated 4 March 2011 for six months which was further extended to another six months vide Order dated 16 September 2011 and then another six months vide Order dated 12 March 2012. dated 21 September 2012 [(F. C. relying on the decision of Supreme Court in the case of Babu Ram v. 32 . relying on the decision of the full bench of its own jurisdiction in the case of CIT v. The taxpayer approached the tribunal for grant of a further stay. 5/2012 [F. even if the delay was not attributable to the taxpayer. The Allahabad High Court dismissed the review petition. Settlement Commission (2004) 264 ITR 571 (Mad). 160 of 2012). The Delhi Tribunal observed that in the case of Narang Overseas (P) Ltd v. it was held by the Special Bench that if there is a cleavage of opinion amongst different High Courts and there is no decision of the jurisdictional High Court on the issue. Circular No. C.inadmissible under Section 37(1) of the Act. contended that the Tribunal had no power to extend a stay beyond 365 days. No. there was no discretion with the court to condone the delay since the power to condone the delay has come to the court by virtue of the amendment made by Finance Act 2010. Since an appeal was filed after 180 days. when the instant appeal was dismissed on the ground of limitation. 142/17/2012-SO(TPL)] For further details please refer to our Flash News dated 24 September 2012 available at this link Retrospective amendment is not applicable to the matter which has already attained finality before introduction of the amendment An appeal was filed by the taxpayer under Section 260A of the Act against the decision of the Tribunal dated 31 August 2005. J. Ecom Gill Coffee Trading Pvt. and on the decision of Special Bench. relying on the decision of the Karnataka High Court in the case of CIT v. and held that cases already settled before the amendment cannot be re-opened. and the principles of natural justice cannot be attracted so far as the question of limitation is concerned. 07/2012. Farooq (2009) 317 ITR 305 (All). with effect from 1 October 1998. 2010. The High Court inter alia relied on the decision of Ace Investment Limited v. in the case of CIT v. rejected the application for condonation of delay and accordingly dismissed the appeal. ACIT [2008] 114 TTJ 433 (Mum) (SB). Circular No. Since there was no transfer.  Every member has an anterior title to the property which is subject matter of partition or a family arrangement. • The High Court held that the order of the Tribunal was in accordance with the law. Therefore. the Tribunal had.  What is recorded in the family settlement is nothing but a partition. Qualcomm Incorporated v. after considering entire material. 33 . R Nagaraja Rao [2012] 207 Taxman 236 (Kar) For further details please refer to our Flash News dated 19 April 2012 available at this link The Income-tax Appellate Tribunal Specifies Procedure and Guidelines for hearing of appeals via VideoConferencing On 2 March 2012. categorically held that the transaction is a family arrangement.As the view of the Bombay High Court in Ronuk Industries and that of the Special Bench in Tata Communications Ltd is favourable to the taxpayer. that has to be followed and it has to be held that the taxpayer is entitled to a stay of the demand even after the expiry of the period of 365 days if the delay in disposal of the appeal is not exclusively attributable to it. 177 to 183/ Del/2012) A family arrangement cannot be construed as 'transfer' for capital gain purposes The Karnataka High Court held that the family arrangement / partition cannot be construed as 'transfer' for capital gain purposes.  Under family arrangement there is adjustment of shares. there is no liability to pay capital gain tax under Section 45 of the Income-tax Act. CIT v. capital gains tax. • In this case. the Tribunal issued a Practice Note alongwith the regulations regarding hearing of appeals through Video Conferencing system. wherein it was held that :  The word ‘transfer’ does not include partition or family settlement as defined in the Act. ACIT (Stay Petition no. there was no question of capital gains and hence. crystallisation of respective rights in the family properties and therefore it cannot be construed as a transfer in the eye of law. For further details please refer to our Flash News dated 23 November 2012 available at this link Excise Valuation Goods sold consistently at a price below the cost of production cannot be accepted as assessable value The central excise authorities rejected the valuation of motor cars which were sold consistently at a price lower than its cost of manufacture to penetrate the market and insisted the taxpayer to compute the assessable value by including the cost of production an other expenses on the ground that the cars were not ‘ordinarily sold’ in the course of wholesale trade as the cost of production was much more than their wholesale price. Pursuant to such decision. • The High Court had considered similar issue in the case of CGT v. the Income-tax Appellate Tribunal (the Tribunal) took a decision to set-up E-Tribunal for hearing appeals viz. Video Conferencing. 1961 (the Act). K N Madhusudan. It is provided that the appeals and applications fixed before the Nagpur Tribunal will be heard through Video Conferencing by the Members of the Tribunal sitting at Mumbai Tribunal E-Bench (EB).  When there is no transfer there is no capital gain and consequently no capital gain tax. 28/2012 . retrieval. The key changes are as follows: • The definition of ‘capital goods’ has been expanded to cover various motor vehicles when used for providing the output services and for transportation of goods. by way of insertion of a new rule.C. the ‘exempted services’ shall not include a service which is exported in terms of the Service Tax Rules. and which convey no information about the product to the consumer cannot come within its scope. The Apex Court held that. The taxpayer had sought an Advance Ruling as to whether the proposed activities would constitute “manufacture” under Central Excise Act 1944 (Central Excise Act). 1944 The taxpayer provides an online platform to facilitate the sale of goods by various merchants. None of the activities performed by the taxpayer alter the primary packing or the original labeling affixed by the merchant under applicable regulations and also no change is made in the MRP/RSP. and accordingly one has to resort to the valuation rules for the purpose of determining the assessable value. • A specific mechanism has been prescribed for distribution of credit by an input service distributor. ‘normal price’ is the price at which the goods are ‘ordinarily sold’. Admittedly taxpayer had been selling cars at a loss continuously for five years. the price declared should be accepted as the assessable value. where admittedly the position is that the original labels including the declaration of MRP/RSP is not being altered by the taxpayer. There is no value addition happening in the present case. All the activities undertaken by the taxpayer are intended to protect the merchant’s goods. each and every case of fixing a label or a sticker cannot come within the purview definition of ‘manufacture’ under Section 2 (f) of Central Excise Act. However.E (NT) dated 20 June 2012 Credit cannot be claimed in the case the supplier has not paid duties to the Government The taxpayer availed CENVAT Credit on goods purchased from a registered vendor. The taxpayer also provided logistical services (storage. facilitate inventory management and the logistics of storage. the transactions of the taxpayer could not fit into description of the expression ‘ordinarily sold’. The subsequent investigations carried out by the central excise authorities revealed that the said vendor had not paid any duties to 34 . • Specific provision is made for refund of CENVAT Credit to service providers of services taxed on a reverse charge basis. 1994. the price charged cannot be considered as the ‘normal price’ under Section 4. since no additional consideration is received over and above the assessable value declared and the dealings with their buyers were at arm’s length. The main objective of the amendment is to bring the CENVAT Credit provisions in line with the provisions under the new Service tax regime (Negative List based levy). Hence. Amazon Seller Services Private Limited [2012-TIOL-04-ARA-CX] [AAR] CENVAT Credit Notification for amending provisions The Central Government amended the CENVAT Credit Rules. shipment and transportation of goods. packing and shipping) in relation to the goods sold by the merchants. Notification No. Value addition is a relevant consideration. Fiat India Private Limited & Others [2012-TIOL-58-SC-CX] Manufacturing definition Each and every kind of packing/ labeling may not amount to ‘manufacture’ as defined under Section 2(f) of the Central Excise Act. Stickers that are affixed to goods for the purposes of inventory management. • The definition of ‘exempted services’ is amended to specifically provide that. and therefore.The taxpayer contended that. The main reason for the taxpayer to sell their cars at a lower price than the manufacturing cost and profit was to penetrate the market and this will constitute extra commercial consideration and not the sole consideration. CCE v. a Notification with regard to the mechanism is awaited. as per Section 4. 2004 effective from 1 July 2012. The AAR has held that. in case at the time of sale of such goods. when the input duty has not been paid initially into the public revenue.the Government and accordingly the central excise authorities demanded the taxpayer to reverse the credit availed. Ellen Industries v. The said Notification grants refund of SAD. what is abated cannot be taken away indirectly. 102/2007-Cus dated 14 September 2007. The customs authorities denied the refund on the ground that the goods are exempt from the payment of sales tax/ VAT and accordingly no sales tax/ VAT is paid at the time of sale of such goods. CCE [2012-TIOL-934-CESTAT-DEL] If VAT is exempted on the sale of goods. One of the conditions of the said Notification was that the refund claim should have been filed within one year from the date of payment of duty. the taxpayer cannot be given duty credit if the supplier from whom they have purchased the goods has not paid the duty to the Central Excise Department in the first place. the taxpayer filed a refund claim for Special Additional Duty of customs (SAD) paid. as per provisions of Notification No. CCE [2012-TIOL-1115-CESTAT-MAD] Circular – area based exemption The Central Board of Excise and Customs (CBEC) clarified that the area based exemption which provides exemption from the payment of excise duties to specified goods cleared from industrial units in the states of Uttaranchal and Himachal Pradesh for a period of ten years from the date of commencement of commercial production. The CESTAT held that. dated 17 February 2012 Customs Refund Refund of SAD of customs is required to be claimed within one year from the date of its payment and not from the date of finalisation of the assessment even under Provisional assessment The imports made by the taxpayer were provisionally assessed and on finalisation of the provisional assessments. the CENVAT Credit scheme cannot allow credit out of public revenue. and not from the date of payment of duty. Comm. they had taken the precaution to verify that the supplier is registered under central excise provisions and accordingly credit availed cannot be denied at their end. the period of one year has elapsed and accordingly the customs authorities rejected the refund claim. as there are other legal recourses available to the taxpayer to obtain compensation from the supplier. 102/07-Cus dated 14 September 2007. 960/3/2012-CX. The taxpayer contended that. then consequently SAD is also not required to be paid and as a result the SAD paid is required to be refunded. of Customs v. Circular No. Global International v. Katyal Metal Agencies [2012-TIOL-1053-CESTAT-KOL] 35 . The SAD is levied to counter-balance the effect of sales tax/ VAT and if sales tax/ VAT itself is not payable on the goods. Accordingly. The CESTAT held that the said Notification is a self contained code. The CESTAT held that. which requires claim to be filed within one year from the date of payment of tax and accordingly the refund claim filed is time barred. SAD refund claim cannot be rejected The taxpayer imported the goods on payment of Special Additional Duty of Customs (SAD) and subsequently claimed the same as refund under Notification No. would continue even in cases of (i) change in the ownership of the unit claiming the exemption or (ii) physical re-location of the unit within the exempted zone or (iii) expansion of units by acquiring adjacent lands and installation of additional plant and machineries therein. In this regard the taxpayer contended that the assessment of bill of entry was provisional until it was finalised and hence they should have been allowed one year time limit from the date of the order finalizing the provisional assessment. by the time the assessment was finalised and refund claim was filed. the importer pays the appropriate sales tax or value added tax (VAT). However. The CESTAT held that as it was undisputed that the goods which were imported did not conform to the specification given to the supplier and negotiations took place between the importer and supplier and. Bangalore. 24/2012-Cus dated 5 September 2012 36 .Duty liability In the case of deficiency in the quality of goods imported. Binani Cement Limited v. JNPT. only with respect to the import of few remaining consignments. by classifying the same under Chapter 9801. and accordingly negotiation took place with the supplier and the rate negotiated was less than the rate originally agreed upon. of Customs [2012-TIOL-1059-CESTAT-BANG] Circular 24X7 customs clearance operations introduced in identified Air Cargo Complexes and Seaports In order to facilitate imports and exports.. Mumbai and Delhi) and Seaports (Chennai. 22/2012-Cus dated 7 August 2012 E-payment of customs duties made mandatory The CBEC has made the e-payment of duty mandatory for importers paying customs duty of Rupees one lakh or more per Bill of Entry and for importers registered under the Accredited Clients Programme. the customs authorities disregarded the negotiated price and applied the price which was declared by the taxpayer in respect of an identical consignment which was imported by the taxpayer earlier. by classifying the same under their respective tariff headings. 24X7 Customs clearance with effect from 01 September 2012. 1986. the bundle of items/ goods must be complete so as to be considered to be “required for the setting up of a power plant or for the substantial expansion of an existing power plant”. The Customs Authorities rejected the registration sought by the taxpayer on the ground that. However. duty is required to be paid on the negotiated price and not on the basis of price of the identical goods The taxpayer imported the goods and cleared the same on provisional basis. considerable items/ goods required for the said project had already been imported and cleared on payment of duty on merits without registering under Project Import Regulations. 21/2002-Cus read with Project Import Regulations. constitute the whole bundle of goods/items of “required for the setting up of a power plant or the substantial expansion of an existing power plant”. the negotiated price is required to be accepted as the assessable value. as Project Imports. In the present case. of Customs [2012-TIOL-1587-CESTAT-AHM] Project Imports benefit available only if the entire consignment is imported under Project Imports The substantial goods required for the setting up of the Mega Power Project were imported by the taxpayer on payment of duty. with effect from 17 September 2012. the CBEC has started. Comm. at identified Air Cargo Complexes (viz. for classification under Heading 9801. by any stretch of imagination. the goods were agreed to be accepted subject to reduction in the price. Subsequent to testing of the said goods. Comm. Chennai. as Project Imports. substantial part of the material requirements for the Power Project imported are cleared on payment of duty at merit rates. Samalkot Power Limited & Others v. on a pilot basis. as a special case. The benefit of Project Imports is claimed only with respect to some items of machinery and these items alone cannot. and (b) Factory stuffed export containers and export consignment covered by Free Shipping Bills Circular No. The CESTAT held that it is imperative that. However. the taxpayer claimed the benefit of Notification No. Kandla and Kolkata) in respect of the following categories of imports and exports: (a) Facilitated Bills of Entry where no examination and assessment is required. Circular No. it was found that the imported goods are not up to standard. 2010 wide Explanation inserted in the categories of ‘Commercial or Industrial Construction Service‘ and ‘Construction of Residential Complex Service’ effective from 1 June 2010 provided for a deeming fiction of provision of construction service if any amount is paid before the issuance of completion certificate and levy of service tax on ‘preferential location services.’ A petition was filled in the Bombay High Court challenging these amendments the grounds that the tax on land and buildings can be levied by States and not by Central Government and there is no provision of service per se. These rules provide for specific provisions. 16/2012 dated 29 May 2012 and Notification No. 2012. In addition. it has also been clarified that no Service tax is applicable on any fee or conversion charges levied for sending such money as the person sending the money and the company conducting the remittance are located outside India. For further details please refer to our Flash News dated 9 July 2012 available at this link Service Tax (Settlement of Cases) Rules. 2012 notified under Service tax Law The CBEC notified Service Tax (Settlement of Cases) Rules. 163/14/2012-ST. changes have been made in reverse charge mechanism wherein it will be joint liability of service provider and recipient to discharge service tax in certain cases. Further. procedures and forms for settlement commission and compounding of offences under Section 89(1) (i. dated 29 May 2012 Clarification on Service tax on remittance of foreign currency in India The Government has clarified that no Service tax is applicable on the amount of foreign currency remitted to India from overseas as ‘transaction in money’. dated 10 July 2012 Levy of Tax on Construction activity Bombay High Court upholds constitutional validity of service tax on construction activities The Finance Act. Also.e. and such services are deemed to be provided outside India in terms of Place of Provision of Services Rules. Earlier more than 115 services were taxable whereas under the Negative List regime all services other than those mentioned in Negative List are taxable. The Bombay High Court dismissed the petition and upheld the levy inter alia on the ground that service tax on 37 . ‘Place of Provision of Services Rules’ have been introduced to replace the present Export Rules and Import Rules.For further details please refer to our Flash News dated 10 September 2012 available at this link Service tax Negative List Regime with effect from 1 July 2012 With the introduction of the Negative List Regime. Further. Consequently. this has been excluded from the definition of ‘service’ under Section 65B of the Finance Act. 2012 and Service Tax (Compounding of Offences) Rules. 17/2012. 1994. Circular No. 2012. certain services are specifically brought into the service tax net by introduction of list of declared services. Notification No. 2012 and Service Tax (Compounding of offences) Rules. provided they are not specifically exempted by way of Mega Notification. there is a paradigm shift from ‘selective taxation’ to ‘comprehensive taxation’. prosecution provisions) of the Finance Act. for which an additional payment is made and it cannot be said that such tax is on land and buildings. In the case of subsequent sale to other customers. In such cases. adopting the sale price of similar flats sold near to the date the land is made available for development • Reconstruction activities undertaken by a society by directly engaging a builder/developer would not be liable to service tax as the same is meant for personal use of the society/its members • Investment amount received by the builder/developer from an investor before commencement of the construction would be treated as a consideration received in advance for services to be provided and therefore. The CESTAT held that a service provider and service receiver relationship existed between the Appellant company and the land owners. It further held that the taxable category of ‘preferential location service’ is towards the additional advantage which the buyer gets in terms of flat facing a particular direction. before the issuance of completion certificate. Build-Operate-Transfer (BOT) projects. Joint Development agreements etc. the Appellants inter-alia constructed flats under a joint development agreement with the land owners and allotted flats in lieu of the land to the land owner. Commissioner of Service tax [2012-TIOL-618-CESTAT-MAD] Applicability of VAT in Maharashtra on newly constructed properties 38 . would be liable to service tax. In terms of the joint venture. the said transaction would also be subjected to service tax • For BOT projects. the consideration for such flats can be derived by applying the valuation principles prescribed under service tax law i. Maharashtra Chamber of Housing Industry and Others v. UOI and Others [2012-TIOL-78-HC-MUM-ST] For further details please refer to our Flash News dated 30 January 2012 available at this link CBEC clarification on levy of Service tax The CBEC issued clarification on applicability of service tax on construction services under various business models and divergent practices being adopted in the construction sector such as a Tripartite arrangement. both the parties joined together in the business of construction of the complex and the land owner brought in the capital by way of his land. The Appellant contested that there was no relationship of service provider and service recipient between the Appellant and the land owner and it was a joint venture for profit. such new entity would be treated as a separate person and its transaction with the builder/developer and owner of the land would be required to be examined for applicability of service tax. The department demanded Service tax on the value of the flats handed over to the landlord after 67 percent abatement. The key highlights of the Circular are as follows: • Service tax would be payable on flats allotted by the builder/developer to the land owner in exchange of development rights. Redevelopment/Rehabilitation projects. the activity of handing over of flats by the Appellant to the land owners would be liable to Service tax. transfer of right to use and/or develop the land by the Government or its agency for a specific period to a concessionaire. Circular No.construction activity is not a tax on land or building per se but a tax on an activity which occurs on land and hence the Central Government has the legislative powers to introduce the levy of service tax on such activity. 151/2/2012-ST dated 10 February 2012 Applicability of Service tax on construction of residential complexes under joint development agreement with the land owners In the instant case. As both the parties were neither taking risks jointly nor doing any common activity and there was no participation by the land owners in organizing or carrying out the activity. road etc.e. LCS City Makers Pvt Ltd v. for construction of building for furtherance of business or commerce would be liable to service tax under the category of ‘renting of immovable property services’ • In cases where the landowner and builder/developer collectively form a new entity or operate under joint/ collaboration basis. • The Trade Circular had majorly clarified that no other method apart from the earlier prescribed 4 methods will be admissible for discharging the tax liability by the Developers. however. 2012 and due date for payment of tax and filing of returns to 31 October. the Sales tax Department issued a new Trade Circular No. the Sales tax Department had issued a Trade Circular No. the same shall be returned alongwith interest at such rate that may be ordered by the Court finally at the time of disposal of the matter. • Against the said judgment. 2440 Of 2012 with Writ Petition No. In case any short payment is made by the Developer by choosing other than above mentioned four options. the High Court dismissed the same. 2012. 2012  In case the Developers pay tax before the due date. process of recovery of tax. MCHI had filed Special Leave Petition No. • The SLP filed by the MCHI as well as by the Promoters and Builders Association came for hearing before the Supreme Court of India on 28 August. file the returns and apply for administrative relief on or before 31 August. 39 .• The constitutional validity of amendment in the Maharashtra Value Added Tax Act 2002 (MVAT Act). • Considering the above. Therefore. 14T of 2012 dated 6 August. • Under the earlier Trade Circular No. 2006. The Supreme Court had admitted the SLP filed by MCHI. 17T of 2012 dated 25 September. 2502 of 2012] seeking the benefit of a composition scheme notified under the MVAT Act. 2012 clarifying the following:  Time for registration for Developers under MVAT Act has been extended till 15 October. Later. 2012 and extended the due date for registration for the Developers till 15 October. • To give effect to the interim Order. [Writ Petition (Lodg) No. the developers were liable to obtain registration under MVAT Act and pay tax on newly constructed properties under MVAT Act with effect from 20 June. 2022 of 2007 in the Bombay High Court. 2012. the balance tax shall be recovered according to the provisions of law. However. and Ors. 2012  The due date for payment of tax and filing of returns has been extended till 31 October. 2012 clarifying certain points. 2012 and pay the tax. the Commissioner of Sales Tax has issued a Trade Circular No. imposing Value Added Tax (VAT) on newly constructed properties was challenged by Maharashtra Chamber of Housing Industry (MCHI) vide writ petition no. The Supreme Court passed an interim Order dated 28 August. 2012.17738 and 17709 of 2012 (SLP) before the Supreme Court of India. 2012 wherein the Developers were liable to get themselves registered under MVAT Act on or before 16 August. 2012. a writ petition was filed by Builders Association of India & Maharashtra Chamber of Housing & Industry and Ors Vs The State of Maharashtra. no stay has been granted to the judgment of the Bombay High Court. on 30 October 2012. • The Bombay High Court upheld the constitutional validity of the same vide judgment dated 10 April. 2012 with regard to the imposition of VAT on newly constructed properties in the state of Maharashtra.14T of 2012 dated 6 August.18T of 2012 dated 26 September. interest or penalty shall remain stayed  The above payment of tax by concerned Developers shall be subject to the final decision in this matter by the Supreme Court  In case the amendment in the MVAT Act is held unconstitutional and the tax so deposited / paid by the Developers is ordered to be returned by the State Government to the Developers. 2002 by a Notification dated 9 July 2010 in respect of the period commencing from 26 June 2006 in the same manner as extended by the Notification to agreements which are registered on or after 1 April 2010. Notification No.5 percent for certain goods such as air conditioners. The important changes made in the Foreign Trade Policy are as under: • The zero percent duty under the Export Promotion Capital Goods (EPCG) Scheme has been extended up to 31 March 2013. mobile phones and watches above a certain price with effect from 1 April 2012. 2012 Notification No. Since the duties have been paid upfront at the time of import of capital goods.5 5 5 5. the export obligation would be 85 percent of normal export obligation. 31. export obligation under the EPCG Scheme would be 25 percent of the normal export obligation.No. motor cars. • Exporters may import capital goods on payment of duty in cash and subsequently receive a duty credit scrip on completion of export obligation. The Director General of Foreign Trade (DGFT) has also notified the Handbook of Procedures and Appendix to the Handbook of Procedures.5 5 14. dated 31st March 2012 Sales not liable to tax 40 .5 4 New Rate (percentage) 5 14.Dated 31st July.Foreign Trade Policy Annual supplement to Foreign Trade Policy notified The Government notified the Annual Supplement to Foreign Trade Policy 2009-14. • The present Policy allows scrips under different schemes of Chapter 3 of Foreign Trade Policy to be used for import of goods under the conditions of these Schemes. 2012 1 August 2013 Notification IX No FD 143 CSL 2. Notification No.126/2012.2011 GO.CT1-TAX-0025/2012 Dated 30th March. televisions. dated The VAT rate in the state of West Bengal has been increased to 14.5 5. • To promote manufacturing activity and employment in the North Eastern Region of the country. Earlier only scrips under SFIS were so permitted for procurement of goods from the domestic market. 456-F.NO.5 14 14.O.12. 1/(RE-2012)/ 2009-14 and Public Notice No. 2012 Notification I No FD 143 CSL 2.Dated 31st July.MS. 68/F2/2011.5 14 Karnataka Effective Date 1 January 2012 Notification No. both dated 05 June 2012 VAT Rate amendments The general rate of VAT has been amended in following states: State Puducherry Orissa Old rate (percentage) 4 12.12277-FIN.02/ (RE:2012)/2009-2014.T. Now these scrips shall be permitted to be utilized for payment of Excise Duty for domestic procurement also.R. 1 April 2012 1 August 2012 Notification S. the High Court held that so long as the purchasing dealer has complied with the requirements under the law. The Commercial Tax Officer (CTO) issued a notice to the dealer stating that agreements executed were works contracts subject to VAT. The refund claim was originally allowed. the claim of the taxpayer cannot be rejected or delayed. movement of goods from the State of Maharashtra to Mumbai High does not constitute a movement from one State to another State which is a mandatory requirement to attract the levy of tax under the provisions of the CST Act. Thus. the authorities construed the same as an interstate sale and sough to levy Central Sales Tax (CST). it was held that the terms of the agreement between the parties gave no indication of a sale or 41 . Pure Helium (India) ltd. Assistant Commissioner (CT) [2012] 50 VST 179 (Mad) Legislature Power State has power to tax deemed sale only if it is a works contract involving transfer of property in goods The issue involved was whether a contract for programming and provision of computer software is treated as a works contract taxable by the state legislature or a service contract falling within the power of Parliament. However. So long as the vendor is a registered dealer. The Supreme Court held that sale of goods at the duty free shop (a custom bonded premise) must be construed as sale of goods before the goods have crossed the customs frontiers and physical delivery of goods would not make the sales taxable. Althaf Shoes (P) Ltd v. However. thereafter a notice was issued seeking to withdraw the refund claim on the ground that its sellers had not reported the sales turnover and remitted the tax and it was directed to pay the tax immediately. Hotel Ashoka v. In the appeal. Commissioner of Sales Tax v. The assessee sold Helium gas to ONGC which is engaged in the production of crude oil at Mumbai High (located about 150 kms from the coastline of the State of Maharashtra).Sale of goods to Mumbai high region not an interstate sale The taxpayer a licensed manufacturer of Helium gas with a factory at Palghar in the district of Thane imported liquefied Helium gas and manufactured the requisite quality of Helium gas in its factory. Allowing the appeal. It is for the revenue to take necessary action against the vendors who had not remitted the tax. Mumbai High should not be considered to be part of any State in India. AC of Commercial taxes & ANR [2012-TIOL-08-SC-VAT] Refund Refund claim cannot be rejected or delayed for the pendency of his/her vendor’s assessment The petitioner a dealer and exporter of finished leather and shoe apparel claimed refund of the input tax credit in respect of the exports made. The department contended that such sales can only be claimed to be exempt if it is affected by transfer of documents of title to goods and not by giving physical possession of goods to customers. The taxpayer claimed that the sales which were effected were sale in the course of export under Section 5(1) of the Central Sales Tax Act 1956 (CST Act) since Mumbai High is located beyond the territorial waters of India and accordingly the sale transaction should be exempt from tax. the claim of the purchasing dealer cannot be denied by the revenue. (2012-VIL-11-BOM)(HC) Sale of goods by duty free shop is exempt from tax The Supreme Court held that tax is not payable on sale of goods by duty free shops at international airports to passengers coming into India since Section 5 of the CST Act exempts sale of goods by transfer of document to title to goods before the goods have crossed the customs frontiers of India. The mere fact that the revenue has not made assessment on the taxpayer’s vendor cannot stand in the way of granting refund to the taxpayer. The High Court held that the Continental Shelf and the Exclusive Economic Zone do not constitute a part of the territory of India and accordingly. The Assessing authority held that there was transfer of intellectual property from the technicians of the dealer to the clients who constituted a sale of intangible goods liable to VAT since the deliverables were both in terms of hardware and software. use or sale therein. entry tax has been introduced with effect from 1 April 2012 at the rate of 1 percent on the entry of specified goods into a local area for consumption. Furthermore. The title to the project/ software to be developed lay with the customer even before the dealer started rendering the service. the consideration was also based on the time spent by the dealer on the development. Therefore.T dated 31 March 2012 42 . On the conception of such an invention or discovery or idea. goods liable to VAT at 1 percent and certain goods liable to VAT at 4 percent are presently excluded. Exempt goods. 453. v. Notification No. At no point in time was the software the property of the dealer. the dealer agreed to disclose it to the client and the client had full power and authority to file and prosecute patent applications. the dealer had given up its rights to the software to be developed by the dealer. even before rendering the service.F. JCCT (Appeals) and another [2012] 55 VST 89 (Kar) Entry Tax In the state of West Bengal. Sasken Communication Technologies Ltd.purchase of this software and hence the entire agreement was for provision of service subject to service tax. 4th Floor Road No. Auda Garden. Phase II Gurgaon. Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Bangalore Maruthi Info-Tech Centre 11-12/1. G-1 10th Floor. Joshi Marg Mahalaxmi. The KPMG name.11. Block – EP & GP. Sector V Salt Lake City. a Swiss entity.com/in Ahmedabad Safal Profitaire B4 3rd Floor. Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Kolkata Infinity Benchmark. Although we endeavour to provide accurate and timely information.10. Inner Ring Road Koramangala. Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Mumbai Lodha Excelus. 8th Floor DLF Cyber City. Plot No. Apollo Mills N. Ravipuram. Opp. G. Palal Towers M. Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Chandigarh SCO 22-23 (Ist Floor) Sector 8C. All rights reserved. logo and “cutting through complexity“are registered trademarks of KPMG International Cooperative (“KPMG International”). Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Pune 703. 43 . No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Delhi Building No. Corporate Road. © 2011 KPMG. a Swiss entity. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). M. Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Chennai No. Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Hyderabad 8-2-618/2 Reliance Humsafar.kpmg. there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Road.www. Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Kochi 4/F.10.