Gujarat High Court: The Court not to act as a regular appellate authority in the grant of sanction u/s 132

Neesa Leisure Limited v. Union of India Through Secretary decided on 4 March, 2011

SPECIAL CIVIL APPLICATION No. 13498 of 2010

Assessment Year: 2010-2011

Relevant facts:

A search action came to be conducted under section 132 of the Income Tax Act, 1962 (the Act) on 8.9.2010, 9.9.2010 and 11.9.2010 on various Companies of the Neesa Group.

Subsequent to the search and survey, the respondent authorities issued summons to the Group Companies asking them to file information/documents for the period since 1.4.2004 till date bank book, unsecured loans, ledger accounts of capital assets, land acquisitions details, documents, equity capital received and loans and advances given. After the search, the Assistant Director of Income Tax, in charge of the search operations, issued several notices under section 131(1A) of the Act. The petitioner wrote several letters to the respondent No.4, Deputy Director (Investigations) as well as other officials in respect of the action taken by the income tax authorities alleging that the action is taken with ulterior motive to harm the business interest of the petitioners.

It is the case of the petitioners that, the conditions precedent for exercise of powers under section 132 of the Act have not been satisfied and that the subsequent inquiry under section 131(1A) of the Act is bad in law as the said powers are required to be exercised prior to the search and not subsequent thereto.

Question/s before the Hon’ble Court:

1. Whether the authorization granted u/s 132(1) has been granted validly in the facts and circumstances of the present case?

2. Whether the issue of notice u/s 131(1A) after the search operations carried out u/s 132, shows a malafide intention of the authorities and renders the search operations invalid on such grounds?

Dismissing the petition of the assessee, the Hon’ble Court held that:

Para 8: “From the principles enunciated in the above referred decisions, it is apparent that for the purpose of exercise of powers under section 132 of the Act, two conditions precedent are required to be satisfied. The first condition is that the concerned officer must have some information in his possession, and the second condition is that, in consequence of such information he must have reason to believe that the statutory conditions for exercise of the power to order search exist. The basis for exercise of power must be some material which can be regarded as information which must exist on the file on the basis of which the authorising officer can have reason to believe that action under section 132 is called for. Such information should be fairly reliable and should not be a mere rumour or an unverified piece of gossip or a hunch…

The court will not act as an appellate authority and examine meticulously the information in order to decide for itself as to whether the action under section 132 is called for. But the court would be acting within its jurisdiction in seeing whether the act of issuance of authorization under section 132 is arbitrary or malafide or whether the satisfaction recorded is such which shows lack of application of mind on the part of the appropriate authority.”

Para 11: “The main plank of the submissions advanced by the learned counsel for the petitioners was that issuance of notices under section 131(1A) of the Act subsequent to the search proceedings was fatal and would render the search proceedings invalid even if the requisite satisfaction had been recorded prior to issuance of authorization under section 132(1) of the Act. This Court does not find any merit in the said contention, inasmuch as if there is sufficient and tangible material available on record, prior to the search, based on which the concerned officer has formed the requisite belief under section 132(1) of the Act, merely because certain other information has been sought for by the authorised officer or any of the officers mentioned in section 131(1A) of the Act, the same would not render the search proceedings invalid.

The decision is available here.

AAR: In a contract for civil construction on turn-key basis, applicant would be eligible for presumptive rate of taxation under section 44BBB

Applicant: Toshiba Plant Systems and Services Corporation

A.A.R. No.864 of 2009

Assessment Year: 2010-11

Relevant Facts: M/s Toshiba Corporation, Japan, the holding company of the applicant is awarded a separate supply contract for off shore supply of plant and machineries to be installed at the Mundra UMP project.

The applicant would initially depute certain expats to the project office set up in Cyber Towers, Hitech city, Madhopur, Hyderabad for provision of services. Further in order to meet the project schedule, the applicant could in the course of the execution of the contract deploy additional expats and workforce, if required. It is contemplated to engage the services of a related party/third party for supply of labour for executing the work under the contract with CGPL.

Question/s before the Hon’ble Authority:

1. Whether on the stated facts and in law, the consideration received by the Applicant for the steam turbine, turbo generator erection of auxiliaries, other equipments including associated electrical, instrumentation and pre-commissioning work for the five units of 800 MW each of Ultra Mega Power Project at Mundra, Gujarat is eligible for presumptive rate of taxation under section 44BBB of the Act in India and accordingly, whether a sum equal to ten percent of the contract amount as and when received by the Applicant shall be deemed to be the profits and gains chargeable under the head, “Profit and gains of business of profession” of the Applicant in India?

2. Whether on the stated facts and in law, if the Applicant engages the services of a related party or third party for supply of labour for executing the work under the contract with the condition that the overall responsibility would remain with the Applicant, whether the Applicant would be eligible for presumptive rate of taxation under section 44BBB of the Act on the entire consideration receivable in terms of the contract?

The Hon’ble Authority decided that:

Para 6: “…we find that the CGPL has executed 2 contracts, one with M/s Toshiba Corporation for off-shore supply of equipments and the other with the applicant for erection of plant in execution for turnkey Mundra UMP Project. Both the contracts are independent of each other. The consideration received by M/s Toshiba Corporation is not taxable in India for the off-shore supply, while the applicant submits the consideration for taxation u/s 44BBB.”

Para 7: “The applicant’s case on the facts now disclosed squarely fits into the description given in this section. The argument on the side of the Revenue that if the contracts are an integral whole in the hands of Toshiba can be examined by it at the appropriate time. But on the facts as now disclosed by the applicant, section 44BBB of the Act would apply.”

The decision is available here.

Supreme Court: Parliament may exercise legislative powers extra-territorially only in cases of existence of sufficient nexus

Gvk Industries Ltd. v. Income Tax Officer, on 1^st March, 2011

CIVIL APPEAL NO. 7796 OF 1997

Relevant facts:

The Appellant by way of a writ petition filed in Andhra Pradesh High Court had challenged an order of the Respondents which decided that the Appellant was liable to withhold a certain portion of monies being paid to a foreign company, under either one of Sections 9(1)(i) or 9(1)(vii)(b) of the Income Tax Act (1961). The Appellant had also challenged the vires of Section 9(1)(vii)(b) of the Income Tax Act (1961) for want of legislative competence and violation of Article 14 of the Constitution. The High Court having upheld that Section 9(1)(i) did not apply in the circumstances of the facts of the case, nevertheless upheld the applicability of Section 9(1)(vii)(b) on the facts and also upheld the constitutional validity of the said provision. The High Court mainly relied on the ratio of the judgment by a three judge bench of this court in ECIL. Hence, the appeal.

Question/s before the Hon’ble Court:

1. Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians?

2. Does the Parliament have the powers to legislate "for" any territory, other than the territory of India or any part of it?

The Hon’ble Court held that:

Para 42: “A question still remains, in light of the extreme conclusions that may arise on account of the propositions made by the learned Attorney General. Is the Parliament empowered to enact laws in respect of extra-territorial aspects or causes that have no nexus with India, and furthermore could such laws be bereft of any benefit to India? The answer would have to be no.”

Para 52: “The learned Attorney General is not only seeking an interpretation of Article 245 wherein the Parliament is empowered to make laws "for" a foreign territory, which we have seen above is impermissible, but also an interpretation that places those vaguely defined laws, which by definition and implication can range over an indefinite, and possibly even an infinite number, of fields beyond judicial scrutiny, even in terms of the examination of their vires. That would be contrary to the basic structure of the Constitution.”

Also, while answering the questions posed before the Hon’ble Court, it was held that -

Para 76: “The answer to the above (Question 1) would be yes. However, the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, - events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like - that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians.”

“The answer to the above (Question 2) would be no. It is obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India, and also with respect to extra-territorial aspects or causes that have an impact on or nexus with India as explained above in the answer to Question 1 above. Such laws would fall within the meaning, purport and ambit of the grant of powers to Parliament to make laws "for the whole or any part of the territory of India", and they may not be invalidated on the ground that they may require extra-territorial operation. Any laws enacted by Parliament with respect to extra- territorial aspects or causes that have no impact on or nexus with India would be ultra-vires, as answered in response to Question 1 above, and would be laws made "for" a foreign territory.”

The decision is available here.

AAR: Denial of benefit of Indexed cost of acquisition of asset to a non-resident in a LTCG not discriminatory under Art. 24 of the India-Canada DTAA

Applicant: Transworld Garnet Company Limited on 22^nd February, 2011

AAR No. 843 of 2009

Assessment Year: 2009-10

Question/s before the Hon’ble Authority:

(1) The Second proviso to section 48 provides that no indexation benefit is available to a non-resident in the computation of long term capital gain arising from transfer of shares in an Indian company. Will not the denial of indexation benefit tantamount to discriminatory tax treatment under Article 24 of the India-Canada tax Double Taxation Avoidance Agreement

(2) Whether in computing the capital gains, deduction is admissible under section 48 of the Act on account of the following expenses incurred in connection with transfer of shares? Fees for valuation of business, professional fees for advice in connection with transfer, legal expenses, fees for escrow account, travel and hotel charges incurred in connection with transfer.

http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITAC&schT=&csId=b2ad777a-30b9-4442-9a64-5a501395669c&rdb=sec&yr=707cfd24-61fa-4e54-afbd-a98ca85903da&sec=48&sch=&title=Taxmann%20-%20Direct%20Tax%20Laws

Relevant facts: The applicant entered into a share purchase agreement with VV Minerals, a partnership firm registered in India for transfer of its shareholding in TGI. The Applicant submits that it had incurred expenses wholly and exclusively in connection with transfer of the shares mentioned supra. These expenses are: Fees for valuation of business, professional fees for advice in connection with transfer, legal expenses, fees for escrow account, travel and hotel charges. It is contended that section 48 of the Act provides that expenditure incurred wholly and exclusively in connection with transfer will be deducted from the full value of consideration from computation of capital gains. As these expenses are allowable deductions in computing capital gains under section 48, the same should be reduced in calculating the taxable capital gains.

Dismissing the plea of the assessee, the Hon’ble Authority held that:

Para 6: “The Art.24 therefore seeks to prevent differentiation solely on the ground of nationality and against nationals as such. A comparison cannot be made between a resident and a national of a state and a national of another state to contend that they must be taxed in the same way. The state is not obliged to extend the same privileges which it accords to its own residents to one who is not. For example the residents are taxable on their worldwide income and the non-residents are not. Therefore, discrimination on account of nationality other than residence may be prohibited. A foreign national may be resident and an Indian national may be non-resident. Both the nationals may be non-residents. But being of different nationalities and being non- residents, the nationals cannot be said to be discriminated in terms of Art 24 of the DTAA.”

Para 11: “The denial of the benefit of the second proviso to section 48 of the Act to the applicant, a non-resident assessee while computing capital gains arising from the sale of shares of TGI would not amount to discriminatory treatment in terms of article 24 of the DTAA with Canada.”

The decision is available here.

Budget 2011: Highlights of the Indirect Tax Proposals

The key points in the speech of the Hon’ble Finance Minister, Mr. Pranab Mukherjee in relation to Indirect Taxes are highlighted hereunder: 

EXCISE:

 o Standard rate of excise duty held at 10 percent; no change in CENVAT rates

o Nominal one per cent central excise duty on 130 items entering the tax net. Basic food and fuel and precious stones, gold and silver jewellery will be exempted.

SERVICE TAX:

o Service tax rate kept at 10 percent

o Service tax widened to cover hotel accommodation above Rs 1,000 per day, A/C restaurants serving liquor, some category of hospitals, diagnostic tests.

o Service tax on air travel increased by Rs 50 for domestic travel and Rs 250 for international travel in economy class. On higher classes, it will be ten per cent flat.

CUSTOMS:

o Iron ore export duty raised to 20 percent

o Peak rate of customs duty maintained at 10 per cent in view of the global economic situation.

o Basic customs duty on agricultural machinery reduced to 4.5 per cent from 5 per cent.

o Works of art exempt from customs when imported for exhibition in state-run institutions; this now extended to private institutions.

o Customs and excise proposals to result in net revenue gain of 73 billion rupees.