Pune ICAI – Direct Tax Refresher...
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Transcript of Pune ICAI – Direct Tax Refresher...
TDS default but no disallowance
• Merilyn Shipping & Transport [TS-220-ITAT-2012(VIZ)] -
Visakhapatnam ITAT Special Bench ruling by majority
• Sec 40(a)(ia) disallowance not attracted if expenses are
actually paid within the previous year without TDS
• Disallowance applicable only to the amounts remaining • Disallowance applicable only to the amounts remaining
outstanding at the end of the year
• Literal interpretation of the term ‘payable’ –
– Payable does not mean payable at any point during the year
• Hyderabad ITAT decision in Teja Construction [2010] 39 SOT
13 (HYD)] upheld
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Software Taxability Particulars Karnataka HC in
Samsung / Delhi
ITAT in Microsoft
AAR in
Millennium
IT Software
Delhi HC in
Ericsson / ITAT
(SB) in Motorola
Mumbai ITAT in
TII Team Telecom
1. Taxable as
royalty u/s
9(1)(vi)?
Yes Yes Does not
amount to
‘royalty’
Not discussed
2. Taxable as Yes Yes Does not Does not amount 2. Taxable as
Royalty under
DTAA?
Yes Yes Does not
amount to
‘royalty’
Does not amount
to ‘royalty’
3. Copyright or
copyrighted
article?
Copyright Copyright Copyrighted
Article
Copyrighted
Article
4. Providing
software
amounts to use
of ‘Process’
Yes Not
discussed
Not discussed Does not amount
to use of
‘Process’
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Software TaxabilityParticulars Karnataka HC in
Samsung / Delhi
ITAT in Microsoft
AAR in
Millennium IT
Software
Delhi HC in
Ericsson / ITAT
(SB) in Motorola
Mumbai ITAT in
TII Team Telecom
5. Whether
software is a
Separate from
other literary
Yes Yes Not discussed
literary work? works
6. Reliance on
SC’s ruling in
TCS on Sales
Tax
TCS cannot be
relied
TCS cannot be
relied
TCS relied on Not discussed
7. Reliance on
OECD
Commentary
OECD cannot be
relied on
OECD cannot
be relied on
OECD relied on Not discussed
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…and the debate continues
Budget 2012
• Royalty definition to include
computer software
• Amendment to Sec 9
proposed w.r.e.f. 1976
ITAT reconciles HC rulings
• Solid Works Corporation
[TS-76-ITAT-2012(Mum)]-
(Feb 12) & Allianz – [TS-204-
ITAT-2012(PUN)] (Mar 12)proposed w.r.e.f. 1976
• Power to notify terms under
DTAA – scope ?
ITAT-2012(PUN)] (Mar 12)
• Software not ‘royalty’
• Follows Delhi HC ruling in
Ericsson over Karnataka HC
ruling in Samsung
• Allows benefit of non-
discrimination article under
DTAA 5
Export commission
Adverse AAR ruling in SKF Boilers
and Driers [TS-203-AAR-2012]
• Export commission paid to non-
resident agent taxable u/s 5(2)(b)
read with Sec 9(1)(i)
• Right to receive commission
• Favourable Delhi HC decision in
Eon Technologies P Ltd [TS-661-
HC-2011(DEL)]
• Commission to foreign parent for
export contracts and realisation
of exports neither 'accrues or • Right to receive commission
accrued in India as the export
order was executed in India
• Agent rendering services abroad
or payment made outside India
not relevant for determining
'situs' of the commission income
• TDS u/s 195 applicable on export
commission
of exports neither 'accrues or
arises' nor 'deemed to accrue or
arise' in India
– No accrual merely based on
credit / sales entries
• HC refers to 1969 and 2000
Circulars
– HC has not considered
withdrawal in 2009
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Act vs DTAA shopping
• Bangalore ITAT ruling in IBM World Trade Corporation [TS-232-
ITAT-2012(Bang)]
• Beneficial tax rate under DTAA vs Act applies separately to
each royalty agreement
– Each royalty agreement constitutes separate source of incomeEach royalty agreement constitutes separate source of income
– Beneficial provisions under Act and DTAA applicable independently to
separate sources of income earned during same year
• Each of these subclauses of Sec 115A(1)(b) are mutually
exclusive and independent
• Pre-June 2005 royalty agreements - Lower rate under
DTAA available (typically 10% or 15%)
• Post June-2005 royalty agreements – Rate under Act (10%)
more favourable than DTAA available 7
Exact 12 months holding - LTCG
• Delhi HC ruling in Bharti Gupta Ramola [TS-264-HC-2012(DEL)]
• Shares/Mutual fund units held exactly for 12 months
constitute long term capital asset
– HC interprets Sec 2(42A) defining ‘short term capital asset’
• Date of acquisition, sale/transfer as well as fraction of day not • Date of acquisition, sale/transfer as well as fraction of day not
to be excluded while computing period of holding
• Expression 'month' to be taken as British calendar month as
defined in the General Clauses Act
• HC allows benefit of long term capital gains exemption
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Deductibility of Portfolio
Management FeesHomi K. Bhabha [TS-577-ITAT-
2011(Mum)]:
• PMS fees not deductible expense
• KRA Holding not good law
• Shankuntala Kantilal decision
overruled by HC in Roshan Babu
KRA Holdings & Trading Ltd [TS-251-
ITAT-2011(PUN)]:
• Fees paid to portfolio manager
based on 'net asset value' of
securities portfolio, deductible
expense.
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overruled by HC in Roshan Babu
Husseini Merchant [TS-8-HC-
2005(BOM)].
• Expenditure incurred by assessee to
remove encumbrance created by
himself, not allowable deduction.
• Coordinate bench decisions in Pradeep
Harlalka [TS-578-ITAT-2011(Mum)] &
Devendra Kothari relied on.
expense.
• Bom HC decision in Shankuntala
Kantilal [TS-6-HC-1991(BOM)]
relied on.
Delhi HC on Sec 14A disallowance
• Delhi HC decision in MAXOPP INVESTMENT LTD [TS-668-HC-
2011(DEL)]
• Assessee company engaged in the business of finance,
investment and dealing in shares and securities
• Assessee purchased shares through borrowed funds for the • Assessee purchased shares through borrowed funds for the
purpose of retaining ‘controlling interest’ in group companies
– Shares classified as ‘trading assets’ by the assessee
• Assessee claimed that interest expense not subject to Sec 14A
disallowance
– Expense was for retaining controlling interest
– Dividend income was merely incidental
• The AO disallowed interest expense u/s 14A
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14A – Delhi follows Bombay HC
• Delhi High Court upheld Sec 14A disallowance
– "in relation to" appearing in Sec 14A of the Act cannot be ascribed a
narrow or constricted meaning
– ‘actual expenditure’ u/s 14A(1) is the ‘actual’ expenditure in relation
to or in connection with or pertaining to exempt income
– Disallowance restricted to actual expense and not to any notional – Disallowance restricted to actual expense and not to any notional
expenditure
• Bombay HC followed; Sec 14A amendment prospective
– Amended provisions of Sec 14A(2), Sec 14A(3) & Rule 8D would be
applicable with prospective effect from AY 2007-08
– HC followed Bombay HC ruling in Godrej & Boyce Mfg. Co. Ltd [TS-125-
HC-2010(BOM)]
– Verify assessee’s claim even if Rule 8D not applicable for AY prior to
2007-0811
Sec 10A deduction - Inter-unit
loss set-offParticulars Unit 1 Unit 2 Total
Profit/(Loss) 200 (40) 160
Depreciation (30) (10) (40)
Profit/(loss) 170 (50) 120
Deduction u/s 10A
• Sec 10A is deduction and not exemption
• Sec 10A deduction available while computing income from
business or profession
– Chapter VI-A provisions are not relevant for Sec 10A deduction
• Deduction available before set-off of brought forward
depreciation and business loss
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• Recent Bombay HC ruling in Black and Veatch Consulting Pvt
Ltd [TS-260-HC-2012(BOM)
– HC follows Bombay HC decision in Hindustan Unilever Ltd (2010) 325
ITR 102
• Other Favourable rulings
Sec 10A deduction - Inter-unit
loss set-off
• Other Favourable rulings
– Yokogawa India Ltd [TS-641-HC-2011(KAR)]
– Scientific Atlanta (129 TTJ 273) Chennai ITAT SB
– M/s F.C.I Technology Services Ltd. Cochin (ITA No 616/Coch/2008)
– Symantec Software India Pvt. Ltd.[TS-765-ITAT-2011(PUN)]
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Sec 10A deduction – Export
Turnover / Total Turnover • Reduction of foreign currency expenses from export turnover
& total turnover
– Genpact India[TS-776-HC-2011(DEL)]
– Tata Elxsi Ltd [TS-637-HC-2011(KAR)]
– Sak Soft Ltd [TS-53-ITAT-2009(CHNY)]– Sak Soft Ltd [TS-53-ITAT-2009(CHNY)]
– Gem Plus Jewellery India Ltd[TS-122-HC-2010(BOM)]
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Share buy back - a tax avoidance
scheme • AAR ruling in XYZ [TS-196-AAR-2012]
• Share buy back proposed by Indian company from its
Mauritian shareholder
– Claimed buy-back as capital gains and not taxable under DTAA
• AAR denies capital gains benefit to Mauritius entity on share • AAR denies capital gains benefit to Mauritius entity on share
buy-back, terms it 'tax avoidance'
• Share buy-back - a scheme for avoidance of Dividend
Distribution Tax (DDT)
– No dividend paid since 2003, profits accumulated in reverses
– Buyback not subscribed by other shareholders
• Buy-back regarded as a distribution of dividend u/s 2(22)
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Share buy back – not exempt u/s 47
• AAR ruling in RST [TS-162-AAR-2012]
• Sec 47(iv) exemption not available on share buyback by
Indian subsidiary from foreign parent company
• Shares held by nominees cannot be considered as shared held
by foreign parentby foreign parent
– Indian company was not a 100% subsidiary
• Sec 47 has overriding effect only on Sec 45 and not Sec 46A
– Sec 46A being special provision relating to buy-back, overrides Sec 45
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Slump sale – negative net worth
• Mumbai ITAT Special bench ruling in Summit Securities
Limited [TS-140-ITAT-2012(Mum)]
• Negative net worth to be added for capital gains tax
computation upon slump sale u/s 50B
– Capital gains tax payable on difference between sale consideration and – Capital gains tax payable on difference between sale consideration and
negative net worth
– Cost of acquisition not 'NIL‘
• Stamp duty value u/s 50C not applicable to slump sale u/s 50B
• AO not empowered to substitute full amount of consideration
received with 'fair market value' in slump sale
• Earlier ITAT decisions in Zuari Industries Ltd and Paper Base
Co. Ltd. overruled
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Depreciation under Finance Lease
Mumbai ITAT Special bench ruling IndusInd Bank Ltd [TS-156-
ITAT-2012(Mum)]
Facts:
• Assessee leased boiler to Indo
Gulf Fertilizers and claimed
depreciation.
Elements of lease agreement:
• Lease not cancellable prior to the
expiry period of 7 years.
• Cost of repairs & insurance to be
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depreciation.
• Assessee claimed that lease was
an operating lease and that it was
owner of the leased asset.
• AO denied depreciation holding
that lease was finance lease.
• Cost of repairs & insurance to be
borne by lessee.
• After expiry of 7 years period,
boiler will be sold to lessee at
predetermined value.
• Lessee to bear loss due to
obsolescence.
• All risks and rewards vest with
lessee.
Depreciation under Finance Lease
ITAT Ruling on Depreciation claim under lease arrangement -
• Lessee ‘real owner’ while lessor only ‘symbolic’ owner under
finance lease
• Depreciation allowable only to lessee in finance lease
ITAT Ruling on facts of the case -ITAT Ruling on facts of the case -
• Lease agreement a finance lease in ‘pith & substance’
• Transaction found to be a mere case of advancing loan
• No genuine leasing of boiler, neither operating nor finance
• Lease transaction a sham, depreciation not allowable
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Vodafone - $ 2 billion saga
• SC rules Hutch-Vodafone overseas deal not taxable in India
• SC rejects Government’s Review Petition
• Government has proposed a retrospective tax amendment
– Amendment has the effect of nullifying SC decision
– Also affects similar M&A deals – Also affects similar M&A deals
More questions -
• Constitutional validity of the retrospective amendment
• Impact on interest and penalty – Is waiver possible ?
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Thank You
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