Cap Rate

The discount rate used to determine the present value of a stream of future earnings. Typically this will be an appropriate risk-free return plus a premium to reflect the risk of that specific investment.

Receipts from capacity 'sale' of telecom cable link with transfer of ownership isn't taxable as 'royalty': ITAT

Flag Telecom Group Ltd. v. DCIT - (2015) 54 taxmann.com 154 (Mumbai - Tribunal)
 
What is envisaged in section 9(1)(vi) read with Explanation thereto, is consideration for use or rights to use of any equipment. If consideration was received by foreign company for sale of capacity involving transfer of ownership of cable system to Indian Company as distinguished from a mere payment for simply user of capacity, the consideration would not be taxable as royalty.

Facts :

• The assessee-company was incorporated in Bermuda, from where it was managed and controlled. Since, India does not have any tax treaty with Bermuda, therefore, the Income Tax Act was applicable.
• It was set up to build fibre optic cable system to increase the telecommunication traffic between and among Western Europe, Middle East, South Asia, South East Asia and Far East. 
• Assessee had entered into Memorandum of understanding (MOU) with 13 parties for the purpose of planning and implementation of the said Fibre optic Cable System. Videsh Sanchar Nigam Limited ('VSNL') was one of the original landing party to the MOU. For the purpose of selling the capacity in the cable system, Cable Sales Agreement (CSA) was entered into amongst the parties. 
• The assessee had sold the capacity to VSNL for USD 28,940,000. The CSA provided for the ownership rights in the Cable System with all the rights and obligations in the capacity cable.

The issue that arose for consideration of Tribunal was:

Whether the amount of US $ 28,940,000 was taxable in the hands of assessee as royalty income-tax Act?

The Tribunal held in favour of assessee as under:

• The entire agreement was for the period of 25 years which coincided with the life of the cable. In the agreement there were clear cut clauses for the ownership.
• One of the clauses of agreement clearly envisaged that the net proceeds on disposition of the cable system would be shared amongst the signatories in proportion to their ownership rights. 
• Not only that, there was right to assign the capacity, which was borne out from the fact that purchaser of the capacity could sell or grant right to use the capacity in the cable system to some other party. 
• All this clearly indicated that the signatory would become the owner of the capacity in the cable system after the purchase, that is, the VSNL in the instant case. 
• This fact further establishes that there was no payment for simply user of the capacity. In case of a 'royalty', agreement, the complete ownership is never transferred to the other party. What is envisaged in section 9(1)(vi) read with Explanation thereto, is that there should be transfer of rights of any kind of the property as defined therein; or imparting of any information in respect of various kinds of property; or use of rights to use of any equipments, etc. 
• If the consideration was received for transferring the ownership with all rights and obligations then such a consideration could not be taxed as 'royalty'.

Collateral

Assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default, also called security.

CIT can't consider violation of provisions of section 13 while granting registration to a trust

Kul Foundation v. CIT (2015) 54 taxmann.com 143 (Pune - Tribunal)

Provisions of section 13 couldn't be applied to deny registration to a trust or an Institution under section 12A - It shall be applied to decide deduction to be allowable to a trust or an Institution while completing assessment proceedings.

Facts :

• In the instant case, one of the objects of the trust was limited to the benefit of Jain community;
• The CIT contended that trust had violated provisions of section 13(1)(b) since benefits of sections 11 and 12 could not be extended to the charitable trust or institution which was established for the benefit of any specific religious community. Hence, he denied registration to trust under section 12A.

Issue:
The issue that arose for consideration before the Tribunal was:
"Whether the CIT has erred in denying the trust registration under Section 12A holding that the object clause of the Trust Deed is specifically for the benefit of the Jain Community which is a specific religious community and hence attracts the provisions of sec.13(1)(b)?"

The Tribunal Held in favour of assessee as under:

• In order to avail of the deduction under sections 11 and 12 of the Act, the trust or institution has to make an application for registration under section 12AA of the Act;
• The CIT after satisfying himself about the objects of the trust or Institution and about the genuineness of its activities, had to pass an order in writing granting or refusing the registration; 
• The Assessing Officer had to consider non-fulfillment of the conditions laid down in section 13(1)(b) during assessment procedure while allowing deduction under sections 11 and 12 to the trust or Institution; 
• Therefore, the CIT was not authorized to consider violation by the trust or Institution on account of provisions of section 13(1)(b) while granting it registration under section 12A.

Recognition of revenue by developer only on registration of sale deeds wasn't a valid method under section 145

ACIT. v. Alcon Developers (2015) 54 taxmann.com 54 (Panaji - Tribunal)

Section 145 makes it mandatory on the part of the assessee to follow either cash or mercantile system of accounting. Recognizing the revenue by developer (i.e., assessee) only when the sale deeds would be registered in favour of the buyers could not be regarded to be either cash or mercantile system of accounting. This method was neither project completion method nor percentage of completion method, thus, this was not a recognized method to recognize revenue under AS-7 too.

Facts :

• Assessee was engaged in the business of real estate activities, such as construction of residential-cum-commercial project, developing of plots, etc. It had completed development work of plots on 31.3.2009, but it did not show the sale proceeds in the profit and loss account even after receiving 70-80% of the sale proceeds.
• The Assessing Officer ('AO') was of the view that development had already been completed, therefore, he re-computed the profit relating to these projects. 
• Assessee contended that he was following project completion method as per AS-7 and it was showing the sales when the registration of the sale deed would be carried out. 
• On appeal, the CIT(A) deleted the additions on the ground that the AO had changed the profit recognition method from project completion to percentage completion. The aggrieved revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of revenue as under:

• The CIT(A) had agreed with assessee's contention that he was following the project completion method but assessee was not recognizing the revenue on the basis of the project completion method.
• Registration of the sale deed represents only the transfer of the title in favour of the buyer once development work on the plots had been completed. 
• Assessee was recognizing the revenue only when the sale deeds would be registered in favour of the buyers. Under AS-7 this was not a recognized method of recognizing the revenue. This method of revenue recognition followed by assessee was neither project completion method nor percentage of completion method.
• Section 145 makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. This method of recognizing the revenue when the sale deeds would be registered in favour of the buyers could not be regarded as either cash or mercantile system of accounting.
• Thus, the method adopted by the assessee was not in compliance with the ingredients as laid down under Section 145. Consequently, the order of AO was to be restored.

Condemnation

The legal seizure of property by a government authority for public use, through the powers of eminent domain, in exchange for fair market value.

Disallowance under section 40(a)(i) should be limited to sum chargeable to tax and not total remittance: CBDT

Section 40(a)(i) stipulates that any interest, royalty , fees for technical services or other sum chargeable to tax, payable either in India to a non-resident/foreign company or payable outside India, shall not be allowed as a deduction if there has been a failure in deduction or in payment of tax deducted in respect of such amounts. Doubts have been raised about interpretation of the term 'other sums chargeable', i.e., whether this term refers to the whole sum being remitted or only the proportion representing the sum chargeable to income-tax. The CBDT has clarified that for the purpose of making disallowance of 'other sum chargeable' under section 40(a)(i), the appropriate portion of the sum which is chargeable to tax shall form the basis of such disallowance. P.S. :The CBDT has clarified that disallowance is not to be made on basis of whole sum remitted to non-resident/foreign company without deduction of tax as section 40(a)(i) contemplates disallowance of only that portion of sum which is chargeable to tax and on which TDS default is made by payer.