snk newsletter- october 2011

8/3/2019 SNK Newsletter- October 2011

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DIRECT TAXESJudicial pronouncements

SNK

Issue 10 October, 2011

NewsletterWebsite : www.snkca.com Email: [email protected]

DIRECT TAXES ... 1 - 12

OTHER LAWS ... 14 - 15

IMPORTANT DUE DATES 15

INDIRECT TAXES . 12 - 14

CIT Vs. M/s. National Travel Services [ITA No. 223 of

2010, 219 of 2010, 1204 of 2010 & 309 of 2011, Delhi HighCourt, dtd. 11.07.2011]

For s. 2(22)(e), firm is shareholder though shares held

in names of partners

The assessee was a partnership firm consisting of three part-

ners being Naresh Goyal, Surinder Goyal and Jet Enterprises

Pvt. Ltd. The assessee was the beneficial owner of 48.18%

of the share capital of Jetair Pvt. Ltd which were held in the

name of its partners Naresh Goyal and Surinder Goyal. The

assessee took a loan of Rs. 28.52 crores from Jetair Pvt. Ltd.The AO held that the said loan was assessable as deemed

dividend u/s 2(22)(e) in the hands of the assessee which

was reversed by the Tribunal. Before the High Court, the as-

sessee argued, relying on Ankitech Pvt. Ltd, Universal Medi-

care 324 ITR 363 (Bom) and Bhaumik Colour 118 ITD 1

(Mum) (SB), that sec. 2(22) could only apply in the hands of

the shareholder and as the assessee was not a

shareholder (its partners were), s. 2(22)(e) could not apply.

Delhi High Court rejecting the assessees plea held that the

first limb of sec. 2(22)(e) is attracted if the payment is madeby a company by way of advance or loan to a shareholder,

being a person who is the beneficial owner of shares. While

it is correct that the person to whom the payment is made

should not only be a registered shareholder but a beneficial

share holder, the argument that a firm cannot be treated as a

shareholder only because the shares are held in the names

of its partners is not acceptable. If this contention is accepted,

in no case a partnership firm can come within the mischief of

sec. 2 (22)(e) because the shares would always be held in

the names of the partners and never in the name of the firm.

This would frustrate the object of sec. 2(22)(e) and lead to

absurd results. Accordingly, for s. 2(22)(e), a firm has to be

treated as the shareholder even though it is not the

registered shareholder.

Commissioner of Income Tax, Cochin v. Electronic Con-

trols & Discharge Systems (P) Ltd [(2011} 13 Taxmann

193, Kerala High Court]

Benefit of deduction under Section 10A is not available in re-

spect of sales made to a unit in Special Economic Zone even

though such sales are considered as deemed exports under

the provisions of the Special Economic Zones Act, 2005.

The provisions in Section 10A are comprehensive and ex-

haustive and that the mandatory conditions of Section 10A (3)

have to be satisfied to get the benefit of deduction on export

profits. Thus the benefit is available only on actual exports

and if the consideration is received in convertible foreign ex-

change. The concept of deemed export under the SEZ Act is

not incorporated in the scheme of deduction under Section

10A, the ITA is a self- contained code and the validity or cor-

rectness of the allowance has to be considered with refer-

ence to the relevant statutory provisions as contained therein.

Where Section 10A provides for deduction on profits derived

from export proceeds received in convertible foreign ex-

change, it could be stated that the Legislature never intended

the benefit to be extended to local sales made by the units in


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Judicial pronouncements

the SEZ, whether as part of Domestic

Tariff Area sales or inter-unit sales

within the Zone or units in other Zones.

Hence the Taxpayer was not entitled to

claim the deduction under Section 10A

in respect of profits derived from the

sales made to a unit in a SEZ.

Roma Builders (P) Ltd. Vs. Joint

Commissioner of Income tax [(2011)

60 DTR (Mum.) (Trib.) 231, ITAT

Mumbai Bench, dtd. 09.03.2011]

Principal object of the assessee com-

pany being to develop and sell the

premises constructed and there is ma-terial on record to show that the said

principal object of the company in-

cludes leasing of the stock i.e. property

for a temporary period to persons/

companies interested in temporary use,

rent is not received from exploitation of

the property by way of complex com-

mercial activities but the rental income

is derived by the assessee as an owner

of the property and it is liable to be as-sessed under the head Income from

house property.

CIT Vs Alembic Glass Industries

Limited [ITA No. 729 of 2011, Gujarat

High Court, dtd. 02.05.2011]

In case of business liability, deduc-

tion is to be allowed even if it is to

be quantified and discharged at a

future date.

If a business liability has definitely

arisen in the accounting year, the de-

duction should be allowed although the

liability may have to be quantified and

discharged at a future date. What

should be certain is the incurring of the

liability. It should be capable of being

estimated with reasonable certainty

though the actual quantification maynot be possible. If these requirements

are satisfied the liability is not a contin-

gent one. The liability is in present

though it will be discharged at a future

date. It does not make any difference if

the future date on which the liability

shall have to be discharged is not cer-

tain.

CIT Vs. Rasol Ltd. [(2011) 59 DTR

(Cal.) 369, Calcutta High Court, dtd.

19.05.2011]

Subsidy received by assessee from the

State Government under a scheme of

industrial promotion which was meant

to provide financial assistance to speci-

fied industries for expansion of capaci-

ties, modernization and improving their

marketing capabilities is capital receipts

though the amount of subsidy isequivalent to 90% of the sales tax paid

by the beneficiary.

Deputy Commissioner of Income tax

Vs. Divis Laboratories Ltd. [(2011)

60 DTR (Hyd.)(Trib.)210, ITAT Hy-

derabad Bench, 25.03.2011]

Commission paid to non resident agent

for services rendered outside India not

being chargeable to tax in India could

not be disallowed under Sec. 40(a)(ia).

Bharati Shipyard Ltd vs. DCIT [ITA

No. 2404/Mum/2009, ITAT Mumbai

Special Bench, dtd. 09.09.2011]

Amendment in Section 40(a)(ia) of

Income Tax Act made by Finance

Act 2010 is not retrospective

The Finance Act, 2010 has extendedthe time limit for depositing tax de-

ducted at source by the due date u/s

139(1) of the Act from the earlier lesser

time available for compliance. If the tax

is deposited by the due date, it would

mean escape from the clutches of sec-

tion 40(a)(ia) for assessment year

2010-2011, but if it is deposited even

the next day beyond the due date,

natural consequences would follow and

it would call for disallowance u/s 40(a)

(ia) in the year of incurring the expendi-

ture. In the like manner, in the year un-

der appeal, if the tax deducted at

source up to February, 2005 had been

deposited up to 31st March, it would

have amounted to compliance of the

provision, but the late deposit even on

1st April, 2005 would amount to non-

compliance warranting interference by

section 40(a)(ia) entailing disallowance

of expenditure in the Assessment year

2005-06. However the fact that the as-

sessee deposited it beyond the pre-

scribed period, would amount to com-

pliance of the prescription of the pro-

viso, entitling the assessee to deduc-

tion in the A.Y. 2006-07. Amendment

carried out by the Finance Act, 2010

with retrospective effect from assess-

ment year 2010- 2011 cannot be held

to be retrospective from assessment

year 2005-2006.

CIT Vs. Ranbaxy Laboratories Ltd.

[(2011) 60 DTR (Del.) 77, Delhi High

Court, dtd. 17.03.2011]

Provision of pension payable to em-

ployees is not covered by Sec. 43B(b) and same is allowable as deduc-

tion.

Clause (b) of Sec. 43B mentions about

provident fund, superannuation fund,

gratuity fund and is followed by any

other fund for the welfare of the em-

ployees. This last clause thus has to

take it colour from the previous clauses

and has to be read ejusdem generic.

The intention of the legislature behind

enacting Sec. 43B(b) was to disallow

the statutory liabilities. The legislature

never intended to disallow a claim for


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ascertained liability which is computed

scientifically in respect of the retiral

benefits of its employees and which is

not to be contributed to a fund. The

pension scheme provide that pension

would be paid by the assessee to its

employees on attaining the retirement

age or resigning after having rendered

services for specified years. Thus,

where the liability on this account ac-

crues form year to year, the same is

payable on retirement /resignation of

the eligible employees.

Shri Homi K. Bhabha Vs. ITO [ITA

No.3287/Mum/2009, ITAT Mumbai

Bench, dtd 28.09.2011]

PMS Fees not deductible against

capital gains. Despite dissenting

orders, reference to Special Bench

not necessary

The assessee placed Rs. 2.25 crores

with ENAM Asset Management Co, a

portfolio manager, which was used forpurchase and sale of securities etc and

gave rise to capital gains. The as-

sessee paid the portfolio manager fees

being 1/2% of the NAV of securities

under management in addition to 20%

of the profits in excess of 15% of the

profits after expenses. The assessee

claimed that the said fee had direct

relation with the capital gains and so

was deductible either as (i) diversion ofincome by overriding title from the sale

proceeds or as (ii) part of the cost of

acquisition of the shares or as (iii) ex-

penditure incurred wholly and exclu-

sively in connection with the transfer of

shares. The AO & CIT (A) rejected the

claim. Before the Tribunal, the as-

sessee argued that though the deci-

sion of the Mumbai Bench in Devendra

Motilal Kothari 50 DTR 369 (Mum) wasagainst the assessee, the decision of

the Pune Bench in KRA Holding &

Trading which had taken a contrary

view had to be followed. The ITAT

Mumbai Bench dismissing the appeal

held that:-

1. While, in Devendra Motilal Kothari

50 DTR 369, the Mumbai Bench

held that the fees paid for portfolio

management services was neither

diversion of income by overriding

title nor cost of acquisition nor cost

of improvement, the Pune Bench

in KRA Holding & Trading de-

clined to follow that by relying on

the judgement of the Bombay High

Court in Shakuntala Kantilal 190

ITR 56 (Bom). Subsequently, the

Mumbai Bench in Pradeep Kumar

Harlalka declined to follow the

Pune Bench on the ground that the

judgement of the Bombay High

Court in Shakuntala Kantilal had

been held to not be good law in

Roshanbabu Mohammed 275 ITR

231 (Bom). The majority opinion

(in terms of number of orders) and

the latest order (in the point of

time) were against the assessee.

2. The argument that the Mumbai

Benches had not appreciated the

correct position in law is not ac-

ceptable. Judicial discipline re-

quires that when a particular issue

has been decided by a bench,

then the subsequent co-ordinate

benches should normally follow

the same though there are no fet-ters on its powers to doubt the cor-

rectness of the earlier order if

there are compelling reasons for

the same. Further, whether an ear-

lier order should be followed or a

reference to the Special Bench be

made depends on whether the

Bench is satisfied or not about the

correctness of the earlier order

and not on the view point of the

aggrieved party. It is only when a

subsequent Bench finds itself un-

able to endorse the earlier view

that it may make reference for the

constitution of the Special Bench.

The aggrieved party cannot com-

pel the later Bench to either take a

contrary view or make a reference

for the constitution of the SpecialBench.

Bennett Coleman & Co. Ltd vs. ACIT

[ITA No. 3013/Mum./2007, ITAT

Mumbai Special Bench, 30.09.2011]

Loss on pro-rata reduction of share

capital is Notional. In absence of

consideration, capital gains provi-

sions do not apply

The assessee invested Rs.24.84

crores in equity shares of Times Guar-

antee Ltd. Pursuant to a scheme of

reduction u/s 100 of the Companies

Act, the face value of Times Guarantee

shares was first reduced to Rs. 5 from

Rs. 10 and thereafter two equity

shares of Rs.5 each were consolidated

into one equity share of Rs.10. The

result was that the assessees invest-

ment was reduced to Rs.12.42 crores.

The assessee, relying on Kartikeya

Sarabhai 228 ITR 163 (SC) & G. Nar-

simhan 236 ITR 327 (SC), claimed that

the reduction in face value was a

transfer and that it had suffered a

long-term capital loss of Rs.22.21

crores after indexation. The AO disal-

lowed the claim on the ground that (i)

there was no transfer and (ii) there

was no consideration and the ma-

chinery provisions of s. 48 cannot ap-

ply. The issue was referred to the Spe-

cial Bench. ITAT Special bench held

by the majority that -

1. First the face value of each share

was reduced from Rs. 10 to Rs. 5

and then two shares of Rs. 5 each

were consolidated into one share

of Rs. 10 each. If the argument isthat earlier shares were replaced

or substituted by new shares, then

there is no transfer but it is

merely a case of substitution of


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one kind of share with another kind

of share (Rasiklal Maneklal (HUF)

177 ITR 198 (SC) followed);

2. Assuming that a reduction of

shares in the manner done by the

assessee amounts to a transfer,

Sec. 45 is not attracted because

there is no consideration receivedby the assessee for the transfer.

Unless and until a particular trans-

action leads to computation of

capital gains or loss as contem-

plated by s. 45 & 48, it cannot at-

tract capital gain tax. On facts, the

assessee had not received any

consideration for reduction of share

capital. While the number of shares

held by the assessee has reducedto 50%, nothing had moved from

the side of the company to the as-

sessee (B. C. Srinivasa Setty 128

ITR 294 (SC) & Bombay Burmah

147 TR 570 followed)

3. Further, by the reduction, the as-

sessees rights had not been extin-

guished because it continued to

hold the same percentage in the

holding of Times Guarentee as it

did before the reduction. There was

no change in the intrinsic value of

his shares and even his rights vis--

vis other shareholders as well as

vis--vis company remained the

same. The concept of capital gains

has to be understood as in the com-

mercial world and there was no loss

that can be said to have actually

accrued to the shareholder as a

result of reduction in the share capi-

tal. Also, there would be no change

even in the cost of acquisition of

shares by virtue of s. 55(v).

Deputy Commissioner of Income Tax

Vs. Ansal Properties & Infrastructure

Ltd. [(2011) 60 DTR (Del)(Trib.)294,

ITAT Delhi Bench, 09.07.2010]

Where the assessee has transferred

entire plant and machinery of one divi-

sion and purchased assets with same

rate of depreciation in other division of

more value, the capital gains on trans-

fer of entire machinery and plant of the

said division amount to nil and not liable

to taxed under Sec. 50.

Mrs. Asha Bharat Shah Vs. ITO [ITA

No. 1716/Mum./2010, ITAT Mumbai

Bench, 15.02.2011]

The word may used in the sub-sec.

(2) to sec. 50C do not give discretion

to the A.O. to refer or not to refer the

matter to the DVO

Sub-section (2) of Sec. 50C provides

that if the assessee claims before the

A.O. that the value adopted by the

Stamp Valuation authority exceeds the

fair market value of the property as on

the date of the transfer which has not

been disputed by the assessee in any

legal proceedings then the A.O. may

refer the case to the Valuation Officer,

as per the provisions of the Wealth-tax

Act, 1957. The Ld. CIT (A) declined to

entertain the plea of the assessee for

referring the matter to the DVO by hold-

ing that the word may is used by the

Legislature and it is discretion of the

A.O. to refer or not to refer. Relying on

the decision of Meghraj Baid ITAT

Mumbai bench held that the word may

used in sub-sec. (2) to sec. 50C signi-

fies that in case the A.O. is not satisfied

with the explanation of the assessee

then he should refer the matter to the

DVO for the valuation.

Further ITAT Mumbai Bench relying on

the judgment of Smt. Sarala N. Sakra-

ney, held that reference by the AO to

the DVO under s.55A for valuation of

fair market value of the property as on

1st April, 1981 is not valid for the rea-

son that fair market value declared by

the assessee as per Government regis-

tered valuers report was more than the

fair market value as estimated by the

DVO.

CIT Vs. Dinesh Megji Toprani (HUF)

[ITA No. 3404 of 2010, Bombay High

Court, dtd 04.08.2011]

Exemption u/s 54F to HUF allowable

even if property is in the name of

individuals but purchased from HUF

account and with HUFs PAN

The assessee HUF sold certain immov-

able properties and out of the sale pro-

ceeds received, purchased immovable

properties and claimed benefit of de-

duction under Section 54F of the In-

come Tax Act, 1961. The assessing

officer was of the opinion that the prop-

erty was purchased in the name of the

individuals namely Dr.Dinesh Megji To-

prani and Mrs.Jyoti Dinesh Toprani and

not in the name of the HUF and, there-

fore, the assessee was not entitled to

the deduction under Section 54F of the

Income Tax Act, 1961.On appeal filed

by the assessee, the Commissioner of

Income Tax (Appeals) allowed the claim

of the assessee and by the impugnedorder, the Income Tax Appellate Tribu-

nal has affirmed the decision of the

Commissioner of Income Tax

(Appeals). Being aggrieved by the

above order, the Revenue has filed in

High Court. The Bombay High Court

dismissing the appeal held that no fault

can be found with the decision of the

Income Tax Appellate Tribunal in allow-

ing the benefit of deduction under Sec-tion 54F of the Income Tax Act, 1961

on the ground that the property pur-

chased in the name of the members of

the HUF, in fact belongs to the HUF.


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CIT Vs. Chiranjeevi Wind Energy

Ltd. [(2011) 243 CTR (Mad.) 195, Ma-

dras High Court, dtd. 10.01.2011]

Different parts of windmill when as-

sembled get transformed into an

ultimate product which is commer-

cially known as Windmill which

amounts to manufacture or produc-

tion within the meaning of Sec. 80-

IB(2)(iii)

The different parts procured by the

assessee by themselves cannot be

treated as windmill. Those different

parts bear distinctive names and whenassembled together, thereafter it gets

transformed into an ultimate product

which is commercially known as a

Windmill. There can, therefore, be

no difficulty in holding that such an

activity carried on by the assessee

would amount to manufacture as well

as production of a thing or article as

set out in Sec. 80-IB(2)(iii). (India Cine

Agencies Vs. CIT(2008) 220 CTR (SC)223 applied).

CIT Vs. Sumi Motherson Innovative

Engineering Ltd. [(2011) 60 DTR

(Del.) 190, Delhi High Court, dtd.

08.10.2010]

While computing book profit under

Sec. 115JB, under cl. (iii) of the Expla-

nation, brought forward loss on the last

date of immediate preceding yearwhich is to be brought forward to the

financial year in question is to be re-

duced; what happens during the

course of the year is not relevant. Tri-

bunal was therefore justified in uphold-

ing the claim of deduction of brought

forward loss as per books as on the

end of the immediate preceding year

even if during the current year such

loss was wiped off due to reduction ofshare capital.

M/s. Synthetic Colour Chem Indus-

tries Vs DCIT [ITA No.5563/M/2009,

ITAT Mumbai Bench, 11.05.2011]

Retraction of statement made dur-

ing the survey after six months is

merely an afterthought

The survey was conducted on

18.2.2005 when the loose papers be-

ing the pages 26, 27, 28, 29, 30 were

found which had been duly signed by

the partner of the assessee firm based

on entries and based on the said pa-

pers the partner of the assessee had

declared undisclosed income ofRs.1.05 crores. Subsequently on

4.3.2005, a fortnight after the date of

survey, the assessee had written a

letter to the AO in which a request had

been made that installments may be

granted for payment of additional tax.

However, 6 months later when the re-

turn was filed, a retraction statement

was enclosed alleging that the partner

had been forced to admit additionalincome and in fact no incriminating

papers were found. These claims have

been rejected by the authorities below

as an after thought. ITAT Mumbai

bench held that no infirmity was in the

conclusion arrived at by the revenue

authorities on this point. In case, the

partner had really been forced to admit

additional income and papers were

cooked up, by the survey party, the

assessee would have immediately af-

ter survey complained to the higher

authorities. The Learned AR for the

assessee admitted that no complaint

had been filed by the assessee. In fact

two weeks after the date of survey the

assessee had written a letter dated

4.3.2005 to the AO requesting for in-

stallment and even in this letter no alle-

gation was made. The loose papers

found have been duly signed by the

partners and these clearly gave the

details of unaccounted sales and un-

accounted commission. Under these

circumstances the affidavits filed re-

tracting the statement and making alle-

gations six months later has to be

treated as a self serving statement bythe partner and his employees and this

has to be rejected as an afterthought.

DCIT Vs. M/s. Stup Consultants Pvt.

Ltd. [ITA No. 5617/Mum/2009; ITA

No. 6062/Mum/2009 & ITA No. 6063/

Mum/2009, ITAT Mumbai bench, dtd.

09.09.2011]

Despite s. 209(3) of the Cos Act,

company can follow cash systemfor tax purposes

The assessee, a company, followed, in

accordance with s. 209(3) of the Com-

panies Act, 1956, the mercantile sys-

tem of accounting according to which

the profits were Rs. 7.48 crores. How-

ever, for income-tax purposes, it fol-

lowed the cash system of accounting

according to which the profits were Rs.

4.76 crores and offered that sum to

tax. The AO rejected the claim on the

ground that u/s 209(3) of the Cos Act,

a company is obliged to follow the mer-

cantile system and that is its regular

method for purposes of s. 145. How-

ever, the CIT (A) upheld the as-

sessees claim. On appeal by the de-

partment, ITAT Mumbai Bench uphold-

ing the assessees plea held that the

assessee has regularly employed the

cash system of accounting in recording

its day-to-day business transactions. It

is not a case where the assessee has

been maintaining its accounts of day-

to-day business under the mercantile

system of accounting and thereafter

prepares accounts in accordance with

cash system of accounting for income

tax purposes. Section 209(3) of the

Companies Act, 1956 does not over-

ride s. 145 of the Income-tax Act.

There was also no valid basis for the

AOs action in rejecting the books of


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Judicial pronouncementsSNK

account and system of accounting fol-

lowed by the assessee. Further, since

the department has accepted the as-

sessees system for the past several

years, the principles of consistency ap-

ply and there should be finality and cer-

tainty in litigation in the absence of

fresh facts to show that the assessees

system of accounting is arbitrary or per-

verse (Amarpali Mercantile 45 ITD 386

(Del) distinguished, Chennai Finance

81 ITD 7 (Hyd) followed).

Dalmia Pvt. Ltd. Vs. CIT & Anr. [Writ

Petition (Civil) No. 6205 of 2010,

Delhi High Court, dtd 26.09.2011]

S. 147: Despite specific & pointed

queries in s. 143(3) assessment, AO

cannot be said to have formed any

opinion if explicit opinion not re-

corded

In the balance sheet enclosed with the

ROI, the assessee disclosed sundry

creditors of Rs. 1.66 crores. In the

course of the s. 143 (3) assessment,the AO asked the assessee to submit

the entire list of sundry creditors with

their names and addresses etc. The

assessee submitted confirmations to

the extent of Rs. 1.13 crores and

though it could not explain Rs. 33

lakhs, the AO assessed only Rs. 19.86

lakhs u/s 41(1) in respect of 7 creditors.

The assessee filed an appeal on the

issue. After the expiry of 4 years andpursuant to an audit objection, the AO

issued a notice u/s 148 seeking to as-

sess the balance of the creditors as

well u/s 41(1). The assessee filed a

Writ Petition challenging the reopening

on the ground that (i) as the AO had

consciously assessed only Rs. 19.86

lakhs though he was aware of the

creditors figure being Rs. 1.66 crores,

it was a case of change of opinionand (ii) as 4 years from the end of the

assessment year had elapsed, reopen-

ing was not permissible as there was

no failure on the part of the assessee to

make a full and true disclosure of the

material facts. Delhi High Court dis-

missing the petition held that:-

1. The argument that as the AO had

called for the details of Rs. 1.66crores and confined the addition only

to Rs. 19.66 lakhs, the reopening is

on a change of opinion is not ac-

ceptable. The question of change of

opinion arises when the AO forms

an opinion and decides not to make

an addition and holds that the as-

sessee is correct. Here, though the

AO had asked specific and pointed

queries with regard to the sundrycreditors of Rs. 1.66 crores, he had

made an addition of only Rs.19.86

lakhs and there was no discussion,

ground or reason why addition of Rs.

32.97 lakhs was not made in-spite of

the assessees failure to furnish con-

formation and details to that extent.

The argument that when the assess-

ment order does not record any ex-

plicit opinion on the aspects nowsought to be examined, it must be

presumed that those aspects were

present to the mind of the AO and

had been held in favour of the as-

sessee is too far-fetched a proposi-

tion to merit acceptance

(Consolidated Photo vs. ACIT 281

ITR 394 (Del) followed);

2. The argument that there was a full

and true disclosure of material facts

is not acceptable because though in

the regular assessment proceed-

ings, the assessee was asked to

furnish details with regard to all

creditors, this was not done. The

term failure on the part of the as-

sessee is not restricted only to the

income-tax return but extends also

to the assessment proceedings. If

the assessee does not disclose or

furnish to the AO complete and cor-

rect information and details it is re-

quired and under an obligation to

disclose, there is a failure on its part

(Honda Siel Power Products vs.

DCIT followed).

DCIT Vs. Rupen Das [ITA No. 1260/

Kol/2010, ITAT Kolkata bench,

12.11.2010]

For loan taken in violation of section

269SS penalty can not be imposed if

same was taken to meet business

needs

ITAT Kolkata Bench noted that the As-

sessing Officer imposed penalty of Rs.

7,00,000 on the assessee under sec-

tion 271D of the Act on the ground that

the assessee had contravened the pro-

visions of section 269SS of the Income-

tax Act by accepting cash loans ex-

ceeding Rs. 20,000. The assessee ex-

plained that these cash loans weretaken to make the payment to the em-

ployees to avoid agitation of the em-

ployees and to maintain good relations

with the employees. The assessee took

the said cash loan due to shortage of

funds and to meet the emergency

needs under bona fide belief that those

transactions would not attract any penal

provision. The Assessing Officer has

not disputed the fact that the loanswere taken for payment of salary/

wages to the employees working as

security personnel for the assessee.

ITAT further held that they also find

force in the submissions of the as-

sessee that there was business exi-

gency forcing the assessee to take

cash loans for the purpose of disburs-

ing salary/wages to the employees of

the assessee. The Assessing Officerdid not dispute the fact that the loans

were taken for payment of salary to the

employees. Hence no penalty should

be levied.


7/157

SNKDIRECT TAXES


CIT Vs. Splender Construction [ ITA

No.1977 of 2010, Delhi High Court,

dtd 14.01.2011]

Despite disclosure of conversion of

stock into investment and accep-

tance by AO, claim that gains is

LTCG attracts s. 271(1)(c) penalty

The assessee owned a plot of land

which in the earlier years was treated

as stock-in-trade. In the year of sale,

the assessee converted the stock into

investment and offered the gains as

LTCG. The AO accepted the conversion

of stock into investment but held that

the gain was a STCG as the period of

holding had to be reckoned from the

date of conversion. This was upheld by

all the authorities including the High

Court. The AO levied penalty u/s 271(1)

(c) which was deleted by the Tribunal

on the ground that as the High Court

had admitted the assessees appeal on

the merits, it showed that the issuewhether the gain was LTCG or STCG

was debatable and could not be treated

as frivolous or mala fide to attract the

levy of penalty u/s 271 (1) (c). On ap-

peal by the department, Delhi High

Court reversing the Tribunal order held

that the Tribunal has side tracked the

main issue. It was obvious that conver-

sion of the land into investment just be-

fore the sale of the property was madeto avoid payment of full taxes. Though

the AO accepted the conversion, the

assessees claim that the gains was a

LTCG amounted to furnishing inaccu-

rate particulars of income. The issue

was not debatable as held by the Tribu-

nal. Though the appeal was admitted by

the High Court, the Tribunal glossed

over a very important and fundamental

fact that the appeal was admitted anddismissed on the same date. Accord-

ingly, when the order of the AO in quan-

tum proceedings was sustained by all

successive authorities and the High

Court also dismissed the appeal at the

admission stage, albeit after admitting

the same, it cannot be said that the is-

sue was debatable.

CIT Vs. SAS Pharmaceuticals [ (2011)

60 DTR (Del) 258, Delhi High Court,

dtd. 08.04.2011]

There is no concealment or non dis-

closure in the case of surrender of

income during survey as the as-

sessee had made a complete disclo-

sure in the IT Return and offered the

surrendered amount for the pur-

poses of tax and therefore no penalty

under Sec. 271(1)(c) could be levied.

Unless it is found that there is actually a

concealment or non disclosure of the

particulars of income, penalty cannot be

impose. There is no such concealment

or non disclosure as the assessee had

made a complete disclosure in the IT

return and offered the surrendered

amount for the purpose of tax.

Insilco Limited Vs CIT [ITA No. 179 of

2009, Delhi High Court, dtd.

11.07.2011]

Tribunal can issue direction beyond

the scope of the appeal for correc-

tion of error

The Delhi High Court held that Tribunal

had rightly given the issue directions

beyond the scope of appeal, which are

nothing but pointing out what the AO

was required to do under the law. This

issue was very much before the Tribu-

nal and the Tribunal has given these

directions to give complete effect to the

orders passed in quantum proceedings.

It is trite law that nobody can be allowed

to enrich itself unjustly and in the matter

of calculation once an error is found that

can always be directed to be corrected.

The Delhi High Court did not agree with

the submission of the learned counsel

for the appellant that the Tribunal has

exceeded its jurisdiction.

Deputy Commissioner of Income Tax

Vs. Summit Securities Ltd. [(2011) 59

DTR (Mum.)(SB)(Trib.) 313, ITAT

Mumbai Special Bench, dtd.

10.08.2011]

Once a case has been decided by an

earlier Bench of the Tribunal, the

subsequent bench should respect

such decision and should not make

departure therefrom; however if after

due application of mind the subse-

quent Bench comes to the conclu-

sion that it cannot agree with the ear-

lier view, it is empowered rather

duty-bound to make reference to the

President on the point they perceive

to be an error of law in the earlier

decision.

CIT Vs. Surya Herbal Ltd. [CC

13694/2011, Supreme Court of India,

dtd. 29.08.2011]

CBDTs low tax effect circular not

applicable to matters having

cascading effect

The High Court, relying on CBDTs In-

struction No. 3/2011 dated 9-2-2011,

dismissed the departments appeal as

not maintainable on the ground that the

tax effect was less than Rs. 10 lakhs.

The department filed a SLP in the Su-

preme Court. Supreme Court allowingthe Petition held that liberty is given to

the Department to move the High Court

pointing out that the Circular dated 9th

February, 2011, should not be applied

ipso facto, particularly, when the matter

has a cascading effect. There are cases

under the Income Tax Act, 1961, in

which a common principle may be in-

volved in subsequent group of matters

or large number of matters. In such

cases if attention of the High Court is

drawn, the High Court will not apply the

Circular ipso facto.


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SNKDIRECT TAXES

Judicial pronouncements (International Taxation)

M/s Tally Solutions Private Ltd. Vs.

The Deputy Commissioner of In-

come Tax [ITA No.1235/Bang/2010,

ITAT Bangalore Bench, dtd

26.09.2011]

Nothing in s.92CA requires the AO

to first form a considered opinion

before making a reference to the

TPO. Further Excess Earning

Method is an establ ished

method of in the case of soft-

ware products.

The assessee sold its Intellectual Prop-

erty Rights (IPRs) (patents, copyrights

and trade marks) to its Associate En-

terprise (AE) for a consideration of Rs.

38.50 crores. The sale price was justi-

fied on the basis that there were

inherent flaws in the IPRs and

intense development inputs were re-

quired to be done by the buyer. The

TPO adopted the Excess Earning

Method (as prescribed by the

International Valuation Standard

Council) and determined the value of

the IPR at Rs.260.63 crores which was

upheld by the DRP. In appeal before

the Tribunal, the assessee raised the

following contentions: (a) that the AO

had made a reference to the TPO with-

out forming a considered opinion on

the issues under reference; (b) the

Excess Earning Method adopted bythe TPO was not a prescribed method

under the Act or Rules; (c) as there

was no appropriate method for deter-

mination of ALP of IPR, the value de-

clared by the assessee had to be ac-

cepted as ALP; (d) on merits, the TPO

had relied on estimates and surmises

in projecting the future cash flows while

disregarding evidence in the form of

audited financial statements. ITATBangalore bench held that:-

1. There is nothing in s.92CA that

requires the AO to first form a

considered opinion before making

a reference to the TPO. It is suffi-

cient if he forms a prima facie opin-

ion that it is necessary and expedi-

ent to make such a reference. The

making of the reference is a step in

the collection of material for mak-

ing the assessment and does not

visit the assessee with civil conse-

quences. There is a safeguard of

seeking prior approval of the CIT.

Moreover, by virtue of CBDTs In-

struction No.3 of 2003 dated

20.5.2003 it is mandatory for theAO to refer cases with aggregate

value of international transactions

more than Rs.5 crores to the TPO

(Sony India 288 ITR 52 (Del) &

Ranbaxy Laboratories 299 ITR 175

(AT) (Del) followed);

2. The argument that the Excess

Earning Method adopted by the

TPO is not a prescribed method is

not acceptable. A sale of IPR is not

a routine transaction involving

regular purchase and sale. There

are no comparables available. The

Excess Earning Method is an

established method of valuation

which is upheld by the U.S Courts

in the context of software products.

The Excess Earning Method

method supplements the CUP

method and is used to arrive at the

CUP price i.e. the price at which

the assessee would have sold in

an uncontrolled condition (method

explained, Intel Asia Electronics

Inc followed);

3. On merits, the Excess Earning

Method has to be applied using

the projected sales (and not actual

sales) because when an intangible

is sold, the risk of future income

potential lies with the buyer.

DCIT Vs. M/s. BP India Services Pri-

vate Limited [ITA No.4425/

Mum/2010, ITAT Mumbai Bench, dtd

23.09.2011]

Transfer Pricing: Important princi-

ples of Comparable Uncontrolled

Transaction explained. In applying

the TNMM, the net profit margin real-

ized from a comparable uncon-

trolled transaction is to be taken

into consideration.

1. The assessee, engaged in provid-

ing support and advisory services

to BP group companies, entered

into international transactions with

its AEs pursuant to which it made

payments for business support

services. The assessee adopted

the TNMM and claimed that the

transactions were at ALP on the

basis that its profit rate compared

favourably with the comparables.

In the list of comparables were two

entities which had suffered a loss.

There were also two other compa-

nies with high profit margin. The

TPO excluded the loss making

companies from the comparables

on the ground that they were hav-

ing a different functional & product

profile as compared to the as-

sessee. In appeal, the CIT (A) held

that the loss making concerns

could not be excluded.


9/159

SNKDIRECT TAXES


He also upheld the alternate argument

that if the loss making companies were

excluded, the high profit companies

also had to be excluded. On appeal by

the department, ITAT Mumbai Benchreversing the CIT(A)s order held that:-

1. Under Rule 10B(1)(e)(ii), the net

profit margin realised by the enter-

prise or by an unrelated enterprise

from a comparable uncontrolled

transaction or a number of such

transaction is computed having

regard to the same base; The

term uncontrolled transaction is

defined in Rule 10A(a) to mean a

transaction between enterprises

other than associate enterprises,

whether resident or non-resident.

The result is that in applying the

TNMM, the net profit margin real-

ized from a comparable uncon-

trolled transaction is to be taken

into consideration. The conditions

require that a case should not only

be comparable but also have un-

controlled transactions. These twin

conditions need to be cumulatively

satisfied. If a case is only compa-

rable but has controlled transac-

tions or vice-versa, it falls outside

the ambit of the list of comparable

cases;

2. Further, Rules 10B (2) & (3) set

out the circumstances with refer-ence to which the comparability of

an international transaction with an

uncontrolled transaction has to be

judged. The decisive factors for

determining inclusion or exclusion

of any case in/from the list of com-

parables are the specific charac-

teristics of services provided, as-

sets employed, risks assumed, the

contractual terms and conditionsprevailing including the geographi-

cal location and size of the mar-

kets, costs of labour and capital in

the markets etc. The fact whether

the comparable has a higher or

lower profit rate has not been pre-

scribed as a determinative factor

to make a case incomparable. This

is because profit is not a factor in

itself, but a consequence of the

effect of various factors. Only if the

higher or lower profit rate resultson account of the effect of factors

given in rule 10B (2) read with sub-

rule (3), that such case shall merit

omission. If however such extreme

profit rate is achieved because of

factors other than those given in

the rule, then such case would

continue to find its place in the list

of comparables;

3. On facts, the two loss making

companies, though excluded by

the TPO for being functionally dif-

ferent, were not eligible to be

taken as comparables because the

whole/ majority of the transactions

were from related/ controlled par-

ties. The transactions were not

uncontrolled transactions and so

the prescription of Rule 10B (1)(e)

(ii) r.w. Rule 10A(a) failed. The

alternate argument that if the loss

making companies are excluded,

the high profit companies should

also be excluded is not accept-

able. As stated above, the ques-

tion of inclusion or exclusion from

the list of comparables under Rule

10B (2) & (3) has to be determined

on the basis of factors like charac-

teristics of services provided, as-

sets employed, risks assumed,

contractual terms and conditions

prevailing including the geographi-

cal location etc and not only on the

basis of high or low profit rate

(Quark Systems 132 TTJ (Chd)

(SB) 1 explained).

CIT Vs. Oracle India (P) Ltd. [(2011)

243 CTR (Del) 103, Delhi High Court,

dtd. 30.03.2011]

Payment of royalty by assessee

company to its US based holding

company is not it by the provisions

of Sec. 92 in the absence of any

comparable case on record to deter-

mine the ordinary profit in similar

business and the price fixed has

been accepted as ALP by the TPO ;

payment of royalty being a business

expenditure which was incurred

wholly and exclusively for the pur-

pose of business of the assessee, it

is to be allowed in toto as business

expenditure.

Assessee, a 100 per cent subsidiary of

US Company, imports master copies

of software from the latter which are

duplicated on blank discs, packed and

sold in the market by way of a sub-

licence. In addition to a lumpsum

amount, assessee pays royalty @ 30

per cent of the list price of the licensed

products. AO diallowed payment of

royalty beyond 30 per cent of the sub-

licencing fee earned by the assessee

by invoking provision of Sec. 92 on the

ground that the software was sold at a

price lesser than the Indian published

price (IPP). The Delhi High Court held

that the act of AO was not justified as

for the purpose of assumption of juris-

diction under Sec, 92 it is necessary to

established that the course of business

between the resident and non resident

is so arranged that the business trans-

acted between them provides to the

resident either (i) no profits, or (ii) less

than ordinary profits which might be

expected to arise in the business.


10/1510

SNKDIRECT TAXES


Since the assessee has declared in-

come, it is not a case of no profit. As

regards the adequacy of profits vis--

vis ordinary profits which might be ex-

pected to arise in the business, this

can be found only when exercise is

undertaken to compare the income of

the assessee with other comparable

enterprise in India. AO did not under-

take this exercise and bring on record

any comparable case to find out the

ordinary profit in this type of business.

Further the price fixed has been ac-

cepted as ALP by the TPO. Once it is

held that the payment of royalty by the

assessee to its parent company is not

hit by the provision of Sec. 92 and the

price fixed is ALP as determined by the

TPO himself, there is no reason to hold

that the expenses could not be allowed

under Sec. 37(1).

What is to be seen is that the expendi-

ture was incurred by the assessee in

the course of business and has nexus

with the business of the assessee.Once these conditions are satisfied,

the payment is to be allowed in toto as

business expenditure. Question of

commercial expediency is to be judged

by the assessee and not by AO.

Emersons Process Management

India Pvt Ltd. Vs. Add. CIT (ITA No.

8118/Mum/2010, ITAT Mumbai

Bench, dtd. 12.08.2011]

Selection of a comparable company

should be determined having regard

to its functional comparability for

the year under review and not with

reference to preceding years

The fact that the company was se-

lected as one of the comparables, by

assessee himself, in the preceding

assessment year cannot be put

against the assessee, as whether or

not a comparable is to be included

must depend on its merits rather than

be solely guided by events of an earlier

year particularly when assessee is

successfully able to demonstrate that

the entity sought to be used as compa-

rable is not engaged in same or mate-

rially similar business at least in the

present year.

Indian Additives Limited v. The ACIT

[ITA No. 951/Mds./2009, ITAT Chen-

nai, dtd. 17.06.2011]

TPO should provide reasons for re-

jecting the Most Appropriate

Method [MAM] used by the as-

sessee before adopting a different

MAM

ITAT Chennai Bench held that particu-

lar MAM used by the taxpayer cannot

be rejected without providing any co-

gent reasons. Further, the Tribunal

also mentioned that if there exist sig-

nificant amount of purchases from As-

sociates enterprises, the same cannot

be included while computing the gross

margins under the Resale Price

Method [RPM]. The Tribunal have also

re-emphasized the importance of com-

paring the Functional, Risk and Asset

Analysis [FAR] analysis of the tested

party and that of the comparable com-

panies while applying the TNM

method.

In Re. Millennium IT Software Ltd.

[A.A.R. No.835 of 2009, AAR, dtd.

29.09.2011]

License fee for Software, even if

copyrighted article, taxable as

royalty

The applicant was the developer of

software. It granted a non-exclusive

and non-transferable license to an In-

dian company to use the software with-

out any sub-licensing rights. The licen-

see was not allowed to modify the soft-

ware programme and could make cop-ies only for its own use. The applicant

filed an application for advance ruling

in which it claimed, relying on Dassault

Systems 322 ITR 125 (AAR) and Tata

Consultancy Services 271 ITR 401

(SC), that the transaction involved the

use/ right to use of a copyrighted arti-

cle but not the copyright itself and so

the license fees were not assessable

to tax as royalty u/s 9(1)(vi) of the Act

& Article 12 of the India-Sri Lanka

DTAA. The Authority of Advance Rul-

ing (IT) rejecting the applicants plea

held that Sec. 9(1)(vi) & Article 12 de-

fine the term royalty to include any

payment for the use of, or the right to

use, a copyright of scientific work.

Software programmes are a

copyright and are protected under the

Copyright Act, 1957. As the software

programme is a copyright, any pay-

ment received for transferring the right

to use it is royalty as defined in the

Act. The argument that there is a dis-

tinction between a copyright and a

copyrighted article is not acceptable

because there is no such distinction

made either in the Income-tax Act or

the Copyright Act. The use of software

involves the use of the copyright; the

software cannot be divorced from the

copyright itself. Accordingly, even a fee

for the use of a copyrighted article is

assessable as royalty. (Microsoft/

Gracemac 42 SOT 550 (Del) followed;

Dassault Systems 322 ITR 125 (AAR)

not followed; Tata Consultancy 271

ITR 401 (SC) distinguished) Dresser

Rand India Pvt. Ltd. v. ACIT [ITA No.

8753/Mum./2010, ITAT Mumbai

Bench, 07.09.2011]

Integral tests for a Cost Contribu-

tion Arrangement to be considered

at arms lengthdefined

The integral tests for a Cost Contribu-

tion Arrangement to be considered at

arms length are: that the services

were availed, the costs have been allo-

cated in a reasonable and an impartial

manner and there is documentation to

demonstrate the receipt of services.


11/1511

SNKDIRECT TAXES

Judicial pronouncements (International Taxation) / Circulars / Notifications

It is the prerogative of the assessee to

decide how he conducts the business

and not for the tax authorities to ques-

tion such commercial decisions. Exclu-

sive method of accounting does not

impact the profit and loss account

thereby the adjustment under section

145A on account of unutilized CENVAT

credit to the closing stock is unwar-

ranted.

Circulars / Notifications / Instruc-

tions / Press Release

Notification No. 47/2011 dtd.

01.09.2011

In exercise of power conferred by Sec.

90 of the Income tax Act, the CentralGovernment through the above notifica-

tion notified that all the provisions of the

Second Protocol amending the agree-

ment between the Government of India

and the Government of Singapore for

the avoidance of double taxation and

the prevention of fiscal evasion with

respect to taxes on income, shall be

given effect to in the Union of India for

taxable periods falling after January 1,2008, that is Financial Year 2008-09

and subsequent financial years in ac-

cordance with the provision of Article 3

of the Protocol.

Notification No. 48/ 2011, dtd.

02.09.2011

In exercise of the powers conferred by

sub Section (1) of Sec. 90A of the In-

come Tax Act, the Central Governmenthad adopted the agreement between

India Taipei Association in Taipei and

Taipei Economics and Cultural center in

New Delhi for the avoidance of double

taxation and the prevention of fiscal

evasion with respect to taxes on income

and notifies that all the provisions of the

said agreement shall be given effect to

in the Union of India with effect from

01.04.2012.


09.09.2011

Vide the above notification, CBDT has

notified (subject to certain conditions)

bonds issued by Industrial Finance Cor-

poration of India, Life Insurance of In-

dia, Infrastructure Development Finance

Company Limited, India Infrastructure

Finance Company Ltd. and Non-

Banking Finance Company classified as

an Infrastructure Finance Company by

the Reserve Bank of India as Long term

Infrastructure bonds in reference to

Sec. 80CCF.


06.09.2011

In exercise of the powers conferred by

Sec. 10(45) of the Income Tax Act, the

Central Government has through the

above notification, notified certain allow-

ances and perquisites w.r.e.f.

01.04.2008 for serving Chairman and

members of Union Public Service Com-

mission namely, the value of rent free

official residence, conveyance facilities,

sumptuary allowance and leave travel

concession. The said notification also

notifies allowances and perquisites for

retired Chairman and retired members

of Union Public Service Commission

which are as follows:

a) A sum of max. Rs. 14,000 per

month for defraying the service of

an orderly and meeting expense

incurred towards secretarial assis-

tance on contract basis.

b) The value of a residential telephone

free of cost and the number of free

calls to the extent of Rs. 1,500 per

month (over and above free calls

allowed).

Order under Sec. 119 of IT Act [F.

No.225/72/2010/ITA.II dtd. 30.09.2011]

Central Board of Direct taxes depart-

ment has extended due date of filing

income tax return for the assessment

year 2011-12 from 30-09-2011 to 31-

10-2011 for the assessee of Sikkim.

This step is taken due to earthquake in

Sikkim last month which cause life dis-turbance as well as life losses in Sikkim

state.

Accordingly, CBDT also extends the

audit report as prescribed under section

44AB of income tax act to 31 October

2011.

Press Information Bureau

India Signs DTAA with Uruguay on

08.09.2011. Agreement will Provide

Tax Stability to the Residents of both

Countries, Facilitate Mutual Economic

Cooperation and Stimulate the Flow of

Investment, Technology and Services.

The Government of India signed a Dou-

ble Taxation Avoidance Agreement

(DTAA) with the Oriental Republic of

Uruguay for the avoidance of double

taxation and for the prevention of fiscalevasion with respect to taxes on income

and on capital on 8th September, 2011.

The DTAA provides that business prof-

its will be taxable in the source state if

the activities of an enterprise constitute

a permanent establishment in that state.

Such permanent establishment includes

a branch, factory, etc. Profits of a con-

struction, assembly or installation pro-

jects will be taxed in the state of source

if the project continues in that state for

more than six months.


12/1512

SNKDIRECT TAXES / INDIRECT TAXES

Judicial Pronouncements / Circulars / Notifications

Profits derived by an enterprise from

the operation of ships or aircraft in in-

ternational traffic shall be taxable in the

country of residence of the enterprise.

Dividends, interest and royalty income

will be taxed both in the country of resi-

dence and in the country of source.

However, the maximum rate of tax to

be charged in the country of source will

not exceed 5% in the case of dividends

and 10% in the case of interest and

royalties. Capital gains from the sale of

shares will be taxable in the country of

source and tax credit will be given in

the country of residence.

The Agreement further incorporates

provisions for effective exchange of

information including banking informa-

tion and assistance in collection of

taxes between tax authorities of the

two countries in line with internationally

accepted standards including anti-

abuse provisions to ensure that the

benefits of the Agreement are availed

of by the genuine residents of the twocountries.

The Agreement will provide tax stability

to the residents of India and Uruguay

and facilitate mutual economic coop-

eration as well as stimulate the flow of

investment, technology and services

between India and Uruguay.

F. NO. 225/93/2009/ITA.II

Guidelines for selection of Cases

for scrutiny for F.Y. 2010-11

Selection of cases for scrutiny during

the financial year 2010-11 will be done

primarily through CASS this year. Man-

ual Selection for scrutiny this year will

be limited only to a few categories of

cases listed below.

List of cases selected during each

month in accordance with the selection

criteria mentioned below shall be sub-

mitted by the Assessing Officers to

their respective Range heads by the

15th

of the following month and also

displayed on the Notice Board of their

office.

These guidelines are meant only for

the use of officers of the Income Tax

Department. These are not be dis-closed even if a request is made under

the right to Information Act, in view of

the decision of the Central Information

Commission in the case of Shri Kamal

Anand Vs Director (ITA-II), CBDT

(Order No. CIC/AT/2007/00617 dated

21.02.2008).

Selection Criteria Applicable to all re-

turns:

a) Value of international transaction as

defined u/s 92B exceeds Rs. 15

crores.

b) Cases involving addition in an ear-

lier assessment year in excess of

Rs.10 lacs on a substantial and re-

curring question of law or fact which

is confirmed in appeal or is pending

before an appellate authority.

c) Cases involving addition in an ear-

lier assessment year on the issue of

transfer pricing in excess of Rs.10

Lakhs or more.

d) Assessments in survey cases for

the financial year in which survey

was carried out This criteria will not

apply if all of the following condi-

tions are fulfilled:

1. There are no impounded books or

documents.

2. There is no retraction of disclosure

made during the survey.

3. Declared income, excluding any

disclosure made during the survey,

is nor less than the declared in-

come of the preceding assessment

year.

e) Assessment in Search & Seizure

cases to be made under sections

158B, 158BC, 158BD, 153A 153C

& 143(3) ofthe IT Act.

f) Assessments initiated under section

147 / 148 of the IT Act.

Assessing Officer may select any re-

turn of scrutiny after recording the rea-

sons and obtaining approval of theCCIT/DGIT. The cases under this

category should be selected if there

are compelling reasons and the case is

not selected through CASS. There

cases should be watched by CCIT /

CIT in respect of the quality of assess-

ment.

INDIRECT TAXES

Judicial Pronouncements

CCE Vs. M/s. Sundstrand Forms

Pvt. Ltd. [Civil Appeal No. 4077 of

2003, Supreme Court of India, dtd.

30.08.2011]

Marketability is essential criteria for

charging excise duty and product

must be marketable in the condition

in which it emerges

The Supreme Court of India in a recent

decision in case of Medley Pharma-

ceuticals Ltd. Vs. The Commissioner of

Central Excise and Customs, Daman,

reported in (2011) 2 SCC 601 has very

carefully considered almost all the pre-

vious decisions of Supreme Court on

the issue of the levy/payment of Excise

Duty Valuation on articles manufac-

tured by the assessee company.

After referring to practically all the deci-

sions on the issue, Supreme Court

held that the consistent view is that the

marketability is an essential criteria for


13/1513

SNKINDIRECT TAXES


charging duty and that the test of mar-

ketability is that the product which is

made liable to duty must be market-

able in the condition in which it

emerges.

Supreme Court also held that the word

Marketable means saleable or suit-

able for sale and that it need not in

fact be marketed but then the article

should be capable of being sold to

consumers, as it is without anything

more. Supreme Court further went on

to hold that the essence of marketabil-

ity of goods is neither in the form nor

in the shape or condition in which the

manufactured article is found but it is

the commercial identity of the article

known to the market for being bought

and sold. The Court further held that

the product in question is generally not

being bought or sold or has no de-

mand in the market, would be irrele-

vant.

M/s. Asia Impex Versus CC, Amris-tar [Customs Appeal No.C/351/2007,

CESTAT Delhi, dtd. 11.01.2011]

Opinion of one expert cannot be

rejected on the basis of that of an-

other expert unless there is suffi-

cient independent reason for such

rejection

The value of the imported goods can-

not be based on the value of the

goods in the local market. In the pre-

sent case, no valid reasons have been

given by the commissioner to reject

the valuation adopted by the overseas

chartered engineer. Similarly, com-

paring the value of the imported goods

which are old and used with the data

available in DOV is also not appropri-

ate as the said data do not disclose

the age, residual life, physical condi-tion of the goods sought to be com-

pared. The decision in the case of An-

ish Kumar Spinning Mills is to the ef-

fect that the opinion of one expert

cannot be rejected on the basis of that

of another expert unless there is suffi-

cient independent reason for such re-

jection

Commissioner of c. Ex., Bangalore

Vs. Tata Advances Materials Ltd.

[2011 (271) ELT 62 (Kar.), Karnataka

High Court, 11.04.2011]

Payment inclusive of Central Excise

Duty by Insurance Company on de-

struction of Capital goods could not

render credit claimed by assessee as

irregular. Assessee had paid insur-

ance premium and got compensation.

It is not a case of double payment or

irregular availment of Cenvat credit.

Home Solutions Retails (India) Ltd.

Vs. Union of India & ors. [ WP(C)

No.3398/2010, Delhi High Court, dtd.

23.09.2011]

Delhi High Court has upheld the

constitutional validity of Service

Tax on renting of immovable prop-

erty with retrospective effect

Delhi High Court held that when prem-

ise is taken for commercial purpose, itis basically to sub serve the cause of

facilitating commerce, business and

promoting the same. Therefore, there

can be no trace of doubt that an ele-

ment of value addition is involved and

once there is a value addition, there is

an element of service.

The imposition of service tax under

Section 65(105)(zzzz) read with Sec-

tion 66 is not a tax on land and build-

ing which is under Entry 49 of List II.

What is being taxed is an activity, and

the activity denotes the letting or leas-

ing with a purpose, and the purpose is

fundamentally for commercial or busi-

ness purpose and its furtherance. The

concept has to be read in conjunction.

Once there is a value addition and theelement of service is involved, in con-

ceptual essentiality, service tax gets

attracted and the impost gets out of

the purview of Entry 49 of List II of the

Seventh Schedule of the Constitution

and falls under the residuary entry,

that is, Entry 97 of List I.

Retailers Association of India Vs.

Union of India & Ors, [(2011) 60 DTR

(Bom) 49, Bombay High court, dtd.

04.08.2011]

Bombay High Court also upheld the

constitutional validity of Service

Tax on renting of immovable prop-

erty with retrospective effect

Levy of service tax on renting of im-

movable property for commercial pur-

poses under Sec. 65(105)(zzzz) of the

Finance Act, 1994, is a charge on ser-

vice and not on lands and buildings

and,therefore, such levy of service tax

is within the legislative competence of

the Parliament referable to the residu-

ary power of the Parliament under Arti-

cle 248 r/w. entry 97 of list I of Sched-

ule VII to the Constitution; amendment

of sub. Cl. (zzzz) was given retrospec-

tive effect so as to cure the deficiency

pointed out by the Delhi High Court in

the original provision and thus, the

same does not invalidate the amended

provision.

Meghachem Industries Vs. Commis-

sioner Of C. Ex., Ahmedabad [2011

(23) STR 472 (Tri.-Ahmedabad),

CESTAT Ahmedabad bench,

04.04.2011]

Courier Service used for sending

documents is definitely activity relating

to business and hence eligible for

availing Cenvat Credit.


14/1514

SNKINDIRECT TAXES / OTHER LAWS

Judicial Pronouncements / Circulars / Notifications

Commr. of C. Ex., Bangalore III Vs.

Satnzen Toyotetsu India (P) Ltd.

[2011 (23) STR 444 (Kar.), Karnataka

High Court, 08.04.2011 ]

Definition of Input Service is inclusive

and services mentioned in Sec. are

only illustrative. Test for eligibility is

whether service is used for manufac-

ture of final product directly or indi-

rectly in relation to activities relating to

business. If any of these two tests are

satisfied, service falls within the defini-

tion of input service and manufacturer

eligible to avail Cenvat credit.

Enso Secutrack Ltd. Vs. Commis-

sioner of C. Ex., Hyderabad [2011

(23) STR 465 (Tri.-Bang.), CESTAT

Bangalore Bench, 19.04.2011]

Provision of Rule 3(3) of Taxation of

Service (Provided Outside India and

Received in India) Rules, 2006 can-

not be invoked if service rendered

and consumed outside India.

The appellant raised FCCBs in the

international capital market and the

money so raised was invested in Mau-

ritius. The service was rendered and

consumed outside India. Once it is

admitted that the money were invested

outside India, but only because the

said money raised is supposedly in

relation to the benefit or business of

the service recipient located in India,provision of Rule 3(3) cannot be in-

voked. The money so raised by issu-

ing FCCBs is invested in Mauritius

which is outside India and the services

rendered were for raising of such

money for investment in Mauritius.

Circulars / Notifications / Instruc-

tions

Notification No. 21 & 22/2011 CE(NT) dtd. 14.09.2011

Central Excise Rules, 2002 have been

amended to provide that the returns

and statements prescribed under

Rules 12 will have to be filed electroni-

cally by all the assessees irrespective

of the duty paid in the preceding years.

Monthly Return for production and re-

moval of goods (ER-1), Quarterly Re-turn (ER-3), Annual Financial Informa-

tion Statement (ER-4) are some of the

returns and statements prescribed un-

der Rule 12.Similar amendment has

been made in CENVAT Credit Rules,

2004 to the effect that assessee will

now have to file the annual Declaration

in respect of principal inputs (ER-5)

and the monthly return of information

relating to principal inputs (ER-6) elec-

tronically irrespective of the duty paid

in the preceding year.

Notification No. 44/2011-ST, dtd.

09.09.2011

Business Auxiliary Services provided

by Sub Brokers to Stock Brokers in

relation to sale or purchase of securi-

ties listed on registered stock ex-

change are exempt from payment ofservice tax vide notification No.

31/2009-ST dated 01.09.2009. Such

exemption has now been extended

vide the above notification to the au-

thorized person also.

Notification No. 45/2011-ST, dtd.

12.09.2011

Taxable service provided to any busi-

ness entity, by an arbitral tribunal, inrespect of arbitration has been ex-

empted from payment of service tax

vide the above notification.

Instruction No. F. No. 276/8/2009-

CX-8A-ST, dtd. 26.09.2011

Vide the above instruction; it has been

held that the service tax liability on any

taxable service provided by a non-

resident or a person located outsideIndia, to a recipient in India, would

arise w.e.f. 18.04.2006, i.e., the date of

enactment of section 66A of the Fi-

nance Act, 1994 and not from

01.01.2005 as instructed vide instruc-

tion no. F No. 275/7/2010-CX-8A,

dated 30-6-2010.

OTHER LAWS


Gheru Lal Bal Chand Vs. State of

Haryana [Punjab & Haryana High

Court]

Innocent purchaser cannot be disal-

lowed Input Tax Credit (ITC) for non

payment of tax by seller.

In legal jurisprudence, the liability can

be fastened on a person who either

acts fraudulently or has been a party to

the collusion or connivance with the

offender. However, law nowhere envis-

ages imposing any penalty either di-

rectly or vicariously where a person is

not connected with any such event or

an act. Law cannot envisage an almost

impossible eventuality. The onus upon

the assessee gets discharged on pro-

duction of Form VAT C-4 which is re-

quired to be genuine and not thereafter

to substantiate its truthfulness by run-

ning from pillar to post to collect the

material for its authenticity. In the ab-

sence of any malafide intention, con-

nivance or wrongful association of the

assessee with the selling dealer or any

dealer earlier thereto, no liability can

be imposed on the principle of vicari-

ous liability. Law cannot put such oner-

ous responsibility on the assessee oth-

erwise; it would be difficult to hold the

law to be valid on the touchstone of

articles 14 and 19 of the Constitution of

India.


15/15

SNKOTHER LAWS

Judicial Pronouncements /Circulars / Notifications

The selling-registered dealer who had

collected tax from the purchasing-

registered dealer acts as an agent for

the Government as held in Atul Fasten-

ers Ltd.s case. Still further, paid would

mean and embrace within it ought to

have been paid as enunciated in El-

phinstone Spinning and Weaving Mills

Co.Ltd.s case. Moreover, the apex

Court in B. R. Enterprises v. State of

U.P., (1999)9 SCC 700, Calcutta Guja-

rathi Education Society v. Calcutta Mu-

nicipal Corporation (2003) 10 SCC 533

and M.Nagraj v. Union of India (2006) 8

SCC 212 has interpreted the rule of

reading down statutory provisions to

mean that a statutory provision is gen-

erally read down so as to save the pro-

vision from being pronounced to be

unconstitutional or ultra vires. The rule

of reading down is to construe a provi-

sion harmoniously and to straighten

crudities or ironing out creases to make

a statute workable.

To conclude, no liability can be fas-

tened on the purchasing registered

dealer on account of non-payment of

tax by the selling registered dealer in

the treasury unless it is fraudulent, or

collusion or connivance with the regis-

tered selling dealer or their predecessor

with the purchasing registered dealer is

established.

M/s. L.N. Gadodia & Sons & ANR. Vs.

Regional Provident Fund Commis-

sioner [SLP No. 11230 of 2008, Su-

preme Court of India, dtd.

26.09.2011]

SC allows clubbing of two establish-

ments as one for the purposes of the

PF as there was unity of ownership,

management, control, finance, la-

bour and functional integrity

When two establishments are run by

the same family under a common man-

agement with common work force and

with financial integrity, they are ex-

pected to be treated as branches of

one establishment for the purposes of

the Provident Fund Act. The authorities

had clubbed two establishments as one

and demanded provident fund contribu-

tion from both. It argued that they were

in separate business enterprises and

registered as separate private limited

companies. However, the Delhi high

court and the Supreme Court accepted

the contention of the PF Commissioner

that they were not separate entities. It

said that the tests in such cases was

whether there was unity of ownership,

unity of management and control, unity

of finance and unity of labour and unity

of functional integrity.

Circulars / Notifications

General Circular No. 66/2011, dtd.

04.10.2011

The time for filing DIN-4 by DIN holders

for furnishing the PAN and to update

PAN details has been extended till

15.12.2011.

General Circular No. 65/2011-MCA,

dtd. 04.10.2011

Company Law Settlement Scheme,

2011 has been extended upto 15th De-

cember, 2011.

Due Dates of key compliances pertaining to the month of October 2011:

5th

Oct. Payment of Service Tax & Excise duty for September6th Oct. Payment of Service Tax & Excise duty paid electronically through internet banking7th Oct. TDS/TCS Payment for September10

th

Oct. Excise Return ER1 / ER2 /ER615

thOct. PF Contribution for September

21st

Oct. ESIC Payment for September25th Oct. Service tax Return for the half year ended on 30-09-2011

15th Oct. Due date of for filing TDS return for the quarter ended on 30-09-2011

The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any individualor entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information presented herein,before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business decisions. Thisnewsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.

snk newsletter- october 2011

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