Clearances of intermediate parts by job-worker to its principal has to be valued as per general rule of valuation

Commissioner of Central Excise, Pune v. Mahindra Ugine Steel Co. Ltd. (2015) 57 taxmann.com 299 (Supreme Court)

Clearances of 'motor vehicles parts' manufactured by job-worker for use in manufacture of 'motor vehicles' by principals, would be valued as per rule 11 and valuation rules 8 and 9 cannot apply thereto.

• Assessee, a job-worker, was manufacturing motor vehicle parts for use by principal in manufacture of motor vehicles

• Assessee and principal were related in terms of section 4(3)(b)(i) viz. interconnected undertaking.

• Department sought valuation of 'parts' under rule 8 or proviso to rule 9 as captively consumed goods.

• Assessee claimed valuation as per rule 11 at 'cost of materials plus job-work charges' treating assessee/job-worker's premises as deemed factory gate.

Supreme Court held in favour of assessee as under:

• Since parts were not captively consumed by assessee-jobworker or on his behalf in production or manufacture of other articles, hence, rule 8 was inapplicable.

• Rule 9 and consequently, proviso to rule 9, was inapplicable Since assessee and principal were interconnected undertaking related in terms of section 4(3)(b)(i). This is because rule 9 mentions relationship that is visualised in sub-clauses (ii) to (iv) only and excludes clause (i). Further, since main rule 9 is not attracted, question of applicability or proviso thereto does not arise.

• Once it was concluded that above rules is not applicable in the case of the assessee, it is rule 11 only which becomes applicable as that is residuary provision for arriving at the value of any excisable goods which are not determined under any other rule.

Activation of SIM cards is a service and not sales

Idea Cellular Ltd. v. Union of India (2015) 57 taxmann.com 293 (Punjab & Haryana High Court)
 

Haryana VAT - Where collection of VAT from assessee was without authority of law and Service Tax department had raised service tax demand upon assessee for period for which Assessing Authority had levied and collected VAT, Assessing Authority was to be directed to transfer amount of VAT to Service Tax department.

• Assessing Authority collected VAT from assessee pursuant to assessment orders on premise that activation of SIM cards was a sale.

• Assessee approached State of Haryana for refund of amount of VAT on ground that activation of SIM card was a service and not a sale.

• The Assessing Authority dismissed the assessee's representation for refund of the amount of VAT on the grounds that the assessee did not challenge its liability before the Assessing Authority, it did not file any appeal against the assessment orders, and as the assessee had charged VAT from its customers, the amount could not be refunded.

High Court held in favour of assessee as under:

• Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India (2006) 3 STT 245 held that activation of SIM cards is a 'service' and not a 'sale'. The assessee is, therefore, liable to pay service tax on the activation of SIM cards and not VAT.

• Since Supreme Court had clearly held that VAT could not be collected on activation of SIM cards, levy and collection of VAT was without authority of law and violative of article 265 of Constitution.

• The Union of India has raised a demand for service tax for the period for which the State of Haryana has levied and collected VAT. If the assessee is called upon to pay VAT and service tax, it would be the case of double taxation.

• In view of the aforesaid, the revenue was to be directed to transfer the amount of VAT collected from the assessee to the Service Tax department of the Union of India.

Subway doesn't have dominant position in fast foods restaurant chains due to presence of Pizza Hut, KFC, etc

RAMAMURTHY RAJAGOPAL V. DOCTOR'S ASSOCIATES INC (2015) 57 TAXMANN.COM 357 (CCI)

Competition Act: Due to the presence of many competitors in the market of fast food restaurant chains, like Pizza Hut, KFC, McDonald's, Cafe Coffee Day, etc., consumers have several options to choose from. Subway neither has strength to operate independently of its competitors, nor the ability to affect its competitors and consumers. Therefore, Subway does not enjoy a dominant position in the relevant market of fast food restaurant chains.

Facts:

• The Informant and Subway Systems India Private Limited ('Subway') entered into a franchise agreement for operating "Subway" at Chennai. The Informant alleged that certain clauses of the franchise Agreement contravened the provisions of section 4 of the Competition Act, 2002 ('the Act').

• The Informant alleged that the market share of Subway in the market of fast food restaurant chain exceeded 30%, thus, Subway had abused its dominant position by imposing unfair conditions in franchisee agreement.

• Based on the above allegations, the Informant prayed for initiation of an investigation against the Subway under section 26(1) of the Act

The Competition Commission of India held as under:

• Commission observed that these allegations did not have any appreciable adverse effect on the competition in the market of fast food restaurant chains since the size of such market was huge as compared with the market size of Subway. Therefore, the impact of alleged unfair conditions in franchise agreement, if any, was negligible. Thus, conduct of Subway would not contravene any provision of section 3 of the Act

• Due to the presence of many competitors in the market of fast food restaurant chains, like Pizza Hut, KFC, McDonald's, Cafe Coffee Day, etc., consumers had several options to choose from. Subway neither had strength to operate independent of its competitors, nor the ability to affect its competitors and consumers. Therefore, Subway did not enjoy a dominant position in the relevant market of fast food restaurant chains.

Harayana VAT must incorporate provisions to exclude value of land from works contract

CHD Developers Ltd. v. State of Haryana (2015) 57 taxmann.com 315 (Punjab & Haryana High Court)

Where assessee, a builder/developer, entered into agreements with prospective buyers to construct flats, etc. and thereafter sell same with some portion of land against valuable consideration, activity of assessee would be covered under term 'works contract' but Assessing Authority was to be directed to pass fresh assessment order

Facts :

• Assessee, a builder/developer, entered into agreements with prospective buyers to construct flats, etc., and thereafter sell same with some portion of land against valuable consideration.
• Assessing Authority in terms of circulars dated 7-5-2013, 4-6-2013 and 10-2-2014 providing for levy of VAT on builders, etc., levied VAT on transaction of sale of flats, floors and villas effected by assessee. 
• Assessee filed writ petition for declaring provisions which include value of land for charging VAT on developers to be ultra vires the Constitution.

High Court held partly in favour of assessee as under :

• From a consideration of various decisions of the Supreme Court arising under article 366(29A) of the Constitution, it follows that the agreement between the promoter/builder/developer and the flat purchaser to construct a flat and thereafter sell the flat with some portion of land does involve construction which would be covered under the term 'works contract'.
• Rule 25 provides for exclusions in respect of labour, services and other like charges and does not provide for any mechanism for exclusion of the value of land. Wherever developer/builder/promoter or the sub-contractor who carries on construction work in a works contract maintains proper accounts, it shall be on the basis of actual value addition on account of goods utilized in the property. Rule 25(2) provides for deduction of charges towards labour, services and like charges and where they are not ascertainable from the books of account maintained by a developer, etc., the percentage rates are prescribed in the table provided in the said rule. 
• It is necessarily required to provide mechanism to tax only the value addition made to the goods transferred after the agreement is entered into with the flat purchaser. The 'deductive method' thereunder does not provide for any deduction which relates to the value of the immovable property. The legislature has not made any express provision in rule 25 for exclusion of value of immovable property from the works contract and its method of valuation has been left to the discretion of the rule making authority. 
• Essentially the value of immovable property and any other thing done prior to the date of entering into the agreement of sale is to be excluded from the agreement value. The value of goods in a works contract in the case of a developer, etc., on the basis of which VAT is levied would be the value of the goods at the time of incorporation in the works even where property in goods passes later on. 
• Further, VAT is to be directed on the value of the goods at the time of incorporation and it should not purport to tax the transfer of immovable property. Consequently, rule 25(2) is held to be valid, but State Government shall bring necessary changes in the said rule inconsonance with the above observations.

Supreme Court rejects High Court's order quashing search warrant due to non-communication of reasons thereof to assessee

DGIT (Investigation) v. Spacewood Furnishers (P.) Ltd. (2015) 57 taxmann.com 292 (Supreme Court)

Facts :

• The block assessment of the assessee was sought to be initiated under Section 153A of the Income-tax Act ('the Act') following a search conducted on the assessee. The same has been interdicted by the High Court rejecting the validity of the warrant authorizing the search under section 132 of the Act;
• The High Court held that it was the Director General who took the decision to issue the search warrant but the said decision was not on the basis of its own satisfaction but was issued on the basis of the satisfaction recorded by the Director of Income-tax (Investigation). Consequently, the High Court held that the satisfaction mandated by Section 132 of the Act was not that of the authority who issued the search warrant, there by vitiating the authorization issued; 
• Aggrieved by the order of High Court the revenue filed the instant appeal.

Supreme Court held in favour of revenue as under :

• The necessity of recording of reasons in case of search under Section 132 has been repeatedly stressed upon by the Courts so as to ensure accountability and responsibility in the decision making process
• The necessity of recording of reasons also acts as a cushion in the event of a legal challenge being made to the satisfaction reached. Reasons enable a proper judicial assessment of the decision taken by the Revenue. However, it would not confer on the assessee a right of inspection of the documents or to a communication of there a sons at the stage of issuing of the authorization. Any such view would undermine the entire exercise contemplated by Section 132 of the Act. It is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee; 
• The High Court had committed a serious error in reproducing in great details the contents of the satisfaction notes containing the reasons for the satisfaction arrived at by the authorities under the Act. We have already indicated the time and stage at which the reasons recorded may be required to be brought to the notice of the assessee. Thus, we could not approve of the aforesaid part of the exercise undertaken by the High Court which has the potential of conferring an undue advantage on the assessee;
• A careful reading of the order of the Director General would go to show that all he did was to record the view that the satisfaction of the Director, Income-tax (Investigation) was reasonable and therefore administrative approval should be accorded. The view taken by the High Court, therefore, could not be sustained. In view of the foregoing discussions the order of the High Court was to be set aside.

Compilation of data and its transformation into e-book for foreign clients held as export of software u/s 10B

CIT v. Ms. Kiran Kapoor (2015) 57 taxmann.com 39 (Delhi High Court)

Where assessee was collecting text, compiling material, designing same and exported it in form of computer software, assessee was entitled to claim benefit of section 10B

Facts :

• The assessee was involved in process of collecting text, compiling material, designing layout, scanning, etc., for projects of foreign clients. She claimed herself to be a software exporter and, accordingly, claim exemption under section 10B.
• The Assessing Officer (AO) disallowed said claim holding that process deployed by the assessee was neither manufacture nor did it amount to creation of software.
• On appeal, CIT(A) upheld the order of the AO which was reversed by the tribunal. Aggrieved with the order of tribunal, revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under :

• Section 10B uses the expression "manufactures or produces…… things or computer software". The four stage process of collecting text , compiling material, designing the layout, scanning, digital image editing (to remove distortion) and final arrangement of the data, ultimately transmitted according to the customer's specification - and ready to be used for printing, (or even e-Book publication) is undoubtedly manufacture or production.
• CBDT vide Notification No. 11521, dated 26.09.2000 had specified 'content Development or animation' or 'Data Processing' as information technology enabled products or services.
• "Content Development or animation" covers compilation of material or data and its transformation into a ready to print/ready to publish book.
• In the instant case, the work which ultimately results in the culmination of the assessee's efforts of compiling, editing, digital designing, etc. "is transmitted or exported from India to any place outside India by any means". It is, therefore, computer software that is produced or manufactured, to qualify for benefit under section 10B.
• Hence, tribunal rightly allowed assessee's claim of deduction under section 10B.

Parking charges collected on vacant land were taxable even if developer was following project completion method

SUDHIR G. BORGAONKAR V. ACIT - (2015) 56 taxmann.com 188 (Bombay High Court)

Where assessee-developer was following project completion method for payment of taxes, parking charges collected by him on vacant land had nothing to do with the completion of his project; he was obliged to pay on parking charges in year of receipt of parking charges.

Facts:

• The assessee, being a builder and developer was following project completion method for purposes of paying taxes.
• He had generated income in assessment year 2000-01 on account of parking charges collected on the vacant land. Since assessee had not filed his return of income of AY 2000-01, a notice under section 148 was issued and income received from parking charges was assessed to tax. 
• On appeal, the CIT (A) set-aside the order of AO on the ground that the amount earned by assessee by exploiting vacant land was an amount relatable to costs of the project and therefore, was taxable in subsequent years. Further the Tribunal set aside the order of the CIT(A)
• Consequently, AO charged interest u/s 234A and 234B in respect of default in payment of advance tax for the assessment year 2000-01. CIT (A) and Tribunal upheld AO action of AO. The aggrieved-assessee filed the instant appeal before High Court.

The High Court held in favour of revenue as under :

• The non-filing of return of income by assessee was on the ground that the income earned on parking charges would have to be returned when the project would be completed. This was not accepted as the amount received on account of parking charges was not a part of any project. Thus parking charges was brought to tax in Assessment Year 2000-01.
• It had been held by the Tribunal that the amount received on parking charges had nothing to do with the appellant's project and was assessable to tax in Assessment Year 2000-01. This has been accepted by the assessee. Thus, the assessee was obliged to pay advance tax and non-payment of the same would carry with it the further burden on interest under Section 234B of the Act. 
• Therefore, the AO was right in charging interest in respect of default in payment of advance tax for the assessment year 2000-01.