Tuesday, May 31, 2011

Service Tax on Immovable Property: Current Status

Service Tax on Immovable Property

Current Status: The Service Tax has to be levied and may be collected by the Government.

Updates: The following are the specific updates regarding the retrospective imposition of service tax.

List of events:-

I. DELHI HIGH COURT

1. The Finance Act, 1994 imposes Service Tax on renting of immovable property.

2. The Hon'ble Delhi High Court holds this renting to be unconstitutional.(Home Retail Solutions v. UOI)

3. The Central Govt. appeals to the Hon'ble Supreme Court.

4. The Legislature amends Finance Act, 1994 to override the decision of the Hon'ble Delhi High Court and imposes Service Tax on renting of immovable property retrospectively.

5. The Hon'ble Delhi High Court stays the imposition of service tax and holds that the Union Govt. cannot impose the tax. (in Writ Petition No. 3398/2010 on May 18, 2010)

6. The Union Govt. approaches the Hon'ble Supreme Court. The Hon'ble Supreme Court vide an order dated January 10, 2011 stays the order of the Hon'ble Delhi High Court and holds that the Union Govt. may impose the Service Tax. On 4th February, while continuing the stay order on the Delhi High Courts orders, it further holds that the Hon'ble Delhi High Court should hear the matter expeditiously.

7. The final arguments in the Hon'ble Delhi High Court concluded in the last week of May, 2011 . Order expected in the first week of June by the Hon'ble Delhi High Court. The stay by the Honn'ble Supreme Court on the Hon'ble Delhi High Court's orders continues.

II. PUNJAB AND HARYANA HC

1. Meanwhile, a similar matter came up before the Punjab and Haryana High Court. The P&H HC has upheld the constitutional validity of the service tax on immovable property. (vide Shubh Timb Steels Ltd. v. Union of India, CWP 11597 of 2010)Link
Further read:

1. Economic Times report
2. Opinion of Mr. Vivek Tankha, Additional Solicitor General, Govt. of India
3. Report by CNN-IBN
4. Report on the Internet

Monday, May 30, 2011

News Updates

1. The Income Tax Department has issued Circular No. 3/2011 which basically deals with the digital authentication of form 16A for the purposes of Tax Deducted at Source. It was felt important as for 16A is filed quarterly.

2. India has also entered into DTAA's with Ethiopia (Press release & DTAA) and Tanzania (Press release and DTAA). Both the agreements incorporate the provisions of effective exchange of information, based on Article 26 of the OECD Model DTAA.

Wednesday, May 25, 2011

Bodyshopping by IT Companies

A new controversy has been raked up after the Income-tax department issued a scrutiny notice to Wipro regarding ‘bodyshopping’. (News report available here)

Bodyshopping refers to a situation where an Indian IT Company sends its software engineers for short assignments abroad. The payment for the services of the professionals are paid directly to the company and the salary is paid to the professional by the Indian IT Company.

The Indian IT Companies do not pay tax/pay a very limited amount of tax on the income thus derived from the foreign companies as they claim exemption u/s 10A of the Income-tax Act, 1961 (“export of articles or things or computer software”).

Now the question before the relevant authorities/courts would be whether this export is actually an export of computer software or export of manpower.

Secondly, the authorities/courts would also have to examine whether the work done ‘onshore’ i.e. outside India, would qualify for the exemption.

Suggested readings:

Outsourcing law (US)

Wikipedia

Livemint article

Monday, May 23, 2011

Transfer pricing not attracted in the absence of liability to pay tax: AAR

Applicant: Goodyear Orient Company (Private) Ltd.and anr. on 02nd May, 2011

A.A.R. Nos. 1006 & 1031 of 2010

Assessment Year:

Relevant Facts:

1. The Applicants are

(i) GTRC, a company incorporated in the US

(ii) GOCPL, a company incorporated in Singapore

(iii) GIL, a company incorporated in India.

The companies manages natural rubber purchasing and other business.

2. Entity (i) owns 75% of the shares in entity (iii) and seeks to transfer it to entity (ii) through a Share Contribution Deed (SCD).

Applicants questions:

1. Whether applicant (i) would be charged capital gains or any other tax?

2. Whether transfer pricing provisions are applicable on applicant (i)?

3. Whether any TDS is required to be deducted by applicant (i)?

4. Whether any tax would arise on GOCPL u/s 56?

Allowing the application of the assessee, the Hon’ble Authority held that:

(i) In the absence of any consideration for transfer, no income may be attributed to the transferee and thus, capital gains tax would not be applicable.

(ii) In the absence of liability to pay tax, Transfer Pricing provisions would not apply.

The decision is available here.

Friday, May 20, 2011

Collection and transmission of data converted into paper logs/magnetic tapes amounted to manufacturing and producing of an article or thing: Delhi HC

Commissioner Of Income Tax vs M/S. Hls India Ltd. on 11 May, 2011

ITA No.627/2005

Assessment Year: 1989-90 – 2003-04

Relevant Facts:

1. The Assessee is an oilfield services company which provides services for exploration and production of hydrocarbons

2. Agreement dated 04/05/1988 was entered with Oil India Ltd. for providing information/analysis for the exploration of certain areas.

3. The assessee sought investment allowance u/s 32A of the Income Tax Act, 1961 (“Act”). The assessee also sought relief u/s 80IA / 80IB of the Act. Further, depreciation on the machinery used was claimed as 100% under Rule 5, Appendix I, Part I, III (ix) of the Income Tax Rules, 1961 (“Rules”)

4. The AO disallowed the claim u/s 32A(2) of the Act. The same was allowed by the CIT (A) and the ITAT as well for the AY 1989-90.

5. A claim u/s 80IA was raised by the assessee in AY 199192. This claim was denied by the AO but allowed by the CIT (A). On appeal, the ITAT remanded the matter back to the AO for fresh consideration.

6. On the claim under Rule 5, Appendix I, Part I, III (ix) of the Rules, the AO disallowed the same claiming that this was only available to mineral oil concerns.

Questions of law:

1. Whether the assessee is an industrial undertaking engaged in the business of manufacture or production of an article or a thing u/s 32A and u/s 80IA/80IB?

2. Whether the assessee is entitled to claim the depreciation allowance @ 100% under Rule 5, Appendix I, Part I, III (ix) of the Rules?

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

(i) Technical information may be collected below the ground, but it is processed, analyzed and technical analysis of the same is done by experts. This information is then converted into understandable format and printed into logs and recorded on magnetic tapes. This would amount to manufacture.

(ii) Drawing an analogy, an X-ray machine converts an X-ray film into an article on which the impression of the bone is carried, it is a manufacture.

(iii) Machinery used for wirelogging and other data assessment for finding oil are machinery used in mineral oil concerns and thus eligible for 100% tax deduction under Rule 5, Appendix I, Part I, III (ix) of the Rules.

The decision is available here.

Thursday, May 19, 2011

Assesses who collect and distribute tips/service charges are liable to deduct TDS on the payments forwarded to its employees: Delhi High Court

Commissioner of Income Tax v. ITC Ltd. decided on 11 May, 2011

Lead matter: ITAs No.475/2010

Assessment Year: 2003-04, 2004-05, 2005-06

Relevant Facts:

1. Surveys were carried out u/s 133A in the premises of the assesses. It was found that tips were being paid to the employees but no TDS was being deducted from such tips.

2. The Assessee was treated as an Assessee-in-default in terms of the provisions of section 201(1) and interest was charged against such defaults of deducting TDS u/s 201(1A).

3. The CIT (A) allowed the matter in favour of the assessee. Similarly, the Tribunal also held in favour of the assessee that tips paid by the assessees to its employees are not liable for TDS under Section 192 of the Income Tax Act, 1961 (“the Act”)?.

Questions of law:

1. Whether the amount of tips collected and paid by the assessee to its employees is salary within the meaning of section 15 and Section 17 of the Act?

2. Whether the assessee is liable to deduct tax u/s 192 against the amounts collected and paid to its employees?

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

(i) The definition of salary as it appears in section 15 has been expanded by section 17. Thus, such salary would also include tips/service charges collected by the assessee.

(ii) The assessee may be in bonafide belief that no tax has to be deducted. Therefore, the assessee was not treated as an assessee in default

The decision is available here.

Wednesday, May 18, 2011

Loans/advances made to a non-shareholder taxable at the hands of the members of the concern, and not at the hands of the concern itself: Delhi HC

Commissioner of Income Tax vs Ankitech Pvt Ltd. decided on 11 May, 2011

Lead matter: ITA No.462 of 2009

Assessment Year: 1986-87

Relevant Facts:

1. The assessee filed a nil return for the relevant period but filed a return for Rs. 1.45 Crores u/s 115JB of the Income Tax Act, 1961.

2. The assessee had received an amount of Rs. 6,32,72,265/- as loans and advances from a company named M/s. Jackson Generators (P) Ltd. (“JGPL”)

3. The directors and shareholders of JGPL the assessee were the same.

4. The AO was of the view that for the purpose of Section 2(22)(e) of the Act the amount received by the assessee from JGPL which constituted advances and loans' would be treated as deemed dividend within the meaning of Section 2(22)(e) of the Act and added the aforesaid amount to the income of the assessee. The CIT (A) upheld the view of the AO. The Tribunal reversed the finding of the CIT (A) and granted relief to the assessee.

Questions of law:

1. Whether the assessee, who was not the shareholder of M/s. JGPL could be treated as covered by the definition of ‘dividend’ and could receive divided as contained in Section 2(22)(e) of the Income Tax Act, 1961?

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

(i) Only the definition of ‘dividend’ has been enlarged by section 2(22)(e) and not of a shareholder. This implies that a shareholder would not include the concern which has such shareholder is a member or a partner and in which he has a substantial interest.

(ii) It would be open for the revenue to treat the said amount in the hands of the shareholders and tax the same in their hands rather than in the hands of the concern to which such loan has been advanced.

The decision is available here.

Tuesday, May 17, 2011

A claim of bad-debt not available u/s 36(1)(vii) may be claimed u/s 37(1): Delhi High Court

Mohan Meakin Limited v. Commissioner Of Income Tax, Delhi decided on 11 May, 2011

ITA No.405/2007

Assessment Year: 1986-87

Relevant Facts:

1. During the relevant assessment year 1986-87, the assessee filed revised return wherein beside other things it had claimed deduction of Rs.4,48,462/- as un- recovered bad debts.

2. The Assessing Officer allowed deductions of those small amounts, but declined that of Rs.4,22,114/- in respect of M/s.Kanpur Boot House of Shri Bhagwan Dass.

3. He was not satisfied with the explanation given by the assessee with regard to the reasons for being unable to recover the said amount. He disallowed the deduction observing that the assessee had failed to produce any evidence regarding efforts made for the recovery of the said amount and thus had not established that it became bad during this year.

4. On appeal, the CIT(A) reversed the order of the AO. On further appeal by the department, the ITAT decided in favour of the department.

Questions of law:

1. In the facts and circumstances of the case and in law, whether the ITAT erred in disallowing deduction of Rs.4,22,114/- to the assessee as bad debts for the assessment year 1986-87?

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

(i) If a bad-debt does not fall under section 36(1)(vii), a claim may be made u/s 37(1). It appears that sections 28 and 29 read together do not show that if a case comes under section 36 then the applicability of section 37 will be taken out but rather means that a case may come either under Section 36 or section 37 and a computation may be made under either of the sections.

(ii) A new argument may be raised at the High Court level even if the same was not raised before the lower authorities.

It was ultimately held that:

Para 10: “Applying the principles of law as regard interpretation of Sections 28, 29, 36(1)(vii), 36(2) and Section 37 of the Act as enunciated by the Division Bench of J&K High Court and the Apex Court in the afore-cited cases, we are of the considered view that it was in the totality of overall situation of the matter that the assessee decided to write off the advances made to M/s.Kanpur Boot House as bad debt. The reason as given by the assessee was apparently well-founded and was abruptly rejected by the Assessing Officer and the Tribunal.”

Para 12: "Merely because the claim was not made out under one particular provision of the Act, but was so made out under another provision of law, we failed to understand as to how the assessee could be debarred to raise such legal question. Having regard to all this, we are of the considered view that it was legally permissible to raise question of deduction under Section 37 of the Act even if it was not raised before the authorities below."

The decision is available here.

Sunday, May 15, 2011

News Updates

1. India has notified the Tax Information Exchange Agreements entered into with Isle of Man and The Bahamas.

2. The CBDT has come out with Circular No. 2 of 2011 which details the procedure for regulating refund of excess amount of TDS deducted and/or paid.

3. It is now mandatory for all stock exchanges to maintain and report monthly data to the Department vide notification 14 dated 9th March, 2011.

4. A new Directorate of Income Tax (Expenditure Budget) has been created under the CBDT by the President vide notification 15 dated 18th March, 2011.

5. The Indian Society of International Law, New Delhi has been exempt under section 35(1)(iii) of the Income Tax Act, 1961 vide notification 22 dated 28th April, 2011.