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Landmark Indian income-tax rulings and tax controversies
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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
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 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 literary work?
Separate from other literary works
Yes Yes Not discussed
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 continuesBudget 2012• Royalty definition to include
computer software • Amendment to Sec 9
proposed w.r.e.f. 1976• Power to notify terms under
DTAA – scope ?
ITAT reconciles HC rulings• Solid Works Corporation
[TS-76-ITAT-2012(Mum)]- (Feb 12) & Allianz – [TS-204-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
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Export commissionAdverse 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 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
• 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 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 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
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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 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 Fees
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Homi 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 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.
KRA Holdings & Trading Ltd [TS-251-ITAT-2011(PUN)]:•Fees paid to portfolio manager based on 'net asset value' of securities portfolio, deductible 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
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 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 2007-08
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Sec 10A deduction - Inter-unit loss set-off
• 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
Particulars Unit 1 Unit 2 TotalProfit/(Loss) 200 (40) 160
Depreciation (30) (10) (40)
Profit/(loss) 170 (50) 120
Deduction u/s 10A
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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 – 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 - Inter-unit loss set-off
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)]– 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 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 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
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 LeaseMumbai ITAT Special bench ruling IndusInd Bank Ltd [TS-156-ITAT-2012(Mum)]
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Facts:• Assessee leased boiler to Indo
Gulf Fertilizers and claimed 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.
Elements of lease agreement:• Lease not cancellable prior to the
expiry period of 7 years. • 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.
Operating vs Finance Lease• Specified period of time• Risk of loss & obsolescence • Ownership – symbolic vs actual • Cancellation of the agreement • Substantial risk and rewards of the assets • Economic life of the asset • Full Payout vs Non-payout lease • Selection of the assets
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Depreciation under Finance LeaseITAT 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 leaseITAT 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
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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