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.

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

Applicant: Goodyear Orient Company (Private) Ltd.and anr. on 02^nd 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.

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.

If a foreign company is liable to tax in India, even if not actually paying tax, has to necessarily file a return u/s 139(1): AAR

Also held:

The transfer pricing provisions from section 92 to 92F of the Act not attracted when sale and purchase of shares between non- resident companies.

VNU International v. Director of Income Tax, 28^th March, 2011

AAR No. 871 of 2010

Relevant Facts:

1. The applicant states that it is a tax resident of the Netherlands and does not have any permanent establishment in India.

2. The applicant first transferred 50% of shares it held in ORG-IMS, a company incorporated in India to IMS-AG, a company incorporated in Switzerland. After the transfer, the applicant was left with 50,765 shares of ORG-IMS, amounting to 50% of the total shares.

3. In a subsequent SPA, the applicant transferred 50% of the shares (50,765 shares) to IMS-AG & Interstatistik AG for a total consideration of ` 74,08,643. The shares were acquired for a consideration of ` 4,61,500.

Questions for consideration:

1. On the facts and circumstances of the case, whether any capital gain earned by VNU International on transfer of 50,765 shares of ORG-IMS to the purchasers would be liable to tax in India as per the provisions of the Act and the Tax Treaty between India and the Netherlands?

2. On the facts and circumstances of the case, if the capital gain is not taxable in India, whether the applicant is required to file any return of income under section 139 of the Act?

3. On the facts and circumstances of the case, whether the transfer of shares by the applicant to IMS AG attracts the transfer pricing provisions of section 92 to 92F of the Act?

4. On the facts and circumstances of the case, whether IMS AG were liable to withhold taxes under section 195 of the Act and if so, on what amount would the tax have to be deducted?

Partly upholding the application of the applicant, the Hon’ble Court held that:

Para 7: “ Transfer pricing provisions from section 92 to 92F of the Act would not be attracted as the sale and purchase of shares is between non- resident companies of the Netherland and Switzerland. Since there is no income chargeable to tax, there would be no liability to deduct tax u/s.195 of the Act.”

Para 8: “We are in agreement with the Learned Advocate that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the Netherlands, the state in which the transferor is a resident.”

Para 13: “...Then, as per the third proviso, every company is required to file its return of income, whether it has an income or a loss. The applicant being a foreign company, is covered within the definition of a company under section 2(17) of the Act. The applicant does not dispute that the income arising from the sale of shares is liable to be taxed in India by virtue of section 5(2) of the Act, though no tax is actually paid in India. It is a different matter that by virtue of DTAA the applicant is actually paying tax in the Netherlands. If the power to tax be granted it is difficult to appreciate the argument that when the resulting income is nil, there is no obligation to file return of income. It may be mentioned that where it is not necessary for a non- resident to furnish return under section 139(1) of the Act, the statue has specifically provided, as is the case under section 115AC(4) of the Act. Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a vide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules 1962. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income tax department.”

The decision is available here.

Mumbai ITAT: The liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s.271C

ACIT (TDS) v. American School of Bombay Education Trust, on 31^st January, 2011

I.T.A.Nos.6349 to 6351/Mum/2009

Assessment Year: 1997-98 to 1999-2000)

Question/s before the Hon’ble Tribunal: Whether action u/s 201(1) deeming an assessee in default is a necessary precondition to the levy of penalty u/s 271C?

Relevant facts: Briefly stated facts of the case are that a survey action u/s.133A was taken upon the assessee on 24-01-2006. Orders u/s. 201(1) and 201(1A) were passed by the DCIT (TDS). Thereafter, penalty was levied u/s.271C, inter alia, in respect of the years under consideration. When the matter came up before the ld. CIT(A), the assessee contended that the Tribunal vide order dated 01-07- 2009 in ITA Nos.3622 to 3624/M/07 has observed that the initiation of proceedings in the instant years was beyond the period of 6 years and hence barred by limitation. Considering the fact that the Tribunal has quashed the orders u/s.201(1) and 201(1A) in respect of these years, the ld. CIT(A) ordered for the deletion of penalty u/s.271C in these years, against which the Revenue has come up in appeals before us.

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

Para 3: “A bare perusal of this provision indicates that penalty u/s.271C can be imposed only when there is a failure on the part of the assessee to deduct or pay the whole or any part of tax and, then, the quantum of penalty is equal to the amount of tax which such person failed to deduct or pay. From here, it emerges that there must be some sum which such person failed to deduct or pay. Such amount constitutes the basis for imposition of penalty u/s.271C. In other words, the liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s.271C… Once the assessee is not in default for failure to deduct or pay tax at source, naturally, there cannot any question of imposing penalty u/s.271C for the reason that the very basis of such penalty is the amount of tax which such person failed to deduct or pay as per law and when there is no such amount in existence, the possibility of imposing penalty will automatically be ruled out.”

The decision is available here.

Mumbai ITAT: There are no tax withholding obligations from payments on account of brokerage on sale of mutual fund units

Jain Investment v. Income Tax Officer, on 24^th January, 2011

Assessment Year: 2006-07

Question/s before the Hon’ble Tribunal: “Whether or not the CIT(A) was justified in upholding the impugned disallowance of Rs 2,87,409, in respect of sub brokerage paid on sale of mutual fund units, on the ground that the assessee failed to discharge his tax withholding obligations in respect of the payments made for such sub brokerage?”

Relevant facts: During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed a deduction of Rs 2,87,409 in respect of the brokerage paid. The Assessing Officer noted that the assessee has not deducted tax at source, as required under section 194H, from these payments. Accordingly, the Assessing Officer invoked section 40(a)(ia) to disallow the payments so made by the assesse.

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

Para 7: “In view of my findings that there were no tax withholding obligation from payments on account of brokerage on sale of mutual fund units, the very foundation of impugned disallowance ceases to hold good in law. The disallowance u/s.40(a)(ia) can only be made when there is a tax withholding requirement, and assessee fails to comply with the said requirement. That is not the case before me. Accordingly, I uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance.”

The decision is available here.