VCES Order is appealable

Case: Barnala Builders & Property Consultants Vs The Deputy Commissioner of Central Excise & Service Tax (P&H)

 

Facts:  The assessee submitted a declaration under VCES scheme which was rejected by the department. The department argued that Vide Circular no. 170/5/2013-ST dated 08-08-2013, the CBEC had clarified that the VCES scheme does not have a statutory provision for filing of appeal against the order for rejection of declaration under Sec 106(2) by the designated authority.

Held by the High Court in favour of assessee:

• The VCES scheme has been incorporated into the act and is thus part and parcel of the Finance Act.
• Thus all the provisions of Finance Act, unless specifically excluded, apply to proceedings under this scheme.

• Instructions issued by CBEC on 08-08-2013 that orders under VCES scheme are not appealable held to be invalid.
• Assessee is allowed to file an appeal and the appeal, if filed, shall be considered and decided within a fortnight.

VCES – Clarification dated 11-12-2013

CBEC, vide instructions dated 11-12-2013, has clarified following issues on VCES

S.No.	Issues	Clarifications
1	Whether an undertaking is required from the declarant stating that there is no unpaid tax dues for the remaining period of the scheme	No. A declaration of tax dues has to be made in Form VCES-1. No other undertaking or declaration required to be furnished.
2	Whether the tax declared can be paid in installments.	Yes. The only condition is that 50% of the tax dues shall be paid by 31-12-2013 and balance 50% by 30-06-2014. For ex. a declarant may pay the 50% amount that he is required to pay by 31-12-2013 in more than 1 installments.
3	Whether the designated authority may raise frivolous/ unnecessary queries regarding the manner of calculation of tax dues.	No. The designated authority may check arithmetical calculation of tax dues. The commissioner, if he has reason to believe and the reasons to be recorded in writing, that the declaration is substantially false, he may serve notice on declarant.

 

eBay India is a dependent agent of eBay International AG but not a “dependent agent PE” so business profits cannot be taxed in India.

Case: eBay International AG vs Dy DIT (Mumbai – Trib)

 

Facts:  The assessee, eBay International AG, was incorporated in Switzerland. It operated specific websites in India that provided an online platform for facilitating the purchase and sale of goods and services to users based in India.

 

The assessee had entered into marketing support agreements with eBay India and eBay motors, for availing of certain support services in connection with its business in India.

 

The AO concluded that the payments received by the assessee from operations of websites were mainly in the nature of FTS. Further, it also held that the assessee had a PE in India in the form of its entities namely, eBay India and eBay motor. On appeal by the assessee, the DRP upheld the order of AO. Aggrieved-assessee filed the instant appeal.

 

 

HELD by the Tribunal in favour of assessee:

 

·         Fees accruing to assessee on successful completion of the transactions between the buyer and seller could not be described as FTS, as the assessee had no role to play in effecting sales and these were in nature of business profits;

·         The existence of PE as per Article 5 of India-Singapore DTAA (‘treaty’) is a must for bringing to charge any business profits as per Article 7 of treaty. The eBay India and eBay motors were dependent agents of assessee, as they were assisting it in carrying on business in India and if any of the conditions given in para 5 of Article 5 of treaty was satisfied, then they would constitute dependent agent PE of the assessee in India

·         First condition: "has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise”. By performing the activities as narrated in the agreement, it was seen that eBay India had at no stage negotiated or entered into contract for or on behalf of the assessee

·         Second condition: “dependent agent habitually maintaining a stock of goods for or on behalf of the enterprise”. This condition was not satisfied as eBay India didn’t maintain any stock of goods for delivery for or on behalf of the assessee

·         Third condition: “dependent agent manufactures or processes the goods or merchandize in that State for the enterprise”. Obviously, this clause was also not applicable because eBay Motors was not required to manufacture or process the goods or merchandise on behalf of the assessee;

·         Thus, the eBay India and eBay motors were dependent agents of assessee but they did not constitute dependent agent PE and, thus, profits earned by assessee could not be taxed as per Article 7 of treaty

 

CA Rahul Jain

rahuljain@rpmd.in

Depreciation cannot be disallowed on ground that some areas in mall remained unutilized

Case: E-City Entertainment (India) Pvt Ltd Vs. ACIT (Mumbai – Trib)

Facts:  The assessee was the owner of a mall of which certain areas were unutilized. AO disallowed the depreciation claim on commercial complex, by holding that its certain areas couldn’t be used by assessee for business purposes.

 

On appeal before the CIT (A), the assessee contended that the entire commercial space was put to use but only a part of it was leased out and it would not mean that the unutilised area was used for non-business purposes or personal purposes. It further contends that it was owner of the entire building so the depreciation couldn’t be disallowed. The CIT (A) allowed the claim of the assessee. Aggrieved-revenue filed the instant appeal.

 

 

HELD by the Tribunal in favour of assessee:

 

·         For the purpose of allowing of depreciation, only the block of assets had to be considered;

·         It had to be seen whether the particular block of assets was owned by the assessee and used for the purpose of business. If block of assets was owned by the assessee and used for the purpose of business, depreciation had to be allowed

·         The observation of the AO, that the depreciation on complex would be allowed to the extent of the area which was used for business purpose, was devoid of any merit

·         Once it was proved that block of asset was used for the purposes of assessee’s business and there was no finding as to whether the block of assets was used for other business purposes, proportionate disallowances of depreciation was not warranted. Thus, the addition made by AO was to be deleted

 

CA Rahul Jain

rahuljain@rpmd.in

If assessee is not engaged in the business of shares dealing, loss from shares dealing cannot be deemed to be from speculation under Explanation to Sec 73 of Income Tax Act.

Case: CIT Vs Orient Instrument Pvt Ltd (Delhi High Court)

Facts:  The assessee was primarily engaged in the business of trading of crafts paper. The assessee also purchased and sold some shares for which he claimed a loss of Rs. 5.53 Lakhs.

AO held that under the Explanation to Sec 73, the said loss of shares was deemed to be arising from speculative transactions and thus cannot be allowed to be set off against business profits.

The CIT(A) and Tribunal allowed the assessee claim by holding that the assessee was not engaged in the “business” of purchase and sale of shares and therefore exp to sec 73 does not apply.

Department appealed before the High Court and argued that even a single transaction of sale or purchase of shares might amount to a “business”

 

HELD by the High Court in favour of assessee:

 

·         The assessee was engaged in the business of trading of crafts paper, installation, job work, consultancy and commission.

·         By all means, transaction whereby it purchased shares and incurred losses on account of the fall in value of share was a solitary one.

·         Findings of Tribunal that transaction did not constitute business carried on by company, cannot be termed as perverse or unreasonable.

·         In circumstances, the court is satisfied that no substantial question or law arises. Appeal was accordingly dismissed

 

CA Rahul Jain

rahuljain@rpmd.in

Income Tax – Speculative Transactions – Recent Amendments

Section 43(5) defines speculative transactions as under:

Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

However, there are some exceptions to this section.

Further, clause (e) of Section 43(5) was inserted by Finance Act, 2013 which reads as under:

“an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association shall not be deemed to be a speculative transaction.”

Eligible transaction means any transaction carried out electronically through registered members and which is supported by a contract note.

Vide Notification no. 90/2013, 91/2013 & 92/2013, following three exchanges has been notified as recognized association (subject to publication of these notifications in the Official Gazette):

·         National Commodity and Derivatives Exchange Limited,

·         Universal Commodity Exchange Limited,

·         Multi Commodity Exchange of India limited

To conclude, trading (eligible transaction) in commodity derivatives on the aforesaid exchange will not fall under the definition of Speculative Transactions, instead it will be considered as Business Income/Loss. Major benefits arising out of the said amendment are:

·         Losses under these transactions are allowed to be set-off with any other income except salaries

·         Unadjusted losses are allowed to be carried forward for 8 assessment years and can be adjusted against and business income. (In case of speculative transactions, losses are allowed to be carried forward only for 4 years and are to be set-off with business incomes only.)

Rahul Jain

rahuljain@rpmd.in

Transfer Pricing - Clarification in respect of applicability of Section 144C

Sec 144C(1) requires that the AO shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereinafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.”

Position before this circular: Earlier, as per para 45.5 of Circular no. 05/2010 dated 03-06-2010, provisions of Section 144C was to be applied in relation to the AY 2010-11 and subsequent assessment years.

 

Clarification by CBDT: Vide Circular No. 09/2013 dated 19-11-2013, CBDT has clarified that section 144C is applicable to any order which proposes to make variation in income or loss returned by an eligible assessee, on or after 1st October, 2009 irrespective of the assessment year to which it pertains.

 

Rahul Jain

rahuljain@rpmd.in

Recent Updates on VCES - Service Tax

Clarification on VCES

 

A new Circular regarding VCES has been issued to clarify the doubts raised relating to VCES. The clarifications are mentioned below:

a) If an inquiry, investigation or audit, pending as on 1.3.2013 was being carried out for the part period i.e. 2008-2011, benefit of VCES would be eligible in respect of 'tax dues' for the period not covered by the inquiry, investigation or audit i.e. for the year 2012.

b) If an inquiry or investigation, pending as on 1.3.2013 was in respect of a specific issue, say renting of immovable property, benefit of VCES would be eligible in respect of 'tax dues' concerning any other issue in respect of which no inquiry or investigation was pending as on 1.3.2013.

c) In case designated authority has reasons to believe that the declaration filed by declarant is covered by section 106(2), a notice of intention to reject the declaration will be given to the declarant within 30 days from the date of filing of declaration stating reasons of rejection to give so as an opportunity of being heard before the rejection.

d) The designated authority may take a view on merit on the basis of facts and circumstances of each case as to whether the inquiry is of roving nature or whether the provisions of section 106 (2) are to be attracted.

e) Benefit of scheme would be available for payment of tax made after 10.05.2013 even though the declaration under the scheme has been made later on.

f) Benefit of scheme would not be available for waiver from penalty and other proceedings where service tax pertaining to the scheme along with interest has already been paid by the assessee.

[Notification No. 174/9/2013-ST dated 25.11.2013]

 

Union Finance Minister Chidambaram warned the service tax evaders saying the current amnesty scheme closes by month-end and that no further chances will be provided to comply with the tax regulations.  Saying that service providers cannot see a fair scheme than VCES, the finance minister said, "No interest, no penalty, no prosecution. I think this is a generous scheme. So utilize it and take advantage of it.

The last date of depositing at least 50% of the declared dues under VCES is 31st December, 2013.

 

Rahul Jain

rahuljain@rpmd.in

Intimation from CBI doesn’t constitute ‘information’, therefore, the authorization to conduct search under Sec 132(1) did not exist and the search became invalid.

Case: Parma Ram Bhakar Vs The DCIT (ITAT Jodhpur)

Facts:  Information was received from CBI that the assessee is carrying undisclosed cash, upon which authorization for search u/s 132(1) were issued. During the course of search operation, some alleged incriminating documents, note books containing details of unexplained payments were claimed to be found and seized. Thereafter, notice under section 153A of the Act was issued by the Assessing Officer. Assessee filed his returns of income for different years on 08/12/2008 and the assessments were completed on 23/12/2008.

On appeal before CIT (A), the assessee challenged the validity of assessments based on said search, but the CIT(A) answered in favour of revenue. Assessee filed an appeal before ITAT.

HELD in favour of assessee:

·         Section 132 contemplates existence of certain eventualities in the event of existence where of the competent authority should have reason to believe the existence of the circumstances mentioned in clause (a) to (c) of sub-section (1) of Section 132 of the Act

·         The existence of reason to believe in consequence of the information in possession of the officer about existence of the reason to believe is not satisfied, there could possibly be no authorization,

·         It appears that the department acted upon the information provided by the police department on 29/03/2007 and on the same day, the warrant of authorisation was issued and the search was conducted, but nothing is brought on record to substantiate that any cash was found, although, search was conducted on the information that undisclosed cash being carried out by the assessee

·         Hon'ble Supreme Court in the case of Union of India Vs. Ajit Jain held as under:- "(iii) intimation simpliciter by the CBI that money was found in the possession of the respondent, which according to the CBI was undisclosed, without something more, did not constitute "information" within the meaning of section 132 of the Income- tax Act, 1961, on the basis of which a search warrant could be issued, and the search conducted on the basis of such information and the block assessment made pursuant to such search was not valid."

·         The search was conducted only on the basis of the information received from S.P. C.B.I. that undisclosed cash being carried out by the assessee, but no such cash or other valuable article or thing were found in the possession of the assessee.

·         Therefore, the authorization to conduct search based on reason under section 132(1) of the Act did not exist and the search became invalid. The assessment order based on the said search cannot stand and to be set aside and the assessment orders passed by the Assessing Officer on the basis of invalid search deserve to be set aside and quashed.

 

Rahul Jain

rahuljain@rpmd.in

Cenvat credit was allowable to assessee even if supplier hadn’t discharged its duty

Case: Commissioner of Central Excise, Jalandhar v. Kay Kay Industries (SC)

 Facts: The respondent-company availed deemed MODVAT credit of Rs.77,546/- during the quarter of March, 2000 on the strength of invoices issued by M/s. Sawan Mal Shibhu Mal Steel Re-Rolling Mills, Mandi Govindgarh. During MODVAT verification it was found that the supplier of inputs had not discharged full duty liability for the period covered by the invoices.

The Department was of the view that appropriate duty of excise had not been paid by the manufacturer of inputs under the invoices on the strength of which the respondent took the benefit of
deemed MODVAT credit and it was obligatory on the part of the company to take all reasonable steps to ensure that the appropriate duty of excise had been paid on the inputs used in the manufacture of their final product as required under Rule 57A(6) of the Central Excise Rules, 1944

Held by Supreme Court:

1) In this case supplier of inputs had given declaration indicating that excise duty had been paid on said inputs. Fact that supplier had not discharged duty was a lapse on part of seller; it was different and not a condition or rather a precondition postulated in Notification;

2) When there was a prescribed procedure and that had been duly followed by the assessee, it could not be said that the assessee had not taken reasonable steps as prescribed in notification;

3) Due care and caution were taken by the assessee and it was not stated by Department what further care and caution could have been taken. Requirement of "reasonable care" does not mean verification from department whether duty stands paid by supplier because that would be travelling beyond notification and practically impossible and would lead to transactions getting delayed;

4) Thus, the Assessee was entitled to deemed credit under the Notification No. 58/97-CE(NT).

 

Rahul Jain

rahuljain@rpmd.in

 

For FIIs, Income arising from transfer of security is to be considered as short term capital gain or long term capital gain as per s. 115AD of the Act

Case: Platinum Asset Management Limited Vs DDIT (No 2) (ITAT Mumbai)

 

Facts:  The assessee incurred a loss of Rs. 172.18 Cr on derivative transactions and this loss was claimed as short term capital loss and was set-off against the Short Term Capital Gain.

The AO held that the said loss constituted a business/ speculation loss and could not be set-off against the STCG. The department argued that in the case of CIT vs. Bharat R. Ruia (HUF) 337 ITR 452 (Bom), it was held that as transactions in derivatives are entered into and settled without taking any delivery of the shares, the same constitutes a speculative transaction.

 

HELD in favour of assessee:

The judgement of the Bombay High Court in Bharat Ruia is not applicable to assessee which are FIIs duly registered with SEBI. FIIs are allowed to only invest in the Capital Market and the income arising from transfer of security is to be considered as short term capital gain or long term capital gain as per s. 115AD of the Act. FIIs are not allowed to do business in the security market. Also, derivative is a security as per the clause (ia) to sub-section (h) of section 2 of The Securities Contracts (Regulation) Act, 1956 with effect from 22.2.2000.

 

CA Rahul Jain

rahuljain@rpmd.in

S. 271(1)(c) penalty cannot be levied if the assessee discharges the primary burden by a cogent explanation and onus shifted on the AO is not discharged.

Case: CIT vs. M/s. Gem Granites (Karnataka) (Madras High Court)

Facts:  There was a search conducted under Section 132 of the Act, and in which it was revealed that in a real estate dealings, there were "on-money" transactions and cash of Rs.27,00,000/- was seized. The assessee offered to admit the "on-money", but claimed that it was taxable only on completion of the projects under the 'completed contract method'. The assessee’s claim was rejected by all the authorities including the High Court.

 

Penalty proceedings were also initiated under Section 271(1)(c) of the Act. Against which, the assessee claimed that there was a mistake in the entries regarding the sale of flats to J.B. Exports in as much as the rate at which the property was shown as sold to the said party was much higher than the rate at which the property was sold to other parties. The AO and CIT(A) rejected the claim but the Tribunal accepted it on the basis that the huge difference in the rate of sale of the flat recorded in other cases and in the case of J.B. Exports supported the assessee’s contention that there may be a mistake in recording the rate. It held that as the department had failed to prove concealment without any doubt, penalty could not be imposed. The department preferred an appeal to High Court.

 

HELD in favour of assessee:

Firstly, it is to be stated that the findings recorded by the Tribunal is a finding of fact. Therefore, unless it is shown that such finding is perverse, the same cannot be interfered, while considering an appeal which can be entertained only on a question of law.

 

Further, merely because the assessment proceedings have been confirmed does not automatically mean that penalty u/s 271(1)(c) is justified.

The Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Reliance Petroproducts Pvt., Ltd., reported in [2010] 322 ITR 158 (SC) pointed out that a “mere making of a claim, which is not sustainable in law, by itself, would not amount to furnishing of inaccurate particulars regarding the income of the assessee.”

 

The Hon’ble SC in the case of Mak Data P. Ltd., vs. Commissioner of Income Tax-II), held that the question would be whether the assessee had offered an explanation for concealment of particulars of income or furnishing inaccurate particulars of income and the Explanation to Section 271(1) raises a presumption of concealment, when a difference is noticed by the Assessing Officer between the reported and assessed income.

The burden is then on the assessee to show otherwise, by cogent and reliable evidence and when the initial onus placed by the explanation, has been discharged by the assessee, the onus shifts on the Revenue to show that the amount in question constituted their income and not otherwise.

 

On facts, the onus cast upon the assessee has been discharged by giving a cogent and reliable explanation. If the department did not agree with the explanation, then the onus was on the department to prove that there was concealment of particulars of income or furnishing inaccurate particulars of income. In the instant case, such onus which shifted on the department has not been discharged. In the circumstances, we do not find that there is any ground for this Court to substitute our interfere with the finding of the Tribunal on the aspect of the bonafides of the conduct of the assessee.

 

CA Rahul Jain
rahuljain@rpmd.in

Before applying the Transfer Pricing provisions, ‘Existence of Income’ is a jurisdictional requirement

Case: Vodafone India Services Pvt Ltd vs UOI (Bombay High Court)

Facts:  The assessee, an Indian Company issued equity shares at a premium of Rs. 8591 per share to its holding company while the NAV of per share was Rs. 53775/-. The assessee claimed that the transfer pricing provisions do not apply as there was no income arising to it.

·         The AO referred the issue to the TPO without dealing with preliminary objection.

·         Assessee contented his stand before TPO but TPO held that he could not decide whether income had arisen or not because his jurisdiction was limited to determine the ALP of the transaction referred to him by AO.

·         The AO passed the draft assessment order u/s 144C(1) without considering the assessee’s objection and held that he was bound u/s 92-CA(4) with the TPO’s determination and could not consider the contention whether the transfer pricing provisions applied.

·         As per the requirement of law, the assessee filed objections before the DRP on the merits of the adjustment made in draft assessment order.

·         Also, assessee filed a writ petition before the High Court challenging the jurisdiction of TPO/AO to make the adjustment.

Argued by Assessee before HC	Held by High Court
It was a precondition before the transfer pricing provisions apply that there has to be income arising to the assessee. As the allotment of shares at a premium does not give rise to income, the transfer pricing provisions do not apply,	It is clear from s. 92(1) that there must be income arising/ potentially arising by an international transaction for the application of the transfer pricing provisions. This is a jurisdictional requirement and has to be dealt with by the AO when specifically raised by the assessee before making reference to the AO. Grant of personal hearing before referring the matter to the TPO has to be read into s. 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee If, after the hearing the assessee, the AO holds that there is an international transaction, that would be binding on the TPO;
There was a breach of natural justice because neither the TPO nor the AO had heard the assessee on, or decided, the fundamental issue as to whether the transfer pricing provisions applied at all	The department’s contention, based on CBDT Instruction No.3 dated 20.05.2003, that the action of the AO in referring the international transaction is a mere administrative act is not acceptable. The AO is bound to hear the assessee in respect of jurisdictional issues before making the reference. The failure to do so is an illegality;
The DRP does not offer an alternative remedy because the DRP has no power to quash the draft assessment order even if it is satisfied that the same is without jurisdiction	The assessee’s contention that the DRP does not offer an alternative remedy because it does not have the power to quash the assessment order even if it is satisfied that the same is without jurisdiction is not acceptable because in Vodafone 37 taxmann.com 250 it was held that the DRP’s power to confirm would include the power not to confirm and to annul the draft assessment order
The DRP cannot take an unbiased view because one of its members is the DIT (TP)	The assessee’s contention that the DRP would not give a fair hearing as one of its members is the DIT (TP) is not acceptable because it overlooks the fact that these are not appeal proceedings but to finalize the draft assessment order. Also, the DIT(TP) who approved the TPO’s order is not on the panel

The High Court also advised that the Revenue should keep in mind the sage advice of Nani Palkhivala that the department should not cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of palpable injustice. In this case it would be natural for the assessee to feel harassed as neither the AO nor the TPO gave a hearing or dealt with the preliminary objection. It is hoped that the revenue will be more sensitive to the just demands of the assessee and not treat the assessee as an adversary who has to be taxed, no matter what;

To conclude, HC put the balls in DRP’s court : The DRP should decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. In case the DRP’s decision on the preliminary issue is adverse, the assessee shall be entitled to challenge it in a writ petition if it can show that the DRP’s decision on the preliminary issue is patently illegal notwithstanding the availability of alternate remedy before the ITAT

Source:  www.rpmd.in/files/docs/rpmd-vol-1.1.pdf


CA Rahul Jain
rahuljain@rpmd.in