Budget 2014 – Cost Inflation Index to be worked out on the basis of Index notified by Govt in this behalf
Cost Inflation Index
The existing provisions contained in section 48 prescribe the mode of computation of income chargeable under the head "Capital gains". Clause (v) of the Explanation to the said section defines the term "Cost Inflation Index" (CII) which in relation to a previous year means such index as may be notified by the Government having regard to seventy-five percent of average rise in the Consumer Price Index (CPI) for urban non-manual employees (UNME) for the immediately preceding previous year to such previous year.
The release of CPI for UNME has been discontinued. Accordingly, it is proposed to amend the said clause (v) of the Explanation to section 48 to provide that "Cost Inflation Index" in relation to a previous year means such index as may be notified by the Central Government having regard to seventy-five percent of average rise in the Consumer Price Index (Urban) for the immediately preceding previous year to such previous year.
This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to assessment year 2016-17 and subsequent assessment years.
AHMEDABAD, JULY 17, 2014: THE appellants are ship breakers and bought old and used ship for breaking up. The ships/vessels contain Marine Gas Oil (HSD) in the tanks of the vessel in addition to the MGO (HSD) lying in the tank of the ship engine. As per the agreements, buyers of the ships also take over the oil bunkers, unused lubricants and unused stores and provisions at the port of delivery of the vessels without any extra payments. The commercial invoice showing the purchase of vessels meant for ship breaking does not disclose any extra price for the MGO (HSD) etc. so acquired by the appellants.
Appellants paid the applicable duty on MGO (HSD) but according to Revenue, MGO (HSD) is a canalised item as per ITC (HS) 2012, Schedule I of Import policy and HSD is subject to import only through IOC subject to Para 2.11 of the Foreign Trade Policy and imports of such MGO/HSD is restricted.
Both the lower authorities held that appellants have contravened the provisions of Para 2.11 of the Foreign Trade Policy thus rendering the MGO/HSD liable to confiscation under Section 111(d) of the Customs Act, 1962 read with CBEC clarification issued under F.No.528/74/2012-GTO(TV), dt.26.01.2013.
The appellants are before the CESTAT and submit as under -
+ As per EXIM Policy Heading 27 10 1940 and 20 10 19030, LDO and HDO are canalised items to be imported only through State Trading Agencies and vessels and other floating structures for breaking up are classified under EXIM code 8908 00 00 of the same EXIM Policy, import of which is free.+ MGO (HSD) is not separately imported by the appellant but is received along with the vessel as ship stores, along with other ship stores and no extra price is paid for such MGO (HSD) acquired by the appellants.+ DGFT letterF.No.IPC/4/5(684)/97/82/PC-2(A), dt.26.06.13 in Para 4 has clarified that surplus fuel stored in the fuel tanks (whether inside or outside the engine room) form an integral part of the vessels machinery and is classifiable under EXIM code 89.08 of the EXIM Policy. That as per Para 2.3 of the Foreign Trade Policy, interpretation made by the DGFT is final and binding. Reliance is placed on the decision in Priya Holding (P) Ltd 2012-TIOL-631-HC-AHM-CUS and it is also emphasized that interpretation made by the DGFT on the import policy are binding on the customs authorities.
The Revenue representative referred to CBEC clarification F.No.528/74/2012-B TO (TU), dt.22.01.2013 and submitted that the fuel contained in the vessels bought for breaking up should not be allowed free as per the import policy restrictions and that these instructions are binding on all the field formations.
The Bench referred to Para 2.3 of Chapter-2 of the Foreign Trade Policy (2009 to 2014) and observed that as per the same any doubt regarding classification of any item in ITC (HS) or HPBv1 or HBPv2 or schedule of DEPB Rates should be referred to DGFT whose decision shall be final and binding. Inasmuch as per the clarification/opinion of Joint Director General of Foreign Trade New Delhi, surplus fuel stored in fuel tanks of vessels/ship brought for breaking up is classifiable under 89.08 along with the main vessel, the Bench observed.
The CESTAT further noted that the opinion/clarification issued by Joint DGFT has to be considered as a clarification issued by DGFT & will be binding on the customs so far as ITC restrictions are concerned under Foreign Trade Policy.
The Bench also added -
+ The same clarification issued by DGFT may not be binding on the Customs for the classification of the same goods under the Customs Tariff Act which is the sole domain of the Customs Authorities.+ However, so far as classification of the ships/vessel, brought in for breaking up along with surplus fuel, will have to be considered classifiable under Heading 89.08 of the Import policy as an integral part of the vessel/ship, as per opinion given by DGFT under F.No.IPC/4/5(684)/97/82/PC-2(A), dt.26.06.2013.+ As the imports under ITC(HS) 89.08 are free without any restrictions, therefore, such MGO/HSD contained in the vessels brought in for breaking up, cannot be held as liable for confiscation under Section 111(d) of the Customs Act, 1962 and no penalties upon the appellants are imposable in the present appeals under Section 112(a) of the Customs Act, 1962.+ It is also relevant to mention that no ITC action is taken by the Revenue when an ocean going vessel is converted into coastal run vessel and only duties are paid on the fuel used during the coastal run.
In fine, the appeals filed by the appellants were allowed with consequential relief.
IT: Profit of contractor depend upon various factors like place of execution of contract, accessibility of labour, raw material, etc. and would, therefore, vary from contractor to contractor
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[2014] 46 taxmann.com 287 (Punjab & Haryana)
HIGH COURT OF PUNJAB & HARYANA
Commissioner of Income-tax II, Amritsar
v.
Earth Tech Engineers*
AJAY KUMAR MITTAL AND MS. ANITA CHAUDHRY, JJ.
IT APPEAL NO. 168 OF 2013†
MARCH 13, 2014
Section 145, read with Sections 29 and 32, of the Income-tax Act, 1961 - Method of accounting - Estimation of income (Profit rate) - Assessment year 2009-10 - Whether profit of a contractor would necessarily depend upon various factors like place of execution of contract, accessibility of labour, raw material, etc. and would, therefore, vary from contractor to contractor - Held, yes - Whether gross receipts to which net profit rate is to be applied shall be determined after giving allowance on account of depreciation - Held, yes - Assessee-firm, engaged in business of execution of government contract, executed works of laying optical fibre cables in a remote border area of Jammu and Kashmir - Assessing Officer made addition to income applying net profit rate of 12 per cent on gross receipt - However, both Commissioner (Appeals) and Tribunal scaled down net profit to 8 per cent and also reduced depreciation out of gross receipt - Whether no question of law arose from order of Tribunal - Held, yes [Paras 3 and 7] [In favour of assessee]
FACTS
| ■ | The assessee-firm was engaged in business of execution of government contract. It filed return of income which came on scrutiny. During assessment proceeding, while examining books of account, some discrepancies were found that expenditure claimed by assessee was very much on the higher side as the work executed by it. Consequently, the assessee was asked to produce proof of expenditure, incurred on wages and labour, wages register and also to correlate wages paid with the project executed. | |
| ■ | Thereupon, the Assessing Officer, thus, applied 12 per cent rate on gross receipt after excluding cost of material supplied by the department and made addition accordingly. | |
| ■ | On appeal, the Commissioner (Appeals) reduced the net profit rate to 8 per cent as against 12 per cent on the contract receipt and allow depreciation and salary paid to partners as claimed. | |
| ■ | On second appeal, the Tribunal upheld the order passed by the Commissioner (Appeals). | |
| ■ | On appeal: |
HELD
| ■ | There is no reason to interfere with the order passed by the Commissioner (Appeals), affirmed by the Tribunal, scaling down the net profit to 8 per cent against 12 per cent applied by the Assessing Officer. The reasons assigned by the Commissioner (Appeals) as well as the Tribunal are clear and cogent and even otherwise no two contractors can have a similar rate of profit. The profit of a contractor would necessarily depend upon various factors like place of execution of the contract, the accessibility of labour, raw material etc. and would, therefore, vary from contractor to contractor. The assessee in the instant case, was admittedly laying optical fiber cables etc. in a remote border area of Jammu and Kashmir. [Para 3] | |
| ■ | The issue before this Court in CIT v. Chopra Bros. India (P.) Ltd. [2001] 252 ITR 412/119 Taxman 866 and Girdhari Lal v. CIT [2002] 256 ITR 318/[2001] 119 Taxman 863 was with regard to deduction to be made on account of depreciation from the gross receipts while applying net profit rate. It was held on the basis of a circular issued by the Board, which was binding on the revenue that the gross receipts to which net profit rate is to be applied shall be determined after giving allowance on account of depreciation. [Para 7] | |
| ■ | In view of the above, no substantial question of law arises in the instant appeal. Accordingly, dismissed. [Para 9] |
CASE REVIEW
CIT v. Gian Chand Labour Contractors [2009] 316 ITR 127/[2008] 167 Taxman 265 (Punj. & Har.)and CIT v. Som Dutt Gargi [IT Appeal No.65 of 2002, dated 12-8-2010] (para 8) distinguished.
CASES REFERRED TO
CIT v. Gian Chand Labour Contractors [2009] 316 ITR 127/[2008] 167 Taxman 265 (Punj. & Har.)(para 4), CIT v. Som Dutt Gargi [IT Appeal No.65 of 2002, dated 12-8-2010] (para 4), CIT v. Chopra Bros. India (P.) Ltd. [2001] 252 ITR 412/119 Taxman 866 (Punj. & Har.) (para 7) and Girdhari Lal v.CIT [2002] 256 ITR 318/[2001] 119 Taxman 863 (Punj. & Har.) (para 7).
Denesh Goyal for the Appellant. Vikas Jain for the Respondent.
ORDER
Ajay Kumar Mittal, J. - This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 191 (in short, "the Act") against the order dated 21.2.2013, Annexure A.3 passed by the Income Tax Appellate Tribunal, Armitsar Bench, Amritsar in ITA No.336 (ASR)/2012, for the assessment year 2009-10, claiming following substantial questions of law:—
| "1. | Whether the Hon'ble ITAT was correct in law in confirming the order of the learned CIT(A) scaling down the net profit to 8% on the gross receipts as against 12% applied by the AO at the time of assessment? | |
| 2. | Whether the Hon'ble ITAT was correct in law in confirming the order of the learned CIT(A) allowing the depreciation out of the net profit?" |
2. A few facts relevant for the decision of the controversy involved, as narrated in the appeal may be noticed. The assessee is a contractor firm. It is engaged in the business of execution of government contracts. Return declaring income of Rs. 23,94,720/- was filed on 29.9.2009 and the same was processed under section 143(1) on 28.3.2011. The case of the assessee was selected for scrutiny. During the course of assessment proceedings, while examining the books of account, certain discrepancies were found. The assessee claimed expenditure of Rs. 2,78,88,170/- which was very much on the higher side as the works executed by the assessee were to the tune of Rs. 7,49,84,804/- only. The assessee was asked to produce proof of expenditure incurred on wages and labour, wages register and also to correlate wages paid with the projects executed. The assessment under section 143(3) of the Act was made and income was determined at Rs.91,94,154 vide order dated 22.12.2011, Annexure A.1 by applying 12% rate on gross receipt after excluding cost of material supplied by the department. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [in short, CIT(A)]. Vide order dated 7.6.2012, Annexure A.2, the CIT(A) partly allowed the appeal and directed the Assessing Officer to apply net profit rate of 8% as against 12% applied at the time of assessment on the contract receipt and to allow the depreciation and salary paid to partners out of that. Accordingly, the income was reduced by Rs. 36,36,070/-. Aggrieved by the order, the revenue filed appeal before the Tribunal. Vide order dated 21.2.2013, Annexure A.3, the Tribunal dismissed the appeal of the revenue and cross objections of the assessee and confirmed the order of the CIT(A). Hence the instant appeal by the revenue.
3. On 9.10.2013, the motion bench while issuing notice of motion had recorded as under:—
'The revenue challenges order dated 21.2.2013 passed by the Income Tax Appellate Tribunal, Amritsar and order dated 7.6.2012, passed by the CIT(A) by raising the following substantial questions of law:—
| "1. | Whether the Hon'ble ITAT was correct in law in confirming the order of the learned CIT(A) scaling down the net profit to 8% on the gross receipts as against 12% applied by the AO at the time of assessment? | |
| 2. | Whether the Hon'ble ITAT was correct in law in confirming the order of the learned CIT(A) allowing the depreciation out of the net profit?" |
We have heard learned counsel for the appellant and find no reason to interfere with the order passed by the CIT(A), affirmed by the Income Tax Appellate Tribunal, scaling down the net profit to 8% against 12% applied by the Assessing Officer. The reasons assigned by the CIT(A) as well as the ITAT, are clear and cogent and even otherwise no two contractors can have a similar rate of profit. The profit of a contractor would necessarily depend upon various factors like place of execution of the contract, the accessibility of labour, raw material etc. and would, therefore, vary from contractor to contractor. The assessee in the present case, was admittedly laying optical fiber cables etc. in a remote border area of Jammu and Kashmir. We therefore, find no reason to entertain the first question raised by the revenue and reject the same. Notice of motion for 17.12.2013, relating to the second substantial question of law.'
Accordingly, the arguments on question No.2 were heard.
4. Learned counsel for the revenue relying upon the judgments of this Court in CIT v. Gian Chand Labour Contractors [2009] 316 ITR 127/[2008] 167 Taxman 265 and ITANo.65 of 2002, CIT v. Shri Som Dutt Gargi, decided on 12.8.2010 submitted that the CIT(A) as well as the Tribunal were in error in allowing the depreciation from the net profit rate of 8%.
5. On the other hand learned counsel for the assessee supported the order passed by the Tribunal.
6. After hearing learned counsel for the parties, we do not find any merit in the appeal.
7. The issue before this Court in CIT v. Chopra Bros. India (P.) Ltd. [2001] 252 ITR 412/119 Taxman 866 and Girdhari Lal v. CIT [2002] 256 ITR 318/[2001] 119 Taxman 863 was with regard to deduction to be made on account of depreciation from the gross receipts while applying net profit rate. It was held on the basis of a circular issued by the Board, which was binding on the revenue that the gross receipts to which net profit rate is to be applied shall be determined after giving allowance on account of depreciation.
8. The judgment relied upon by the learned counsel for the revenue in Gian Chand Labour Contractors'scase (supra) was relating to claim of deduction on account of freight charges paid by the assessee to the truck operators union where net profit rate was applied. In Som Dutt Gargi's case (supra), the assessee claimed deduction of interest paid from income on application of net profit rate. In both the cases, it was held that the same could not be reduced from the net profit rate applied for calculating the income of the assessee. That is not the position in the present case and these judgments are, thus, distinguishable.
9. In view of the above, no substantial question of law arises in this appeal. Accordingly, the same is hereby dismissed.
SB †Arising out of order of ITAT - Amritsar In IT Appeal No. 336 (Asr.) of 2012, dated 21-2-2013.
Revenue has to enquire into whether duplex house is one house or two separate houses before determining annual value
IT: Where assessee claimed that two flats owned by him in a building in fact formed a single property by way of one duplex flat and, thus, its annual value was to be assessed at nil, matter was to be remanded back for disposal as to whether it was a case of two separate residential houses joined together for easy access, or two flats represented a single residential house by applying user test
Revised Rate of Interest in Service Tax
Dr. Sanjiv Agarwal
Revised Rate of Interest w.e.f. 1.10.2014Vide Notification No 12/2014-ST dated 11.7.2014, rate of interest to be charged on delayed payment of service tax has been enhanced w.e.f. 1.10.2014, based on period of delay. Thus, longer the delay period , higher would be the rate of interest payable. Accordingly, the rate of interest shall be as under :
| S.No. | Period of delay | Rate of Simple Interest Per Annum |
| 1 | Up to six months | 18 percent |
| 2 | More than six months and up to one year | 18 percent for the first six months of delay; 24 percent for delay beyond six months |
| 3 | More than one year | 18 percent for the first six months of delay; 24 percent for period beyond six months up to one year; 30 percent for any delay beyond one year |
To illustrate, suppose, there is a delay of 15 months in payment of service tax of Rs 1 lakh by the assessee. The impact of rate change would be as under:
If paid prior to 1.10.2014
Interest @ 18% p.a for 15 months Rs. 22500
If paid after 1.10.2014
(say due on 1 August 2013 and paid on 1 November 2014)
Period upto 30.9.2014 (14 months @ 18 % p.a.) Rs 21000
1 month @ 30% p.a.(as delay is > 1 year) Rs. 2500
———————–
Total Interest Rs 23500
————————
The impact of interest would be much more if payment is delayed after October, 2014.
It may be noted that:
1) 3 percent interest rate concession allowed u/s 75 shall continue to be allowed to specified small service providers
2) This rate structure will not be applicable to VCES cases as interest @ 18% p.a. is payable under the scheme which ends on 31 December, 2014
3) The rate of interest is simple interest per annum
4) New interest rate will be operational only on or after 1 October, 2014. Upto 1.10.2014, rate of interest @ 18% p.a. will continue to apply.
Proposed Effects of Finance Bill, 2014 On Service Tax
Ankit Bidasaria, CA & CS
Over the last decade the service tax collections have shown tremendous growth, thus it is becoming more important to the Government Exchequer. After the introduction of Negative List based Service Tax regime, to broaden the tax base of service tax, only option available is to snip the negative list and the exemptions. Thus, the following new services have been brought into service tax net:
- Sale of Space or time on online, mobile ads- Earlier service tax was applicable on only broadcast media. Now service tax will be levied on advertisements on Internet and mobile. However, print media shall remain excluded from service tax.
- Radio Taxi Services- Service provided by radio-taxis has been brought under the Service tax net. The abatement as give to rent-a-cab service shall be allowed to radio taxi service, to keep them at par.
Changes in exemptions
- Exemption given to air conditioned contract carriages is being withdrawn and an abatement of 60% shall be given, therefore effective ate shall be 4.944%.
- Exemption given to clinical research organizations for services by way of technical testing or analysis on human participants shall been withdrawn.
- Exemption in respect of services of water supply, public health, sanitation conservancy, solid waste management or slum improvement or upgradation provided to Government, local authority or Governmental authority shall remain. But, exemption shall not be available to services not directly connected with these services.
- Concept of "Auxiliary educational services" has been omitted and only the following specified services received by eligible educational institutes shall be exempt from service tax-
o transportation of students, faculty and staff of the eligible educational institution;
o catering service including any mid-day meals scheme sponsored by the Government;
o security or cleaning or house-keeping services in such educational institution;
o services relating to admission to such institution or conduct of examination.
- Currently, exemption is given services by way of renting of hotel, inn, guest house, club or other commercial places meant for residential or lodging purpose having declared tariff less than Rs. One thousand. The exemption to other commercial places is being removed, by the removal of the word "Other commercial places".
- Exemption extended to life micro-insurance schemes for the poor, approved by IRDA, where sum assured does not exceed Rupees Fifty Thousand.
- Transport of organic manure by vessel, rail or road (by GTA) is being exempted. Therefore, organic manure shall be at equal footing with fertilizers which are already exempted.
- Services provided by way of loading, unloading, packing, storage or warehousing, transport by vessel, rail or road (GTA), of cotton, ginned or baled is being exempted.
- Exemption is being given to Services provided by common bio-medical waste treatment facility operators to clinical establishments.
- Specialized financial services received by RBI from outside India, in the course of management of foreign exchange reserves, e.g. external asset management, custodial services, securities lending services, are being exempted.
- Exemption is being given on services provided by the Indian tour operators to foreign tourists in relation to tours wholly conducted outside India.
- New section (Section 100) is being inserted to provide retrospective exemption for services provided to Employee's State Insurance Corporation during the period prior to July 01, 2012.
Interest on late payment of Service Tax made more stringent to regularize payment of service tax
| Extent of Delay | Simple Interest Rate per annum |
| up to six month | 18% |
| Six month to one year | 18% for first six months and 24% for beyond six month |
| More than one year | 18% for first six months 24% for next six month and 30% for beyond one year |
Changes in Reverse Charge Services
- Services provided by a Director to a body corporate to be brought under the reverse charge mechanism. Thus, service receiver, i.e., the body corporate shall be the person liable to pay service tax.
- Services provided by Recovery Agents to Banks, Financial Institutions and NBFC also been brought under the reverse charge mechanism, i.e. service receiver will be the person liable to pay service tax.
- In renting of motor vehicle, portion of service tax payable by service provider and service receiver will be 50% each.
Changes in abatement
- Abatement in respect of transport of goods by vessel to be increased from 50% to 60%.
- Service receiver in GTA service may avail abatement, without having to obtain non-availment of Cenvat Credit certificate from service provider.
- The service of tour operator is also being allowed to avail Cenvat credit on the input service of another tour operator, which are used for providing the taxable service.
Changes in place of Provision of Service
- Provision for prescribing conditions for determination of place of provision of repair service carried out on temporarily imported goods, to be omitted. However it may be noted that exclusion does not apply to goods that arrive in the taxable territory in the usual course of business and are subject to repair while such goods remain in the taxable territory.
- The definition of intermediary is being amended to include the intermediary of goods in its scope. An intermediary of goods shall be covered under Rule 9(c) of the place of provision Rules.
- Hiring of vessels or aircrafts, will be covered by the general rule, i.e., location of the service receiver.
Changes in Cenvat Credit
- Time limit for availment of credit on input and input services is being amended and credit shall be taken within six months from the date of the invoice or challans or other documents specified.
- The condition to pay invoice value to the service provider for availing credit of tax paid shall be withdrawn in case of service tax paid full under reverse charge.
- Re-credit of Cenvat credit reversed on account of non-receipt of export proceeds within the specified period, to be allowed, if such export proceeds are received within one year from the specified period. This can be done on the basis of documentary evidence of receipt of payment.
SEZ- Procedural Simplification
- The Central Excise Officer would issue Form A-2, within fifteen days from the date of receipt of Form A-1.
- Exemption would be available from the date when list of service on which SEZ is entitled to, provided Form A-1 is furnished to the jurisdictional Central Excise Officer within fifteen days of its verification. If furnished later, exemption would be available from the date on which Form A-1 is so furnished.
- In case of pending issuance of Form A-2, exemption will be available subject to condition that authorization issued by the Central Excise officer will be furnished to service provider within a period of three months from the date of provision of specified service. If the same is not provided within the said period of 3 months, the service provider shall pay Service tax on the service so provided.
- As regards services covered under full Reverse Charge, it is mentioned specifically in Form that the requirement of furnishing service tax registration number of service provider shall be dispensed with.
- A service shall be treated as exclusively used for SEZ operations, if the recipient of service is a SEZ unit or developer, invoice is in the name of such unit/developer and the service is used exclusively for furtherance of authorized operations in the SEZ.
Changes in Point of taxation Rules
- The Point of Taxation in respect of Reverse Charge under the first Proviso to Rule 7 of the POT Rules has been amended to bring certainty in determining the point of taxation. It is proposed to provide that point of taxation shall be the payment date or the first day after three months from the date of invoice, whichever is earlier.
Changes in the Service Tax (Determination of Value) Rules
- In Rule 2A of the Service Tax Valuation Rules, category 'B' and 'C' of works contracts proposed to be merged into one single category, with percentage service portion as 70% for the chargeability of Service Tax.
Other Changes
- Section 67A is amended enabling Government to prescribe rules for determination of rate of exchange for calculation of taxable value in respect of certain services. Rules will be prescribed in due course, after the Bill receives the assent.
- Reference to first proviso to sub-section (1) of section 78, in section 80, to be omitted, wherein power was grated to waive the 50% penalty imposable in cases where Service Tax has not been levied, not paid or short levied or short paid.
- Section 73 is amended providing time limits for completion of adjudication which are to be followed, as far as possible.
- Vide section 83; Section 35F of the Central Excise Act is already applicable to service tax. Section 35F of the Central Excise Act is being substituted with a new section which prescribes a mandatory fixed pre-deposit of 7.5% of the duty demanded or penalty imposed or both, for filing appeal before the Commissioner (Appeals) or the Tribunal at the first stage. Further, 10% of the duty demanded or penalty imposed or both, for filing the second stage appeal before the Tribunal. The amount of pre-deposit payable would be subject to a ceiling of Rs.10 crores. All pending appeals/stay applications would be governed by the statutory provisions prevailing at the time of filing such stay applications/appeals. When the amended section 35F in the Central Excise Act comes into force, it would, mutatis mutandis, apply to service tax.
- E-payment of Service tax will be made mandatory with effect from October 1, 2014. Relaxation from e-payment may be allowed by the Deputy Commissioner/ Asst. Commissioner on case to case basis.
(Author may be contacted at bidasaria_a@yahoo.co.in)
RBI eases FDI norms- permits investment in partly paid shares and warrants
CS Vinita Nair, Debolina Banerjee
Preamble
An usher of tremendous promotion in Foreign Direct Investment was marked on 10th July, 2014 when our Finance Minister expressly stated the need and want to promote more Foreign Direct Investment in selective sectors where it helps the larger interest of Indian Economy. This was marked by a proposed change in the composite cap of FDI in Defence and Insurance sector which was raised to 49% from the earlier cap being 26% with full Indian Management control via the FIPB route. This was done to infuse some big relief to the capital starved Indian economy.
Present Circular
Another major amendment in the FDI regime has been made by RBI/2014-15/123 A.P.(DIR Series) Circular No.3 dated 14th July, 2014[1] (Present Circular). Capital under FDI only meant fully paid up equity shares, compulsorily convertible preference shares and debentures. However, RBI vide Notification No. FEMA. 308/2014-RB[2]dated 30th June, 2014, which was published in official gazette on 8th July, 2014 vide G.S.R. No. 436(E), amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Principal Regulations) to the effect that partly paid up equity shares also become eligible instrument for FDI and Foreign Portfolio Investment (FPI) by Foreign Institutional Investors (FIIs)/Registered Foreign Portfolio Investors (RFPIs). Preference shares and debentures are required to be fully paid, mandatorily and fully convertible. Further, warrants issued in accordance with Companies Act and SEBI guidelines have also become eligible instrument for FDI and Foreign Portfolio Investment (FPI) by FIIs and RFPIs
Pricing and other requirement in case of partly paid shares
For being eligible for FDI, the pricing of the equity share has to be made upfront and 25% of the partly-paid equity shares should be realised upfront (including amount of share premium, if any); the balance consideration towards fully-paid equity shares should be received within a period of 12 months.
Further RBI has made an ease out note at this point and provided some leeway for large fund raising transactions. This is to say that the balance consideration towards the fully-paid equity shares to be received within a period of 12 months shall not be mandatory for both listed and unlisted Indian companies when the issue size exceeds Rs 500 crore. But, the investee company, whether listed or unlisted, will have to appoint a monitoring agency under Regulation 16 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).
In this connection the Investee company can appoint a public financial institution or any of the scheduled commercial banks named in the offer documents as bankers to the issue for the purpose of discharging the functions of a monitoring agency and also to report to the investee company in the format specified in Schedule IX of ICDR Regulations on a half yearly basis, till the proceeds of the issue have been fully utilised.
Issue of warrants under SEBI guidelines and under Present circular:
Regulation 4 (3) of ICDR Regulations as amended from time to time permits issue of warrants along with public issue or rights issue of specified securities i.e. equity shares and convertible securities. However, the same is subject to the condition that the tenure of such warrants shall not exceed 12 months from the date of allotment in the public/ rights issue and not more than one warrant shall be attached to one specified security. Further, regulation 77 (2) mandates that an amount equivalent to 25% of the consideration determined in terms of regulation 76 is to be paid against each warrant on the date of allotment of warrants. The balance of the consideration shall be paid at the time of allotment of equity shares pursuant to exercise of option against each such warrant by the warrant holder.
Under the Present Circular, the pricing of the warrants and price/conversion formula needs to be determined upfront. The amount of consideration payable upfront is the same as stipulated under SEBI guidelines i.e. 25% of the consideration. However, the balance consideration towards fully paid equity shares needs to be received within 18 months. Price at the time of conversion shall not be less than fair value at the time of issuance but can surely be more than the pre-agreed price.
Reporting requirements
The Present Circular stipulates that the reporting of receipt of foreign inward remittance towards each upfront and call payment for such transaction shall be made within a period of 30 days from the date of receipt of the amount of consideration received by the Indian company in the RBI prescribed "Advance Reporting Form[3]" along with copies of Foreign Inward Remittance Certificate, Know Your Customer (KYC) report on non-resident investor and details of the Government approval, if any.
Further in case of reporting of issue or transfer of partly paid shares, the same shall be reported in form FC-GPR and Form FC-TRS respectively to the extent the equity shares are called up. In case of issue or transfer of warrants, the reporting shall be alike as that of shares and should reflect the extent up to which the amount in respect of equity shares has been called up by the company.
An additional reporting norm in case of issue of warrants has been specified by RBI which mandates that the identity of non-resident investor shall be disclosed for the purpose of compliance with KYC norms at the time of issuance of warrants.
Onus of compliance with other requirements
| Compliance required | Onus to ensure compliance is on whom? |
| Prior approval of the Foreign Investment Promotion Board (FIPB), Government of India for issue of partly-paid shares/ warrants | Issuer Company |
| Sectoral caps are not breached even after the shares get fully paid-up or warrants get converted into fully paid equity shares | Issuer Company and Non-resident investors acquiring the same |
| Requirements under the Companies Act, 2013 for issuance of partly paid shares and warrants | Issuer Company |
| forfeiture of the amount paid upfront on non-payment of call money shall be in accordance with the provisions of the Companies Act, 2013 and Income tax provisions | Issuer Company |
Conclusion
This move will surely be welcomed by the Indian Company as it enables further attracting FDI investors. The Investors need not make upfront payment of entire amount while investing in warrants or partly paid shares. Conversion period and price of conversion in case of warrants are also duly governed. This is surely the next big change in 2014 subsequent to relaxation of FDI regulations by permitting optionality clause permitted by RBI in January, 2014.
[The above post is contributed by CS Vinita Nair and Debolina Banerjee at Vinod Kothari & Co. They can be contacted at vinita@vinodkothari.com and mt@vinodkothari.com respectively]
[1] http://rbi.org.in/scripts/NotificationUser.aspx?Id=9095&Mode=0
[2] http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9094&Mode=0
[3] http://rbidocs.rbi.org.in/rdocs/content/pdfs/03NOAPDIR714_AN.pdf
- See more at: http://taxguru.in/rbi/rbi-eases-fdi-norms-permits-investment-partly-paid-shares-warrants.html#sthash.rKQTq4DA.dpuf IT: 'Ready to print books' exported by assessee in form of a CD or e-mail are customized electronic data eligible for claiming benefit of deduction under section 10B
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[2014] 46 taxmann.com 147 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'D'
Kiran Kapoor
v.
Income-tax Officer, Ward -23 (2), New Delhi*
S.V. MEHROTRA, ACCOUNTANT MEMBER
AND A.T. VARKEY, JUDICIAL MEMBER
AND A.T. VARKEY, JUDICIAL MEMBER
IT APPEAL NO. 3911 (DELHI) OF 2009
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
MAY 7, 2014
Section 10B of the Income-tax Act, 1961 - Export oriented undertaking (Customized electronic data) - Assessment year 2006-07 - Whether 'ready to print books' exported by assessee in form of a CD or e-mail are customised electronic data eligible for claiming benefit of deduction under section 10B as per law - Held, yes - Whether irrespective of form in which input data is, so long as end product is in form of electronic data which is customised by assessee for end use of a particular customer, then benefit of deduction under section 10B cannot be denied - Held, yes [Paras 17 & 21] [In favour of assessee]
Words and Phrases : 'Computer programmes' as defined in Explanation 2 to section 10B of the Income-tax Act, 1961
FACTS
| ■ | The assessee was engaged in business of export of software of 'ready to print books'. It had claimed exemption under section 10B on account of design layout formation and scanning of books. | |
| ■ | The Assessing Officer disallowed the said claim and hence, addition was made to income of the assessee. | |
| ■ | The Commissioner (Appeals) confirmed said disallowance. | |
| ■ | On further appeal: |
HELD
| ■ | Barring applicability of section 10B(2)(i), which is the subject matter of dispute in the instant case it is admitted by both the parties that all other conditions relevant to applicability of section 10B are being satisfied by the taxpayer. The meaning of a phrase or word has to be seen in the framework of the context in which it has been used. In the instant case, the intention of the Legislature is to provide benefit of deduction to enterprises which are not simply engaged in manufacture or produce any article or thing, but even to those assessees whose end product is any customized electronic data. Benefit of deduction under section 10B is also available on rendering of any of the services as notified by the Board like the item (ii) in the notification wherein even call centres, animation, etc. which are brought in the sweep of any product or services stated in clause (b) of item (i) of Explanation 2 to section 10B. Therefore, Tribunal found merit in the submissions made by assessee that the restricted scope of the meaning of the phrase 'manufacture or produce' as narrated by the Commissioner (Appeals) in its order would result in diffusing and diluting the real legislative intention and, therefore, merits rejection. [Para 15] | |
| ■ | In the instant case, the assessee after collecting raw data and pictures has utilized its expert designing skills in producing 'a ready to print e-book'. The assessee in his submissions has neatly narrated the entire sequence of activities carried on by it. The samples produced were also shown to the Assessing Officer, however he has conveniently chosen to remain quite on this aspect. The final product is intended for use of a particular customer and, therefore, the case under consideration does fit in the category of production of 'any customized electronic data' as per the definition of 'computer software' defined inExplanation 2 to section 10B. Even if it is said that the assessee has merely customized the data, which was already available and has not created altogether new software then too the assessee cannot be deprived of the benefit of deduction. It is pertinent to note that the definition of 'produce' is wider than the term 'manufacture' as held by the Supreme Court in a number of decisions and does not require to produce or manufacture altogether a new product; but if the outcome of the process is a different product than the input, it would fall under the definition of 'produce'. Whatever form the input data is, so long as the end product is in the form of electronic data which is customised by assessee for the end use of a particular customer, then benefit of deduction under section 10B cannot be denied and there is no dispute that the final product of the assessee was in electronic form. [Para 17] | |
| ■ | The Commissioner (Appeals) has erred in considering the definition of 'Computer Software' as per clause (i) of Explanation 2 to section 10B in a conjunctive manner and not disjunctive manner without considering that word used in between sub-clauses (a) and (b) is 'or'. The Commissioner (Appeals) has erred in comparing the work done by the assessee with 'computer programme'. Here it is to be noted that it is not assessee's case that its case falls under sub-clause (a) of clause (i) to Explanation 2 to section 10B. It is the consistent stand of the assessee that its case falls under sub-clause (b) of clause (i) to Explanation 2 to section 10B. Here it is to be seen that whether the assessee is engaged in any customization of electronic data. Tribunal found that Commissioner (Appeals) has not recorded any finding in this respect in his order. Also it was found that Commissioner (Appeals) has tested assessee's case under section 10BB. The assessee had submitted that scope of section 10BB is limited in scope as compared to the new definition in new section 10B. In this regard it is to be taken note that post amendment old section 10B requires 'processing of management of electronic data' whereas new section 10B is larger in scope and only requires 'any customized electronic data'. The difference is that old section 10B requires that input data must necessarily be in electronic form whereas in new section 10B this requirement is done away with. [Para 18] | |
| ■ | The requirement of the provision (section 10B) is that there should be a customized electronic data and such data should be exported outside India. The data which a customer may require may be gathered either by manual effort or by electronics means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, it becomes a customized electronic data which can be exported to qualify for deduction under section 10A. The process of actually collecting the data need not be IT enabled. What all is required is that the data collected should be in an electronic form. The exact language of sub-clause (b) of clause (1) of Explanation 2 is 'any customized electronic data'. [Para 19] | |
| ■ | Thus, it was found that assessee's business involved export of ready to print books which is the 'customized electronic data'. The nature of activity done by the assessee in the EOU was that of producing designs, drawings, layouts and scanning for the projects of foreign clients on the basis of their parameters and specifications. This activity is done by taking into consideration the data collected by the assessee itself or from clients. Though the steps/stages involved in completion of a particular assignment for the foreign client has been reproduced by the Assessing Officer, still neither the Assessing Officer nor Commissioner (Appeals) have appreciated these aspects in the right prespective. [Para 20] | |
| ■ | Thus, assessee's succeeded in its claim for deduction. It is held that the ready to print books exported by the assessee in the form of a CD or e-mail are customised electronics data eligible for claiming benefit of deduction under section 10B as per law. Therefore, the appeal filed by the assessee is allowed and the Assessing Officer is directed to allow deduction under section 10B in accordance with law. [Para 21] |
CASE REVIEW
CIT v. Lovlesh Jain [2012] 204 Taxman 134/2011] 16 taxmann.com 366 (Delhi) (para 15); ITO v.Accurum India (P.) Ltd. [2010] 126 ITD 69 (Chennai) (TM) and Cybertech Systems & Software Ltd. v.CIT [2012] 51 SOT 83/21 taxmann.com 59 (Mum.) (para 20) followed.
CASES REFERRED TO
ITO v. Accurum India (P.) Ltd. [2010] 126 ITD 69 (Chennai) (TM) (para 8), Sultena Begum v. Prem Chand Jain [1997] 1 SCC 373 (para 10), CIT v. Lovlesh Jain [2012] 204 Taxman 134/[2011] 16 taxmann.com 366 (Delhi) (para 10), M.L. Outsourcing Services (P.) Ltd. v. ITO [2011] 46 SOT 154/12 taxmann.com 193 (Delhi) (para 12), Cybertech Systems & Software Ltd. v. CIT [2012] 51 SOT 83/21 taxmann.com 59 (Mum.) (para 12) and Asstt. CIT v. Amadeus India (P.) Ltd. [2001] 79 ITD 407 (Delhi)(para 12).
M.S. Syali, Tarandeep Singh and Harkund Singh for the Appellant. S.N. Bhatia for the Respondent.
ORDER
A. T. Varkey, Judicial Member - This is an appeal preferred by the assessee against the order of the ld CIT(A)-XXII, New Delhi dated 20-08-2009 for the Assessment Year 2006-07.
2. The grounds of appeal are as follows:—
| "1. | That on the facts and in law the Commissioner of Income Tax (Appeals) (hereinafter referred to as the 'CIT(A)) erred in upholding the disallowance of deduction u/s 10B of the Income Tax Act (hereinafter referred to as the 'Act') | |
| 2. | That on facts and in law the CIT(A) erred in holding that condition stipulated by section 10B(2)(i) is not satisfied. | |
| 3. | That on facts and in law the CIT(A) erred in upholding the levy of interest u/s 234B and 234D of the Act. | |
| 4. | That on the facts and in law the orders passed by both the CIT(A)and the Assessing Officer are void ab initio and bad in law." |
3. Ground No. 1 and 2 are same therefore it is adjudicated together.
4. Apropos disallowance on deduction u/s 10B(2)(i) of the Income Tax Act, 1961 (herein after 'the Act').
5. The brief facts of the case are as follows. The assessee is an individual, who filed her return declaring an income of Rs. 6,34,607/-. Subsequently a notice u/s 143(2) was issued by the Assessing Officer, which culminated in an order u/s 143(3) dated 24.12.2008. During the assessment proceedings, the Assessing Officer found that the assessee had claimed exemption u/s 10B of the Act to the tune of Rs. 39,32,654/-. Assessee has claimed to be a software exporter to Netherland to one Mr. Rolli Jansen B. V. and had claimed deduction u/s 10B, which has been disallowed by the Assessing Officer. During the assessment proceedings the Assessing Officer sent a notice dated 05.12.2008 to the assessee which reads as under:—
"In your return you have shown exempt income u/s 10B of the Income Tax Act, 1961 amounting Rs. 39,32,653/-. While examining the details and documents filed on record it came to my knowledge you have shown exemption on account of design layout formation and scanning of books"
6. After reproducing the reply of the assessee in the assessment order the Assessing Officer has observed while disallowing the claim made u/s 10(b) as under:—
"Reply of the assessee is not as per Act definition hence addition of Rs. 39,32,654/- is being made.
In view of the above facts and material available on records, the income of the assessee is computed as under:—
| INCOME RETURNED (As per computation) | Rs. 6,34,607.12 | |
| Addition on account of section 10B(2)(i) as discussed above | Rs. 39,32,654.00 | |
| NET TAXABLE INCOME | Rs. 45,67,261.13 | |
| NET TAXABLE INCOME ROUNDED OFF | Rs. 45,67,260.00" |
7. Aggrieved by the said order of the Assessing Officer the assessee preferred an appeal before the ld CIT(A), who was pleased to dismiss the same. Aggrieved by the said order of the ld CIT(A) the assessee is before us.
8. Ld Sr. Advocate Shri M. S. Syali appearing for the assessee stated that the assessee's business involved the export of software of ready to print books. The term "software" means ready to print files for illustrated books which their client have to forward to their respective printers to get the finished physical products. According to the ld Sr. counsel there are four stages for the completion of their products and pointed our attention to Page 58 of the Paper Book. The first stage is the collection of material, where the assessee has to collect the raw material that goes into making of the final files. This raw material comprises mainly of text and photographs. Various authors, photographs, photo agencies are the providers of this material depending on the subject of the book. It was stated that this is done by collecting data from various sources including internet. Referring to a specific work conducted by the appellant in a book titled '100 wonders of India' it was submitted that the appellant had engaged a freelance Mr Nirad Grover for collection of photographs necessary for production of the book. The Senior Counsel also specifically referred to copy of agreement with Mr Nirad Grover enclosed at pages 63-64 of the paper book. Thus, all this materials collected by the assessee will be in an edited state. When this exercise is over, then it proceeds to the next stage of design and layout. Here the designers take the raw material and use it to make the layout of the book within the given parameter and specifications of their clients. The materials need to be designed and laid out in a manner which fits the size and number of pages given for the particular book. According to the Sr. counsel, this stage is a specialized stage and the assessee's book designers are experts in the field of making layouts that are unique and user friendly. After designing and laying out of the materials in the manner prescribed by their customer's, comes the next stage. The third stage is the scanning and color correction. For that the images which are used in the book need to be of a good print quality; and they have to go though a stage that is known as "scanning and color correction". Here each photograph is scanned (which is provided to them in a hard format) and the color correction happens on the digital format. According to the Sr. counsel, experts in this field uses application in software's like Acrobat Reader and QuarkX Press, tweak the date, photographs and colours and remove blemishes so as to make the final product i.e. the book appearing to the eyes of the client and customers. A hard copy of the "Book 100 Wonders of India" was also shown to us to demonstrate the entire transformation process, so that the best results can be seen in the final product. After this stage finishes, the next stage i.e stage four, then has to embed the high resolution color corrected images into the lay out and prepare the final files (software) that are ready to be exported on a CD or electronically onto the servers of their client. These files, according to the Sr. counsel are the final designed and laid out files which have the high resolution images embedded in it; and according to him, satisfies the definition of software as per Section 10(B) of the Act; and also it falls under the notification issued by the CBDT and relied upon the judgement of Chennai Bench of ITAT in the case of the ITO v. Accurum India (P) Ltd.[2010] 126 ITD 69 (TM) and the ld Sr. counsel contended that sub-clause (b) of clause (i) of explanation 2 to section 10A gives the meaning of the term computer software. One of the meaning given is any "customized electronic data" or any product or service of similar nature, as may be notified by the board. In other words, if an assessee is engaged in the export of any customized electronic data, then, profit earned from such export would qualify for deduction u/s 10A. ld sr. counsel pointed out that sub-clause (a) refers to any computer programme, sub-clause (b) refers to any customized electronic data. According to the Sr. counsel, the computer programme referred to in sub-clause (a) may or may not be customized and may be useful for general application. Therefore, the ld Sr. counsel emphasized that the electronic data referred to in sub-clause (b) necessarily has to be customized. The word 'customized' means that the data is suitable for a specific customer only; and he added that since the expression customized electronic data is quite general in nature and also considering the fact that the computer applications are fast expanding, one cannot visualize as to what type of products or services will come up in future, that the parliament in its wisdom has delegated this power to CBDT to issue necessary notification in this regard. Taking into consideration this aspect the CBDT has exercised its delegated power to specify information technology enabled products or services as per clause (b) of (1) of Explanation to Section 10B and has notified the same. The Sr. Counsel drew our attention to the said notification of the CBDT which is reproduced as under:—
"13.2 The Notification, referred to in clause (b) of Explanation 2(i) above, issued by the Central Board of Direct Taxes dated 26-9-2000, is as under:
S.O.890(E) - In exercise of the powers conferred by clause (b) of item (l) of Explanation 2 of section 10A. Clause (b) of item (l) of Explanation 2 to section 10B and clause (b) to Explanation to section 80HHC of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the following Information Technology enabled products or services as the case may be for the purpose of said clauses namely :—
| (i) | Back-Office Operations | |
| (ii) | Call Centres | |
| (iii) | Content Development or animation | |
| (iv) | Data Processing | |
| (v) | Engineering and Design | |
| (vi) | Geographic Information System Services | |
| (vii) | Human Resources Services | |
| (viii) | Insurance claim processing | |
| (ix) | Legal Databases | |
| (x) | Medical Transcription | |
| (xi) | Payroll | |
| (xii) | Remote Maintenance | |
| (xiil) | Revenue Accounting | |
| (xiv) | Support Centres and | |
| (xv) | Web-site Services" |
9. It was submitted by Shri Syali that as stated before Section 10B grants a benefit for "manufactures or produces any articles or things or computer softwares". The terms "computer software" has thereafter been defined in Explanation 2 to include as under:—
| (a) | any computer programme recorded on any disc, tape, perforated media or other information storage device; or | |
| (b) | any customized electronic data | |
| (c) | any product or service of similar nature as may be notified by the Board. |
10. Relying upon the above statutory provisions it was submitted by Shri Syali that a statute granting exemption has to be interpreted liberally and in a beneficial manner. Further he submitted that the phrase "manufacture or produce" has to be given a contextual interpretation. It was submitted that the way CIT(A) has interpreted this phrase would make the provisions of this section otiose as regards the services notified by CBDT. By relying upon the decision of Apex Court in case of Sultana Begum v. Prem Chand Jain[1997] 1 SCC 373 it was contend that the statute has to be read as a whole to find out the real intention of the legislature. It was further submitted by the ld Sr. advocate that the nature of activities carried out by the appellant need to be considered in the contextual requirements and definitely it would tantamount to "production" if not "manufacture" since the later is larger in magnitude and is more expansive and liberal than the term "manufacture". In support of this proposition Shri Syali relied upon the decision of jurisdictional High Court in case of CIT v. Lovlesh Jain [2012] 204 Taxman 134/[2011] 16 taxmann.com 366 (Delhi).
11. During the course of hearing an example of "Legal Database" was given by the Senior Counsel. In regard to this he cited example of ITRs on CD and Taxmann on CD. According to him, these softwares help in customizing already existing court judgments (which are easily available in public domain) in an electronic form so that they can be easily viewed and rummaged. Likewise it was submitted that the activities carried on by the assessee are also more akin to the Content Development or Animation Service, Data Processing Service or Back-office Operation notified by CBDT under Explanation2 clause (1) sub-clause(b) to section 10B.
12. It was finally contended by Shri Syali that the nature of activities carried out by the appellant in the instant case would undistinguishably be "customized electronic data" which does qualify for deduction u/s 10B. It was submitted that the ready to print e-books exported by the appellant are tailor made to meet the requirements of a particular client / customer. It was submitted that after collecting data and pictures from various sources, the designing of the entire content is done as per the client's specific requirements. To thrust his point further it was submitted by the Senior Counsel that e-prints of book "100 wonders of India" was a project which was undertaken by the appellant in many foreign languages including English. Lastly it was submitted by Shri Syali that the above interpretation of phrase "customized electronic data" has now been well settled by the following co-ordinate bench decisions:
| ♦ | Accurum India (P.) Ltd. (supra) | |
| ♦ | M.L Outsourcing Services (P.) Ltd. v. ITO [2011] 46 SOT 154/12 taxmann.com 193 (Delhi) (URO) | |
| ♦ | Cybertech Systems & Software Ltd. v. CIT [2012] 51 SOT 83/21 taxmann.com 59 (Mum.) | |
| ♦ | Asstt. CIT v. Amadeus India (P.) Ltd. [2001] 79 ITD 407 (Delhi) |
13. In reply the ld Senior DR on the other hand supported the orders passed by Assessing Officer and ld CIT(A). It was submitted by the ld Sr DR that the appellant has not been able to clearly demonstrate the computer software, which it manufactures or produces. The ld Sr. DR argued that the conditions given in clause (b) of Explanation 2(1), namely, "any customized electronic data or any product or service of similar nature, as may be notified by the CBDT, which is transmitted or exported from India to any place outside India by any means, had to be fulfilled, before a claim could be allowed u/s 10A of the Act. It was therefore submitted by the Ld Sr DR that both the authorities below have rightly rejected the claim made by the appellant and therefore the concurrent finding of the authorities below may not be disturbed.
14. We have carefully considered the submissions made by both the parties and material available on record and has gone through the case laws cited by both the parties. Since the dispute centers on applicability of provisions of section 10B of the Act, to the facts of the case it will be apposite to first consider the relevant statutory provisions. Section 10B provides as under:
'10B. Special provisions in respect of newly established hundred percent export-oriented.— (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.
| ** | ** | ** |
(2) This section applies to any undertaking which fulfills all the following conditions, namely :—
| (i) | it manufactures or produces any articles or things or computer software; | |
| (ii) | it is not formed by the splitting up, or the reconstruction, of a business already in existence : |
| ** | ** | ** |
Explanation 2.—For the purposes of this section,—
(i) "computer software" means—
| (a) | any computer programme recorded on any disc, tape, perforated media or other information storage device; or | |
| (b) | any customized electronic data or any product or service of similar nature as may be notified by the Board, |
which is transmitted or exported from India to any place outside India by any means.'
15. Barring applicability of section 10B(2)(i) of the Act, which is the subject matter of dispute in the instant case it is admitted by both the parties that all other conditions relevant to applicability of section 10B are being satisfied by the taxpayer. In our considered opinion the meaning of a phrase or word has to be seen in the framework of the context in which it has been used. Phrase "Manufacture or produce" will have a different contextual meaning when it is read in a statute let us say for e.g. the Excise law, since the parliamentary intention there will be to attract levy of tax, however in the present case we are called upon to interpret this phrase as applicable to a statute granting benefit of an exemption / deduction from taxable total income. In the instant case the intention of legislature is to provide benefit of deduction to enterprises which are not simply engaged in manufacture or produce any article or thing, but even to those assesses whose end product is any customized electronics data. Benefit of deduction u/s 10B of the Act, is also available on rendering of any of the services as notified by the Board like the item (ii) in the notification (supra) wherein even call centers, animation, etc which are brought in the sweep of any product or services stated in clause (b) of item (i) of Explanation 2 to Section 10B. Therefore we find merit in the submissions made by ld Sr Advocate Shri Syali that the restricted scope of the meaning of this phrase as narrated by the ld CIT(A) in its order would result in diffusing and diluting the real legislative intention and therefore merits rejection. Support in this regard can be drawn from the decision of Hon'ble Jurisdictional High Court in case of Lovlesh Jain(supra) relied upon by Shri Syali. In this case it has been held by the Hon'ble High Court as under:
'10. The word "manufacture" can be given, both a wider as well as a narrower connotation. In wider sense, it simply means to make, fabricate or bring into existence an article or product either by physical labour or by mechanical power. Given a narrower connotation it means transforming of the raw material into a commercial product/commodity or finished product which has a new, separate entity but this does not necessarily mean that the material by which the commodity is manufactured must lose its identity. The latter connotation has been accepted and applied with some moderation/clarification in several decisions, keeping in view the context in which the word "manufacture" has been used. The Supreme Court in Graphic Company India Ltd. v. Collector of Customs [2001] 1 SCC 549 and Union of India v. Delhi Cloth and General Mills Company Limited AIR 1963 SC 791 has held that manufacture has to be understood to mean transformation of goods into a new commodity commercially distinct and separate, and having its own character, use and name whether it be the result of one or several processes. However, every change does not result in "manufacture" though every change in an article may be a result of treatment or manipulation by labour or/and machines. If an operation or process that renders a commodity or article fit for use, which it is otherwise not fit, the change/process falls within the meaning of the word "manufacture".
11. We may refer with profit to the Supreme Court's elucidation in CIT v. Tara Agencies [2007] 292 ITR 444 / 162 Taxman 337 (SC). Herein the Supreme Court has turned to the definition provided in the Central Excise Act, 1944 among other relevant definitions. The relevant paragraphs of this decision are reproduced below:
"11. The term manufacture has not been defined in the Income-tax Act, 1961.
12. The term manufacture has been defined in section 2(f) of the Central Excise Act, 1944. Parts (i) and (ii) of section 2(f) read as under:-
2(f). 'Manufacture' includes any process-
| (i) | incidental or ancillary to the completion of a manufactured product; and | |
| (ii) | which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture". |
12A. Clause (f) gives an inclusive definition of the term 'manufacture'. According to the dictionary, the term 'manufacture' means a process which results in an alteration or change in the goods which are subjected to the process of manufacturing leading to the production of a commercially new article. In determining what constitutes 'manufacture' no hard and fast rule can be applied and each case must be decided on its own facts having regard to the context in which the term is used in the provision under consideration.
13. The term manufacture has been defined by the Black Law Dictionary (5th Edition) as under: 'Manufacture : The process or operation of making goods or any material produced by hand, by machinery or by other agency; anything made from raw materials by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labor or machine.
14. The word 'manufacture' has been defined in Halsbury's Laws of England, 3rd Ed. Vol. 29 p.23 as under:—
'Manufacture has been defined as a manner of adapting natural materials by the hands of man or by man-made devices or machinery and as the making of an article or material by physical labour or applied power'; but the practice is to accept as 'manufacture' a wider range of industrial activities than such a definition would suggest. It includes articles made in situ as well as articles made in a factory.
15. The Supreme Court of the United States of America has defined the term 'manufacture' a century ago in Anheuser-Busch Brewing Assn. v. United States (1907) 52 L Ed. 336. The definition has been followed in subsequent American, English and Indian cases. The definition reads as under: Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary. ..There must be transformation; a new and different article must emerge, having a distinctive name, character or use."
12. As noticed above, Section 10A/10B is applicable when an undertaking manufactures, or is engaged in production of articles or things. The term "production" has a larger magnitude and is more expansive and liberal than the term "manufacture". The terms manufacture and produce were interpreted in theCIT v. TATA Locomotive & Engineering Co. Ltd. [1968] 68 ITR 325 (Bom.), and it was held:—
"In its roots the word "manufacture" comes from the Latin word "manus" which means "hand" (and "manu" is the ablative of the word "manus") and the word "facere" which means "to make". In origin, therefore, the word implied the making of anything by hand, by with the passing of time and in the context of industrial development the word has acquired a number of shades of meaning. In connection with industry or in industrial undertaking, two shades of meaning are important. In the Oxford Dictionary, vol. 6, the two shades of meaning are given as follows : (1) The first is "the action or process of making articles or material (in modern use, on a large scale) by the application of physical labour or mechanical power." This is the most generic meaning in its application to industry or industrial undertaking or establishments. (2) There is also another more limited meaning which is found referred to in the authorities as meaning the transforming of raw material into a commercial commodity or a finished product which has a separate identity (Commissioner of Income tax v. Ajay Printery Pvt. Ltd.(1)). This shade of meaning is more appropriately used in the past participle "manufactured". See Oxford Dictionary, Vol. 6, at page 143, sense No. 1, where the meaning is "fabricated from raw material". InAswathanarayana v. Dy Commercial Tax Officer (1) at page 801 one finds a useful compilation of meaning attached to the word "manufacture" from various dictionaries and other sources.
Similarly, the word "produce" with reference to its meaning in industry or political economy has two different senses. In vol. 8 of the Oxford Dictionary, at page 1422, the two meaning are given as follows: "To bring forth, bring into being or existence (a) generally to bring (a thing) into existence from its raw materials or elements or as the result of a process" and "(d) To compose or bring out by mental or physical labour (a work of literature of art); to work up from raw material, fabricate, make, manufacture (material object)".
In the Ajay Printer's case, a Division Bench of the Gujarat High Court pointed out that the word "manufacture" has a wider and a narrower connotation. In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power. The word "manufacture" in ordinary parlance would mean a person who makes, fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning which is the narrower meaning implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus both the words "manufacture" and "produce" apply as well to the bringing into existence of something which is different from its components. One manufactures or produces an article which is necessarily different from its components."
13. The difference in the words 'manufacture', 'production (to produce)' and 'process' was examined by the Supreme Court in Tara Agencies's case (supra). On the question of what is meant by the term 'production', it has been elucidated and explained as under:—
"16. In Black's Law Dictionary (5th Edn.), the term "production" has been defined as under:
"Production.—Process or act of producing. That which is produced or made; i.e. goods. Fruit of labor, as the productions of the earth, comprehending all vegetables and fruits; the productions of intellect, or genius, as poems and prose compositions; the productions of art, as manufactures of every kind."
17. The term "produce", as defined in New Webster's Dictionary of the English Language (Deluxe Encyclopaedic Edition), is as follows:
"Produce.—To bring forth into existence; to bring about; to cause or effect, esp. intellectually or creatively; to give birth to; to bear, furnish, yield; to make accrue; to bring about the performance of, as a movie or play; to extend, as a line. To bring forth or yield appropriate offspring, products, or consequences.'
16. Meaning of phrase "customized electronic data" need not detain us longer. Recently a Third Member decision in case of Accurum India (P.) Ltd. (supra) has elaborately discussed the same. In this judgment it has been held by the Ld Third Member as under:
'7. Let us consider the above role of the Circulars in the context of sub-clause (b) of clause (i) of Explanation 2 to section 10A of the Act. The said clause (i) gives the meaning of the term "Computer Software". One of the meanings given is "any customised electronic data or any product or service of similar nature, as may be notified by the Board". In other words, if the assessee is engaged in the export of any customised electronic data, then, profit earned from such export would qualify for deduction under section 10A of the Act. It may be noted that whereas sub-clause (a) refers to any computer programme, sub-clause (b) refers to any customised electronic data. Computer programme referred to in sub-clause (a) may or may not be customised and may be useful for general application. On the other hand, the electronic data referred to in sub-clause (b) has necessarily to be customised. By the word "customised" is meant that the data is suitable for a specific customer only. Considering the fact that the expression "customised electronic data" is quite general in nature and also considering the fact that computer applications are fast expanding, one cannot visualise as to what type of products or services will come up in future. Considering this ever-expanding horizon of software products and services, the Board has been given the power to notify such products and services which in its opinion should qualify for deduction under section 10A. In other words, this power of the Board when exercised, it will ensure proper administration of the fiscal statute as observed by the Supreme Court in UCO Bank's case (supra). It is in this sense the ld. A.M. has observed that the Board's Circular has made the job of the Assessing Officer quite simple. Thus, it is this role, as explained by the Supreme Court, which is played by the Board by issuing the Circular, dated 26-9-2000.
| ** | ** | ** |
9. The ld. JM is right in mentioning that software is not merely knowledge but, rather is knowledge recorded in a physical form having a physical existence, taking up space on a tape, disc or hard drive, making physical things happen and can be perceived senses. However, he misdirected himself by misunderstanding that since the recruitment and training of the personnel was by itself not I.T. enabled, the profit earned by the assessed is not eligible for deduction under section 10A of the Act. The requirement of the provision is that there should be a customized electronic data and such data should be exported outside India. The data which a customer may require, may be gathered either by manual effort or by electronic means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, it becomes a customized electronic data which can be exported to qualify for deduction under section 10A. The process of actually collecting the data need not be IT enabled. What all is required is that the data collected should be in an electronic form. If one were to go by the understanding of the ld. JM, then perhaps the purpose of giving impetus to software industry or to the computerization as a whole, would be defeated. As an illustration, if a person wants to open a garment shop in a particular locality, it may approach a consulting firm to explore the market potentiality of that area. In that case, the consulting firm will have to initially work manually to collect data like, number of garment shops in the locality, the economic strata to which the population residing in that locality belongs, the spending habits of the people residing in the locality, etc. All these activities will have to be carried out manually and once the data is collected, it may be collated and analyzed and may be stored in an electronic device. This becomes the IT enabled customized electronic data. If this data is exported outside India, the consulting firm will be eligible for deduction under section 10A. Similar is the situation in the present case. The assessee invited applications for recruitment through newspapers, carried out interviews, selected them and trained them. It is worthnoting that this exercise was carried out not for namesake but it was a serious and sincere effort which is reflected by the magnitude on which the assessee worked. More than 7,000 applications were received which were vetted and then the process of recruitment was undertaken. All these data were stored in an electronic device and transmitted to US for the use of the parent company. Recruitment can be done online also, but perhaps the scale of operation may not be as huge as it was in the present case. Training can also be carried out online but it cannot be as effective as a classroom training. If the intention of the Legislature was that in order to qualify for deduction under section 10A, every activity should be carried out through electronic means, then the purpose of enacting section 10A would have been totally defeated. The exact language of sub-clause (b) of clause (1) of Explanation 2 is "any customized electronic data". Thus, if the result of the entire exercise of recruitment and training is stored in an electronic device, it is not possible to say that it is not a customized electronic data. If the data is in a form other than electronic, then the export thereof will not qualify for the deduction. This aspect, as mentioned earlier, has to be examined by the Assessing Officer in the course of the assessment and which in this case, there is no dispute that the data was in the electronic form.'
17. In the instant case we find that the appellant after collecting raw data and pictures has utilized its expert designing skills in producing a ready to print e-book. Shri Syali in his submissions has neatly narrated the entire sequence of activities carried on by the appellant. The samples produced before us were also shown to the AO, however he has conveniently chosen to remain quite on this aspect. The final product is intended for use of a particular customer and therefore the case under consideration does fit in the category of production of "any customized electronic data" as per the definition of computer software defined in Explanation 2 to section 10B of the Act. The above Third Member decision is germane to the issue before us and therefore it clearly supports the case of appellant. In our considered opinion even if it is said that the appellant has merely customized the data, which was already available and has not created altogether new software then too the appellant cannot be deprived of the benefit of deduction. It is pertinent to note that the definition of "produce" is wider than the term manufacture as held by the Hon'ble Supreme Court in a number of decisions (referred to in Lovesh Jain's case above) and does not require to produce or manufacture altogether a new product; but if the outcome of the process is a different product than the input, it would fall under the definition of 'produce'. In our considered view, whatever form the input data is, so long as the end product is in the form of electronic data which is customised by the appellant for the end use of a particular customer, then benefit of deduction u/s 10B of the Act cannot be denied. And there is no dispute that the final product of the assessee was in electronic form. We may also refer here another co-ordinate bench decision in case of Cybertech Systems & Software (supra) wherein it has been held by a co-ordinate bench as under:
"14.1 Thus it is clear that when the process of customisation involve addition, modification and creation of new programmes as per the requirement of the individual clients by utilising the foundation of standard programme and such exercise involves human expertise and intellectual process to bring the end result a different product or thing and fit into the definition of term produce. Further, in the case ofAmadeus India (P.) Ltd. (supra) the coordinate Bench of the Tribunal has considered and decided a similar question in para 35 as under:
35. The assessee which occupies a position mid-way between the two fulfils, it will be clear from the facts stated above, the functions of a programme exporter, it does not add mere entries to the database as done by the travel agent. In fact it has no direct interest in adding to, or drawing extracts from the database built into the computer like the several operators all the world over. What it does actually is to supplement the functions of the Amadeus Group by preparing and transmitting programmes to the latter for incorporation into portions or "partitions" in its mega-computer at Erding in Germany, so as to enable the travel agents in its marketing region draw on the available information for their benefit. Its activities are to issue instructions to the master-computer to recognise the operators, identify them and provide them access to specific portions of the database. There can be no doubt whatever, for the reasons discussed above, that the assessee manufactures, produces and exports software within the meaning of the three specified sections of the Act. It is open to it to claim exemption under anyone of these sections and as is well established by pertaining to interpretation of taxing statutes is entitled to choose that one which is most favourable to it in any particular assessment year."
18. We find that the ld CIT(A) has erred in considering the definition of "Computer Software" as per clause (i) of Explanation 2 to section 10B in a conjunctive manner and not disjunctive manner without considering that word used in between sub-clauses (a) and (b) is "or". The ld CIT(A) has erred in comparing the work done by the assessee with "Computer Programme". Here it is to noted that it is not assessee's case that its case falls under sub-clause (a) of clause (i) to Explanation 2 to section 10B. It is the consistent stand assessee that its case falls under sub clause (b) of clause (i) to Explanation 2 to section 10B. Here it is to be seen that whether the assessee is engaged in any customization of electronic data. We find that ld CIT(A) has not recorded any finding in this respect in his order. We find also that ld CIT(A) has tested assessee's case u/s 10BB. However we find that counsel for the assessee had submitted that scope of section 10BB is limited in scope as compared to the new definition in new section 10B. In this regard it is to be taken note that post amendment old section 10B requires "processing or management of electronic data" whereas new section 10B is larger in scope and only requires "any customized electronic data". The difference is that old section 10B requires that input data must necessarily be in electronic form where as in new section 10B this requirement is done away with. This interpretation has found favour by ITAT in Accurum India's case (Supra) were in at para 9 (of Third Member order) it has been held that "The data which a customer may require, may be gathered either by manual effort or by electronic means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, it becomes a customized electronic data which can be exported to qualify for deduction u/s 10A".
19. The requirement of the provision (Section 10B) is that there should be a customized electronic data and such data should be exported outside India. The data which a customer may require may be gathered either by manual effort or by electronic means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, it becomes a customized electronic data which can be exported to qualify for deduction u/s 10A. The process of actually collecting the data need not be IT enabled. What all is required is that the data collected should be in an electronic form. The exact language of sub-clause(b) of clause (1) of Explanation 2 is "any customized electronic data.
20. Thus we find that Assessee's business involved export of ready to print books which in the instant case is the "customized electronic data". The nature of activity done by the assessee in the EOU was that of producing designs, drawings, layouts and scanning for the projects of foreign clients on the basis of their parameters and specifications. This activity is done by taking into consideration the data collected by the assessee itself or from clients. Though the steps/stages involved in completion of a particular assignment for the foreign client has been reproduced by the AO at page 2 of the assessment order, still neither the Assessing Officer nor ld CIT(A) have appreciated these aspects in the right perspective.
21. In the light of the decisions of Ld Third Member in the case of Accurum India Limited and co-ordinate bench decision in case of Cybertech Systems (supra), we find that the appellant merits to succeed in its claim for deduction u/s 10B of the Act. We hold that the ready to print books exported by the appellant in the form of a CD or e-mail are customised electronic data eligible for claiming benefit of deduction as per law. Therefore the appeal filed by the assessee is allowed and the AO is directed to allow deduction u/s 10B of the Act in accordance to law.
22. In the result the appeal is allowed.
POOJA*In favour of assessee.
IT/ILT : Benefit of Article 8 of the Indo-Malaysia DTAA is also applicable to shipping of goods from Indian Port to Hub Port using feeder vessels under a space charter or slot charter as the entire voyage from the Indian Port to final destination port is inextricably linked and cannot be segregated. "Operation of ship" for Article 8 purposes can be done as charterer which does not mean to own or control the ship either as owner or as a lessee The word "charterer" should not be confused with the word "owner" or "lessee". The word "charterer" cannot be interpreted as analogous to "owner" or "lessee" by applying noscitur a socii
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[2014] 47 taxmann.com 50 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'L'
MISC Berhad
v.
Assistant Director of Income-tax (International Taxation), Range -4(1)
P.M. JAGTAP, ACCOUNTANT MEMBER
AND AMIT SHUKLA, JUDICIAL MEMBER
AND AMIT SHUKLA, JUDICIAL MEMBER
IT APPEAL NOS. 6431, 6432, 6499 TO 6503 (MUM.) OF 2012
[ASSESSMENT YEARS 2004–05 TO 2007-08 & 2009-10]
[ASSESSMENT YEARS 2004–05 TO 2007-08 & 2009-10]
JULY 16, 2014
Kanchan Kaushal, Dhanesh Bafna, Aliasger Rampurawala and Faizan Nursumar for the Appellant.Dr. Narendra Kumar for the Respondent.
ORDER
Per Bench - The aforesaid appeals have been filed by the assessee as well as the Revenue against the consolidated impugned order dated 2nd July 2012, passed by the learned Commissioner (Appeals)-XI, Mumbai, for the aforementioned assessment years. The appeals preferred for the assessment year 2004-05 to 2007-08, relate to the quantum of assessment passed under section 143(3) r/w section 147 r/w section 144C(3), whereas, the appeal for the assessment year 2009-10, is in relation to the quantum of assessment passed under section 143(3) r/w section 144C(3).
2. Since all these appeals pertain to the same assessee involving common issues arising out of identical set of facts and circumstances, therefore, as a matter of convenience, these appeals were heard together and are being disposed off by way of this consolidated order.
3. We will first take up the issues which are arising in assessee's appeal and are permeating through in all the years. For the sake of ready reference, grounds of appeal for the assessment year 2004-05 are reproduced herein below:-
| "1. | On the facts and in the circumstances of the case and in law, the Hon'ble Commissioner of Income-tax (Appeals) ['CIT(A)'] erred in confirming the action of the learned Assistant Director of Income-tax (International Taxation)-4(1) ['ADIT'] in reopening the assessment under section 147 of the Income Tax Act, 1961. | |
| 2. | On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the learned ADIT in denying the benefit of Article 8 of the India-Malaysia Double Taxation Avoidance Agreement (Tax Treaty) on freight income earned by the appellant from shippers for transporting cargo loaded on feeder vessels for onward transportation by vessels owned, leased or chartered by the Appellant. | |
| 3. | On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in not treating the freight income earned by the appellant from shippers for containers loaded on feeder vessels as income from use/maintenance/rental of containers, etc. and thereby erred in not granting the benefit of Article 8(3) of the Tax Treaty to such income. | |
| 4. | On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the learned ADIT in holding Crescent Shipping Pvt. Ltd. ('Crescent') as a permanent establishment' ('PE') of the appellant in India under Article 5 of the Tax Treaty. | |
| 4a. | On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the learned ADIT in holding Crescent as a Fixed Place PE under Article 5(1) of the Tax Treaty. | |
| 4b. | Without prejudice to Ground No. 4(a) above, the Hon'ble CIT(A) erred in confirming the action of the learned ADIT in holding that the premises of Crescent are being used by the appellant as a 'sales outlet', thereby constituting a PE under Article 5(2)(h) of the Tax Treaty. | |
| 4c. | On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the learned ADIT in holding Crescent as an agency PE under Article 5(5) of the Tax Treaty. | |
| 4d. | On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in not appreciating that Crescent is not a PE within the meaning of Article 5(7) of the Tax Treaty since Crescent is an independent agent as the transactions between the appellant and Crescent are on an arm's length basis. Furthermore, the Hon'ble CIT(A) erred in not appreciating that Crescent is a legally and economically independent entity. | |
| 5. | On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in not appreciating that no income of the appellant could be brought to tax in India as the arm's length commission paid to Crescent, which is taxable in India in the hands of Crescent, fully extinguishes the tax liability of the appellant in India. | |
| 6. | On the facts and in the circumstances of the case and in law, the ADIT erred in estimating freight attributable to the feeder essels, by applying deemed rate of 10% instead of 7.5% under section 44B. | |
| 7. | On the facts and in the circumstances of the case and in law, the. Hon'ble CIT(A) erred in confirming the action of the learned ADIT in levying interest of Rs.36,60,770 under section 234B of the IT Act despite the fact that the appellant was not liable to pay any advance tax on the basis of (a) Double Income Tax Relief Certificate issued by the Tax Department itself and (b) the fact that freight income of the appellant was tax deductible at source having regard to the specific provisions of section 209(1)(d) of IT Act." |
Besides this, the assessee has also taken a additional ground which is common in the appeals for the assessment year 2004-05, 2005-06 and 2006-07 and 2007-08. The same reads as under:-
"8. On the facts and in the circumstances of the case and in law the learned ADIT(IT), erred in passing the order under section 143(3) r/w section 147 & 144C(3) of the Act, without serving the notice under section 143(2) of the Act."
4. Ground no.1, relates to validity of re-opening of assessment under section 147.
5. Before us, the learned counsel, Mr. Kanchan Kaushal, appearing on behalf of the assessee, at the outset, submitted that the ground no.1, relating to validity of re-opening of assessment under section 147, which is common in all the appeals preferred by the assessee, except for the assessment year 2009-10, is not pressed. Consequently, ground no.1, is treated as dismissed as "not pressed" for all the assessment years 2004-05, 2005-06, 2006-07 and 2007- 08.
6. On a perusal of the other grounds of appeal and also the additional ground, following issues are culled out in the assessee's appeals which can be summarised as under:-
| (i) | Denial of benefit of Article-8 of Indo-Malaysia DTAA on the freight income earned by the assessee from shipping of cargo through feeder vessels for onwards transportation by mother vessels i.e., ships owned and leased by the assessee. In other words, transportation of cargo from Indian Port to Hub Port by feeder vessels, has not been considered as operation of ships within the meaning of Article 8(1) and 8(2). | |
| (ii) | Denial of treaty benefit under Article-8(3), on the freight income earned by the assessee from shipping of containers loaded on feeder vessels as income from use/maintenance or rental of containers used in connection with the operation of ships; | |
| (iii) | Treating M/s. Crescent Shipping Pvt. Ltd., as a Permanent Establishment (P.E) in India under various paragraphs of Article-5; | |
| (iv) | The Assessing Officer has erred in estimating freight attributable to feeder vessels by applying deemed rate of 10% instead of 7.5% under section 44B; | |
| (v) | Charging of interest under section 234B; and lastly | |
| (vi) | Validity of the assessment order and the additions made on the ground of non-issuance/service of notice under section 143(2), after filing of the return of income in response to the notice under section 148, as raised in the additional ground. |
7. Regarding the preliminary issue, the learned counsel though admitted that the issue of non-service of notice under section 143(2), has not been raised either before the Assessing Officer or before the learned Commissioner (Appeals), but raised for the first time before the Tribunal by way of additional ground, however, being a legal ground, arising from the facts and material on record which does not require any further investigation of facts, therefore, the same should be admitted. In support of the admission of the said ground, reliance has been placed on various decisions including that of the decision of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. v. CIT, [1998] 229 ITR 383 (SC).
8. After hearing both the parties, the said additional ground, as raised in various years, challenging the validity of the assessment on the ground of non-issuance/service of notice under section 143(2), is hereby admitted as the same is purely a legal ground which goes to the root of the validity of the assessment. It is evident from the assessment records produced by the learned Departmental Representative before us, that though there is a notice under section 143(2) dated 7th September 2011, for compliance on 21st September 2011, however, neither there is any evidence of service of such notice nor there is any mention in the order sheet entry by the Assessing Officer about the issuance and service of notice under section 143(2). The learned Departmental Representative submitted that even though there is no evidence of issuance or service of notice under section 143(2), however, the same cannot be raised at this stage, because the proceedings under section 148, have been commenced after 1st April 2008, and in view of the provisions of section 292BB, the service of notice under section 143(2), cannot be challenged if the same has not been raised before the authorities below. Whereas the learned counsel submitted that the provisions of section 292BB, will not be applicable in the present case, as the same has been made applicable from 1st April 2008, i.e., assessment year 2008-09. Here, in these appeals, the assessment years involved are prior to the assessment year 2008-09, therefore, this issue can be raised at this stage in the impugned assessment years. Both the parties have filed huge compilation of case laws in support of their contentions and have also made their detail arguments before us.
9. However, at present, we are not discussing the issue validity of passing of assessment due to non-issuance/non-service of notice under section 143(2), as in the assessment year 2009-10, this issue of non-service of notice under section 143(2), is not in dispute and in any way, we have to decide the issue on merits in that year. Therefore, we are taking up the main issue of denial of benefit of Article-8, which is a core issue permeating through in all the years under appeal and are based on identical set of facts. Accordingly, we are proceeding with the merits of the case, especially the issue relating to denial of benefit under Article-8 of Indo-Malaysia treaty on the freight income earned by the assessee from operation of shipping business. Being the first year of dispute before us, we are narrating the facts of the assessment year 2004-05.
10. Facts in brief:- The assessee, M/s. MISC Berhad, is a company incorporated under the laws of Malaysia having its registered office in Malaysia and is also a tax resident of Malaysia. The assessee is engaged in the business of shipping in international traffic and is also the owner of ships either owned by it or taken on lease. In India, the assessee has appointed an agent M/s. Crescent Shipping Pvt. Ltd., for booking of freights of cargo for transportation from one destination to other in international traffic. During the year under consideration, the assessee has received total freight of Rs. 1,54,59,46,952. In the computation of income filed along with the return of income on 9th September 2004, the assessee has sought for double tax relief @ 50%, as per Article-8 of India-Malaysia DTAA in the following manner:-
| Total Freight Collected | Rs. 1,54,59,59,364 |
| Income @ 7.5% Of Rs. 15,49,59,364 | Rs. 11,59,46,952 |
| Tax Payable @ 40% On Rs. 11,59,46,952 | Rs. 4,63,78,780 |
| Add: Surcharge On Rs. 4,63,78,780 | Rs. 12,35,856 |
| Total Tax | Rs. 4,76,16,636 |
| Less: Relief 05% As Per Double Taxation Avoidance Agreement Between India And Malaysia | Rs. 2,38,08,318 |
| Tax Payable On Freight Income | Rs. 2,38,08,318 |
| Taxes Already Paid | Rs. 2,38,14,485 |
| Refund Due | Rs. 6,167 |
11. The said return of income was duly processed under section 143(1), vide intimation dated 29th November 2005. Thereafter, a notice under section 148 dated 10th March 2011, was issued for re-opening the assessment primarily on the basis of reasons given in the assessment order for the assessment year 2008-09, wherein it was noted by the Assessing Officer that the assessee has earned freight firstly, from the transportation of cargo of goods in the international traffic by operation of ships owned by it or pooled by it and secondly, from carriage of goods by feeder vessels belonging to other shipping line, wherein the assessee did not have pool arrangements. Thus, on entire freight benefit of Article-8, cannot be given. The cargo/goods is transported in two stages, first from Indian port to Hub port through feeder vessels and at the second stage, the cargo/goods which are loaded on the feeder vessels are transhipped later at the hub port to the assessee's ship owned by it to the final destination. Thus, the assessee has earned the freight which is also attributable to voyage performed on feeder vessels which are operated by third party and on this receipt also, the assessee has claimed a benefit of Article-8, which cannot be given on the correct interpretation of the said Article in India Malaysia DTAA. The relevant observations of the Assessing Officer in this regard, are as under:-
"7. The assessee is running shipping line. The assessee is tax resident of Malaysia. From the details furnished, it is noticed that the assessee has earned freight from the following:-
| (i) | Carriage of goods in international traffic by operation of ships (owned/chartered/pooled by it). | |
| (ii) | Carriage of goods in international traffic by operation of ships (owned/chartered/pooled by it) including feeder vessels operated by third party feeder vessel operator. |
8. As regard the freight earned from (i) above i.e, carriage of goods in international traffic by operation of hips owned/chartered/pooled by it, there is no dispute regarding the claim of benefit of Article/of DTAA. Even as regards (ii) above, the portion of the freight attributable to voyage performed on owned/chartered/pooled ships of the assessee, the assessee is allowed to Article 8 benefit since the assessee has furnished documentary proof to substantiate the linkage between the voyage performed on feeder vessel and mother vessel (which are owned/chartered/pooled by it).
9. As such, issue (which was also present in A.Y. 2008-09 on the basis of which the case has been reopened for A.Y. 2004-05 is regarding availability of Article-8 benefit to the portion of freight which is attributable to voyage performed on feeder vessels which are operated by third parties (and not the assessee). As per the details filed by the assessee, the total freight earned by the assessee from (ii) above is Rs.43,22,62,275. This freight is for the entire voyage i.e., from the load port to the ultimate discharge port.
10. It is noticed that the assessee has used feeder vessels belonging to other shipping lines and with these line the assessee was not having pool arrangement. The container loaded on these feeder vessels are transhipped later at a hub port on the assessee's own ships or ships chartered/pooled by it. It is seen that in such cases, the assessee books some space in the ships operated by other shipping line (feeder operator) and such hip are also not covered by pool agreement. On the booked space, assessee loads its container and issues bill of lading to the shippers/customers. The assessee in such case does not have any control on the running or the ships. The assessee was asked to explain why the freight attributable to voyages performed on these feeder vessels should not be denied benefit of DTAA. The assessee filed detailed submission stating that since it is engaged in shipping business and this freight of Rs.432,262,275 has been earned from shipping operations, it should be allowed benefit under Article 8 of DTAA. It was also stated that income from use, maintenance, etc. of containers is exempt under Article 8(3) of DTAA and since the assessee is using its owned/leased containers which are loaded on these feeder vessels and for which no separate charges are recovered from shippers/customers, the freight attributable to voyage performed on feeder vessels is covered under Article 8(3) of DTAA as income from use of containers, etc."
12. Thereafter, the Assessing Officer noted that the wordings of Article-8, in the Indo-Malaysia treaty is different from shipping article of OECD model convention which goes to show that the two contracting parties at the time of signing of DTAA were well aware of the restrictive meaning of the term used in Article-8(1) and 8(2). The meaning of "profits derived from the operation of ships" has been restricted to Profits derived from transportation of goods carried on by the "owner" or "lessee" or "charterer" of ships. It cannot be extended to any ancillary activities or the activities which are supplementary in nature. The "operation of ships" comprises of purchasing of ships or hiring it on time charter basis, employing the Captain and the crew and most importantly assuming the risks both financial and operation. The assessee by transporting the cargo in its container which are allowed on the ships of 3rd party i.e., feeder vessels is not assuming such risk. The chartering of some space on feeder vessels cannot be equated with chartering of complete ship. Just by issuing of bill of lading, the assessee cannot be said to be involved in the operation of shipping as it has no control of such ships (i.e., feeder vessels) which are used in the transportation activities. He further noted that the present Indo- Malaysia treaty is different from OECD model convention because in the treaty itself the operation of ships has been defined. The wide interpretation given in the OECD commentary cannot be imported here. The contracting parties were very well aware of such a commentary of OECD and, therefore, have clearly intended that the business of transportation must be by the ships owned or leased or chartered by the assessee. In the present case, the Assessing Officer held that insofar as the transportation by feeder vessels, the assessee is neither the owner nor the lessee nor the charterer of the feeder vessels carrying the cargo up to the Hub port. Therefore, the income derived from such voyage would be outside the scope of Article-8, even though the assessee may be engaged in the business of carrying the goods in the international traffic. Thus, the freight derived from carriage of goods from Indian port to Hub port through feeder vessels will not qualified to be income derived from the "operation of ships". In support of his contention, he has strongly relied upon the decision of DIT(IT) v. Cia-De-Navegacao Norsul, [2009] 121 ITD 113 (Mum.).
13. The learned Commissioner (Appeals) too confirmed the reasoning and the conclusion of the Assessing Officer that the transportation through feeder vessels does not fall within the definition of "operation of ships" as contained in Article-8(2). He too relied upon the decision of the Tribunal, Mumbai Bench, in Cia-De-Navegacao Norsul (supra). One of the main planks of the argument of the assessee before the learned Commissioner (Appeals) was that there was a linkage of goods from India to Hub Port and finally to the destination port for which the cargo was booked and, therefore, the assessee was eligible for the treaty benefit under Article-8, as the entire voyage has to be taken into consideration, qua the profit derived from operation of ship. This contention of the assessee was not accepted by the learned Commissioner (Appeals) on the ground that transportation of goods from India Port to Hub Port can at best be regarded as incidental or ancillary to main transportation of goods which is not permitted within the definition of "operation of ships" as defined Article-8(2) of Indo- Malaysian treaty.
14. Before us, the learned Counsel, Mr. Kanchan Kaushal, submitted that the assessee owns shipping line and is engaged in operation of ships in the international traffic. As a part of its shipping business, it used to book the cargo from India up till final destination port. For this purpose, it issued bill of lading to the shippers and customers for the entire voyage. For the purpose of its transportation of cargo, the assessee used the services of feeder vessels operated by third parties by using space charter/slot charter from Indian Port to Hub Port. At the Hub Port, the containers which were owned by the assessee were transferred to mother vessels i.e., the ships owned by the assessee and from thereon, the cargos/containers were transported by its own ships to the final destination port. The entire voyage from India Port to Hub Port and from there to final destination port, is inextricably linked and cannot be segregated as held by the Assessing Officer and the learned Commissioner (Appeals). He further submitted that the Assessing Officer has, in fact, admitted that the assessee has furnished proof to substantiate the linkage of the voyage performed on feeder vessels and mother vessels (i.e., ships owned by the assessee). The Revenue's case is that since the feeder vessel is not owned/leased by the assessee, therefore, the benefit of Article-8, cannot be given on the goods carried through the feeder vessel is not a correct interpretation of Article-8(2). The carriage of goods from the feeder vessel is nothing but a charter only, in a sense that the assessee has booked space charter/slot charter for its containers which are owned by it. For the purpose of explaining the meaning of "charter", as contemplated in Article-8(2) of the present treaty, he strongly referred and relied upon the decision of the Hon'ble Jurisdictional High Court in DIT v. Balaji Shipping U.K. Ltd., [2012] 253 CTR (Bom.) 460. In this case also, he explained that the assessee has transported the cargo through feeder vessels to the hub port and from hub port the cargo was transferred to vessel owned/leased/chartered by the assessee to the final destination. While adjudicating on these facts, their Lordships have examined the meaning and the definition of "charter"/"charterer". In this regard, he drew our attention to the specific observation made by the Court. From this judgment, he submitted that it can be clearly inferred that "charter" means "slot charter" also. If the goods have been transported by availing slot charter, then also it has to be considered as income from operation of ships. He also drew our attention to the decision of the Tribunal, Mumbai Bench, in APL Co. Pte. Ltd. v. DDIT, [2013] 35 CCH 255, wherein the Tribunal, after discussing meaning of the word "charter" given in various dictionaries, has held that "slot charterer" is to be held as charter per-se.
15. Regarding the decision of the Tribunal, Mumbai Bench, in Cia- De-Navegacao Norsul (supra), which has been heavily relied upon by the Assessing Officer and the learned Commissioner (Appeals), he submitted that, first of all, in this case, there is a categorical finding by the Assessing Officer that the assessee has failed to link and establish the voyage wise transportation and whether the feeder vessel were actually loading the goods into mother vessels or not, which the assessee had claimed that it was operating and secondly, the Tribunal has not examined the meaning of "charter" which has now been discussed and explained by the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd. (supra). Further, there is a categorical finding by the Tribunal that the assessee could not provide any material or evidence that there was a slot charter agreement with the feeder vessel. Thus, the said decision cannot be held to be applicable either in law or on facts in the present case. He also referred to the decision of the Tribunal in Hapag Lloyd Container Line GmbH v. ADIT(IT), [2012] 146 TTJ (Mum.) 279, wherein the Tribunal denied the benefit of Article-8 on the ground that no link between the transportation of cargo by the feeder vessel and transportation by mother vessel owned by the assessee could be established. Thus, if the assessee is able to establish the link between the two, then the benefit of Article-8 has to be given. He also filed small note giving the meaning of the term "charter" and "charterer", as appearing in various dictionaries which have been referred to by the Tribunal, in APL Co. Pte. Ltd. (supra).
16. Per contra, the learned Departmental Representative, Dr. Narendra Kumar, submitted that the ratio laid down by the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd. (supra), cannot be referred and relied upon in the present treaty of Indo-Malaysia, where the "operation of the ships" has been clearly defined to mean profits derived from the transportation carried on by the "owners" or "lessees" or "charterers" of ships. Whereas, in Balaji Shipping U.K. Ltd. (supra), the decision was rendered in the context of Indo-U.K. treaty, wherein the operation of ships has not been defined. The Indo-U.K. treaty is based on OECD model convention which also speaks about ancillary and incidental services. Article-9 of Indo-U.K. treaty does not define operation of ships and, therefore, the meaning and the scope as explained in the commentary of model convention has been adopted by the High Court. This aspect of the matter has been clearly brought out by the Assessing Officer and the learned Commissioner (Appeals) in their respective orders, that the commentaries of model convention cannot be applied in case of Indo-Malaysian treaty. He further submitted that in the context of India-USA treaty, wherein the similar definition has been given as in the Indo-Malaysia treaty, the Tribunal, Mumbai Bench, in ADIT v. Federal Express Corporation, has held that benefit of Article-8, would be available to the assessee, only when the assessee is the owner, lessee or a charterer of a ship or air craft. Any such transportation de-hors as owner charterer or lessee would be outside the scope of expression used in Article-8(2). The word "charterer" used in the Article has to be seen from the context of the meaning understood for the words "owner" and "lessee" i.e., a person who has substantial control over on the ship. In other words, the word "charterer" has to derive its meaning from the other two words used in the article i.e., "owner" or "lessee". He further referred to the decision of the Tribunal in ADIT v. M/s. Simatech Shipping Forwarding LLC, ITA no.3819-3820/Mum./2011, order dated 17th July 2013, wherein the Tribunal held that the decision of Balaji Shipping U.K. Ltd. (supra), cannot be relied upon on Article-8 of Indo-UAE treaty which is similarly worded with that of Indo-Malaysia treaty and is different from Indo- U.K. treaty. Lastly, he referred to the decision of the Tribunal, Mumbai Bench, in DDIT v. United Parcel Services Co., ITA no.2808- 2809/Mum./2006, order dated 14th March 2012, wherein the Tribunal, on similar wording of Article-8(3) of Indo-US DTAA, has distinguished the case of Balaji Shipping U.K. Ltd. (Tribunal order) and OECD commentary and held that the same would not be applicable. The Tribunal, in this decision, has heavily relied upon the decision of Federal Express (supra). Thus, the decision of the Hon'ble Jurisdictional High Court inBalaji Shipping U.K. Ltd. (supra) cannot be held to be applicable in the context of the present case. To show the distinction of the words used in different treaties, he filed a comparative chart of expression used in Article-8 of various treaties to prove his point that wherever "operation of ships" have been defined as transportation carried on by the "owner", "lessee" or "charterer", the same have to be differently interpreted wherein there is no such qualifying meaning of "operation of ships".
17. In the rejoinder, the learned Counsel submitted that the decision of Federal Express, cannot be relied upon as this decision is rendered prior to the decision of the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd. (supra), where the High Court has considered the meaning of the term "charterer" in extensive manner to hold that even the "slot charter" falls within the ambit of the word "charterer". Similarly, in other decisions also, the meaning of "charterer" has not been taken into consideration or the concept of the linkage of voyage.
18. We have heard the rival submissions, perused the relevant order of the Assessing Officer and the learned Commissioner (Appeals) and also the material placed on record qua the first issue. The assessee is a Malaysian company which is running a shipping line i.e., operating ships in the international traffic for carriage of goods. Insofar as the operation of shipping business from India is concerned, the assessee has been booking cargo from shippers/customers in India up till final destination port with all risks and responsibility. The bill of lading has been issued for the entire voyage. Since the assessee's ships owned/leased by it were not operating in the territorial waters of India, therefore, it has transported the cargos from Indian port to Hub port using the service of feeder vessels which are owned by the third party. The containers transported through feeder vessels have been sent by way of slot charter or space charter arrangement. From the hub port, the assessee's containers are transshipped on the mother vessel, which are owned/leased by the assessee and from there it is carried to the final destination port by the assessee's own ship. The Assessing Officer has very categorically held that there is linkage between the voyage performed through feeder vessels and finally by mother vessels. This is evident from Para-7 and 8 of the assessment order for the assessment year 2004-05, the relevant text of which has already being incorporated in the earlier part of the order. Insofar as the voyage between Hub Port and final destination port, there is no dispute as the Department has accepted that transportation of goods and freight receipts from such voyage are from operation of ship as envisaged in Article-8(2), for which the benefit of Article-8 has been given. However, the dispute is with regard to the transportation of goods from Indian Port to Hub Port through feeder vessels which have been held to be income not derived by operation of ships, because the assessee is not the "owner", "lessee" or the "charterer" of the feeder vessels. The Department has held that the chartering of some space or slot charter arrangement cannot be equated with chartering of a complete ship and just by issuing bill of lading for the entire voyage, the assessee cannot be said to be involved in operation of ships insofar as the transportation through feeder vessels are concerned, because the assessee has no control of such ships. A distinction has also been made on the meaning of the words used in Article-8 of Indo-Malaysia DTAA from the OECD model convention. Lastly, strong support has been derived from the decision of the Tribunal, Mumbai Bench, in Cia De Navegacao Norsul (supra). The assessee's case on the other hand has been that the word "charterer" also includes space charterer or slot charterer and the same cannot be segregated from the meaning of operation of ships. Heavy reliance has been placed on the concept of charterer given by the Hon'ble Bombay High Court in Balaji Shipping U.K. Ltd. (supra) and that there is an inextricable linkage between transportation of goods from Indian Port to final destination port.
19. First of all, we have to understand the expression used in Article- 8 of Indo-Malaysia DTAA which reads as under:-
"ARTICLE-8
Shipping and Air Transport
| 1. | Profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State. | |
| 2. | For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including: |
| (a) | the sale of tickets for such transportation non behalf of other enterprises; and | |
| (b) | the rental of ships or aircraft incidental to any activity directly connected with such transportation; |
| 3. | Profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance, or rental of containers (including trailers, barges and related equipment for the transport of containers) used in connection with the operation of ships or aircraft in international traffic shall be taxable only in that State." |
20. For the shipping income, the Para-2 categorically envisages that for the purpose of Article-8, profits from the operation of ships in the international traffic means, profit derived by an enterprise from the transportation by sea of goods carried on by the "owner" or "lessee" or "charterer" of ships. Thus, the profits from the "operation of ships" have been qualified by the words carried on by the "owner" or "lessees" or "charterer". This meaning assigned to operation of ships in the India-Malaysia treaty is in contra-distinction with OECD model convention, where the operation of ships has not been defined. The Article-8 of OECD model convention reads as under:-
"Article-8
Shipping, Inland Waterways Transport and Air Transport
| 1. | Profits from the operation of ships or aircraft in international traffic shall be taxable only in the contracting State in which the place of effective management of the enterprise is situated. | |
| 2. | Profits from the operation of boats engaged in inland waterways transport shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated." |
In the aforesaid Article, operation of ships have not been defined or qualified by any such words which have been specifically used in Article-8 of Indo-Malaysia DTAA. The commentary on Article-8 of OECD model convention explains the scope of Article-8 in the following manner:-
"4. The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise) that it operates in international traffic. However, as international transport has evolved, shipping and air transport enterprises invariably carry on a large variety of activities to permit, facilitate or support their international traffic operations. The paragraph also covers profits from activities directly connected with such operations as well as profits from activities which are not directly connected with the operation of the enterprise's ships or aircraft in international traffic as long as they are ancillary to such operation.
4.1 Any activity carried on primarily in connection with the transportation, by the enterprise, of passengers or cargo by ships or aircraft that it operates in international traffic should be considered to be directly connected with such transportation.
4.2 Activities that the enterprise does not need to carry on for the purposes of its own operation of ships or aircraft in international traffic but which make a minor contribution relative to such operation and are so closely related to such operation that they should not be regarded as a separate business or source of income of the enterprise should be considered to be ancillary to the operation of ships and aircraft in international traffic.
6. Profits derived by an enterprise from the transportation of passengers or cargo otherwise than by ships or aircraft that it operates in international traffic are covered by the paragraph to the extent that such transportation is directly connected with the operation, by that enterprise, of ships or aircraft in international traffic or is an ancillary activity. One example would be that of an enterprise engaged in international transport that would have some of its passengers or cargo transported internationally by ships or aircraft operated by other enterprises, e.g. under code-sharing or slot-chartering arrangements or to take advantage of an earlier sailing. Another example would be that of an airline company that operates a bus service connecting a town with its airport primarily to provide access to and from that airport to the passengers of its international flights."
Thus, in the absence of any qualifying words in the OECD model convention Article-8, the scope of operation of ships has been expanded to include various activities directly connected and also which are not directly connected with the ships or aircraft. That is, ancillary activities have also been brought within the ambit of Article-8.
21. In the decision in Balaji Shipping U.K. Ltd. (supra) rendered by the Hon'ble Jurisdictional High Court, Article-9 of Indo-U.K. DTAA has been examined, which is based on OECD model convention. In this case also, the facts were quite similar to the assessee's case, wherein the assessee had entered into slot hire agreement for providing slot spaces in the feeder vessel for transporting of goods from Indian Port to Hub Port and from Hub Port, the goods were transferred to the vessels which were owned/hired by the assessee. The bill of lading was also issued for the entire voyage. In this context, the Hon'ble High Court has examined the meaning of slot charterer, charterer and also the various ways in which the goods can be transported which falls within the ambit of "operation of ships". The High Court has taken note of the meaning of slot charterer in the following manner:-
"12. Before referring to the provisions of the Act and the DTAA, it is necessary to understand the nature of connecting carrier Agreements which provides for the hire of container slot spaces. In Maritime Law (6th Edition) the author Christopher Hill states:-
SLOT CHARTER PARTIES
This has reference to the carriage of containers, or to use current jargon, TEUs (20 foot equivalent units). The ship owner or operator "rents out" or hires a "piece" of space (a percentage of the total space available on the vessel) for carrying TEUs in return for which he receives hire calculated in accordance with the number of slots (accommodation for each TEU) payable whether or not those slots or spaces are actually used.
In his judgment in the Tychy (1999) 2 Lloyd's Rep.21) Clarke LJ said "…… there is no distinction in principle between a slot charter and a voyage charter of a part of a ship. They are both in sense charterers of a space in a ship. A slot charter is simply an example of a voyage charter of part of a ship". Clarke LJ further on in his judgment at p. 22 gave his view that a slot charterer could even be described as the charterer of the ship, not merely a charterer."
The reference to this commentary which in turn refers to the judgment is only to indicate what a slot charter is and that such agreements have been in use for decades. Needless to add that our reference to the same has no bearing upon Admiralty law including on the aspect of arrest of ships.
The assessment order sets out clause 2 of the Connecting Carrier Agreement between the respondent and OEL, which reads as under:-
"2(a) The carrier has offered container slots space to the line (respondent) and the line (respondent) has accepted to use such space on as/when required basis." [emphasis added]
22. Thereafter, their Lordships have also taken note of the fact that Article-9 does not define operation of ships and in that context they have referred to the commentary of model convention also. Under the scope of Article-9, their Lordships have held that where the goods are transported by an enterprise by availing a slot hire facility by it on the ship of another from a port in India up to a Hub Port abroad and from there transporting the goods further to the final destination upon a ship owned or chartered or otherwise controlled by it, will fall within the meaning of operation of ships under Article-9. They have also taken note of the fact that Article-9 does not require the ship to be owned by the enterprise and it merely requires the income to be from the operation of ships in international traffic and in that context they have held that where the goods have been transported by the assessee from a Port in India directly to their final destination to a port abroad by availing of slot hire facility obtained by it on the ship of another will also fall within Article-9. Thus, the whole of the ratio laid down in Balaji Shipping U.K. Ltd. (supra) cannot be applied in the present case, as the phrases used in Article-8 in Indo-Malaysia treaty is indeed differently worded. However, certain relevant observations and interpretation of word "charterer"/"charter" by the Hon'ble High Court can be taken as guidance for understanding these terms, which shall be discussed in the later part of the order.
23. We will now independently examine Article-8(1) and Article-8(2) of Indo-Malaysia DTAA. The crucial phrase or words which need to be analysed here are "operation of ships", transportation by the "owner" or "lessees" or "charterers" of ships. First of all, the word "operation" is different from the word "operate" or "operator". The word "operate" means to control the functioning of machine, process or system. Here, the person in control is important. The word "operator" means, a person who operates the equipment or a machine. Here for our purpose operator of ship. Whereas, the word "operation" connotes the fact or condition of functioning or being active i.e., some kind of activity. The operation of ships cannot be understood merely as an operator of ships or a person who operates the ships. The word "operation of ships" has to be understood in a broader sense of carrying out shipping activity. The carrying of shipping activity could be as an owner of a ship or as a lessee of a ship or as a charterer of a ship. Here, the word "owner" has to be inferred as a person who owns a ship and the word "lessee" as a person who owns the ship for a given lease period. The word "charterer" has to be understood as a person who charters or hires a ship for a voyage. The Law Lexicon (P. Ramanatha Ayier, 2nd Edn.), defines the word "charterer" as "one who, by contract acquired the right to use a vessel belonging to another. One who charters or hires or engages the whole or part of a ship under an agreement of Charter Party for a voyage". Here, the word "charterer" does not mean the owner or lessee of a ship. The word "charter Party" has been defined in Law Lexicon as "an indenture of covenants and agreements made between merchants and mariners concerning their sea affairs. It is a contract by which a ship or some principal part thereof, is let to a merchant for conveyance of goods on a determined voyage to one or more places". From this definition, it is amply evident that the word "charterer" means hiring of a ship for a voyage, either whole of the ship or a part of a ship. The word "charter" completely eludes the concept of ownership. A charterer of a ship cannot be the owner of a ship. Therefore, the contention of the learned Departmental Representative that the word "charterer" has to be understood in the context of owner or lessee that is having control of the ship is perhaps not the correct understanding of the word "charterer". The principle of noscitur-a-sociis i.e., the meaning of doubtful word may be ascertained by reference to the meaning of the words associated with it will also not apply here. In other words, the meaning of the word "charterer" cannot be imported from or to be understood from the meaning of the word "owner" or "lessee". The learned counsel, before us, has also filed various meaning of the term "charter" or "charterer", which are as under:-
| (i) | Dictionary of International Business terms (Financial World Publishing), defines the term "Charter" as under:- | |
| | "To rent an aircraft or vessel, or a part of its cargo space, for a particular journey or a period of time." | |
| (ii) | Black's Law Dictionary (9th Edition) defines the term "charter" which includes the term "space charter" which is defined as under:- | |
| | "A charter for a part of a vessel's capacity, such as a specified hold or deck or a specified part of the vessel's carrying capacity." | |
| (iii) | K.J. Aiyar's Judicial Dictionary (12th Edition) defines the term "charter party" as under:- | |
| | "An agreement in writing by which a ship - owner agrees to let an entire ship or part thereof, to a merchant, for the carriage of goods on a specified voyage, or during a specified period, for a sum of money which the merchant agrees to pay as freight for their carriage." | |
| (iv) | Concise Law Dictionary by P. Ramanatha Aiyar (Year 2005), defines the term "charterer" as under:- | |
| "One who charters or hires or engages the whole or part of a ship under an agreement of charter party for a voyage." | ||
| (v) | Chamber's 20th Century dictionary defines the term "charterer" as under:- | |
| "to establish by charter: to let or hire, as a ship, on contract. | ||
| (vi) | Modern legal usage dictionary defines the term "charterer" as under:- | |
| | "a person to whom a vessel is chartered in a charterparty." | |
| (vii) | Oxford dictionary defines the term "charterer" as under:- | |
| | "A contract to hire an aircraft, ship, etc. for a special purpose." | |
| (viii) | Maritime and Shipping Dictionary 2012, defines the term "charter" as under: | |
| | "A voyage charter whereby the ship owner agrees to place a certain number of container slots ("TEU and/or FEU) at the charterer's disposal." |
24. From the above definitions of the term "charter" or "charterer", one thing is amply clear that it means hiring of vessels or a ship or a part of its space under an agreement for a voyage. Thus, even a part of a space in the vessels for a particular journey is also considered as "charter of ship" or "charterer". In the decision of Balaji Shipping U.K. Ltd. (supra), while referring to the judgment of Tychy (supra), the High Court have noted that a "slot charter" and a "voyage charter" of a part of a ship are in a sense charterers of a space in a ship.
25. From the above discussion, the following inferences can be deduced:-
| (i) | Firstly, the operation of a ship can be done as charterer which does not mean to own or control the ship either as an owner or as a lessee; | |
| (ii) | Secondly, charterer is a hirer of a ship under an agreement or arrangement to acquire the right to use a vessel or a ship for the transportation of a good on a determined voyage, either the whole of the ship or part of the ship or some space of the ship in a charter party agreement; and | |
| (iii) | Thirdly, the word "charterer" includes a voyage charter of a part of a ship or a slot, as it is also arrangement or agreement to hire a space in a ship owned and leased by other persons. |
Thus, in our opinion, the word "charterer" should not be confused from the word "owner" or "lessee" or having control of the ship or as an operator of the ship. The operation of ship can be done as a charterer, which includes part of a ship or particular space in a ship.
26. Under the Income Tax Act, 1961, there is a separate code of shipping, Chapter-XIIG, which contains special provision relating to income of shipping companies. Section 115VB, defines operating ships in the following manner:-
"Section 115VB: For the purposes of this Chapter, a company shall be regarded as operating a ship if it operates any ship whether owned or chartered by it and includes a case where even a part of the ship has been chartered in by it in an arrangement such as slot charter, space charter or joint charter :
Provided that a company shall not be regarded as the operator of a ship which has been chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years."
27. Though the above definition of "operating of ships" is for the purpose of Chapter-XIIG, however, we are referring only for a limited inference for understanding the concept that "charterer of ships" includes even a part of the ship in an arrangement such as slot charter, space charterer or joint charter. The slot charterer or space charterer in a ship cannot be read in isolation or separate from the meaning of charterer. As held earlier by us, though the decision of the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd.(supra), cannot be applied in a blanket manner in the present case, however, for the purpose of understanding the meaning of "charter" or "charterer" or "slot charterer", the said decision gives in-depth analysis which can be adopted in the present case also only for the purpose of assigning the true meaning of the word "charterer".
28. Another very important observation made by the High Court which is quite relevant to note is, how the slot charterer agreements or space charterer agreement are inextricably linked with the shipping business in the present day shipping business. The said observations are as under:-
"26. An enterprise may not ply the ships owned or chartered or otherwise controlled or managed by it in respect of certain routes. It would however, on account of the business exigencies, be required to carry cargo on such routes. Business expediency could arise on account of a number of reasons and different situations such as obliging regular clients, or cultivating new ones. If it were not to do so, it may well loose clientele. Ships owned or chartered or otherwise controlled or managed by an enterprise may not be available on the particular route on a given day or for a particular period. The enterprise may already have entered into contracts or may even be required to enter into contracts for the carriage of goods on that route on that day or during that period. The trade would expect, the enterprise to perform its contracts and/or ensure there is no break in its services. This it can do by availing slot hire agreements. Their refusal or failure to do so, may well affect their business and reputation adversely.
27. By availing the facility of slot hire agreements, the enterprise does not arrange the shipment on behalf of the owner of the said vessel, but does so on its own account on a principal to principal basis with its clients. Such cases also have a nexus to the main business of the enterprise of the operation of ships. They are ancillary to and complement the operation of ships by the enterprise. If they are not merely ancillary to the main business of operation of ships but constitute the primary and main activities of the enterprise, it may be a different matter, which we are not called upon to consider in the facts and circumstances of the present case."
29. From the above observations, it can be understood that the facility of slot hire agreement with the feeder vessels to complete the voyage is not merely an auxiliary or incidental activity to the operation of ships, but inextricably linked. If the transportation of cargo by feeder vessels belonging to other enterprise is only a part of main voyage by the mother ship i.e., owned or leased by the assessee enterprise, then it has to be taken as a part and parcel of the operation, which is inextricably linked with the completion of the entire voyage. The linkage between the transportation by feeder vessels, mother vessels of the ship owned by the assessee has to be established. In the present case, insofar as the issue of linkage between the voyage performed between the feeder vessels and mother vessels, the assessee has been able to establish before the A.O. which is evident from the observations of the A.O. in Para-7 & 8, wherein he held that the freight earned from carriage of goods in international traffic by operation of ships including feeder vessels operated by 3rd party operator, the assessee has furnished documentary proof to substantiate the linkage between the voyage performed on feeder vessels and mother vessels. The Assessing Officer's case rests upon the premise that voyage carried on by the feeder vessels has to be segregated for the purpose of allowing benefit under Article-8, because chartering of some space i.e., slot chartering, feeder vessels cannot be equated with chartering of complete ship. By this, the Assessing Officer means that the assessee must have complete control of such ships even under the charter agreement. Thus, the view taken by the Assessing Officer for denying the benefit under the present Article-8 is not tenable as per our discussion in the forgoing paragraphs, that chartering of some space or slot charterer in a ship is actually a part and parcel of charter of a ship. Under the charterer agreement, there is no ownership or control of entire ship because the risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting the cargo of the person who has hired the ship and the hirer agrees to pay for conveyance of goods on a determined voyage. The risk of the assessee is towards its customers from whom he has agreed to transport the cargo/goods from the destination port of booking to the final destination port. Thus, in our opinion, such a strict interpretation of the word "charterer" as adopted by the Department cannot be sustained.
30. Now coming to the decision of Cia-De-Navegacao Norsul (supra), we find that in the said decision, the assessee had failed to link and establish the voyage wise transportation, whether the feeder vessels were actually loading the goods into the mother vessels, which the assessee had claimed that it was operating. This is evident from Para- 2 of the said Tribunal order. Further, as pointed out by the learned counsel, the plea of the assessee that there was a slot charter agreement with the feeder vessel orally was not supported by any material or evidence. It was in this context that this plea of slot charter agreement with the feeder vessel was rejected. Further, in view of the menaing of the concept of charter and slot charter as explained by the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd. (supra), the said decision may not apply here in this case, particularly when in the said decision, the Tribunal has not discussed what is meant by "charterer" as explained later on by the Hon'ble Bombay High Court. Regarding other decisions relied upon by the learned Departmental Representative which are mainly based on the decision of the Federal Express Corporation (supra), we find that in this case also, the plea of the assessee that it had booked space on Air India's aircraft and such booking of space amounted to charter of aircraft partly, was rejected on the ground that this was not raised by the assessee before the lower authorities. The Tribunal thus, set aside the issue to the file of the Assessing Officer to examine when a space is booked with other airlines, the question, whether transportation through such airlines can be said to be transportation by aircraft chartered by the assessee or not with reference to the first part of the definition of Article-8(2) with Indo-U.S. treaty. Similarly, the decision of M/s. Simatech Shipping Forwarding LLC, as relied upon by the learned Departmental Representative, will not apply because in this case also, the matter was set aside to the file of the Assessing Officer to decide the case in the light of the decision of the Federal Express Corp. (supra). Similar was the case in United Parcel Service (supra) also. In none of the decisions, the true import or meaning of the word "charterer" has been taken into consideration as adopted by the subsequent decision of the Hon'ble Jurisdictional High Court.
31. Thus, in our conclusion, we hold that transportation of cargo in the container belonging to the assessee from Indian Port i.e., Port of booking to the Hub Port through feeder vessel by way of space charter/slot charter arrangement, falls within the ambit of the word "charterer" and, therefore, it cannot be segregated form the scope of "operation of ships" as defined in Article-8(2) of the Indo-Malaysian treaty. In the present case, the voyage between the Indian Port to the Hub Port through feeder vessel and from Hub Port to final destination port through mother vessel owned/leased by the assessee are inextricably linked and there is complete linkage of the voyage and, therefore, the entire profits derived from the transportation of goods carried on by the assessee is to be treated as profits from operation of ships and, therefore, the benefit of Article-8, cannot be denied to the assessee on the part of the freight from voyage by the feeder vessels. Thus, ground no.2, raised by the assessee in all the years under appeal is allowed.
32. Since the benefit of Article-8, has been given to the assessee on the freight income earned by it, therefore, we are not adjudicating upon the plea for the benefit under Article-8(3). Likewise, the issue of Permanent Establishment Article-5, is also not adjudicated upon as the same will come into question, once the benefit under Article-8 is denied and income is to be computed as per Article-7. Thus, ground no.3, 4, 4(a), 4(b), 4(c), 4(d) and 5, in all the appeals are treated as academic in nature.
33. Now, coming to the issue of non-service of notice under section 143(2), as raised by the assessee in the additional ground of appeal, in the appeal for the assessment year 2004-05 to 2007-08, the issue is left open and we are not entering into the semantics of the dispute, whether the issuance and service of notice can be challenged on the proceedings commenced after 1st April 2008, albiet relating to the assessment years prior to the assessment year 2008-09, or not, as on merits we have already granted the relief under Article-8 to the assessee by which the profit from its shipping income is held not to be taxable in India.
34. In ground no.6, the assessee has challenged the estimation of freight attributable to feeder vessels by applying deemed rate of 10% instead of 7.5% under section 44B.
35. This ground will also become infructuous in view of our decision given for ground no.2, wherein we have held that the profit derived by the assessee from its shipping business is not taxable in India.
36. In ground no.7, the assessee has challenged the levy of interest under section 234B.
37. As admitted by both the parties, this issue is covered in favour of the assessee by the decision of the Hon'ble Jurisdictional High Court in DIT(IT) v. NGC Network Asia LLC, [2009] 313 ITR 187 (Bom.), and, therefore, in view of this admitted position, we hold that the assessee is not liable for levy of interest under section 234B. Hence, in this case also, the assessee was not liable to pay any advance tax on the basis of double income relief certificate issued by the Income-tax Department and the fact that the freight of the assessee was deductible at source having regard to the specific provisions of section 209(1)(d) and, therefore, the duty was cast upon the payer to deduct the tax at source and failure on the part of payer to do so, no interest can be imposed on the payee assessee under section 234B.
38. As stated in the operating part of the order, the grounds raised in assessee's appeal for all the years are identical, therefore, our findings, as given above, will apply mutatis mutandis with respect to similar grounds raised in all the years under appeal. Finally, all the appeals of the assessee are treated as partly allowed in the manner indicated above.
39. In the result, assessee's all the appeals are partly allowed.
In Revenue's appeal being ITA no.6431/Mum./2012, for the assessment year 2005-06, following ground has been raised:-
"1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the interest levied u/s 234D without appreciating the fact that interest is chargeable on the excess amount so refunded."
40. Before the learned Commissioner (Appeals), it was submitted by the assessee that interest under section 234D, can be levied were the refund is granted under section 143(1) and no refund is due on regular assessment. In support of this contention, decision of the Tribunal, Vishakhapatnam Bench, in Dredging Corporation of India Ltd. v. ACIT, [2011] 142 TTJ 252 (Vizag), was relied upon. The learned Commissioner (Appeals) decided the issue in favour of the assessee following the Tribunal order.
41. Before us, the learned counsel further relied upon the decision of the Tribunal, Mumbai Bench, in ACITv. BOR Ltd., ITA no.2246-2240/ Mum./2009 and the decision of Hyderabad Bench, in K. Anji Reddy v.DCIT, 59 SOT 92 (Hyd.) and submitted that in this case already assessment under section 143(3), was made accepting the returned income. Thereafter, the case was re-opened and the assessment under section 147/143(3) was made. Therefore, no interest under section 234D, can be levied.
42. The learned Departmental Representative, on the other hand, justified the levy of interest.
43. After hearing both the parties, we find that this issue has been decided in favour of the assessee in various decisions by the Tribunal, wherein it has been held that where the assessment has already been completed under section 143(3), it cannot be said that the assessment made under section 147, was a regular assessment in terms of Explanation 1 to section 234D. Accordingly, no interest under section 234D, is leviable on the assessee. Thus, ground raised by the Department stands dismissed.
44. In the result, Revenue's appeal for the assessment year 2005-06 is dismissed.
We not take up Revenue's appeal being ITA no.6432/Mum./2012, for the assessment year 2007-08.
45. Ground no.1, relates to treating of interest income as income from other sources.
46. The assessee submitted that the interest has been received from income tax refund under section 244A. the interest income was offered to tax @ 20%. The Assessing Officer has taxed the interest @ 40% without granting benefit of Article-11.
47. The learned Commissioner (Appeals), after following the Special Bench decision of the Tribunal, Delhi, in ACIT v. Clough Engineering Ltd., [2011] 138 TTJ (Del.) 385 (SB), decided the issue in favour of the assessee.
48. Both the parties admitted that this issue is covered by the Special Bench decision of the Tribunal cited supra and, therefore, the tax on interest has to be at a beneficial rate under Article-11 of the Indo- Malaysian treaty. Thus, we affirm the order of the learned Commissioner (Appeals) on this issue. Ground no.1, thus stands dismissed.
49. Ground no.2, is similar to the ground no.1, raised by the Revenue in ITA no.6431/Mum./2012, and consistent with the view taken by therein, ground no.2, is also dismissed.
50. In the result, Revenue's appeal for the assessment year 2007-08 is dismissed.
51. To sum up, all the assessee's appeals are partly allowed and Revenue's all the appeals are dismissed.
Regards,
Pawan Singla , LLB
M. No. 9825829075Trading in derivative by Company mainly engaged in Trading of Shares will be treated as Speculative
Losses in Speculation Business
The existing provisions of section 73 of the Act provide that losses incurred in respect of a speculation business cannot be set off or carried forward and set off except against the profits of any other speculation business. Explanation to section 73 provides that in case of a company deriving its income mainly under the head "Profits and gains of business or profession" (other than a company whose principal business is business of banking or granting of loans and advances), and where any part of its business consists of purchase or sale of shares, such business shall be deemed to be speculation business for the purpose of this section. Sub-section (5) of section 43 defines the term speculative transaction as a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is settled otherwise than by way of actual delivery. However, the proviso to the said section exempts, inter alia, transaction in respect of trading in derivatives on a recognised stock exchange from its ambit.
It is proposed to amend the aforesaid Explanation so as to provide that the provision of the Explanation shall also not be applicable to a company the principal business of which is the business of trading in shares.
This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent assessment years.
Budget 2014 – Mutual Funds, Securitisation Trusts and Venture Capital Companies or Venture Capital Funds to file return of income
The existing provisions contained in section 139 of the Act provide that every person being a company or a firm or being a person, other than a company or firm, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeds the maximum amount which is not chargeable to income-tax, shall furnish a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. Apart from the above, certain other entities, who are not chargeable to income-tax in accordance with the provisions of section 10, are obligated to file their return of income if their total income without giving effect to the provisions of section 10, exceeds the maximum amount which is not chargeable to income-tax.
Clause (23D) of section 10 exempts the income of a Mutual Fund, clause (23DA) of section 10 exempts the income of a securitisation trust from the activity of securitisation and clause (23FB) of section 10 exempts the income of a venture capital company (VCC) or venture capital fund (VCF) from investment in a venture capital undertaking. The Mutual Fund or securitisation trust or VCC or VCF are not obligated to furnish their return of income under section 139 of the Act. Instead they are required to furnish a statement giving details of the nature of the income paid or credited during the previous year and such other relevant details as may be prescribed.
It is proposed to amend sub-section (4C) of section 139 so as to provide that Mutual Fund referred to in clause (23D) of section 10, securitization trust referred to in clause (23DA) of section 10 and Venture Capital Company or Venture Capital Fund referred to in clause (23FB) of section 10 shall, if the total income in respect of which such fund, trust or company is assessable, without giving effect to the provisions of section 10, exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year in the prescribed forms and verified in the prescribed manner and setting forth such other particulars as may be prescribed and all the provisions of the Act, so far as may be, apply as if it were a return required to be furnished under sub-section (1) of section 139.
Further, in the case of the Mutual Funds and securitisation trusts referred to above, the requirement of filing of statements before an income-tax authority is proposed to be dispensed with by omitting sub-section (3A) of section 11 5R and sub-section (3) of section 1 15TA.
These amendments will take effect from 1st April, 2015.
HC deletes disallowance for TDS default which was invoked by AO without giving an opportunity to assessee
IT : Where AO disallowed payment of freight expenses on account of non-deduction of tax at source without giving assessee an opportunity to collect necessary evidence and explaining same in support of its case, there being violation of principles of natural justice, impugned disallowance diserved to be deleted
Budget 2014 – Assessment of income of a person other than the person who has been searched
Section 153C of the Act relates to assessment of income of any other person. The existing provisions contained in sub-section (1) of the said section 153C provide that notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belong to any person, other than the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A.
It is proposed to amend section 153C of the Act to provide that notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to any person, other than the person referred to in section 1 53A, then books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A if he is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to in sub-section (1) of section 153A .
The amendment will take effect from 1st October, 2014.
Budget 2014 Grants Power of Survey for verification of TDS defaults
Power of survey
The existing provision contained in section 133A of the Act enables the Income-tax authority to enter any premises in which business or profession is carried out for the purposes of survey. An income-tax authority acting under this section may impound and retain in his custody any books of account or documents inspected by him during the course of survey. However, he shall not retain in his custody any such books of account or document for a period exceeding ten days (exclusive of holidays) without obtaining the approval of the Chief Commissioner or Director General therefor, as the case may be.
An income-tax authority acting under section 133A has the powers as conferred upon it under sub-section (1) of section 131. With a view to align the time period and the authority for approval beyond the specified time period it is proposed to provide that an income-tax authority under section 133A shall not retain in his custody any such books of account or other documents for a period exceeding fifteen days (exclusive of holidays) without obtaining the approval of the Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General or Principal Commissioner or Principal Director or Commissioner or Director therefor, as the case may be.
Further, it is also proposed to amend section 133A to provide that an income-tax authority may for the purpose of verifying that tax has been deducted or collected at source in accordance with the provisions of Chapter XVII-B or Chapter XVII-BB, as the case may be, enter any office, or a place where business or profession is carried on, within the limits of the area assigned to him, or any such place in respect of which he is authorised for the purposes of this section by such income-tax authority who is assigned the area within which such place is situated where books of account or documents are kept. The income-tax authority may for this purpose enter an office, or a place where business or profession is carried on after sunrise and before sunset. Further, such income-tax authority may require the deductor or the collector or any other person who may at the time and place of survey be attending to such work,—
(i) to afford him the necessary facility to inspect such books of account or other documents as he may require and which may be available at such place, and
(ii) to furnish such information as he may require in relation to such matter.
It is also proposed to provide that an income-tax authority may place marks of identification on the books of account or other documents inspected by him and take extracts and copies thereof. He may also record the statement of any person which may be useful for, or relevant to, any proceeding under the Act. However, while acting under sub-section (2A) he shall not impound and retain in his custody any books of account or documents inspected by him or make an inventory of any cash, stock or other valuables.
These amendments will take effect from 1st October, 2014.
AO's discretion to initiate penalty proceedings couldn't be vitiated by revisional order of CIT
July 17, 2014[2014] 46 taxmann.com 168 (Chandigarh - Trib.)
IT : In terms of section 271AAA, Assessing Officer has discretionary power to initiate penalty proceedings and, therefore, revisional order under section 263 cannot be passed for directing Assessing Officer to initiate penalty proceedings
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