HUF or its Karta not a body corporate and not eligible to become a partner in LLP, MCA clarifies

SECTION 5 OF THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 - PARTNERS - WHETHER HINDU UNDIVIDED FAMILY (HUF)/ITS KARTA CAN BECOME PARTNER/DESIGNATED PARTNER (DP) IN LIMITED LIABILITY PARTNERSHIP (LLP)

GENERAL CIRCULAR NO. 13/2013 [F.NO. 1/13/2012-CL-V], DATED 29-7-2013

1. It has come to the notice of the Ministry that some Hindu Undivided Families (HUFs)/Kartas of such families are applying to become partner/ Designated partner (DP) in LLPs and a question has arisen whether a 'HUF' or a karta can be allowed to do so. The matter has been examined in consultation with Ministry of Law.
2. As per section 5 of LLP Act, 2008 only an individual or body corporate may be a partner in a Limited Liability Partnership. A HUF cannot be treated as a body corporate for the purposes of LLP Act, 2008. Therefore, a HUF or its karta can not become designated partner in LLP. 
3. This issues with the approval of Secretary, MCA

Service tax refund can't be denied without specifying documents required from assessee

CMA CGM GLOBAL (INDIA) (P.) LTD. V. COMMISSIONER OF SERVICE TAX (Mumbai - CESTAT)

Department cannot deny refund of service tax alleging non-supply of 'requisite documents'; it must specify, in writing, list of documents required, in addition to documents already submitted by assessee

In the instant case the assessee was a service provider to its associates which were located outside India. The assessee wrongly raised invoices on its associates for commission which had to be received from the associates and paid service tax thereon. Later on, on finding that invoice was not to be issued, it issued credit note and filed a claim for refund along with copy of service tax returns, invoices, credit notes, correspondence and challan and a certificate from chartered accountant. Despite all that the refund claim was rejected on the premise that the assessee had not provided the required documents in support of claim of its refund.

The Tribunal remanded the matter with the following observation:

The adjudicating authority must have specified, in writing, list of documents required, apart from documents already submitted by the assessee. Matter was to be remanded back for supply and verification of additional documents required by the adjudicating authority.

Valuation loss is allowable even if stock-in-trade shown as investment in compliance of RBI guidelines

KARNATAKA BANK LTD. v/s. ACIT (Karnataka)

Even though assessee-bank disclosed shares as investments in balance sheet to comply with RBI Guidelines, it was not estopped from treating the same as stock-in-trade for income-tax and claiming valuation loss thereon as these shares had been consistently shown as stock-in-trade in income-tax in the past years also

The High Court held as under:

• For the purpose of IT Act, as the assessee had consistently been treating the value of investment for more than two decades as stock-in-trade and claiming valuation loss thereon, it was not open to the authorities to disallow the said loss on the ground that in the balance-sheet it was shown as investment in terms of the RBI Regulations; 
• The question whether the assessee was entitled to particular deduction or not would depend upon the provisions of law relating thereto and not the way, in which the entries were made in the books of account. It was not decisive or conclusive in the matter; 
• The value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the Bank had to take into consideration the market value of the shares; 
• If the market value of shares was less than the cost price, they were entitled to deductions and it couldn’t be denied by the authorities under the pretext that it was shown as investment in the balance sheet; 
• The order passed by the authorities holding that in view of the RBI guidelines, the assessee was estopped from treating the investment as stock-in-trade was not correct. That finding recorded by the authorities was to be set aside. 

Acquisition of a new flat in exchange of an old flat is deemed construction and allows section 54 benefits

SMT. VEENA GOPE SHROFF V. ITO (Mumbai - Tribunal)

Where possession of new flat was received within 3 years from date of transfer, in exchange of an old flat under development agreement, it amounted to construction of property under section 54.

In the instant case, the assessee had exchanged an old flat for a new flat and got cash compensation under the development agreement with the builder. She claimed exemptions under section 54 and 54EC from capital gains arising on account of transfer of old flat. During assessment, the Assessing Officer (AO) disallowed the exemption under sec. 54 and 54EC on the ground that the assessee had neither purchased a house property nor constructed a new residential house. On appeal, the CIT (A) confirmed the disallowance made by AO. The assessee, on the other hand, contended that new flat had been constructed by the builder and its possession was handed over to her within a period of three years from the date of transfer and, therefore, this amounted to construction of a new flat.

The Tribunal held in favour of assessee as under:

• The assessee had exchanged an old flat with a new flat constructed by the builder under development agreement which amounted to transfer under section 2(47);
• Thus, the only other condition which was required to be satisfied was that assessee either had to purchase a new residential flat within the prescribed limit or construct a new residential flat within a period of 3 years from the date of transfer;
• The acquisition of a new flat under a development agreement in exchange of the old flat amounted to construction of new flat. This view was supported by the decision of the Tribunal in the case of Jatinder Kumar Madan v. ITO (2012) (Mumbai);
• Therefore, the provisions of section 54 were applicable and assessee was entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer;
• Since cash compensation was part of consideration for transfer of the old flat and the assessee had invested the money in NABARD bonds, the exemption under section 54EC would also be available. The assessee’s new flat got completed within a period of 3 years from the date of transfer of the old flat. Therefore, the assessee’s claim of exemption under section 54 was to be allowed and the order of the CIT(A) was set aside.

Assessee can change his method for determining ALP before TPO if it exhibits a better result

MATTEL TOYS (I) (P.) LTD. v/s. DY. CIT (Mumbai - Tribunal)

Assessee was not precluded to plead before the Transfer Pricing Officer (TPO) that the method chosen by him as the most appropriate method ('MAM') was not resulting into proper determination of ALP and some other method should be resorted to. Appellate authorities can take into consideration such a plea before them provided assessee demonstrates as to how a change in the method would produce better or more appropriate ALP in the facts of the case.

In the instant case, the assessee was importing toys from its AE and reselling the same in India without any value addition. The assessee in its TP study report chooses TNM Method as MAM which was accepted by the TPO and additions were made by it applying operating gross profit margin as PLI instead of average operating margin chosen by assessee. Assessee contended before CIT(A) that method chosen by it was not MAM and that RPM was MAM. The CIT(A) rejected assessee's contentions and dismissed appeal. Hence, instant appeal was filed by assessee against CIT(A)'s order.

The Tribunal held in favour of assessee as under:

• Under the RPM, products similarity was not a vital aspect for carrying out comparability analysis but operational comparability was to be seen. The gross profit margin earned by the independent enterprise in comparable uncontrolled transactions was a guidance factor in this method;
• This is also what happens in the case of a distributor wherein the property and service are purchased from the A.E. and are resold to other independent entities, without any value additions. The gross profit margin earned in such transactions becomes the determination factor to see the gross compensation after the cost of sales;
• As the assessee was a distributor of Mattel toys and got the finished goods from its A.E. and resold the same to independent parties without any value addition. In such a situation, RPM could be the best method to evaluate the transactions whether they were at ALP;
• Even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it was not precluded from raising the objections before the TPO or the Appellate Courts that such a method was not an appropriate method and was not resulting in proper determination of ALP and some other method should be resorted to;
• The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it was found that by adopting one of the prescribed methods other than those chosen earlier, the most appropriate ALP could be determined, the assessing authorities as well as the appellate Courts should take into consideration such a plea before them provided, it was demonstrated as to how a change in the method would produce a better or more appropriate ALP. Thus, the impugned order of CIT(A) was set aside.

Agency Permanent Establishment exist only if agents fit into meaning of ‘dependent agent’ provided in Article 5 of India-USA DTAA

VARIAN INDIA (P.) LTD V. ADIT (INTERNATIONAL TAXATION) (Mumbai - Tribunal)

In order to treat any agent as Permanent Establishment (PE) within meaning of Article 5 of relevant DTAA it is very vital that such agent should fit into description of 'Dependent Agent' and has to perform either of activities as mentioned in that article

The facts of the instant case were as under:

1. Assessee was Indian branch (VIB) of an American company VIPL which in turn was a 100 per cent subsidiary of Varian USA. Varian group of companies (VGCs) had five overseas entities in USA, Australia, Italy, Switzerland and Netherlands;
2. VIPL entered into distribution and representation agreement with all five VGCs for supply and sale of analytical lab instruments manufactured by them to Indian customers directly;
3. As per agreements, VGCs sold analytical lab instruments to Indian customers directly and assessee carried out pre-sale activities like liasoning and other incidental post-sale support activities for which it was entitled to commission;

The moot issue that arose for consideration of Tribunal was as under:

Whether the assessee-company, i.e., VIPL through its Indian branch (VIB) constituted a PE for Varian USA, Varian Australia and Varian Italy?

The Tribunal held as under:

1. Under article 5(4) of Indo-US DTAA, an agent is deemed to be PE if conditions mentioned therein are fulfilled;
2. In the instant case, the first condition as to whether the assessee is habitually exercising the authority to conclude contracts on behalf of the VGCs was not fulfilled, as it could be gathered from the facts that the assessee has no authority and also cannot negotiate or conclude contracts on behalf of the VGCs. It only provides marketing support and liaisoning activity for pre-sale and incidental and ancillary post-sale activities;
3. The second condition that the agent has no such authorities but habitually maintains Stock of Goods and merchandise from which he regularly delivers goods on behalf of foreign enterprises which contributes to the sale of the goods and merchandise also does not fulfilled, as the assessee has no authority on behalf of the VGCs and does not maintain any cost of analytical instruments supplied by the VGCs to the customers in India. The assessee mainly facilitates the process of sale;
4. The third condition is whether the person habitually secures orders wholly or almost wholly for the enterprise. In assessee's case, the orders relating to indent sale are only introduced and liaised by the assessee and not secured by it. Thus, none of the three conditions as enumerated in article 5(4) stands fulfilled so as to hold that the assessee is a dependent agent of various VGCs in India;
5. Under Article 5(5) of the Indo-US DTAA, an agent is a PE when the following twin conditions are satisfied simultaneously Firstly, when the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise; and Secondly, the transactions between the agent and enterprise are not made under the arm's length conditions. Both these conditions were not complied with in the instant case. Thus, under Article 5(5) also, the assessee cannot be held to be agent for constituting a PE in India for the various VGCs;
6. Even under the India-Australia DTAA and India-Italy DTAA, similar provisions are there in Article 5(4) with regard to the dependent agents. Under these DTAAs also, except for clause (d) all other clauses are by and large similar to Article 5(4) of Indo-US DTAA. The additional clause (d) provides that if a dependent agent manufactures or processes enterprise's goods or merchandise belonging to enterprise in that State, then such an agent is deemed as PE. In the instant case, admittedly, the assessee does not manufacture or process any other products developed or manufactured by VGCs. Thus, this clause of Article 5(4) in the above DTAAs is also not applicable
7. In order to treat any agent as PE it is very vital that such agent should fit into the description of 'Dependent Agent' and has to perform either of the activities as mentioned in Articles 5 of relevant treaty, otherwise it couldn’t be held that agent constitutes a PE of the foreign enterprise.

Vehicle registration services rendered by motor car dealer to its buyers aren’t ‘Business Support Services’

MY CAR (PUNE) (P.) LTD. V. COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX (Mumbai - CESTAT)

 

Rendering of assistance by a motor car dealer to its buyers in getting motor vehicle registration done cannot, prima facie, be regarded as 'Business Support Services'

In the instant case, the assessee, a motor car dealer, rendered services relating to registration of car to its buyers on payment of fixed charges. Such charges were used towards registration of car and excess collection, if any, was retained by the assessee. The Department sought to levy service tax on excess amount retained by assessee under 'Business Support Service' regarding it as 'transaction processing'

The Tribunal took, prima facie, the view in favour of assessee with the following observation:-

• Prima facie the activity undertaken by the assessee does not come within the purview of 'Business Support Service';
• The assessee was rendering assistance to its clients in getting the motor vehicle registration done. The said activity, by no stretch of imagination, could be considered as supporting the business of its customers.