International Tax Practices incorporated in DTC

Residence   of    company    to    be    based    on    Place    of    effective management

 Place of effective management‘ is an internationally recognized concept for   determination  of  residence  of  a  company  incorporated  in  a  foreign jurisdiction.       Most of our tax treaties recognize the concept of ‗place of effective management‘ for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. It is an internationally accepted principle that the place of effective management is the place where  key management and commercial decisions that are necessary for the conduct of the entity‘s business as a whole are, in substance, made.

Structural Comparison of DTC

Income Tax Act comprises 23 Chapters,656 sections, 14 schedules
Wealth tax Act comprises 8 chapters and 47 sections
DTC 2010 comprises 22 chapters, 319 clauses, 22 schedules

Salient Features of DTC

            The  salient  features  of  the  code  are  as follows:

(i)         It consolidates and integrates all direct tax laws and replaces both the Income  Tax  Act,  1961  and  the  Wealth  Tax  Act,  1957  by  a  single legislation.

(ii)        It  simplifies  the  language  of  the  legislation.  The  use  of  direct,  active speech,  expressing  only  a  single  point  through  one  sub-section  and rearranging the provisions into a rational structure will assist a lay person to understand the provisions of the Direct Taxes Code (DTC).

Why Income Tax Act being replaced with DTC

As per Note given by Ministery of Finance to Standing Committee on Finance and presented  on 9-3-2012 in 49th report of Committee:
The Income-tax Act, 1961, has been subjected to numerous amendments since its  passage fifty years ago. It has been considerably revised, not less than thirty-four times, by amendment Acts besides the amendments carried out through the annual  Finance Acts. These amendments were necessitated by policy changes due to the changing economic environment,      increasing sophistication of commerce, increase in international  transactions  as  a  result  of  globalization,  development  of information technology, attempts to minimize tax avoidance and in order to clarify the statute in relation to judicial decisions. As a result of all these amendments, the basic structure of the Income-tax Act has been  over burdened  and  its  language  has  become  complex.  In  particular,  the numerous amendments have rendered the Act difficult to decipher by the average   tax-payer.  The  Wealth-tax  Act,  1957  has  also  witnessed amendments.

Refund under VAT(Section 18,39,40,41 Form 29,30,30A 30B to 30D)

United nations and Constituent Agencies

Schedule G Organizations (United nations and its constituent agencies) are entitled to

§refund of tax paid for Goods purchased in the state

§On every single purchase

§From a taxable person or registered person

§Exceeding Rs. 5000

§Excluding Tax Amount

§On Application in Form 29A

§Certificate from head of the organization that goods are purchased for use in official functioning of organization to be furnished

§Note; Refund is allowable even if tax not paid

§Refund is allowable even for purchases from registered person

Taxation of New Pension Scheme

New pension scheme was intiated by PFDRA(Pension Fund Regulatory and development authority). NPS has been extended to all the citizens of India from 1-5-2009

New pension scheme is applicable to new entrants to government service or any other employer. As per the scheme, it is mandatory for persons entering service on or after January 1, 2004, to contribute 10 percent of salary every month towards notified pension account. A matching contribution is required to be made by the employer to said account. The tex treatment under the new scheme is as follow --

Penalty u/s 51 can not be levied for mere non reporting at ICC barrier

Mere statement of driver is not enough to impose penalty where transaction not reported at barrier but other wise goods are accompanied by genuine documents
Pandey Steel Industries (PVAT-Tri) 18 STM 353

No penalty u/s 51 for issue of vat invoice instead of retail invoice

PVAT 2005 does not provide any penalty for issuing vat invoice in place of retail invoice. Further if goods are loaded from one place although are shown to be purchased from some other place, it does not prove mens rea
Pooja Steel and Allied Indisutries (PVAT -TRI) 18 STM 251

Medical Equipment under warranty not reported at ICC

Held that since goods are highly sophisticated medical equipment for which payment made through a/c payee cheque and goods were duly recorded in books and under 2 year warranty. No penalty u/s 51 leviable
Medical Diagnostic P Ltd 18 STM 248(PVAT TRI)

Supply of food stuff by school is not Sale

If main activity is imparting education and not business, any incidental activity like supply of food stuff would not constitute business. Hence it will not be covered by "Sale"

Scholars Home Senior Secondary School 18 STM 328 (HC- Uttrakhand)

RC Charges not includible in Sale

Obligation to obtain RC is upon buyer. Facilitation of RC by seller is in nature of service rendered by Seller. Charges therefore recovered by seller can not form part of turnover of seller. RC charges therefore do not fall under " amount charged by seller in respect of goods at the time or before the delivery there of"
Sehgal Autoriders P Ld (Bom) 18 STM 285 

Hire Purchase or Installment Sale

§Sale Price shall be valuable consideration payable to a person for such delivery.

§The amount of interest shall be reduced as per Rule 15.

§Further as per ETC order dated 5.10.10, in case M/s. Aay Pee Industries, hire charges on shuttering material shall be taxable @ 12.5% because they are not declared goods. Taxable turnover shall be the amount of hire charges. Against C forms tax on hire charges shall be 2%

Sale by partnership Firm having same partners

§When one firm transfers goods to another firm and both the firms have identical partners, the transfer does not amount to sale (Moni parsad Singh 39 STC 131 CAL.)

§However if the shares of the partners are different, the transaction amounts to sale

   (Punjab Oil Mills 1992 PHT 377 Pb. Tri)

Sale price

As per section 2(zg) , sale price means :

•The amount of valuable consideration received or receivable by a

  person for any sale made

• including any sum charged on account of

a) freight

b) Storage       

c) demurrage

d) Insurance

e) Any sum charged for anything done by the person in respect

                of goods- At the time of  OR

                            - Before the delivery there for

ITC on gas cylinders

 ITC on Gas Cylinders is not admissible as packing material because Item no. 202 read with Entry no. 58 relating to packing material does not cover containers of iron and steel.
  Further since gas cylinders are not sold and are only provided on returnable basis, no ITC is admissible because for claiming ITC goods must be used for sale or in manufacturing, processing, packing of taxable goods for sale as per section 13.
 Further held that appellant company stands aggrieved because ITC denied to its consumers and is entitled to make application u/s 85.
(IOC PVAT TRI 2009 13STM 458

ITC on Used Transformer Oil

Used Transformer oil shall remain petroleum product
Bhakra Beas Management 2007 10 STM 109

ITC on Diesel

 As per order u/s.85 dtd. 12-04-2006 in case of Malwa Cotton Spinning Mills, ITC on diesel used in generation of electric power is not eligible for ITC.
 However, the above decision was challenged before PVAT tribunal. As per decision of PVAT tribunal rendered on 24-05-2006, 10 STM 219, diesel used in generation of electric power used in captive consumption for manufacturing taxable items held to be eligible for ITC
 Further , the rectification application made by department before tribunal has been rejected on 29-01-2009 on the ground that decision is correct and needs no rectification
 As per Supreme Court order in Rajasthan Texchem Ltd 10 STM 358, diesel used in running generator set for production of ultimate product can only be termed as raw material and not otherwise
 As per Allahabad High Court in Goel India, Moradabad, 11 STM 286 Diesel oil and other oils used for running generator sets would be entitled to be treated as part of manufacturing process.
 As per decision of Punjab and Haryana High Court delivered on 24.08.2010, ITC on diesel is not allowable, because specific provision over rules general provision.

ITC on promotional Items

No ITC allowable on promotional items like iron, wrist watches, T-shirts, Bags, which are offered as gift along sale of main product
L.G. Electronics 2006 STM 655 Del-VAT

ITC for person who has applied for TIN

Where a person has applied for R.C. and is granted R.C. w.e.f. date of his application shall be treated as registered person
A.V. Patiala Biscuits Manufacturing Pvt. Ltd.
1977 39 STC 381

TRANSPORTATION OF GOODS Section 51, Rule 63 to Rule 70

Establishment of Check Posts and ICC (1)
• If with a view to prevent or check – avoidance or Evasion f tax under this Act
• State Government, considers it necessary so to do
• It may by notification
• Direct for establishment of check post or ICC or both
• At such place or places, as may be specified in the notification.

An inclusive definition is a definition of expansion.

 The Supreme Court has held that the words used in an inclusive definition denote extension and they cannot be treated as restricted in any sense. When inclusive definition is dealt with, it would be inappropriate to put a restrictive interpretation upon terms of wider denomination. The word 'includes' is an inclusive definition and expands the meaning. [See for instance, Corporation of the City of Nagpur v. Its employees AIR 1960 SC 675, Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar AIR 1974 SC 1728 and Doypack Systems (P.) Ltd. v. Union of India AIR 1988 SC 782
When words of expansion are used, it is justified to fall back upon the rule of ejusdem generis not Noscitur a sociis

AAR can justifiably entertain its discretion not to allow the application under section 245R(2) where application made 4 years after transaction in question entered into

In Red Hat India (P.) Ltd.,

[2012] 18 taxmann.com 259 (AAR - New Delhi) (3-2-2012)
• As an authority constituted under a statute, Authority for Advance Rulings may have a jurisdiction to decline a ruling even when one of these clauses in the proviso is not attracted or one of them is not strictly satisfied

• The Authority can justifiably exercise its discretion not to allow the application under section 245R(2) of the Act on the ground that the applicant has not approached this Authority with reasonable diligence and has approached it only more than four years after the transaction giving rise to the application was entered into and even assessments for two years were already completed

Application for advance ruling barred if transaction involved in application is identical to transaction included in a return of income filed before making application

 In GTB Invest ASA decision rendered on 3-2-2012

 [2012] 18 taxmann.com 262 (AAR - New Delhi)

 By filing a return, an assessee invites an adjudication on all the questions arising out of that return; sub-section (2) of section 245R only speaks of the question arising before the Authority; so if an answer to that question would be involved in the return filed or would arise out of the return filed, it would be a case where the bar is attracted

• By filing a return, that person is inviting the Assessing Officer to decide the question for him and that makes the question pending before the income-tax authority; then clearly, the bar under clause (i) of the proviso to section 245R(2) of the Act would be attracted

Penalty: Important Jugements

Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) (Favoring assessee)
Associated Cement Co. Ltd. Vs. CTO (1981) 4 SCC 578 (favoring assessee)
Director of Enforcement Vs. M.C.T.M. Corporation (P) Ltd. (1996) 2 SCC 471,(favoring revenue)
Union of India Vs. Dharamendra Textile Processors (2008) 13 SCC 369 (favoring revenue)

CCE Vs. Pepsi Foods Ltd. (2011) 1 SCC 601 (favoring asseessee)

Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) Held that 
An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal

No Penalty leviable where disclosure made in audit report regarding non deduction of TDS

Decision of ITAT Delhi in case of New Horizon India Ltd. rendered on 5-5-2010

FACTS OF THE CASE

During the course of assessment proceedings, the Assessing Officer found that assessee had made certain payments, totalling Rs. 7.15 lakhs, on account of royalty, advertisement etc., on which tax at source had not been deducted. The auditors of the assessee had themselves quantified those payments as inadmissible under section 40(a)(ia); and the audit report was attached with the IT return. However, the same had not been reduced while computing the total loss for taxation purposes. The assessee had agreed to the disallowance with the condition that it will be allowed in the next year. The Assessing Officer held that as per the provision of section 40(a)(ia), the expenditure of Rs. 7.15 lakhs was not deductible. Hence, the Assessing Officer disallowed the same and gave further remark that as per the provision of section 40(a)(ia), the same will be allowable in the next assessment year, i.e., the year in which it would be paid by the assessee. On the above disallowance, penalty under section 271(1)(c) was also levied. The Commissioner (Appeals) confirmed the levy of penalty.

Search and Seizure in case of doctor

Decision of Allahabad High Court delivered on 2-03-2012 in case of Dr. Roop

Facts of the case:

Search conducted on doctor couple

Pleadings on behalf of doctor:

1. AO called for returns of doctor after conducting search. It means returns were not checked before conducting search. So, there was no reason to believe, at most there can be reason to suspect but that does not justify search u/s 132.

As per SC in Seth Brothers 74 ITR 836, PR Metreni  157 Taxmann 325,

- Search is a serious invasion on privacy and freedom of tax payer

-powers u/s 132 must be exercised strictly according to law .

If Interest offered to tax, the principle debt qualifies as bad debt

In Veerabhadra Rao 155 ITR 152 the Supreme Court held in the context of a loan that if the interest is offered to tax, the loan has been “taken into account in computing the income of the assessee” and qualifies for deduction u/s 36(1)(vii).The effect of the judgement is that in order to satisfy the condition stipulated in s. 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. 

If brokerage offered to tax, the principal debt qualifies as a “bad debt”

Judgements of Delhi and Mumbai High Court discussed as under:


In Shreya S. Morakhia held by ITAT Mumbai and confirmed by High Court

The assessee, a broker, claimed deduction for bad debts in respect of shares purchased by him for his clients. The AOrejected the claim though the CIT (A) upheld it. On appeal by the Revenue, the matter was referred to the Special Bench. Before the Special Bench, the department argued that u/s 36(2), no deduction on account of bad debt can be allowed unless “such debt or part thereof has been taken into account in computing the income of the assessee”. It was argued that as the assessee had offered only the brokerage income to tax but not the value of shares purchased on behalf of clients, the latter could not be allowed as a bad debt u/s 36(1)(vii). HELD rejecting the claim of thedepartment:

Even existence of a computer server amounts to existence of a PE

 A place of business means all tangible assets (e.g., premises, facilities, machinery or equipment or installations) used for carrying on the business, whether or not they are exclusively used for business purpose; para 17 of the Model Commentary states that a PE may exist if the business of the enterprise is carried on mainly through automatic equipment and the activities of the personnel are restricted to setting up, operating, controlling and maintaining such equipment; thus, even existence of a computer server amounts to existence of a PE within a jurisdiction-18 taxmann.com 171 (AAR - New Delhi) AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI AREVA T&D India Ltd.,(7-2-2012)

Sale of Software- Whether Royalty

Determination of question raised above is crucial in the context that if sale of software is held not royalty then if non resident does not have any PE in India, no income can be said to accrue or arise in India u/s9 and hence non resident is not taxable in India.
But if sale of software  is held to be royalty, income shall be deemed to accrue or arise in India if payment is made by resident and software is used for the business or profession in India, even if non resident does not have PE in India

Cost Inflation Indexation in case of Gift, inheritance etc.

 Held in [2012] 18 taxmann.com 261 (Delhi) HIGH COURT OF DELHI Arun ShunglooTrust (13-2-2012): Benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gain tax on the 'real' or actual gain and not on the increase in the capital value of the property due to inflation; this is the object or purpose in allowing benefit of indexed cost of improvement, even if the improvement was by the previous owner in cases covered by section 49; accordingly, there is no justification or reason to not allow the benefit of indexation to the cost of acquisition in cases covered by section 49; this is not the legislative intent behind clause (iii) of Explanation to section 48 of the Act

The expression 'held by the assessee' used in Explanation (iii) to section 48 has to be understood in the context and harmoniously with other sections; the term 'held by the assessee' should be interpreted to include the period during which the property was held by the previous owner

Calculation of time limit for 54EC Bonds liberally construed- 6 months to be calculated from date of receipt of consideration

Held in Chanchal Kumar Sircar [2012] 18 taxmann.com 304 (Kolkata - Trib.):
Where property is sold by assessee under a transaction ('deemed transfer') covered by section 53A of Transfer of Property Act, possession handed over to buyer on execution of agreement against part payment and balance payment received after 6 months on registration of property, period of six months for making deposit under section 54EC of the Act should be reckoned from dates of actual receipt of consideration; if period is reckoned from date of agreement and receipt of part payment at first instance, then it would lead to an impossible situation by asking assessee to invest money in specified asset before actual receipt of same; this is based on High Court decisions in the context of sections 54E, 54B, 54EA and 54EB which are similarly worded as section 54EC

TDS on Commission Income of non resident for services outside India

Held in SKF Boilers & Driers (P.) Ltd. by AAR (dtd 22-02-2012):18 taxmann.com325

 Fact that agents have rendered services abroad in form of soliciting orders and commission is to be remitted to them abroad are wholly irrelevant for purpose of determining situs of their income; income arising on account of commission payable to two agents is deemed to accrue and arise in India, and is taxable under the Income-tax Act in view of specific provision of section 5(2)(b) read with section 9(1)(i); provision of section 195 would apply, and rate of tax will be as provided under Finance Act for relevant year

Fee for freight and logistics is not fee for technical services under s. 9

Held by ITAT Mumbai in UPS SCS Asia Ltd. (dtd 22-02-2012)

Freight and logistics services (such as transport, procurement, customs clearance, sorting, delivery, warehousing, pick up) do not fall within the ambit of 'managerial, technical or consultancy services' which fall within definition of 'fees for technical services' in Explanation 2 to section 9(1)(vii)