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.