Notification Alert

The CBDT has issued the following notificaitons on the 7th of February, 2011:

Notification 7 of 2011 on 7th February, 2011

Notification 8 of 2011 on 7th February, 2011

- to grant approval under section 35(1)(i) of the Income Tax Act, 1961 to Fluorosis Research & Rural Development Foundation, Delhi & Kelkar Education Trust, Mumbai, respectively.

Notification Alert

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

1. Notification No. 8/2011 – Customs (N.T.), dated 02-02-2011: Amends Determination of Origin of Goods under the Preferential Trade Agreement between Member States of ASEAN and the Republic of India Rules, 2009

2. Notification No. 9/2011 – Customs (N.T.), dated 10-02-2011: Amends the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995

Tax Information Exchange Agreements

Exchange of information between the tax authorities of states can be done through Double Taxation Avoidance Agreements (DTAAs) and Tax Information Exchange Agreements (TIEAs).

Tax Information Exchange Agreements (“TIEAs”) are generally bilateral agreements under which territories agree to co-operate in tax matters through exchange of information. The OECD Global Forum Working Group on Effective Exchange of Information (“the Working Group”) is the organization behind the development of the TIEAs. Various low tax jurisdictions such as Bermuda, the Cayman Islands, Cyprus, the Isle of Man, Malta, Mauritius, and the Netherlands Antilles form a part of the Working Group. The mandate of the Working Group was to develop a legal instrument that could be used to establish effective exchange of information.

TIEAs are intended for use with countries where DTAAs are not considered appropriate. They are entered into with jurisdictions which levy very low or no tax at all. Thus, it enables the tax authorities to exchange information on specific points. The corresponding article in a DTAA is modeled similar to Article 26 of the OECD Model Convention on Income and Capital.

Governed by the terms of the agreement, the requesting party generally would furnish the following information:

• the identity of the taxpayer/person under examination or investigation;
• the period for which information is requested;
• the tax purpose for which the information is sought;
• Grounds for believing that information is held in requested state;
• Name and address of person believed to be in possession of requested information;
• Statement that request is in conformity of law and administrative practice of applicant state;
• Statement that request is in conformity of law and administrative practice of applicant state;

This information would be then processed and the requested party would proceed to provide for:

• information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees, as well as;
• full information regarding the ownership of companies, partnerships, trusts, foundations and other entities and all persons in an ownership chain, including settlers, trustees, beneficiaries, founders, members of foundation council and so on, as the case may be.

It is clear that TIEAs are a positive step towards tax transparency and to bring to book, the probable offenders. As per the terms of the agreement/s, the requesting state is not required to state a ‘probable cause’ to get the relevant information. The terms used in these treaties run along the lines of the country requesting the information claiming that they believe the information to be relevant to their tax investigation. This means that the scope for seeking information is not limited, and can be sought in a variety of causes.

On the other hand, there may be a violation of the privacy of individuals as their information would be open to access by the government. Also, there is a limitation on the lines that there is no automatic exchange of information. The request document is supposed to contain a lot of information, including the purpose for which the information is sought and exhaustion of local remedies. This may then be a stumbling block to the free access of information.

Similarly, the old argument of the non-existence of an independent tribunal raises concern as to the impartial adjudicator. Though the agreement provides for a Mutual Agreement Procedure (MAP), the absence of a time limit for the conclusion of the same raises concerns. It is argued that the information may be provided too late, be outdated or worse, help the person/tax evader cover his tracks.

However, the major limitation stems from the simple fact that most low-tax jurisdictions do not maintain any financial records, nor have any norms to identify shareholders or KYC (Know Your Client) norms. The absence of information with the jurisdiction itself gives it a valid reason to avoid providing relevant information, if at all provide any information. Therefore, there may not be any information to share at all!

As is seen from the limited practice of these treaties across various jurisdictions, The Model TIEA is a slow, largely ineffectual, resource-intensive process that seems unlikely to be used much more in the future than it has been in the past, despite the increased number of haven jurisdictions adopting it. At the same time, it would be completely unfair to rubbish these treaties as a mere hogwash since these are the first steps towards tax transparency across jurisdictions.

Under the Indian laws, these agreements (TIEAs) are duly executed by the Government of India under the provisions of section 90(c) of the Income Tax Act, 1961 and are notified thereunder.

The text of the agreement as drafted by the Working Group of the OECD is available here.

Tax Information Exchange Agreement with Bahamas

India has recently entered into a Tax Information Exchange Agreement(TIEA) with Bahamas.
This agreement lists as the fourth agreement that has been entered into by India, after Bermuda, Isle of Man and British Virgin Islands.

The Press Release in this regard is available here.
The text of the agreement is available here.

We shall soon have a post relating to TIEA's and their efficacy in dealing with information sharing between nations.

Mumbai ITAT: Prior to 2003, if Assessee has filed earlier returns, no penalty for non-filing of return in case returns filed in earlier years

M/s Noble Electric Co. v. Income Tax Officer, on 11^th February, 2011

ITA No. 1655/Mum/2007

Assessment Year: 2001-02

Question/s before the Hon’ble Tribunal: whether as per the explanation (3) to section 271(1)(c) as exists prior to 1.4.2003, the assessee’s non filing of the return of income for the assessment year under consideration would be deemed as concealment of particulars of income.

Relevant facts: The assessee is a partnership firm and did not file return of income u/s 139(1) within a period as prescribed under the Act. The notice under sect ion 142(1) was issued on 26.12.2001 requesting the assessee to file its return of income for the assessment year under consideration. The AO passed the assessment u/s 144(3) of the Act estimating the total income of the assessee at Rs.2,45,63,230/ - being the short term capital gain on sale of immovable property consisting of land and building vide agreement dated 28.9.2000 for a total consideration of Rs.2,60,00,000/ - . The penalty proceedings were initiated under the provisions of sect ion 271(1)(c) of the Act and a penalty of Rs.1,81,55,071/ - was imposed vide order dated 30.3.2006.

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

Para 7: “In view of the above decision of the Hon. Jurisdictional High Court , we are of the view that the assessee had already filed the returns of income and some of them are definitely within the time prescribed u/s 139(4) then non filing of the return for the assessment year under consideration would not be deemed as concealment of the particulars of the income on the part of the assessee as per explanation (3) as stood prior to 1.4.2003. Accordingly, in the facts and circumstances of the case, and in view of the decision of the hon. Jurisdictional High Court in the case of CIT V/s Lata Shantilal Shah the penalty is liable to be deleted.”

The decision is available here.

News Updates: Information Sharing Agreement with British Virgin Islands

India has signed a Tax Information Exchange Agreement (TIEA) with British Virgin Islands.
This would allow the Indian authorities to access information from countries often labeled as 'tax havens'. The information would be shared by the countries in case of placement of a specific request.

The TIEA with British Virgin Islands is available here.

The Economic Times reports the India is vetting a proposal to impose tax sanctions against countries that refuse to share information on suspected tax evaders.

The news report is available here.

Delhi High Court: Coating of Titanium with oxides of noble metals is manufacture u/s 80-IA

M/s Titanor Components Ltd. v. CIT & Anr, on 4 February, 2011

ITA No. 24/1999

Assessment Year: 1994-95

Question/s before the Hon’ble Court:

(i). Whether coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is "manufacture" or "production" of "article" or "thing" within the meaning of section 80-IA(2)(v) of the Income Tax Act, 1961?

(ii). Whether the conclusion, drawn by the Income Tax Appellate Tribunal that by coating electrode or titanium anodes the appellant was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80IA(2) of the Income Tax Act, 1961, is erroneous being (a). Contrary to mandatory provision of section 80IA;

(b). Contrary to and inconsistent with the evidence on record?

Relevant facts: The assessee was required to coat the titanium substrates numbering 1212 at a total cost of Rs 6,42,84,480/-. The per square metre cost of coating titanium substrates was pegged at Rs 19,500/-. Importantly, the cost agreed to did not include excise duty which was required to be reimbursed by UHDE. Furthermore, the assessee was also obliged to dispatch the coated titanium substrates to another company, i.e., one Alpha Label India Ltd (hereinafter referred to as Alpha) alongwith necessary documentation, which included, the excise gate pass; so as to enable the said entity from claiming MODVAT credit in respect of the excise duty. Evidently, Alpha was required to undertake further fabrication work to manufacture "membrane cell elements". It is not disputed that the assessee executed the contract arrived at between itself and UHDE.

The assessing officer was evidently of the view that the deduction under Section 80IA of the I.T. Act was not available to the assessee as the "process" whereby, the titanium substrates were coated by the assessee did not constitute "manufacture" within the meaning of the said provision.

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

Para 12.1: “It is trite law that only that process is recognized as constituting manufacture which results in emergence of a distinct article on being subjected to either treatment, or labour or even manipulation.”

Para 12.2: “But for the purposes of imposition of excise duty it is not enough that manufacture takes place, it should result in production of an article which is marketable though not necessarily marketed.”

Para 13: “As in the Central Excise and Salt Act, 1944, in the I.T. Act there is no definition of the word manufacture. The expression industrial undertaking, however, has been defined inter alia in the explanation to Section 33B of the I.T. Act as any undertaking which is mainly engaged in the manufacture or processing of goods. The Tribunal in this case has, returned a finding to the effect that the assessee has been treated as an industrial undertaking by the relevant authorities. However, after accepting that the assessee is an industrial undertaking; (and there being no dispute that the only activity in which the assessee is engaged in is: coating titanium substrates with noble metal oxides) the Tribunal, curiously, went on to say that what was produced was not a distinct article ignoring the evidence on record.”

Para 14.1: “In our view the Tribunal had to employ the test of fitness in ascertaining whether the process employed by the assessee rendered the free issue material supplied to it (whether referred to as titanium substrates or a titanium metal anode), fit for use in the industry.”

The decision is available here.

Press release by the CBDT

The CBDT has issued a press release on 7th February, 2011.

The net tax collection has registered a growth of 20.37% in a period from April 2011 to January, 2011.

The release also reflects the expedient handling of returns by the Centralized
Processing Center of the Income Tax Department at Bengaluru.

The press release is available here.

Kolkata ITAT: No segregation of amount paid for a share attributable to transfer and ‘controlling interest’ – The whole amount is to be taxed

ACIT, Kolkata v. R.K.B.K. Fiscal Services, decided on 3^rd February, 2011

I.T.A.No. 770/KOL/2010, inter-alia

Assessment Year: 2006-07

Question/s before the Hon’ble Tribunal:

(1) Whether the transaction in question involved in addition to and apart from the transfer of shares a transaction of transfer of controlling interest by the assessee namely the promoter group to Holcim and there was transfer of control of the company.

(2) If the answer to the first is in the affirmative, on the principles of apportionment what value out of the composite consideration received to be apportioned as value received for the transfer of controlling interest?

(3) Whether the value of controll ing interest is liable to capital gains tax?

Relevant facts: The assessee, in his return of income, disclosed short term capital gain of Rs.3,77,02,504/- and long term capital gain of Rs.7,27,34,858/- from off market transactions of sale of shares of M/s. Gujarat Ambuja Cements Ltd. to Holderind Investment Limited through their Authorized Representative, Mr. Paul Hungentobler (hereinafter referred to as Holcim Mauritius). Though pursuant to agreement with Holcim and the assessee [ assessee being one of the various parties, who entered into a joint agreement with Holcim ] the full value of consideration was Rs.105/- per share, it was contended by the assessee before the AO that the value of share was only Rs.74.20 per share and the balance of Rs.30.80 was paid for parting with the managerial control. In support of the above contention the valuation report prepared by Deloitte Haskins & Sells was also submitted. It was contended by the assessee that only Rs.74.20 could be taken as sale consideration received for transfer of shares and the balance amount of Rs.30.80 could not be taxed as the same was on account of transfer of capital asset which had no cost of acquisition.

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

Para 22.12: “In the facts and circumstances of the case, we are of the considered opinion that the amount received by the assessee for the said non-compete undertaking is squarely covered by section 28(va) of the Act.. It has nothing to do with transfer of controlling interest. We, therefore, hold that in terms of said agreement Rs.15/- per share is assessable as income under the head ‘business’ as per provision of section 28(va) of the Act.”

Para 22.16: “As regards the full value of consideration of transfer of shares of M/s.GACL as per agreement dated 28-01-06, the agreement itself states the same to be Rs.90/- per share. It has not been disputed by the ld. AR for the assessee that full value of sale consideration has no relationship with ‘market value’ of the capital asset. Thus, there is no question of determination of market value of impugned capital asset being share. In this view of the matter, the valuer’s report as submitted by the assessee has no relevance for adjudication of the issue at hand.”

Para 22.18: “We, therefore, hold that :-

a. The full value of consideration for transfer of impugned shares is Rs.90/- per share for the purpose of calculation of capital gains;

b. Rs.15/- per share is to be assessed as income under the head’ business’ as per section 28(va)”

The decision is available here.

Departmental Updates

The Income tax department has come up with the instructions regarding Income limits for assigning cases for Deputy Commissioners / Assistant Commissioners / ITOs.

The instructions are available here.