Corporate guarantees are outside the ambit of international transaction even after retrospective amendment to section 92B

Bharti Airtel Ltd. v. ACIT [2014] 43 taxmann.com 150 (Delhi - Tribunal)

The Tribunal held as under:

• Capital financing transactions (covered by the Explanation to section 92B) are international transactions only if they have any real bearing as distinct from contingent effect on the profits, income, losses or assets of the enterprise;
• When an assessee extends an assistance to the Associated Enterprise (AEs), which does not cost anything to the assessee, such an assistance or accommodation will not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B(1).
• Corporate guarantees issued for the benefit of AEs do not cost anything to the issuing enterprise and yet it might provide certain comfort levels to the parties dealing with the AEs;
• These guarantees do not have any impact on profits, income, losses or assets of the enterprise. Therefore, corporate guarantees do not fall within the scope of the term 'international transaction' even after insertion of Explanation to section 92B by Finance Act, 2012 with retrospective effect from 01.04.2002.

Income of Malaysian branch of Indian Company not taxable in India if it was taxable in Malaysia on existence of Permanent Establishment

ACIT v. Sivagami Holdings (P.) Ltd [2014] 42 taxmann.com 418 (Chennai - Tribunal)

Facts:

• The assessee, an investment company, had a branch in Malaysia. It had admitted foreign income from Malaysian branch in its return of income and had claimed exemption on as per India-Malaysia DTAA.
• Thus, the issue that arose before the Tribunal was whether the Malaysian Branch of the assessee-company had a permanent establishment in Malaysia?.
• The levy of tax on the income of Malaysian Branch entirely hinges on the aforesaid question. In case the answer to above question was in affirmative, the income arising from foreign Branch would be exempt from tax in view of DTAA between India and Malaysia.

The Tribunal held as under:

• The order passed by Tribunal in earlier assessment year relating to assessee's own case was as under:
• There was nothing on record to deny the Malaysian branch of assessee-company the status of a permanent establishment operating in Malaysia;
• There was no dispute that the taxability of the income of the assessee and its Malaysian branch was governed by the India-MalaysiaDTAA (‘treaty’);
• As far as the income attributable in the hands of the assessee's Malaysian branch was concerned, the income was to be taxed in Malaysia;
• The income generated in the hands of the Malaysian branch of the assessee company was rent and interest income. They were generated from assets of assessee situated outside India;
• Therefore, the income of Malaysian branch of assessee-company was liable for taxation in Malaysia. Once it was liable for taxation in Malaysia, treaty made it clear that the said income was not subjected to the jurisdiction of Indian taxation.

• Thus, following the aforesaid order, it was held that the Malaysian Branch of the assessee was having a permanent establishment in Malaysia and the income arising there from was not taxable in India in view of treaty.
• Thus, the appeal of revenue was to be dismissed.

Survey party's promise of non-selection of case in scrutiny won't invalidate cases selected as per set norms. Even where petitioner disclosed additional income on assurance of survey party that his case would not be taken-up for scrutiny; Assessing Officer was still empowered to select petitioner’s case for scrutiny assessment.

Ajay v. Dy.CIT [2014] 42 taxmann.com 210 (Bombay High Court)

Facts:

• Pursuant to survey carried out by Income-tax department, the statement of petitioner had been recorded in which he had disclosed additional income;
• The petitioner contended that he had signed said statement after an assurance had been given by survey party that his return of income would not be taken-up for scrutiny;
• Subsequently, the petitioner was served with notice under section 143(2) informing him that his case was selected for scrutiny assessment. In the instant writ, the petitioner had challenged the legality and validity of scrutiny assessment.

The High Court held as under:

• The Assessing Officer is empowered to select a particular case for scrutiny assessment in view of guidelines fixed for selection of cases for income tax scrutiny;
• The Assessing Officer recorded reasons for selection of petitioner's case, sought approval of approving authority, who approved selection and, thereafter, assigned case for assessment;
• Thus, the requisite procedure was followed which was necessary before issuing notices under sections 143(2) and 142(1). Hence, the petition was to be dismissed.

ITES can’t be classified into BPO and KPO services; Companies providing ‘high end’ and ‘low end services’ not comparable

Maersk Global Centres (India) (P.) Ltd. v. ACIT [2014] 43 taxmann.com 100 (Mumbai - Tribunal) (SB)

The Tribunal held as under:

• Classification of ITES into low-end BPO services and high-end KPO services for comparability analysis would not be fair and proper;
• The companies providing mainly high-end services by using specialized knowledge and domain expertise couldn’t be considered as comparable for assessee-company, which was engaged in providing low end back office support services (like voice or data processing services) to its AE;
• Therefore, these entities (i.e. companies providing high end services) could not be taken as comparable to the assessee-company which was mainly involved in providing low-end services.

ESOP expenses is an employee cost; ITAT allows deduction for difference between market price and issued price

Novo Nordisk India (P.) Ltd. v. Dy.CIT [2014] 42 taxmann.com 168 (Bangalore - Tribunal)

Facts:

• The assessee was a wholly owned subsidiary of NNAS. As per the plan developed by NNAS, its employees and employees of its affiliates  were entitled to purchase its shares at a price, lesser than the market price
• In pursuance of aforesaid plan, assessee framed ESOP, as per which, the difference between fair market value of shares of parent company and price at which those shares were issued by assessee to its employees was reimbursed to its parent company;
• The sum so reimbursed was claimed as expenditure by assessee as an employee cost. The Assessing Officer rejected the claim of the assessee on ground that it resulted in capital building of the parent company.
• The CIT(A) confirmed the order of the Assessing Officer. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

• The shares were acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the assessee who in turn paid it to the parent company;
• The difference between the fair market value of the shares and the price at which shares were issued to the employees was met by the assessee. This factual position was not disputed at any stage by the revenue;
• Thus, there was no basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company;
• The impugned expenditure was wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company was also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1);
• Thus, the appeal of the assessee was to be allowed.

High Court agrees to keep confidentiality of 2G spectrum report; non-disclosure to assessee won’t vitiate reassessment

Acorus Unitech Wireless (P.) Ltd. v. ACIT [2014] 43 taxmann.com 62 (Delhi)

 

The High Court held as under:

• The law only requires that the information on which the Assessing Officer (AO) records his or her satisfaction that income has escaped assessment, is communicated to the assessee, without mandating the disclosure of any specific document;
• Where the reasons recorded had been communicated and it provided (independent of the 2G Report referred to in the reasons) details of the new and tangible information that support the AO's opinion, non-supply of 2G Spectrum report prepared by DIT(Inv) to the assessee on the grounds of confidentiality would not vitiate the proceedings initiated under section 147;
• There is no legal proposition that mandates the disclosure of any additional document. However, the AO could not, in all cases, refuse to disclose documents relied upon by him on account of confidentiality;
• The principle denying privilege or confidentiality would operate when no material is provided in addition to the mere assertion of the subjective satisfaction of the AO;
• Even then, the claim for privilege may still prevail in that the Court may consider the manner in which the documents were to be inspected, but such question did not arise in the instant case, where concrete and specific details (which supported the belief under section 147/148) were communicated to the assessee;
• Thus, the non-disclosure of the 2G Spectrum Report did not affect the impugned notice.

Contractual liability to pay custom duty on importer’s behalf won’t be hit by section 43B, it’s not statutory liability

Oswal Agro Mills Ltd. v. CIT[2014] 42 taxmann.com 100 (Delhi)

The High Court held as under:

• Section 43B applies only in cases of statutory liability. By virtue of the said section a statutory liability is not deductable in the year in which it accrues, if the same remains unpaid. A deduction with respect to a statutory liability is allowed only on payment of the same;
• The liability to pay the amount of additional customs duty on behalf of the importers as and when they were called upon to discharge the same was clearly a contractual liability and not a statutory liability;
• Therefore, in the instant case, the question as to whether the said liability would be considered as deductible under Section43Bwould not arise;
• Even assuming that section 43B would apply to such contractual liability, the furnishing of a bank guarantee to importers would not be considered as actual payment under section 43B so as qualify for deduction under that section.

Waterfront royalty recovered by State Government was not an 'intellectual property service'

State Charge Gog Port of Magdalla v. Commissioner of Central Excise & Service Tax [2014] 41 taxmann.com 376 (Ahmedabad - CESTAT)

Facts:

• The assessee, i.e., State Government had collected Waterfront Royalty charges, which were charged by Government of Gujarat from Fort users/private parties for use of such Waterfront;
• The Department sought levy of service tax on such charges under Intellectual Property Services.

The Tribunal held in favour of assessee as under:

• The definition of Intellectual Property Rights is about right available with an individual or person;
• The charges collected by the assessee-Government for usage of Waterfront as Waterfront Royalty Charges could not, prima facie, be covered under definition of Intellectual Property Rights.

Deemed STCG under section 50 qualifies for section 54EC relief as deeming fiction only provides mode of computation

CIT v. Polestar Industries [2014] 41 taxmann.com 237 (Gujarat)

 

Capital gain computed under section 50 qualifies for exemption if investment is made out of sale proceeds towards prescribed bonds under section 54EC.

In the instant case the issue that arose for consideration of High Court was as under:

Whether the exemption permitted by the statute under Section 54EC shall be available in the case of capital gains arising out of transfer of depreciable asset under section 50?

The High Court held in favour of assessee as under:

• The Madras High Court in the case of M. Raghavan v. Asstt. CIT [2004] 134 Taxman 790 has held as follows: The object of introducing section 50 was to disentitle the owners of such depreciable assets from   claiming the benefit of indexing. The said provision was never meant to confer such multiple benefits to assessees selling depreciable assets;
• Section 50 creates a deeming fiction only for mode of computation of capital gains under sections 48 and 49 and not for other provisions;
• Section 54EC does not make any distinction between depreciable assets and non-depreciable assets and, therefore, deduction available under section 54EC shall be available in case of capital gains arising out of transfer of depreciable asset, if investment is made out of sale proceeds towards prescribed bonds under section 54EC;
• Thus, the appeal of revenue was to be dismissed.

Investment of sales consideration provides section 54F relief even if construction isn't completed within 3 years

ITO v. Smt. B.S. Shanthakumari [2014] 41 taxmann.com 325 (Bangalore - Tribunal)

 

Where consideration received on transfer of property had been invested by assessee in construction of residential house, merely because construction was not completed in all respects within stipulated period, benefit of section 54F, could not be denied.

The Tribunal held in favour of assessee as under:

• It was clear from the order of the CIT (A) that the assessee had commenced construction of the building within a period of three years from the date of transfer of property. The construction, however, could not be completed by the assessee within three years;
• The Karnataka High Court in case of CIT v. Sambandam Udaykumar [2012] 19 taxmann.com 17 had taken a view that under the provisions of section 54F, the condition precedent was that the capital gain realized from sale of capital asset should have been parted by the assessee and invested in construction of a residential house;
• Benefit of section 54F couldn’t be denied to assessee if the money was invested in constructing the residential house, even if the construction was not completed in all respects and house was not in a condition to be occupied within the stipulated period;
• There is no particular stage of completion of construction that is contemplated by the provision. Therefore, the benefit of deduction under section 54F was to be allowed to the assessee.

Retainer fee to doctor would attract section 192 TDS instead of section 194J TDS if terms of contract prove him to be an employee

Escorts Heart Institute & Research Centre Ltd. v. Dy. CIT [2014] 42 taxmann.com 200 (Jaipur - Tribunal)

Cumulative effect of agreement with retainer-doctor is relevant to decide whether TDS is to be effected either under section 192or under section 194J.

The Tribunal held as under:

• Retainer-doctor was an employee and not an independent professional as terms of contract provided that:
• Retainer-doctor was debarred from taking any other assignment with any other company engaged in business similar to assessee-company (i.e., corporate hospital);
• He was required to follow rules, regulations and policies of assessee-company and to report to the head of the department in which he was working;
• He was to be paid fixed consolidated monthly fee with no fee-sharing with hospital.

• The retainership agreement was also for a limited period. Mere fact that the retainer-doctor had to raise monthly bills for getting payment of consolidated retainership fee would not make him an independent professional doctor, when in substance the cumulative effect of agreement indicated employer-employee relationship;
• Thus, his fixed monthly retainer fee was in nature of salary which would be liable for tax deduction under section 192 and it was not a professional fee liable for tax deduction under section 194J.

Amount of investment and not extent of construction is relevant to compute relief under section 54F

CIT v. Dr. R. Balaji [2014] 41 taxmann.com 411 (Karnataka)

 

Section 54F relief was available if sale consideration was invested in purchase of residential building as per provisions; in such a case extent of construction of residential building was irrelevant.

The High Court held in favour of assessee as under:

• What the law (i.e., section 54F) contemplates is, after selling the property, if the assessee invests the sale consideration in purchase of a residential property, he is entitled to exemption under section 54F;
• What should be the extent of construction of residential building, what facilities should be provided in such constructions to be eligible for the exemption, have not been set out in the Act;
• The Authorities have ensure, whether what is purchased is a residential construction or not?;
• If the material on record showed that prior to the sale, the vendor lived there and had sold the site along with the residential construction, merely because the property was not suitable to the assessee and construction materials were kept there, would not be a valid grounds to deny exemption under section 54F;
• Thus, assessee was entitled to avail of relief under section 54F.

Normal dress worn by employees isn’t ‘uniform’, no exemption on uniform allowance; employer to withhold tax

ONGC, Basin Baroda v. ACIT(TDS) [2014] 42 taxmann.com 350 (Ahmedabad - Tribunal)

The Tribunal held as under:

• As per dictionary meaning or even as otherwise understood in common parlance, "uniform" is an identifying outfit or style of dress which is identical or consistent without variations in details. Examples are uniform of police personnel, armed forces, canteen staff, etc;
• Uniform may change as per rank and designation of group of employees concerned. If appellant's interpretation of 'uniform'(that it's a standard style of dress and not uniformity of dressing style) were to be accepted, in every office, any dress worn by the employees' would qualify as 'uniform';
• The prescribed uniform was done away by appellant way back in 1995. No 'uniform' was prescribed by appellant during the period under consideration;
• Therefore, it could not be said that the allowance was towards purchase or maintenance of uniform and it could not be exempted from tax in the hands of employees under Rule 2BB(l)(f) read withsection10(14)(i). Thus, the appellant was liable for TDS from uniform allowances.