Notification Alert

The Central Board of Excise and Customs (CBEC) has come out with the following notifications:

06/2011 – Customs (N.T.) (dated 27th January, 2011) - Rate of exchange of conversion of each of the foreign currency with effect from 1^st February, 2011

01/2011 – Customs (N.T.) (dated 14th January, 2011) -

Amends Notification No. 36/2001 – Customs (N.T.), dated, the 3^rd August, 2001.

The Board's Customs Circulars issued so far this year are available here.

OECD Updates

The OECD has come up with the following:

1. The Transfer Pricing of Intangibles: Scope of the OECD Project on 25th January, 2011. The document can be found here. The cases in India relating to Intangibles have been very limited in number till now.

2. The Global Forum on Transparency and Exchange of Information for Tax purposes, hosted by the OECD have found that the tax laws in some jurisdictions do not meet Global Standards.

The jurisdictions are: Barbados, the Seychelles, San Marino, Trinidad and Tobago, Australia, Denmark, Ireland, Norway and Mauritius

A synopsis of the findings are available here.

Technological Assistance for the IT Dept.

During the recent raids at homes of leading bollywood actresses, the IT Department has pressed into service its newly acquired 'weapon': FREDDIE (Forensic Recovery of Evidence Device Diminutive Interrogation Unit).
It collects voluminous data in very less time and is a counter to logic bombs.

The powers of the IT Department relating to Search and Seizure are laid down in section 132 of the Income Tax Act, 1961.

Read more about the recent usage of FREDDIE here.

Delhi High Court: Enhancement of compensation after legal proceedings should be disclosed in the current relevant assessment year.

The Central India Electric Supply Co. Ltd. v. Income Tax Officer, on 28 January, 2011

Assessment Year: 1979-80

Question/s before the Hon’ble Court:

(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that re-assessment proceedings under Section 147(a) read with Section 148 of the Income-tax Act, 1961 had been rightly initiated against the assessee?

(2) Whether the Tribunal was right in holding that valid approval had been accorded by the Central Board of Direct Taxes under Section 151(i) of the Income-tax Act for re- opening of the assessment of the assessee?

Relevant facts: The assessee company was engaged in the generation and supply of electricity from its units at Bilaspur and Katni. These units were acquired by the Government of Madhya Pradesh in the year 1964 when the appellants licence expired & not renewed. The compensation for compulsory acquisition of both the units was fixed at Rs.5,85,000/- and paid to assessee in the year 1964 itself. It is not disputed that the assessee received some payment in the previous year 1978-79 relatable to the assessment year 1979-80 (after eliciting more compensation pursuant to legal proceedings). A notice dated 15.11.1981 under Section 148 of the IT Act was issued to the assessee appellant company requiring it to furnish its return for assessment.

Upholding the appeal of the assessee, the Hon’ble Court held that:

(1) They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable. This is completely absent in the present case.

(2) There is no finality emerging in matters of enhancement of compensation as none of the parties can contemplate in advance as to what would be the fate of the appeal proceedings. On receipt of the enhancement compensation, the appellant disclosed the same in its return as was the case in P.C. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd.s case (supra); Harish Chandra & Ors.s case (supra); Hindustan Housing & Land Development Trust Limiteds case (supra); and New Friends Co-operative House Building Society Ltd. v. CIT & Anr. case (supra).

The decision is available here.

Supreme Court Of India: Drugs Manufactured And Distributed As Free “Physician Samples” Excisable, To Be Valued At Pro Rata Basis

Medley Pharmaceuticals Ltd. V. CCE, Daman and Ors., on 14 January, 2011.

Questions before the court:

1. Whether "Physician Samples" are excisable goods in view of the fact that they are statutorily prohibited from being sold under the Drugs and Cosmetics Act, 1940 (in short, "Drugs Act") and the Rules made thereunder?

2. If physician's samples are held to be excisable, then what is the appropriate method of valuing physician samples for the purpose of excise duty?

Decision of the court:

Holding the physian samples to be excisable the court held as follows:

Para 24: ‘Any requirement or condition imposed by the Drugs Act and Rules made thereunder, is in furtherance of its above stated object of regulating and maintaining the quality of Drugs. 25) The primary object of the Act is to raise revenue by imposing duty on goods that are manufactured as mentioned above (see Kedia Agglomerated Marbles Ltd. v. CCE, (2003) 2 SCC 494). In other words, the scope of the Act extends to the event of manufacture of goods, for the levy of excise duty. These two Statutes and the Rules made thereunder, operate in entirely two different fields having different objects, purposes and schemes. The conditions or restrictions contemplated by one statute should not be lightly and mechanically imported and applied to fiscal statue for non levy of excise duty, thereby causing a loss of revenue. This Court in CCE v. Shree Baidyanath Ayurved Bhavan Ltd., (2009) 12 SCC 419 has held: "55. True it is that Section 3(a) of the Drugs and Cosmetics Act, 1940 defines "Ayurvedic, siddha or unani drug" but that definition is not necessary to be imported in the new Tariff Act. The definition of one statute having different object, purpose and scheme cannot be applied mechanically to another statute. As stated above, the object of the Excise Act is to raise revenue for which various products are differently classified in the new Tariff Act." 26) Therefore, the prohibition on the sale of Physician Samples intended for distribution to medical practitioners as free samples by Rule 65 (18) of the Drugs Rules shall have no bearing or effect upon the levy of excise duty under the Act, since excise is a duty on manufacture, duty is payable whether or not goods are sold. Excise duty is payable even in case of free supply, since sale is not a necessary condition for charging duty under the Act.’

Para 29: ‘The primary reason of distributing free physician samples by the manufacturer of pharmaceutical drugs to us appears to be only for the purpose of advertising of the product and thereby enhancing the sale of the product in the open market. It has been shown by research that the market of a pharmaceutical company is enhanced substantially by the distribution of free physician samples. In other words, the distribution of such physician samples serves as a marketing tool in the hands of the pharmaceutical companies [See Sarah L. Cutrona et al., Characteristics of Recipients of Free Prescription Drug Samples: A Nationally Representative Analysis, 98 Am. J. Pub. Health 284 (2008)].’

As for the valuation, it has to be on a pro rata basis. The judgement reads:

Para 41: ‘Coming to the valuation of the physician samples for the purpose of levy of excise duty, in our view, this issue need not detain us long in view of the decision of this Court in the case of Commissioner of Central Excise vs. M/s. Bal Pharma [Civil Appeal No. 1697 of 2006]. This Court has upheld the conclusion of the Tribunal that the physician's samples have to be valued on pro-rata basis. The Tribunal, while arriving at the aforesaid conclusion, had relied upon its earlier decision in the case of Commissioner of Central Excise, Calicut vs. Trinity Pharmaceuticals Pvt. Ltd., reported as 2005 (188) ELT 48, which has been accepted by the department. Therefore, we hold that physician samples have to be valued on pro-rata basis for the relevant period.’

CESTAT, Chennai: Depriciation under Income Tax Act not applicable in existence of a uniform procedure laid down by the CBEC

CESTAT, Chennai: Depriciation under Income Tax Act not applicable in existence of a uniform procedure laid down by the CBEC

CCE, Madurai v. M/s. GGN Spinning Mills P. Ltd., decided on 18.01.2011

Relevant facts:

The respondents removed capital goods on which they had availed CENVAT credit to their sister unit. According to the rules in force at the material time, they were required to pay duty on the value of the capital goods. The respondents have calculated depreciated value applying depreciation at the rate of 25% as provided under the Income Tax Act. Boards Circular No. 643/34/2002-CX dated 1.7.2002 (Sl. No. 14 to the Table annexed to the circular) read with Circular F. No. 495/ 16/93-Cus. VI dated 26.5.1993 referred to therein provided a mechanism to calculate depreciation for these purposes. By applying Income Tax, the department argued, provisions the respondents have short-paid a duty amount of Rs.6,89,987/-. The original authority demanded this amount while the lower appellate authority had set it aside.

Question before the tribunal:

Whether the depreciation under the income tax can be used for custom and excise purposes?

Decision of the tribunal:

Upholding the demand for increased duty, the tribunal held as follows:

Para 4: “. I find that the Board has issued a circular clarifying how the depreciation is to be worked out for computing the value of used capital goods in this case and the circular is being uniformly followed by all assessees subject to excise control. There is no particular reason why the respondents herein have to be treated differently. The lower appellate authority has clearly erred in allowing depreciation as admissible under the Income Tax law when a uniform and unambiguous procedure has been laid down by the Central Board of Excise and Customs to be followed by all assessees subject to excise law.”

Mumbai ITAT: No penalty u/s 271(1)(c) for tax evasion when final determination of income on Minimum Alternate Tax basis.

Ruchi Strips & Alloys Ltd. v. DCIT, on 21^st January, 2011

Assessment Year/s: 2003-04, 2005-06

Question/s before the Hon’ble Tribunal: Whether penalty can be imposed in respect of the assessment of total income under the normal provisions of the act when ultimately the total income is determined u/s. 115 JB of the Income Tax Act?

Relevant facts: There was a search and seizure operation u/s. 132 of the Income Tax Act, 1961 (the Act) carried out by the department in the business premises of the assessee on 17.11.2005. In the return of income filed after the search for Assessment year 2003-04 and 2005-06, the income surrender at the time of search was duly offered for tax. Since the total income computed as per the normal provision of the Act in both the aforesaid assessment years was less than the book profits computed u/s. 115 JB of the Act. The AO ultimately levied tax on the total income computed under the provision of section 115 JB of the Act.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 7: "In the facts and circumstances of the present case no penalty could have been imposed on the assessee because there was no tax sought to be evaded because the addition in respect of which penalty was imposed was made while computing total income under the normal provisions of the Act and ultimately the total income of the Assessee was determined on the basis of book profits u/s.115JB of the Act. We, therefore, cancel the penalty imposed by the Assessing Officer and confirmed by the CIT(A)."

The decision is available here.

Delhi ITAT: Comparables having super-normal profits to be excluded from forming basis for Transfer Pricing

Adobe Systems India Private Ltd. v. ACIT, on 21^st January, 2011

Assessment Year: 2006-07

Question/s before the Hon’ble Tribunal: Whether the comparables to be used under transfer pricing can be ones using super-normal profits?

Relevant facts: The TPO in this case passed a Transfer Pricing order making a upward adjustment of ` 10,40,75,727/- on the arms length price of the international transactions. The TPO did so by rejecting some of the comparables used by the assessee and added some more comparables which the assessee had objected.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 5: “It is undisputed that these three companies have shown supernormal comparable profits as compared to the other comparable. There exclusion from the list of comparable is quite correct. By excluding these three companies from the comparables and showing the computation on the basis of TPO data the arithmetic mean of OP/OC to 17.15% which falls within the +-5% range as permitted by section 92(C)(2). Hence, we find considerable cogency in the arguments of the ld. counsel of the assessee in this regard.”

The decision is available here.